UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended July
31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-32239
Commerce Energy Group,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-0501090
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.
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600 Anton Boulevard
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92626
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Suite 2000
Costa Mesa, California
(Address of principal
executive offices)
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(Zip Code
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Registrants telephone number, including area code
(714) 259-2500
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value
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American Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for at least the past
90 days: Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filers and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated Filer
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Accelerated
Filer
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Non-accelerated
Filer
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
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No
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The aggregate market value of the Common Stock held by
non-affiliates of the registrant as of January 31, 2007 was
approximately $42,074,457 (computed using the closing price of
$1.45 per share of Common Stock on January 31, 2007, as
reported by the American Stock Exchange).
As of October 16, 2007, 30,372,618 shares of the
registrants Common Stock were outstanding.
You should carefully consider the risk factors described below,
as well as the other information included in this Annual Report
on
Form 10-K
prior to making a decision to invest in our securities. The
risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not
presently known or that we currently believe to be less
significant may also adversely affect us. Unless the context
requires otherwise, references to the Company,
Commerce, we, us, and
our refer specifically to Commerce Energy Group,
Inc. and its subsidiaries.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
On one or more occasions, we may make statements regarding our
assumptions, projections, expectations, targets, intentions or
beliefs about future events. All statements other than
statements of historical facts included in this Annual Report on
Form 10-K
relating to expectation of future financial performance,
continued growth, changes in economic conditions or capital
markets and changes in customer usage patterns and preferences,
are forward-looking statements.
Words or phrases such as anticipates,
believes, estimates,
expects, intends, plans,
predicts, projects, targets,
will likely result, will continue,
may, could or similar expressions
identify forward-looking statements. Forward-looking statements
involve risks and uncertainties which could cause actual results
or outcomes to differ materially from those expressed. We
caution that while we make such statements in good faith and we
believe such statements are based on reasonable assumptions,
including without limitation, managements examination of
historical operating trends, data contained in records and other
data available from third parties, we cannot assure you that our
expectations will be realized.
In addition to the factors and other matters discussed in
Item 1A. Risk Factors in this Annual Report on
Form 10-K,
some important factors that could cause actual results or
outcomes for Commerce Energy Group, Inc. or our subsidiaries to
differ materially from those discussed in forward-looking
statements include:
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regulatory changes in the states in which we operate that could
adversely affect our operations;
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fluctuations in the market price of energy resulting from
seasonal weather and other factors that adversely impact the
cost of our energy supplies and could prevent us from
competitively servicing the demand requirements of our customers;
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changes in the restructuring of retail markets which could
prevent us from selling electricity and natural gas on a
competitive basis;
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our dependence upon a limited number of third-party suppliers of
electricity and natural gas;
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our dependence upon a limited number of local electric and
natural gas utilities to transmit and distribute the electricity
and natural gas we sell to our customers;
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decisions by electricity and natural gas utilities not to raise
their rates to reflect higher market cost of electricity and
natural gas, thereby adversely affecting our competitiveness;
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our ability to obtain and retain credit necessary to support
both current operations and future growth and profitability;
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our ability to successfully integrate businesses we may acquire;
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our ability to successfully compete in new electricity and
natural gas markets that we may enter, and;
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our dependence upon independent system operators, regional
transmission organizations, natural gas transmission companies,
and local distribution companies to properly coordinate and
manage their transmission grids and distribution networks and to
accurately and timely calculate and allocate the cost of
services to market participants.
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Any forward-looking statement speaks only as of the date on
which such statement is made, and, except as required by law, we
undertake no obligation to update any forward-looking statement
to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not
possible for management to predict all such factors.
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Overview
Commerce Energy Group, Inc., or Commerce, is an independent
energy marketer of retail electric power and natural gas supply
to residential, commercial, industrial and institutional
customers. We also provide consulting, technology and
transaction data management services to energy-related
businesses. Unless otherwise noted, as used herein, the
Company, we, us, and
our means Commerce Energy Group, Inc. and its
subsidiaries.
Commerce operates through its two wholly-owned subsidiaries,
Commerce Energy, Inc. and Skipping Stone Inc. Commerce Energy,
Inc., or Commerce Energy, formerly Commonwealth Energy
Corporation and doing business as electricAmerica,
is licensed by the Federal Energy Regulatory Commission, or
FERC, and by state regulatory agencies as an unregulated retail
marketer of natural gas and electricity. As of July 31,
2007, we provided natural gas and electricity to approximately
196,000 residential, commercial, industrial and institutional
customers in ten states. Skipping Stone Inc., or Skipping Stone,
provides energy-related consulting and information to utilities,
electricity generators, natural gas pipelines, wholesale energy
merchants, energy technology providers and financial
institutions.
Commerces predecessor, Commonwealth Energy Corporation, or
Commonwealth, was formed in California in August 1997. On
July 6, 2004, Commonwealth reorganized into a holding
company structure, whereby Commonwealth became a wholly-owned
subsidiary of Commerce.
Commerce was incorporated in the State of Delaware on
December 18, 2003. Our executive offices are located at 600
Anton Boulevard, Suite 2000, Costa Mesa, California 92626
and our telephone number is
(714) 259-2500.
Our fiscal year ends July 31.
Industry
Background
Electricity
In order to increase consumers competitive options
beginning in 1992, the U.S. electric utility industry began
a process of deregulation, which primarily served to unbundle
generation, transmission, distribution and ancillary services
into separate components of a utilitys service. As in
other industries that have been deregulated, competition in the
electric service industry was intended to provide consumers with
a choice of multiple suppliers and was expected to promote
product differentiation, lower costs and delivery of enhanced
services. To obtain these benefits, customers in deregulated
utility markets would be able to choose to switch their electric
supply service from their local utility to an alternative
supplier.
In 1996, some states, and some of the utilities within those
states, proceeded to allow their end-use customers direct access
to marketers, enabling them to purchase their electricity
commodity from entities other than the local utilities in
competitive retail markets. These proceedings created new market
participants of which Commerce Energy is one. They are known in
California as Electricity Service Providers, or ESPs, and in
other states by this or similar terms. Presently, approximately
one-half of the states in the United States have either enacted
enabling legislation or issued regulatory orders to proceed with
such retail direct access.
The electricity distribution infrastructure in place prior to
deregulation remains largely unchanged, with the primary
difference being that parties other than the local utility can
utilize the delivery infrastructure by paying usage fees. ESPs
use this established electricity network for the delivery of
energy to their customers.
Electricity is a real-time commodity and cannot be stored. As
soon as it is produced, it must be simultaneously delivered into
the grid to meet the demand of end users. Most electricity grids
and wholesale market clearing activities are managed by third
party entities known as Independent System Operators or ISOs, or
Regional Transmission Organizations or RTOs. The ISO or RTO is
responsible for system reliability and ensures that physical
electricity transactions between market participants are managed
in such a way as to assure that proper electricity reserve
margins are in place, grid capacity is maintained and supply and
demand are balanced.
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To maintain profitability, we must effectively manage or shape
our purchased electricity supply to the real-time demand or load
of our customers. These load-shaping activities, required by the
hourly variability in the electricity usage patterns of our
customers compared to the fixed hourly volume purchased from our
suppliers, results in our holding of long or short energy
positions. A long position occurs when we have committed to
purchase more electricity than our customers need, and a short
position occurs when our customers usage exceeds the
amount of electricity we have committed to purchase. In both
situations, we utilize the wholesale electricity spot market and
ISO clearing markets to balance our long or short energy
positions, selling supply when in a long position and buying
when in a short position. It is not possible to be completely
balanced on every delivery hour; therefore we always have some
exposure to price volatility in the wholesale market for
electric power.
Purchases and sales in the wholesale market are regulated by
FERC, to whom we report regularly. Weather, generation capacity,
transmission, distribution and other market and regulatory
issues also are significant factors in determining our wholesale
procurement and sales strategies in each of the markets we serve.
FERC has deregulated the wholesale electricity market by
allowing power marketers and utilities who do not have market
controlling power, to sell wholesale electric power at market
rates (
i.e.
, whatever rate the buyer and seller agree
upon), as opposed to requiring that prices be cost-based
(
i.e.
, based on the suppliers cost of the
electricity).
FERC has further encouraged competition in the wholesale bulk
power markets by promulgating open access transmission rules in
1996, which have led to the increasing commoditization of
electricity markets. FERCs open access transmission rules
require transmission providers under its jurisdiction to allow
eligible customers access to their transmission systems at
cost-based rates. This has enabled purchasers of wholesale power
to access a larger number of potential suppliers, thereby
enhancing competition.
FERC has continued to promote increased competition in RTOs
which have ultimate control over the bulk transmission system in
a particular geographic area. Wholesale electricity or bulk
power, once purchased and sold almost exclusively between
traditional utilities under bilateral arrangements, is now
traded by many different market participants on organized
markets, including hourly, daily and monthly spot markets, power
exchanges and financial markets, such as futures and options
markets. Competitive markets now exist in many regions of the
country for energy, automatic generation control, spinning
reserves, other categories of ancillary services and capacity.
Organizations such as the New York Mercantile Exchange, or
NYMEX, and the Intercontinental Exchange, or ICE, offer trading
opportunities in electricity futures and options at various
locations across the country. The price of electricity is
largely set by these competitive markets. Recently, the growth
and evolution of wholesale electricity markets has been
accelerated with the formation of RTOs. These RTOs are
developing organized market structures for the purpose of
providing more efficient and competitive wholesale marketplaces
for the benefit of consumers in the regions in which they
operate.
Retail electric marketers procure power supplies for delivery to
end-use customers from a variety of wholesale power producers or
merchant generation companies, either through term supply
contracts or on a spot basis. In addition, short-term daily or
hourly supply requirements can be purchased or sold through the
balancing markets operated by the ISO or RTO. The physical
distribution of electricity to retail customers remains the
responsibility of the local utility, which collects fees for its
services. Most states also allow the utility to provide
additional services, such as reading meters, generating customer
bills, collecting bills and taking requests for service changes
or problems, while in other states the utility is not allowed
to, or chooses not to, perform these services.
Natural
Gas
The natural gas industry, government regulated since 1938, began
a process of deregulation in the early 1980s leading to a
dynamic industry with a highly competitive market place and a
commodity that is widely traded in the daily and futures
markets. The market price of natural gas is quoted at various
locations or regional hubs around the country. These regional
hubs are usually priced at a differential to the largest
centralized point for natural gas spot and futures trading in
the United States known as the Henry Hub, located in Louisiana,
and used by the NYMEX as the contractual point of delivery for
its natural gas futures contracts. There are over 70 major
market hubs, or intersections of various pipeline systems, where
natural gas transactions occur. In addition, purchases and sales
are made at thousands of gas processing plants where gas enters
the national grid, city gate interconnections where gas
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leaves the national grid, and industrial and electric generator
direct connections with large pipelines making up the national
grid. Thousands of contracts are bought and sold daily at the
market centers. These market centers have various degrees of
liquidity in both the cash and forward markets. Prices may vary
widely from hub to hub, reflecting regional market conditions.
Additionally, thousands of transactions occur at non-market hub
interconnections and often these transactions are based upon or
priced relative to the major market hub or hubs in their
vicinity.
Although transactional prices of natural gas are determined by
market forces, the cost of transportation of natural gas from
the outlet of gathering systems and processing plants to the
city gate interconnection with local gas
distributors is performed by regulated pipelines which
essentially act as common carriers. Any market participant
desiring transportation services from such pipelines must be
offered such services on an equal basis with other market
participants. Transportation from the city gate to the burner
tip, a common term for where a consumer uses the gas, is
performed by regulated local utilities. Unlike the interstate
natural gas pipelines that act as common carriers, the local gas
distribution companies are a mixture of common carrier,
selective carrier, and non-carrier systems. Only common carrier
and some selective carrier systems can be accessed to serve
retail residential and commercial/industrial customers.
Retail natural gas providers for the most part procure natural
gas supplies for delivery to end-use customers from a variety of
wholesale natural gas suppliers, mostly at a relevant market
hub, either through term supply contracts or on a spot basis.
The physical distribution of natural gas to retail customers
remains the responsibility of the local natural gas utility,
which collects a fee for the use of its distribution system.
Core
Products and Services
Our core business is the retail sale of electricity and natural
gas to end-use customers. We also provide professional
consulting and technology services to utilities, electricity
generators, wholesale energy merchants, financial institutions
and energy technology companies.
Commerce
Energy, Inc.
We sell electricity and natural gas service to customers under
both month-to-month and longer-term service contracts. The
difference between the sales price of energy delivered to our
customers and the related cost of our energy supplies,
transmission costs, distribution costs and ancillary services
costs provides our gross profit margin. The electricity and
natural gas we sell is generally metered and delivered to our
customers by the local utilities. The local utilities also
provide billing and collection services for many of our
customers on our behalf.
We buy electricity and natural gas in the wholesale market in
time-specific, bulk or block quantities usually at fixed prices.
With respect to electricity markets, we balance the differences
between the actual sales demand or usage of our customers and
our bulk or block purchases by buying and selling any shortfall
or excess in the spot market. ISOs and RTOs perform real-time
load balancing for each of the electric grids in which we
operate. Similarly, with respect to natural gas markets, supply
and demand balancing is performed by Commerce Energy in
connection with agreements with the local distribution company
or LDC utilities or by the LDCs themselves on behalf of Commerce
Energy, for each of the natural gas markets in which we operate.
We are charged or credited by the ISOs and LDCs for balancing
the electricity and natural gas purchased and sold to our
customers.
Skipping
Stone Inc.
Skipping Stone offers a number of related professional
consulting services and technologies to energy companies such as
utilities, electricity generators, natural gas pipelines,
wholesale energy merchants, energy technology providers and
investment banks. Skipping Stone is focused on assisting clients
with business process improvements, market research, training,
Sarbanes-Oxley process level implementations, systems design and
selection, and strategic and tactical planning for new market or
merger activities. Additionally, Skipping Stone provides natural
gas pipeline information to market participants and government
customers through its technology center using its
capacitycenter.com website.
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Our
Customers and Markets
As of July 31, 2007, we were delivering electricity and
natural gas supply to customers in 10 states and 22 LDC
markets. We periodically review and evaluate the profitability
of our operations in each of these markets and the advantages to
us of entering other potential LDC markets that are open for
direct access sales to end-use customers. The review of entrance
in a new market area would include exploring opportunities to
acquire existing portfolios of customers from current suppliers
in targeted markets.
We operate in one reportable business segment, energy retailing,
in one geographic area, the United States. Our customer base
consists of residential, commercial, industrial and
institutional customers. Our business is not dependent upon any
one customer or a few major customers and, during fiscal 2007,
no one customer accounted for more than 10% of our net revenues.
In addition to expansion of our core products and services into
new deregulated markets and targeted customer classes, we are
working to broaden the scope of our energy-related products and
services to include energy efficiency offerings and additional
outsourced services.
As of July 31, 2007, we served approximately 196,000
electricity and natural gas customers. Although a number of our
customers, particularly in our commercial and industrial sales
segment, have more than one account, we determine and report our
customer count with each customer defined as an individual
customer account. We served electricity customers in 12 LDC
markets within six states: California, Pennsylvania, Michigan,
Maryland, New Jersey and Texas and natural gas customers in 13
LDC markets within seven states: California, Florida, Georgia,
Maryland, Nevada, Ohio and Pennsylvania.
Sales of electricity and natural gas comprised 64% and 34%,
respectively, of total net revenues during fiscal 2007; 74% and
25%, respectively, during fiscal 2006; and 89% and 10%,
respectively during fiscal 2005.
Skipping Stone is engaged by over 50 clients under master
agreements, with up to a dozen active engagements in any given
month. Approximately 1%-2% of total net revenues in fiscal 2005
through 2007 have been attributable to Skipping Stone.
Strategy
Commerce Energys profitability depends on our ability to
achieve sufficient customer scale in order to create a
profitable operating cost structure. To achieve this scale, we
intend to substantially grow our customer base in markets that
offer adequate gross margins, shed customers which may no longer
be served economically, evaluate and align our market presence
to achieve optimum returns on investments and seek out
acquisition opportunities that will advance our growth goals.
Growth plans include:
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Substantially growing our customer base in energy markets that
have rate structures, market rules, consumer demographics,
energy consumption patterns, access to favorable energy supply
and risk management profiles that allow us to economically serve
the market.
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Establishing a market position for the Commerce Energy brand
that is differentiated from competitors, relevant to customers
and other key stakeholders and executable by the Company.
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Within our mass market division, continuing to develop a robust
sales channel mix including outbound and inbound telesales,
online sales and enrollment, affinity alliances, direct mail and
advertising, as well as various indirect sales partnerships,
including network marketing, door-to-door solicitations,
independent agents and online affiliates.
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Establishing strategic supplier relationships that will enable
us to offer a broad range of innovative service plans, pricing
flexibility and competitive rates.
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Offering additional products and services to our customers
designed to help consumers use energy more efficiently and to
otherwise bring better control of their energy costs.
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Pursuing community aggregation programs that enable us to enroll
larger numbers of consumers more economically than through
traditional
one-by-one
marketing efforts.
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Continuing to develop our Commercial & Industrial or
C&I division in its pursuit of small- and medium-size
commercial consumers, particularly those with multiple-location
(multi-state) requirements.
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Sales and
Marketing
Commerce Energy markets electricity and natural gas utilizing
contract terms based either on fixed or variable rates. The
majority of our fixed-rate contracts are for a duration of 12 to
24 months, with occasional shorter-term offerings based on
market conditions and customer preferences. Our monthly variable
rate contracts are cancellable after 30 days notice,
allowing customer flexibility with respect to a longer term
price or supplier commitment. During fiscal 2007, approximately
85% of our new customer sales contracts were under fixed-rate
contract terms. As expected, following unprecedented increases
in the wholesale cost of energy and significant volatility of
market prices during the second half of calendar 2006, customers
were more inclined to lock in certainty in the cost of their
energy. As the wholesale market price of energy declines, we
believe customers may increasingly move toward our monthly
variable-rate contracts, thus allowing them to take advantage of
decreasing market prices.
A variety of approaches are utilized in acquiring customers,
including a professional sales force calling on C&I
end-users and various mass market sales channels in pursuit of
residential and small businesses. Historically, a majority of
our customers have been acquired through telesales and network
marketing. More recently, door-to-door sales have been added as
well as targeted broadcast advertising, direct mail and
on-line
affiliates.
Service after the sale is a critical part of our success. During
fiscal 2007, high levels of customer growth resulted in hiring
and training new staff members, as well as improving technology
platforms to expedite the processing of new customer accounts,
to ensure timely and accurate billing and to provide one-call
resolution to customer inquiries.
Our sales efforts are divided into two divisions: C&I,
representing sales to medium-sized and larger commercial
accounts, and Mass Market, comprised of residential customers
and small businesses.
Commercial &
Industrial
The C&I segment comprises electricity and natural gas sales
to small and
medium-size
commercial consumers, municipal and government entities. These
sales primarily consist of structured products and negotiated
contracts developed to meet the budgetary needs and risk
tolerance of an individual customer. The typical C&I
customer possesses a high level of understanding of the energy
business and current market conditions. Competition for these
types of customers is robust, with several established
competitors in each geographic market. C&I sales involve a
longer sales cycle, higher energy usage and lower per unit
margins than the typical mass market customer.
Commerce Energy has established itself as a preferred provider
of customers with multi-location, multi-state requirements.
Leveraging our information systems and operational capabilities,
we are able to attract and retain customers such as retail
chains, hotel/motel chains, food service chains and school
districts, in addition to small- and medium-sized,
single-location commercial consumers. Although other indirect
sales channels are utilized, we make sales to this customer
segment largely through the establishment of direct customer
relationship by experienced account executives.
Mass
Market
Sales to mass market customers are comprised of pre-defined
service plans developed on the usage patterns of a typical small
business or residential consumer. Historically, telesales and
network marketing were utilized almost exclusively for the
acquisition of customers in the mass market. In order to
significantly increase our sales in this customer segment, we
began utilizing a number of other sales channels for the
acquisition of mass market customers, during fiscal 2007,
including third-party door-to-door commissioned salespersons,
online shopping sites, direct mail and targeted print and
broadcast advertising.
Energy
Supply
We do not own electricity generation assets or natural gas
producing properties. All of the electricity and natural gas we
sell to our customers is purchased in the wholesale market from
third-party suppliers in time-specific
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block quantities under short-term and long-term contracts,
usually at fixed prices. Although we have open lines of credit
with suppliers, contractual purchase terms with suppliers often
require additional collateral to support our energy purchases.
We utilize our available cash and letters of credit issued under
our bank credit facility to meet any collateral requirements of
our energy suppliers.
With respect to electricity markets, we balance the differences
between the actual sales demand or usage of our customers and
our bulk or block purchases by buying and selling any shortfall
or excess in the spot market. ISOs and RTOs perform real-time
load balancing for each of the electric grids in which we
operate. Similarly, with respect to the natural gas market,
supply and demand balancing is performed by Commerce Energy in
connection with agreements with the LDC utilities or by the LDC
themselves on behalf of Commerce Energy, for each of the natural
gas markets in which we operate. We are charged or credited by
the ISOs and LDCs for balancing of our electricity and natural
gas purchased and sold for our account, and we are subject to
costs or fees charged by the ISOs or LDCs for these electricity
and natural gas balancing activities related to our account.
Wholesale electricity and natural gas are readily available from
various third party suppliers in our markets, except for the
state of Michigan, where all of our electricity is purchased
from one supplier. In fiscal 2007, two electricity suppliers
each accounted for 10% of our direct energy costs and one gas
supplier accounted for 25% of our direct energy costs, and their
relationships are not secured by
long-term
contracts. Based upon current information from our suppliers, we
do not anticipate any shortage of supply. However, in the event
of a supply shortage, there can be no assurance that we would be
able to timely secure an alternative supply of electricity or
natural gas at prices comparable to our current contracts, and
the failure to replace a supplier in a timely manner at
comparable prices could materially harm our operations.
We employ risk management policies and procedures to control and
monitor the risks associated with volatile commodity markets and
to assure a balanced energy-sales-and-supply portfolio within
defined risk tolerances.
Competition
Commerce
Energy, Inc.
In markets that are open to competitive choice of retail energy
suppliers, there are generally three types of competitors: the
incumbent utilities, utility-affiliated retail marketers and
small to mid-size independent retail energy companies, such as
Commerce Energy. Competition is based primarily on price,
product offerings and customer service.
The competitive landscape differs in each utility service area,
and within each targeted customer segment. For residential and
small commercial customers in most service territories, the
primary competitive challenges come from the incumbent utility
and affiliated utility marketing companies. For the medium-sized
commercial customer, competitive challenges come from the
utility and its affiliated marketing company, as well as other
independents. However, this segment is still the least targeted
segment among our competition due to the difficulty in balancing
cost of acquisition and margin objectives. The large commercial,
institutional and industrial segments are very competitive in
most markets with nearly all customers having already switched
away from the utility to an alternate provider. National
affiliated utility marketers, energy producers and other
independent retail energy companies often compete for customers
in this segment.
The incumbent regulated utilities and the nationally-branded
utility affiliates typically benefit from the economies of scale
derived from the strength of substantial asset-based balance
sheets, and vertically integrated business models that combine
production, transmission and distribution assets. For incumbent
utilities these advantages are often offset by the lack of
flexibility to offer multiple product choices to their
customers, while the nationally- branded affiliates often
struggle with long-term focus and cultural adaptation to a
non-regulated market environment.
Increasing our market share depends on our ability to convince
customers to switch to our service. The local utilities have the
advantage of long-standing relationships with their customers,
and they have longer operating histories, greater financial and
other resources and greater name recognition in their markets
than we do. In addition, local utilities have been subject to
many years of regulatory oversight and thus have a significant
amount of experience regarding the policy preferences of their
regulators, as well as a critical economic interest in the
7
outcome of proceedings concerning their revenues and terms and
conditions of service. Local utilities may seek to decrease
their tariff retail rates to limit or to preclude the
opportunities for competitive energy suppliers and may seek to
establish rates, terms and conditions to the disadvantage of
competitive energy suppliers. There is an emerging trend among
some local utilities to exit the merchant function and actively
encourage customers to change their energy supply service. This
is sometimes encouraged by the framework for deregulation within
which the local utility operates.
Among the retail marketers and wholesale merchants, competition
is most intense for the larger volume commercial and industrial
accounts. Our primary target customer segments are small to
medium commercial customers. We expect that the combination of
our existing residential customer base and our continued growth
will enhance our ability to successfully compete for larger
commercial and institutional customers.
Most customers who switch away from the local utility do so for
economic benefit. Once switched, customer retention is based on
continuing competitive pricing, reliability of supply and
customer service.
Some of our competitors, including local utilities, have formed
alliances and joint ventures in order to compete in the
restructured retail electricity and natural gas industries. Many
customers of these local utilities may decide to stay with their
long-time energy provider if they have been satisfied with their
service in the past. Therefore, it may be difficult for us to
compete against local utilities and their affiliates.
We also may face competition from other nationally-branded
providers of consumer products and services. Some of these
competitors or potential competitors may be larger and better
capitalized than we are.
Skipping
Stone Inc.
We face competition in selling consulting and outsourced
services from a large variety of companies. These competitors
may be engaged in the energy business, as we are, or may be
national and international management and information technology
firms.
Seasonality
Our sales volumes and revenues are subject to fluctuations
during the year due primarily to the impact of seasonal weather
factors on customer energy demand and the related market prices
of electricity and natural gas. Electricity sales volumes are
historically higher in the summer months for cooling purposes,
followed by the winter months for heating and lighting purposes.
Natural gas sales volumes are higher in the winter heating
season, with the lowest demand occurring during the summer.
Governmental
Regulation
In states that have adopted deregulation, state Public Utility
Commissions or PUCs, Public Service Commissions or PSCs, or
equivalent bodies, have authority to license, certify and
regulate certain activities of electric and natural gas
retailers. Commerce Energy is subject to regulation by the
Commissions in each state in which we sell electricity and
natural gas. As of July 31, 2007, we were licensed or
certified by the applicable Commissions in 11 states. These
licenses and certificates permit us to sell electricity and
natural gas to commercial, industrial, institutional and
residential customers. The requirements for licensing and the
level of regulation vary from state to state.
We consider each utility service territory within which we
operate to be a distinct market due to the unique
characteristics of each. A discussion of regulations for our
market service areas follows.
State
Regulations
Wholesale market rules are expected to change over the next
several years as RTOs continue in their efforts through a
variety of FERC-filed or state Commission rules and procedures
to relieve congested transmission systems, encourage expansion
of transmission networks and attempt to enhance competition in
the bulk power markets. These changes will likely impact our
retail electricity business in several RTOs in which we operate,
specifically: Pennsylvania New Jersey
Maryland or PJM Interconnection, referred to as the PJM Market,
Electric Reliability Council of Texas, referred to as ERCOT, and
the California Independent System Operator or
8
CAISO. These proposed changes could increase transmission
charges in the form of congestion pricing to relieve congestion
at certain delivery or interconnection points on a transmission
system (nodal pricing and related measures) and through higher
transmission capacity charges permitted by FERC to stimulate
more investment in new transmission lines and facilities. While
these changes will likely increase transmission charges, at
least in the short run, they may lead to a more efficient and
expanded transmission system within these RTOs that can
accommodate more transactions, and help the Company to access
more customers at the wholesale and retail level. There is no
way to impute an exact effect through a cost/benefit analysis
because there are many variables, and RTOs may be permitted
different ways to achieve the same objective of enhancing
competition in the bulk power, wholesale markets.
Electricity
California
.
In 1996, California
Assembly Bill 1890 codified the restructuring of the California
electric industry and provided for the right of Direct Access.
Direct Access allowed electricity customers to buy their power
from a supplier other than the electric distribution utilities
beginning January 1, 1998. On April 1, 1998, we began
supplying customers in California with electricity as an ESP. On
September 20, 2001, the California Public Utilities
Commission or CPUC, issued a ruling suspending electricity
Direct Access. This ruling permits ESPs to keep their current
customers and to solicit Direct Access customers served by other
ESPs; however, it prohibits us from signing up new non-Direct
Access customers in California, for an undetermined period of
time. The amount of statewide load on Direct Access service has
declined to approximately 10%.
On May 24, 2007, the CPUC voted 4-1 to begin a new
proceeding Order Instituting Rulemaking or OIR,
which will examine, among other things, the legal authority of
the CPUC to reopen the retail electric market unilaterally,
(without further legislation), the public policy benefits of
lifting the Direct Access suspension, and the retail rules
governing a reconstituted Direct Access market. It is
anticipated the OIR will be completed in the second half of
2008, and that as a result, the Direct Access market may reopen
in 2009, unless legislation is introduced to prevent such a
result.
Under legislative mandate, the CPUC is implementing the
states Resource Adequacy Requirement or RAR. In September
2005, California Assembly Bill 380, covering electrical
restructuring and resource adequacy was passed into law. This
bill requires the CPUC, in consultation with the ISO, to
establish RARs for all Load-Serving Entities or LSEs. The bill
requires each LSE to secure generating capacity adequate to meet
its load requirements, including but not limited to, peak demand
and planning and operating reserves, deliverable to locations
and at times as may be necessary to provide reliable electric
service. The CPUC issued its Final Decision on system RARs on
October 27, 2005. The Final Decision requires LSEs,
including Investor-Owned Electric Utilities or IOUs, or ESPs,
and Community Choice Aggregators or CCAs, to have capacity to
serve their retail customers forecasted loads and a
15-17%
reserve margin beginning in June 2006. On June 29, 2006,
the CPUC issued its decision on local RARs, for which
requirements are established annually under CPUC allocation
principles. The CPUC adopted a penalty of $40 per kW-year on the
amount a LSE is deficient in meeting the annual requirements, in
addition to backstop procurement costs. As a LSE, Commerce
Energy is subject to the RARs and its provisions, including
penalties for non-compliance. The ability of Commerce Energy to
recover costs associated with RAR from its customers will be
subject to market pricing and competitive forces.
On September 26, 2006, California Senate Bill 107 was
signed into law. The bill amends the existing law concerning
renewable portfolio standards or RPS, for LSEs in the state. The
bill accelerates the procurement targets such that 20% of retail
sales are procured from eligible renewable energy resources no
later than December 31, 2010. The former law required 20%
by 2017. Rules to implement Californias RPS, including
development of a renewable energy certificate market and
flexible compliance measures, continue to evolve. As such, the
associated costs to Commerce Energy or its customers are not
fully known.
On September 27, 2006, California Assembly Bill 32,
The California Global Warming Solutions Act of 2006,
was signed into law. AB 32 sets in statute mechanisms to reduce
greenhouse gas or GHG, emissions to 1990 levels, by the year
2020. Carbon dioxide or
CO
2
makes up about 83% of Californias GHG emissions, largely
from fossil fuel combustion. Transportation is responsible for
42% of
CO
2
emissions and electric power emits 19.6% of
CO
2
emissions. The impact of this bill is not yet known. The
regulatory agencies continue to debate whether the
9
GHG reporting responsibilities and reduction requirements should
be imposed as either a first seller or load
based method. First seller method covers the
generating plants responsible for GHG emissions. A load
based method would pose a regulatory burden on us, and
perhaps a cost increase to our retail customers.
CAISO is expected to implement a nodal market design on
April 1, 2008, known as Market Redesign and Technology
Upgrade or MRTU. The design provides better market efficiencies,
in terms of congestion management and market price signals.
However, the design poses systems complexity, higher transaction
volumes, and requires greater hedging sophistication for market
participants such as Commerce Energy. Additionally, MRTU may
pose higher credit requirements because of congestion revenue
rights being allocated to, and auctioned among, load-serving
entities such as Commerce Energy. We are taking prudent steps to
prepare for MRTU. We have engaged third-party project management
and information technology services to guide this effort and
convert our transaction systems.
California
Refund Proceeding
In 2001, FERC ordered an evidentiary hearing (Docket
No. EL00-95)
to determine the amount of refunds due to California energy
buyers for purchases made in the spot markets operated by the
CAISO and the California Power Exchange or CPX, during the
period October 2, 2000 through June 20, 2001, or the
Refund Period. Among other holdings in the case, FERC determined
that the Automated Power Exchange or the APX, and its market
participants could be responsible for, or entitled to, refunds
for transactions completed in the CAISO and the CPX spot markets
through APX. FERC has not issued a final order determining
who owes how much to whom in the California Refund
Proceeding, and it is not clear when such an order will be
issued. As discussed above, APX and its market participants have
entered into a settlement that resolves how refunds owed to APX
will be allocated among its market participants.
In the course of the California Refund Proceeding, FERC has
issued dozens of orders. Most have been taken up on appeal
before the United States Court of Appeals for the Ninth Circuit
or the Ninth Circuit, which has issued opinions on some issues
in the last several years. These cases are described below in
the section as the California Litigation.
California Litigation. Lockyer v. FERC.
On September 9, 2004, the Ninth Circuit issued a decision
on the California Attorney Generals challenge to the
validity of FERCs market-based rate system. This case was
originally presented to FERC upon complaint that the adoption
and implementation of market based rate authority was flawed.
FERC dismissed the complaint after sellers refiled reports of
sales in the CAISO and the CPX spot markets and bilateral sales
to California Department of Water Resources during 2000 and
2001. The Ninth Circuit upheld FERCs authority to
authorize sales of electric energy at market-based rates, but
found that the requirement that sales at market-based rates be
reported quarterly to FERC for individual transactions is
integral to a market-based rate regime. The State of California,
among others, has publicly interpreted the decision as providing
authority to FERC to order refunds for different time frames and
based on different rationales than are currently pending in the
California Refund Proceedings, discussed above in
California Refund Proceeding. The decision remands
to FERC the question of whether, and in what circumstances, to
impose refunds or other remedies for any alleged failure to
report sales transactions to FERC. On December 28, 2006,
several energy sellers filed a petition for a writ of certiorari
to the U.S. Supreme Court. The U.S. Supreme Court
denied the petition. We cannot predict the scope or nature of,
or ultimate resolution of this case.
CPUC v. FERC.
On August 2, 2006,
after reviewing certain FERC decisions in the California Refund
Proceedings, the Ninth Circuit decided that FERC erred in
excluding potential relief for alleged tariff violations related
to transactions in the CAISO and the CPX markets for periods
that pre-dated October 2, 2000 and additionally ruled that
FERC should consider remedies for certain bilateral transactions
with the California Department of Water Resources previously
considered outside the scope of the proceedings. The decision
may expose Commerce to claims or liabilities for transactions
outside the previously defined refund period. At
this time, the ultimate financial outcome for Commerce is
unclear.
To allow parties the opportunity to consider ways to settle
disputes, the Ninth Circuit extended the deadline for seeking
rehearing of the CPUC and Lockyer decisions to November 16,
2007 and delayed issuing the order
10
remanding the CPUC and Lockyer cases back to FERC. We are
studying the courts decision, but are unable to predict
either the outcome of the proceedings or the ultimate financial
effect to us.
Pennsylvania
.
In 1996, the Electricity
Generation Customer Choice and Competition Act was passed. The
law allowed electric consumers to choose among competitive power
suppliers beginning with one-third of the States consumers
by January 1999, two-thirds by January 2000, and all consumers
by January 2001. Commerce Energy began serving customers in
Pennsylvania in 1999.
Current utility default rates are capped until 2010 as a result
of the restructuring related to the Electric Choice Law. As
power prices rise significantly, it has become clear that the
utility price cap is not realistic or representative of true
market power costs. Squeezed between a capped utility rate, high
wholesale electricity costs and the high cost of servicing
customers in Pennsylvania due to the market rules and market
structure, many companies, including Commerce Energy, have
reduced the number of customers they serve in the state. The
Pennsylvania Office of Consumer Advocate is circulating a
pricing analysis in an attempt to show that post-rate-cap rate
increases will be severe. This action is an attempt to support
its position that the Electric Choice Law needs to be modified
to eliminate the prevailing market prices standard
and replace it with a lowest reasonable cost
standard, in addition to other anti-competitive proposals that
it is supporting.
There are no current rate cases or filings at the Pennsylvania
PUC which would impact the Companys financial results.
PJM
.
PJM, the regional transmission
organization, comprising the wholesale transmission system for
our retail customers served in Pennsylvania, New Jersey and
Maryland, implemented a new Capacity Market design effective
June 1, 2007. Known as the Reliability Pricing Model or
RPM, this design auctioned generating capacity between sellers
and buyers. However, unlike the previous Capacity Market design,
RPM divided the PJM system into three geographic zones, and
awarded a single-clearing price for each zone and for each year
of three years forward. Capacity prices under RPM were
significantly higher than seen previously. As a capacity buyer
on PJM, this new design made it difficult for us to remain
competitive with default or bundled service offerings by the
incumbent utility in certain retail markets such as Baltimore
Gas & Electric or BGE.
Michigan
.
The Michigan state
legislature passed two acts, the Customer Choice Act and
Electricity Reliability Act, signed into law on June 3,
2000. Open Access, or Choice, became available to all consumers
of Michigan electric distribution utilities, beginning
January 1, 2002. We began marketing in Michigans
Detroit Edison service territory in September 2002.
On February 4, 2005, Detroit Edison filed an application to
unbundle and realign its electric rates. The application
proposed the unbundling of Detroit Edisons existing rate
classes into their cost components attributable to the
generation, including transmission, and distribution functions
and the phasing out of rate class imbalances relative to cost of
service. Detroit Edison explained that its application would
allow the utility to unbundle its residential, commercial and
industrial retail electric rate schedules into their separate
components based on 2004 fully allocated embedded costs.
On December 22, 2005, the Michigan Public Service
Commission or the MPSC approved Detroit Edisons filing.
The MPSC directed that distribution charges for choice and
bundled customers should be brought into parity through aligning
their rates, effective February 2006. This order resulted in a
rate reduction for bundled commercial and industrial customers.
This order had a major impact on Choice customers because the
MPSC allowed the utility to shift costs earlier associated with
energy charges to the distribution portion of the customer bill.
As a result, Choice customers saw an increase in their
distribution charges, which ultimately resulted in a total
bill increase.
New efficient meter rules and a removal of Detroit Edisons
stranded cost charge in combination with a higher power cost
recovery surcharge is closing the gap between the utilitys
rate and the rate offered by suppliers. However, competition has
been effectively halted in Michigan due to the design of Detroit
Edisons rate.
On April 19, 2007, a package of three pro-competitive bills
was introduced in the state Senate. One of those bills was also
introduced in the state House of Representatives. These bills
are supported by members of the Customer Choice Coalition, an
umbrella group of residential, commercial and industrial
customers as well as alternate electric suppliers and
independent generators. These bills take Michigans laws
toward allowing choice
11
and competition in the electric system and open the door to
additional movement toward a free market in a deliberate manner.
Maryland
.
In 1999, the Maryland General
Assembly passed the Electric Choice and Competition Act. Part of
this Act required that all customers receive a rate reduction,
followed by a rate freeze. The rate reduction of 6.5% for BGE
customers was based on the last BGE rate case in 1993. The rate
freeze in the BGE service territory expired on July 1,
2006. The market price obtained through the standard offer
service competitive auction process in the BGE service territory
increased 72%. This increase paved the way for Commerce Energy
to start offering products to all classes of customers at rates
that are market based and highly competitive to BGEs
standard offer service rate. Commerce Energy was licensed by the
Maryland PSC on July 7, 2004.
In an attempt to mitigate the impact of the BGE rate increase,
the Maryland General Assembly in special session in June, 2006
passed Senate Bill One which among other things limited the BGE
rate increase to 15% for the period July 1, 2006 through
May 31, 2007; however, that limit was imposed as a credit
to the utilitys transportation fees and did not affect the
commodity price increase.
In the closing hours of the 2007 session, the Maryland General
Assembly passed SB 400. The bill instructs the PSC to conduct
investigatory and evidentiary proceedings including the use of
outside experts and consultants to reevaluate the general
regulatory structure, agreements, orders and other prior actions
of the PSC under the Electric Customer Choice and Competition
Act of 1999, including the determination of, and allowances for,
stranded costs. The PSC is required to file an interim report on
or before December 1, 2007 to the governor and a final
report to the General Assembly on or before December 1,
2008.
New Jersey
.
Deregulation activities
began in New Jersey in November 1999 when the Board of Public
Utilities or the BPU, approved the implementation plan. Commerce
Energy began marketing in New Jersey in the Public Service
Gas & Electric Company or PSE&G, service
territory in December 2003.
Since 2002, the four New Jersey Electric Distribution Companies
including PSE&G have procured electric supply to serve
their Basic Generation Service or BGS, customers through a
statewide auction process held each year in February. BGS
customers are customers who are not served by a third party
supplier or competitive retailer. The utility uses a rolling
procurement structure whereby each year one-third of the load is
procured for a three-year period. A portion of the load that was
bid on three years ago will come up for re-bidding in 2007. We
anticipate that this will cause the auction rate to increase and
create a BGS rate that is closer to the current market price.
The New Jersey Board of Public Service has proposed revisions to
its energy competition standards. The rules will be applicable
to electric power suppliers, gas suppliers, BGS providers and
basic gas supply service or BGSS providers, electric public
utilities, gas public utilities, aggregators, energy agents,
energy public utilities and public utility holding companies.
The proposed rule changes include anti-slamming provisions,
affiliate relations, licensing and registration, government
aggregation programs and retail choice consumer protection
changes. We believe that we are in compliance with these pending
rule changes and see no material impact to our operations.
Texas
The Texas deregulation law, or
SB7, was enacted in 1999, enabling the Texas electric market to
open for retail competition and customer choice on
January 1, 2002. On that date Texas consumers could choose
their Retail Electric Provider or REP. Commerce Energy began
serving electric customers in the Oncor (formerly TXU Electric
Delivery) and CenterPoint service territories of ERCOT. On
May 16, 2005, we expanded further into the Texas service
territories of American Electric Power or AEP, and Texas New
Mexico Power or TNMP. On January 1, 2007, the default
service known as Price to Beat expired under SB7,
resulting in full price competition between retailers affiliated
with the incumbent utility and non-affiliated retailers.
Approximately 55% of retail load, approximately 43% in the
residential class alone, has switched to non-affiliated retail
electric providers, such as Commerce Energy.
Wholesale costs for congestion management, system reliability,
and balancing energy on the ERCOT grid may increase to an
unknown extent for market participants, such as Commerce Energy.
Specifically, cost responsibility and allocation for replacement
reserve service, an ancillary service for ERCOT grid operations,
continues under policy review in ERCOTs stakeholder
process, along with a proposal to implement administrative
pricing as an
12
adder to the balancing energy market price under certain
emergency conditions. Whether these costs will be directly
assigned to certain market participants, or uplifted
to all market participants based on a load-ratio share, is
unknown and continues under policy development. Our ability to
recover these charges from our retail customers is subject to
market pricing and competitive forces.
ERCOT is expected to shift its current operation of the
wholesale transmission system from zonal to nodal design in
December 2008. The nodal design will assign congestion costs
directly to those responsible, unlike the zonal design in which
most congestion costs are uplifted to all market
participants. However, like the nodal design expected for
California, and currently existing in the PJM market, nodal
poses systems complexity, higher transaction volumes, and
requires greater hedging sophistication for market participants
such as Commerce Energy. During the fiscal year ending
July 31, 2008, or fiscal 2008, we will be working with our
qualified scheduling entity on the ERCOT system to prepare for
the nodal design changes.
Credit risks have increased for retail electric providers
selling to residential customers. Under existing law, Commerce
and other retail electric providers can only use electric bill
payment history to deny service beginning on January 1,
2007. However, a common database providing electric bill payment
history is not available for retail electric providers. Until
the database is voluntarily created, or mandated by policy, we
will continue to rely on the Public Utility Commission of Texas
Customer Protection Rules to manage credit risk. Those rules
give us the right to request a deposit or advanced payment and
to disconnect for non-payment.
Natural
Gas
Beginning with the Natural Gas Policy Act of 1978, the
U.S. Congress initiated a process that ended federal
control over the price of natural gas at the wellhead. This
ultimately set in motion a series of public policy changes by
the FERC and state utility commissions that have resulted in
consumer choice programs for all natural gas users in certain
states.
We serve natural gas customers in 13 utility gas market areas in
the following seven states:
California
.
We currently serve
residential and small commercial customers in the Southern
California Gas and Pacific Gas & Electric gas markets.
We are the only core aggregation transportation provider to
residential customers in these market areas. There are no
current rate cases or filings pending before the California PUC
that are anticipated to impact our financial results.
Florida
.
In April 2000, the Florida
Public Service Commission adopted rules that extend customer
choice to all nonresidential users of natural gas in the State
regardless of volume. This gives small businesses in Florida the
same option that was previously available only to large
industrial and commercial customers. The rules also specify that
local distribution companies may offer transportation services
to residential customers. Commerce Energys entry into the
Florida natural gas market is a result of the acquisition of
commercial and industrial customers purchased from Houston
Energy Services Company, L.L.C., or HESCO, completed in
September 2006. We operate in four LDC markets in Florida.
Georgia
.
In 1997, the Georgia General
Assembly passed the Georgia Natural Gas Competition and
Deregulation Act, or the Georgia Gas Act. The Georgia Gas Act
reorganized the Georgia retail natural gas market and allowed
natural gas marketers to serve retail consumers. The Georgia
Public Service Commission has implemented a comprehensive
unbundling program in the state. Over 80% of the states
residential gas consumers are serviced by certified gas
marketers. The ability to disconnect customers for non-payment
of invoices is severely constrained by system design and human
resource limitations in this market. This may affect our ability
to limit losses within this market.
Maryland
.
In 1997, natural gas choice
was brought to Maryland consumers. We provide gas service to
residential and small commercial customers in the Baltimore
Gas & Electric market area. There are other gas
marketers that serve these types of customers. In July 2005, the
Maryland Public Service Commission proposed enhanced customer
protection rules, yet to be adopted which will be applied to the
retail energy market. The approval of these rules will not
impact financial results as the Company we are currently
compliant.
13
Nevada
.
In 1985, the Nevada State
Legislature passed legislation permitting the selling of natural
gas as a discretionary service in Nevada. Consequently,
industrial and large commercial consumers of natural gas have
been able to choose their supplier. Commerce Energys entry
into the Nevada natural gas market is a result of the
acquisition of commercial and industrial customers purchased
from Houston Energy Services Company, completed in September
2006. We operate in one LDC market in Nevada.
Ohio
.
In 1997, natural gas choice
programs began in Ohio. We provide gas service to residential
and small commercial customers in the Dominion East Ohio, or
DEO, and Columbia Gas of Ohio service areas.
DEO will exit the merchant function in Ohio, and its plan was
approved by the Public Utilities Commission of Ohio, or PUCO,
earlier this year. The plan was divided into two sections, Phase
I and Phase II. In Phase I, suppliers and marketers bid for
supply only. In Phase II, suppliers and marketers will bid to
serve any bundled customers remaining with DEO. On
August 29, 2006, DEO conducted an auction for pricing of
its natural gas wholesale supply of natural gas for the time
period October 2006 through August 2008.
The auction participants will bid a monthly retail price
adjustment to be added to the monthly NYMEX settlement price.
The sum of these will become the Standard Offer Service, or SOS,
price that will replace the current Gas Cost Recovery, or GCR,
rate. The GCR rate has traditionally been calculated on a
monthly basis using imbalances from prior months. The new SOS
rate will more closely reflect true market costs.
It is expected that DEO will be submitting an application to the
PUCO by October 31, 2007 for Phase II.
Pennsylvania
.
In 1997, the natural gas
supply service in Pennsylvania was fully opened to competition
for all customer classes. The Natural Gas Choice and Competition
Act specified that after five years (July 2004) the PUC was
to initiate processes to evaluate the competitiveness of natural
gas supply services in the state and report its findings to the
General Assembly. As a result, the Pennsylvania PUC released a
report on its findings in 2006. It was discovered that the State
at this time could be more supportive of competition by changing
some of the rules and taxes currently imposed on suppliers. A
report regarding their findings is expected to be released later
this year.
Federal
Regulations
Federal
Energy Regulatory Commission
We also are subject to regulation by various other federal,
state and local governmental agencies. Our electric purchases
and sales are subject to the jurisdiction of the Federal Energy
Regulatory Commission, or FERC, under the Federal Power Act. We
make sales of electricity pursuant to a Power Marketer
certificate issued by FERC. While not generally regulating the
rates or terms or conditions of electricity sales, FERC has the
authority to institute proceedings to identify transactions
involving rates that are not just and reasonable due to market
manipulation and to reverse or unwind such transactions to
ensure just and reasonable rates.
The
Federal Energy Policy Act of 2005
On August 8, 2005, the Energy Policy Act of 2005, or EPA
2005, was signed into law. The scope of EPA 2005 is broad,
addressing fossil, nuclear and renewable energy, energy
efficiency and tax credits and incentives, across a range of
energy producing and consuming sectors. Certain changes mandated
by EPA 2005 may have a direct or indirect effect on our
business. In particular, provisions intended to enhance the
reliability of electric transmission and delivery systems,
further the transparency of electricity and natural gas markets,
encourage the construction of new electric transmission
infrastructure, and facilitate the importation of natural gas
should increase the efficiency of the competitive wholesale
natural gas and electricity markets in which we participate.
Furthermore, effective February 8, 2006, EPA 2005 replaced
the Public Utility Holding Company Act of 1935, or PUHCA 1935,
with the Public Utility Holding Company Act of 2005, or PUHCA
2005. PUHCA 2005 involves much less extensive regulation than
PUHCA 1935, but does include provisions involving FERC access to
books and records of public utility holding companies and their
affiliates, as well as certain oversight over affiliate
transactions. In accordance with EPA 2005, FERC has finalized
rules (RM05-32-000) to address certain issues related to
implementation of PUHCA 2005, including implementing the Federal
access to books and records.
14
In the past, through a series of no action letters, the
U.S. Securities and Exchange Commission, or the SEC, has
concluded that electric and gas marketers who did not own or
operate electric generation, transmission or distribution
facilities or gas retail distribution facilities were not
public-utility companies, and their parent companies were not
public-utility holding companies, under PUHCA 1935. In its final
rule, FERC confirmed that such electric and gas marketers are
not public-utility companies under PUHCA 2005, and that their
parent companies are not holding companies under PUHCA 2005
(provided such parent companies do not own other entities that
would be considered public-utility companies), so they would not
be subject to the provisions of the new law.
In June 2007, mandatory, enforceable reliability standards were
imposed on the bulk power industry under the Energy Policy Act
of 2005. The bulk power industry includes power plants and
transmission infrastructure. The North American Electric
Reliability Corporation or NERC is responsible for developing
and enforcing 83 reliability standards. NERC maintains a
compliance registry of 1,400 entities, and any violation of the
reliability standards can result in enforcement actions and
fines. We are not included among the 1,400 entities, but
nonetheless believe that such standards will serve to protect
the operation of the bulk power system, through which we procure
and deliver wholesale power supplies to our retail loads.
Intellectual
Property
Intellectual property assets include our proprietary software
and service products, our registered trademarks
(electricAmerica
®
,
Green
Smart
®
,
1-800-Electric
®
,
electric.com
®
,
capacitycenter.com
®
and Utilihost,
Inc.
®
),
our
1-800-Electric
telephone number and rights to our internet domain names
electric.com, commerceenergy.com and electricAmerica.com. We
believe that each of our intellectual property assets offers us
strategic advantages in our operations.
Our strategy for protection of our trademarks is to routinely
file U.S. federal and foreign trademark applications for
the various word names and logos used to market our services to
licensees and the general public. The duration of the
U.S. and foreign registered trademarks can typically be
maintained indefinitely, provided proper fees are paid and
trademarks are continually used or licensed by us.
Employees
As of July 31, 2007, we employed 255 full-time
employees, including 45 in administration, 50 in marketing and
sales, and 160 in operations. Our employees are not covered by a
collective bargaining agreement or represented by a labor union.
We have not experienced any work stoppages and consider our
employee relations to be good.
Available
Information
Our Internet address is
www.CommerceEnergy.com.
There, we
make available, free of charge, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. Our SEC reports can be accessed through
the Investor Relations section of our Web site. The other
information found on our Web site is not part of this or any
other report we file or furnish to the SEC.
Any of the materials we file with the SEC may also be read and
copied at the SECs Public Reference Room at
100 F Street, NE, Washington, D.C. 20549.
Information on the operation of the SECs Public Reference
Room may be obtained by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet website that contains reports,
proxy and information statements, and other information
regarding issuers that file electronically with the SEC at
http://www.sec.gov.
15
If
competitive restructuring of the retail energy market is delayed
or does not result in viable competitive market rules, our
business will be adversely affected.
The Federal Energy Regulatory Commission, or FERC, has
maintained a strong commitment to the deregulation of wholesale
electricity markets. The new provisions of EPA 2005 should serve
to further enhance the reliability of the electric transmission
grid which our electric marketing operations depend on for
delivery of power to our customers. This movement at the federal
level has in part helped spur deregulation measures in the
states at the retail level. Twenty-three states and the District
of Columbia have either enacted enabling legislation or issued a
regulatory order to implement retail access. In 18 of these
states, retail access is either currently available to some or
all customers, or will soon be available. However, in many of
these markets the market rules adopted have not resulted in
energy service providers being able to compete successfully with
the local utilities, and customer switching rates have been low.
Our business model depends on other favorable markets opening
under viable competitive rules in a timely manner. In any
particular market, there are a number of rules that will
ultimately determine the attractiveness of any market. Markets
that we enter may have both favorable and unfavorable rules. If
the trend towards competitive restructuring of retail energy
markets does not continue or is delayed or reversed, our
business prospects and financial condition could be materially
adversely impaired.
Retail energy market restructuring has been and will continue to
be a complicated regulatory process, with competing interests
advanced not only by relevant state and federal utility
regulators, but also by state legislators, federal legislators,
local utilities, consumer advocacy groups and other market
participants. As a result, the extent to which there are
legitimate competitive opportunities for alternative energy
suppliers in a given jurisdiction may vary widely, and we cannot
be assured that regulatory structures will offer us competitive
opportunities to sell energy to consumers on a profitable basis.
The regulatory process could be negatively impacted by a number
of factors, including interruptions of service and significant
or rapid price increases. The legislative and regulatory
processes in some states take prolonged periods of time. In a
number of jurisdictions, it may be many years from the date
legislation is enacted until the retail markets are truly open
for competition.
Other aspects of EPA 2005, such as the repeal of PUHCA 1935 and
replacing it with PUHCA 2005, may also impact our business to
the extent FERC does not continue the SECs precedent of
not regulating electric and gas marketers under PUHCA. A
proposed rulemaking implementing PUHCA 2005 is currently pending
before FERC. If marketers and their parent companies and
affiliates are to be regulated under PUHCA 2005, FERC may have
access to their books and records and has oversight of their
affiliate transactions. Various parties participating in FERC
rulemaking have urged FERC not to regulate marketers and other
entities that do not own or operate gas or electric facilities.
In addition, although most retail energy market restructuring
has been conducted at the state and local levels, bills have
been proposed in Congress in the past that would preempt state
law concerning the restructuring of the retail energy markets.
Although none of these initiatives has been successful, we
cannot assure stockholders that federal legislation will not be
passed in the future that could materially adversely affect our
business.
We
face many uncertainties that may cause substantial operating
losses and we cannot assure stockholders that we can achieve and
maintain profitability.
We intend to increase our operating expenses to develop and
expand our business, including brand development, marketing and
other promotional activities and the continued development of
our billing, customer care and power procurement infrastructure.
Our ability to operate profitably will depend on, among other
things:
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our ability to attract and to retain a critical mass of
customers at a reasonable cost;
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our ability to continue to develop and maintain internal
corporate organization and systems;
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the continued competitive restructuring of retail energy markets
with viable competitive market rules;
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our ability to effectively manage our energy procurement and
shaping requirements, and to sell our energy at a sufficient
profit margin; and
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our ability to obtain and retain credit necessary to support
future growth and profitability.
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16
We may
have difficulty obtaining a sufficient number of
customers.
We anticipate that we will incur significant costs as we enter
new markets and pursue customers by utilizing a variety of
marketing methods. In order for us to recover these expenses, we
must attract and retain a large number of customers to our
service.
We may experience difficulty attracting customers because many
customers may be reluctant to switch to a new supplier for
commodities as critical to their well-being as electricity and
natural gas. A major focus of our marketing efforts will be to
convince customers that we are a reliable provider with
sufficient resources to meet our commitments. If our marketing
strategy is not successful, our business, results of operations
and financial condition could be materially adversely affected.
We
depend upon internally developed, and, in the future will rely
in part on vendor-developed, systems and processes to provide
several critical functions for our business, and the loss of
these functions could materially adversely impact our
business.
We have developed our own systems and processes to operate our
back-office functions, including customer enrollment, metering,
forecasting, settlement and billing. We are currently in the
process of replacing a number of our internally developed legacy
software systems with vendor-developed systems. Problems that
arise with the performance of such back-office functions could
result in increased expenditures, delays in the launch of our
commercial operations into new markets, or unfavorable customer
experiences that could materially adversely affect our business
strategy. Any interruption of these services could also be
disruptive to our business. As we transition from our own
systems to new vendor-developed systems, we may incur
duplicative expenses for a period of time, and we may experience
installation and integration issues with the new systems or
delays in the implementation of the new systems. If we
experience some or all of these new system implementation risks
and these result in unreliable or inaccurate data for our
financial reporting, we may not be able to establish a
sufficient operating history for Sarbanes-Oxley 404 attestation
requirements, which we expect we must meet by no later than
fiscal year ending July 31, 2008 for managements
attestation, and July 31, 2009 for the attestation of our
independent auditors. Should our market capitalization exceed
$75 million (as defined) on January 31, 2008, we would
require the attestation of our independent accountants on
July 31, 2008.
Substantial
fluctuations in electricity and natural gas prices or the cost
of transmitting and distributing electricity and natural gas
could have a material adverse affect on us.
To provide electricity and natural gas to our customers, we
must, from time to time, purchase the energy commodity in the
short-term or spot wholesale energy markets which can be highly
volatile. In particular, the wholesale electricity market can
experience large price fluctuations during peak load periods.
Furthermore, to the extent that we enter into contracts with
customers that require us to provide electricity and natural gas
at a fixed price over an extended period of time, and to the
extent that we have not purchased the entire commodity to cover
those commitments, we may incur losses caused by rising
wholesale prices. Periods of rising prices may reduce our
ability to compete with local utilities because their regulated
rates may not immediately increase to reflect these increased
costs. Energy Service Providers like us take on the risk of
purchasing power for an uncertain load, and, if the load does
not materialize as forecast, it leaves us in a long position
that would be resold into the wholesale electricity and natural
gas market. Sales of this surplus electricity could be and often
are at prices below our cost. Long positions of natural gas must
be stored in inventory and are subject to the lower of cost or
market valuations that can produce losses. Conversely, if
unanticipated load appears that may result in an insufficient
supply of electricity or natural gas, we would need to purchase
the additional supply. These purchases could be and often are at
prices that are higher than our sales price to our customers.
Either situation could create losses for us if we are exposed to
the price volatility of the wholesale spot markets. Any of these
contingencies could substantially increase our costs of
operation. Such factors could have a material adverse effect on
our financial condition.
We are dependent on local utilities for distribution of
electricity and natural gas to our customers over their
distribution networks. If these local utilities are unable to
properly operate their distribution networks, or if the
operation of their distribution networks is interrupted for
periods of time, we could be unable to deliver electricity or
17
natural gas to our customers during those interruptions. This
would result in lost revenue to us, which could adversely impact
the results of our operations.
The
terms of our credit facility may restrict our financial and
operational flexibility.
The terms of our asset-based credit facility restrict, among
other things, our ability to incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with other persons or sell,
assign, transfer, lease, converge or otherwise dispose of all or
substantially all of our assets. Further, we and our subsidiary,
Commerce Energy, are required to maintain specified financial
ratios and satisfy certain financial condition tests. Our
ability and Commerce Energys ability to meet those
financial ratios and tests can be affected by events beyond our
ability and control, respectively, and there can be no assurance
that we will meet those tests. Substantially all of our assets
and our operating subsidiaries assets are pledged as
security under our asset-based credit facility.
We may
need additional capital in the future and it may not be
available on acceptable terms, or not at all.
In the future, we may need to raise additional capital to fund
the working capital requirements of our operations and growth,
enhance or expand the range of services or products we offer to
our customers, or respond to competitive pressures or perceived
opportunities, such as investment, acquisition and expansion
activities; if such additional capital funds are not available
when required or on acceptable terms, our business and financial
results could suffer.
We may
issue additional shares of common stock that may dilute the
value of our common stock and adversely affect the market price
of our common stock.
In addition to the approximately 30.4 million shares of our
common stock outstanding at July 31, 2007, we may issue
additional shares of common stock in the following scenarios: a
significant number of additional shares of our common stock may
be issued if we seek to raise capital through offerings of our
common stock, securities convertible into our common stock, or
rights to acquire such securities of our common stock.
Additionally, as of July 31, 2007, we may issue
approximately 7.0 million shares of our common stock
pursuant to outstanding stock options; and 1.0 million
shares of our common stock pursuant to awards under our 2006
Stock Incentive Plan.
A large issuance of shares of our common stock will decrease the
ownership percentage of current outstanding shareholders and may
result in a decrease in the market price of our common stock.
Any large issuance may also result in a change in control of the
Company.
If the
wholesale price of electricity decreases, we may be required to
post letters of credit for margin to secure our obligations
under our long term energy contracts.
If the market price of wholesale electricity decreases below the
price of the electricity we purchase under long-term contracts,
the power suppliers may require us to post margin in the form of
a letters of credit, or other collateral, to protect them
against our potential default on the contract. If we are
required to post such security, it could adversely affect our
liquidity.
Some
suppliers of electricity have been experiencing deteriorating
credit quality.
We continue to monitor the credit quality of our energy
suppliers to attempt to reduce the impact of any potential
counterparty default. As of July 31, 2007, the majority of
our counterparties are rated investment grade or above by the
major rating agencies. These ratings are subject to change at
any time with no advance warning. Deterioration in the credit
quality of our energy suppliers could have an adverse impact on
our sources of electricity purchases.
We are
required to rely on utilities with whom we compete to perform
some functions for our customers.
Under the regulatory structures adopted in most jurisdictions,
we are required to enter into agreements with local utilities
for use of the local distribution systems, and for the creation
and operation of functional interfaces necessary for us to serve
our customers. Any delay in these negotiations or our inability
to enter into reasonable
18
agreements with those utilities could delay or negatively impact
our ability to serve customers in those jurisdictions. This
could have a material negative impact on our business, results
of operations and financial condition.
We are dependent on local utilities for maintenance of the
infrastructure through which electricity and natural gas is
delivered to our customers. We are limited in our ability to
control the level of service the utilities provide to our
customers. Any infrastructure failure that interrupts or impairs
delivery of electricity or natural gas to our customers could
have a negative effect on the satisfaction of our customers with
our service, which could have a material adverse effect on our
business. Regulations in many markets require that the services
of reading our customers energy meters and the billing and
collection process be retained by the local utility. The local
utilitys systems and procedures may limit or slow down our
ability to add customers.
We are
required to rely on utilities with whom we compete to provide us
accurate and timely data.
In some states, we are required to rely on the local utility to
provide us with our customers energy usage data and to pay
us for our customers usage based on what the local utility
collects from our customers. We may be limited in our ability or
unable to confirm the accuracy of the information provided by
the local utility. In addition, we are unable to control when we
receive customer payments from the local utility. If we do not
receive payments from the local utility on a timely basis, our
working capital may be impaired. In the event we do not receive
timely or accurate usage data, our ability to generate timely
and accurate bills to our customers will be adversely affected
which, in turn, will impact the ability of our customers to pay
bills in a timely manner.
We are
subject to federal and state regulations in our electricity and
natural gas marketing business and the rules and regulations of
regional Independent System Operators, or ISOs, in our
electricity business.
The rules under which we operate are imposed upon us by federal
and state regulators, the regional ISOs and interstate
pipelines. The rules are subject to change, challenge and
revision, including revision after the fact.
In California, the FERC and other regulatory and judicial bodies
continue to examine the behavior of market participants during
the California Energy Crisis of 2000 and 2001, and to
recalculate what market clearing and
bi-lateral
contract prices should have or might have been under alternative
scenarios of behavior by market participants. In the event the
historical costs of market operations were to be reallocated
among market participants or recalculated in the event of
bi-lateral contracts, this could have a material adverse
financial impact on us, but the extent of any such amount cannot
be predicted. Please see the discussion under Part 1,
Item 1. Business Governmental Regulation
Electricity California.
In
some markets, we are required to bear credit risk and billing
responsibility for our customers.
In some markets, we are responsible for the billing and
collection functions for our customers. In these markets, we may
be limited in our ability to terminate service to customers who
are delinquent in payment. Even if we terminate service to
customers who fail to pay their utility bill in a timely manner,
we may remain liable to our suppliers of electricity or natural
gas for the cost of the electricity or natural gas and to the
local utilities for services related to the transmission and
distribution of electricity or natural gas to those customers.
The failure of our customers to pay their bills in a timely
manner or our failure to maintain adequate billing and
collection programs could materially adversely affect our
business.
Our
revenues and results of operations are subject to market risks
that are beyond our control.
We sell electricity and natural gas that we purchase from
third-party power supply companies and natural gas suppliers to
our retail customers on a contractual or monthly basis. We are
not guaranteed any rate of return through regulated rates, and
our revenues and results of operations are likely to depend, in
large part, upon prevailing market prices for electricity and
natural gas in our regional markets. These market prices may
fluctuate substantially over relatively short periods of time.
These factors could have an adverse impact on our revenues and
results of operations.
Volatility in market prices for electricity and natural gas
results from multiple factors, including:
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weather conditions, including hydrological conditions such as
precipitation, snow pack and stream flow;
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seasonality;
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unexpected changes in customer usage;
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transmission or transportation constraints or inefficiencies;
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planned and unplanned plant or transmission line outages;
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demand for electricity;
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natural gas, crude oil and refined products, and coal supply
availability to generators from whom we purchase electricity,
natural disasters, wars, embargoes and other catastrophic
events; and
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federal, state and foreign energy and environmental regulation
and legislation.
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We may
experience difficulty in successfully identifying, integrating
and managing the risks related to businesses or assets that we
may acquire and in realizing the anticipated economic benefits
related thereto.
We do not have a great deal of experience acquiring companies or
large blocks of assets, and the companies and assets we have
acquired have been small. We have evaluated, and expect to
continue to evaluate, a wide array of potential strategic
transactions. From time to time, we may engage in discussions
regarding potential acquisitions. Any of these transactions
could be material to our financial condition and results of
operations. In addition, the process of integrating an acquired
company, business or group of assets may create unforeseen
operating difficulties and expenditures and risk. The areas
where we may face risks include:
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The need to implement or remediate controls, procedures and
policies appropriate for a public company at companies that
prior to the acquisition lacked these controls, procedures and
policies;
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Diversion of management time and focus from operating our
business to acquisition integration challenges;
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Cultural challenges associated with integrating employees from
the acquired company into our organization;
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Retaining employees working in the businesses or group of assets
we acquire;
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The need to integrate the accounting, management information,
human resource and other administrative systems of an acquired
business or assets to permit effective management;
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The possibility of increased customer attrition with respect to
the assets we acquire; and
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The need to secure adequate supplies of electricity and natural
gas to service the demands of the acquired business or assets.
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Also, the anticipated benefit of many of our acquisitions may
not materialize. Future acquisitions or dispositions could
result in potentially dilutive issuances of our equity
securities, the incurrence of additional debt, contingent
liabilities or amortization expenses, or write-offs of goodwill,
any of which could harm our financial condition. Future
acquisitions may require us to obtain additional equity or debt
financing, which may not be available on favorable terms or at
all.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential stockholders
could lose confidence in our financial reporting; which would
harm our business and the trading price of our
stock.
We purchase substantially all of our power and natural gas under
forward physical delivery contracts, which are defined as
commodity derivative contracts under SFAS No. 133. We
also utilize other financial derivatives, primarily swaps,
options and futures, to hedge our price risks. Accordingly,
proper accounting for these contracts is very important to our
overall ability to report timely and accurate financial results.
We have devoted significant resources to remediate and improve
our internal controls. Although we believe that these efforts
have strengthened our internal controls and addressed the
concerns that gave rise to reportable conditions and material
weaknesses in fiscal 2004 and 2005, we are continuing to work to
improve our internal controls, particularly
20
in the area of energy accounting. We cannot be certain that
these measures will ensure that we implement and maintain
adequate controls over our financial processes and reporting in
the future. Any failure to implement required new or improved
controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our
reporting obligations. Inferior internal controls could also
cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading
price of our stock.
Investor
confidence and share value may be adversely impacted if our
independent registered public accountants are unable to provide
us with the attestation of the adequacy of our internal controls
over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act of 2002.
As directed by Section 404 of the Sarbanes-Oxley Act of
2002, the Securities and Exchange Commission adopted rules
requiring us, as a public company to include a report in our
Annual Report on
Form 10-K
that contains an assessment by management of the effectiveness
of our internal controls over financial reporting for fiscal
2008. In addition, our independent registered public accountants
must attest to and report on the effectiveness of our internal
controls over financial reporting. The requirement pertaining to
our independent registered public accountants attestation
report may initially apply to our Annual Report on
Form 10-K
for the fiscal year ending July 31, 2008, if our market
capitalization (as defined) exceeds $75 million on
January 31, 2008. How companies implement these
requirements, including internal control revisions, if any, to
comply with Section 404s requirements, and how
independent registered public accountants will apply these new
requirements and test companies internal controls, are
continually evolving. Although we are diligently and vigorously
reviewing our internal controls over financial reporting to
comply with the new Section 404 requirements, we cannot be
certain as to the outcome of the testing of our internal
controls and any remediation efforts that may be needed. When
independent registered public accountant attestation is
required, there is the risk that our independent registered
public accountants may not be satisfied with our internal
controls over financial reporting or the level at which these
controls are documented, designed, operated or reviewed, or that
the independent registered public accountants interpret the
requirements, rules or regulations differently than we do. This
could result in an adverse reaction in the financial marketplace
due to a loss of investor confidence in the reliability of our
financial statements, which ultimately could negatively impact
the market price of our shares.
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Item 1B.
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Unresolved
Staff Comments.
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Not Applicable.
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Item 1C.
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Executive
Officers of the Registrant.
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Information
About Our Executive Officers
The following table sets forth information regarding our
executive officers, including their respective business
experience during the last five years and age as of
October 16, 2007. Executive officers are elected by, and
serve at the pleasure of, the Board of Directors. There are no
arrangements or understandings pursuant to which any of the
persons listed below was selected as an executive officer.
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Name and Position
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Age
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Principal Occupation and Other Information
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Steven S. Boss
Chief Executive Officer and Director
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Mr. Boss has served as a director of the Company since July 2005
and was appointed Chief Executive Officer of the Company in
August 2005. Since August 2005, Mr. Boss also has served as a
director and President of the Companys principal operating
subsidiary, Commerce Energy, Inc., and as a director and Chief
Executive Officer of Skipping Stone Inc., another wholly-owned
subsidiary of the Company.
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Name and Position
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Age
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Principal Occupation and Other Information
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From 2003 to August 2005, Mr. Boss practiced law, specializing
in the representation of energy companies and commercial energy
users. He also has significant operating experience in the
retail energy industry. From 2000 to 2003, he served as
President of Energy Buyers Network LLC, an energy consulting
firm that provided regulatory representation and structured
direct-access energy transactions for commercial energy users.
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Before that, Mr. Boss served as President of Sierra Pacific
Energy Company and Nevada Power Services, both of which were
non-regulated energy services operating subsidiaries of Sierra
Pacific Resources, and served as President and Chief Executive
Officer of Sunrise Energy Services Inc. an independent, natural
gas marketing company whose stock was publicly traded on the
Amex and London stock exchanges.
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He earned a Bachelor of Science degree in Aerospace Engineering
from the University of Texas, a Juris Doctorate from the
University of Southern California and has been a member of the
California State Bar since 1974.
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J. Robert Hipps
Interim Chief Financial Officer
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Mr. Hipps joined the Company as Interim Chief Financial Officer
in July 2007. Mr. Hipps has been a partner with Tatum, LLC, an
executive service and consulting firm, since April 1998 and a
member of its board of managers since January 2003. While at
Tatum, he served as Interim Chief Financial Officer of Southstar
Energy, the parent company of Georgia Natural Gas, a natural gas
marketer, from October 2001 to February 2004 and Interim Chief
Financial Officer for the Municipal Electric Authority of
Georgia for a three month period.
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Earlier, Mr. Hipps was Senior Vice President of Finance and
Chief Financial Officer of National Services Industries (NSI), a
diversified New York Stock Exchange (NYSE) company, from 1990 to
1996. He previously served as Vice President and Controller, and
Vice President and Treasurer of General Signal Corporation, a
Fortune 300 company and producer of electronic and
electrical control systems. Prior to that, Mr. Hipps was
vice president and treasurer of Neptune International
Corporation, a NYSE company involved in fluid measurement and
water pollution control equipment.
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Name and Position
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Age
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Principal Occupation and Other Information
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Mr. Hipps began his career at Price Waterhouse & Co.s
New York office. He earned a Bachelor of Arts degree from
Yale University and a Master of Business Administration degree
from Stanford University. He received his CPA certification in
New York State.
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Thomas L. Ulry
Senior Vice President, Sales and Marketing
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Mr. Ulry joined the Company in February 2005 as Senior Vice
President, Sales and Operations and currently serves as Senior
Vice President, Sales and Marketing teams.
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From October 2003 until he joined Commerce, Mr. Ulry served as
Global Vice President and Chief Operating Officer of ACN Energy,
a network sales organization with a broad range of services
across the deregulated industries that we acquired in February
2005. ACN Energy is a division of ACN, Inc.
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From November 2001 to July 2003, Mr. Ulry served as Senior Vice
President for Nicor Energy LLC., a diversified company providing
natural gas distribution, where he was responsible for managing
the profit and loss center for its consumer business unit.
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Prior to that, Mr. Ulry served as President and Chief Operating
Officer for Energy.com Corporation, a company providing
comparison energy shopping over the Worldwide Web.
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Mr. Ulry has also worked at Access Energy Corporation and with
Unicorp Energy Inc., as Manager of Information Systems. In
addition, Mr. Ulry served as Director of Operations for Aquila
Inc. / Broad Street Oil & Gas where he designed, built and
implemented office systems.
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R. Nick Cioll
Vice President, Chief Risk Officer
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Mr. Cioll was appointed Chief Risk Officer of the Company in
October 2006. Mr. Cioll has served as Vice President of Risk
Management for Commerce Energy since July 2004.
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From April 2002 to July 2004, Mr. Cioll served as director of
Risk Management at TXU Corporation, a company that engages in
electricity generation, residential and business retail
electricity sales, and wholesale power and natural gas market
activities. From 2001 to 2002, Mr. Cioll served as Internal
Business Consultant at TXU Corporation. From 1999 to 2001, Mr.
Cioll served as Senior Vice President and Chief Strategy Officer
of RateXChange Corporation, an
e-commerce
startup.
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Mr. Cioll received a Bachelor of Science degree in Economics
from Louisiana State University and a Master of Business
Administration degree with a finance option from the University
of New Orleans. Mr. Cioll became a Certified Public Accountant
in 1993.
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We sublease approximately 39,000 square feet of office
space in Costa Mesa, California, which houses our principal
executive offices and administrative and operations space. This
lease expires in September 2009. We also lease approximately
17,000 square feet of office space in Irving, Texas which
expires in January 2010 and lease office space in Boston,
Massachusetts and Houston, Texas. The Boston office consists of
approximately 3,200 square feet under a lease that expires
in June 2010, and the Houston office consists of approximately
5,000 square feet under a lease that expires in September
2009.
23
We believe that our current facilities are sufficient for the
operation of our business, and we believe that suitable
additional space in various local markets is available to
accommodate any needs that may arise.
|
|
Item 3.
|
Legal
Proceedings.
|
American
Communications Network
On February 24, 2006, American Communications Network,
Inc., or ACN, delivered to us an arbitration demand claim,
alleging that Commerce was liable for significant actual,
consequential and punitive damages and restitution on a variety
of causes of action including anticipatory breach of contract,
unjust enrichment, tortuous interference with prospective
economic advantage and prima facie tort with respect to alleged
future commissions arising after their termination of the Sales
Agency Agreement effective February 9, 2006. ACN, Commerce
Energy and the Company entered into the Sales Agency Agreement
in connection with the Companys purchase of certain assets
of ACN and certain of its subsidiaries in February 2005. This
claim was delivered via mail to the Company but was not filed
with the American Arbitration Association, or the AAA.
On March 23, 2006, Commerce Energy filed a Demand for
Arbitration with the AAA in New York of this dispute, asserting
claims for declaratory relief, material breach of contract and
breach of the implied covenant of good faith and fair dealing.
Our Demand for Arbitration sought compensatory damages in an
amount to be determined at the arbitration. On May 4, 2006,
ACN filed with the AAA in New York its Demand for Arbitration of
this dispute with the Commerce Energy. In its Demand, ACN
alleges claims against Commerce Energy for breach of contract
and breach of implied duty of good faith and fair dealing,
seeking damages and restitution in amounts to be determined at
the hearing.
On June 11, 2007, the Company, Commerce Energy, Peter
Weigand, an individual, and ACN, entered into a Settlement
Agreement and Mutual Release or the Settlement Agreement.
Pursuant to the Settlement Agreement, Commerce and ACN mutually
released all claims against one another, and Commerce made a
cash payment of $3.9 million to ACN. In addition, the
Company, Commerce Energy and ACN have filed with the American
Arbitration Association a Stipulation to Dismiss All Claims with
Prejudice relating to the pending arbitration proceeding between
the Company, Commerce Energy and ACN, Case No. 13 198 Y
00688 06. Pursuant to the Settlement Agreement, the Company and
Commerce Energy have no future financial or other obligations to
ACN, other than customary covenants set forth in the Settlement
Agreement.
California
Refund Case
During 2000 and 2001, we bought, sold and scheduled power in the
California wholesale energy markets through the markets and
services of APX, Inc. or APX. As a result of a complaint filed
at FERC by San Diego Gas and Electric Co. in August 2000
and a line of subsequent FERC orders, we became involved in
proceedings at FERC related to sales and schedules in the CPX,
and the CAISO, markets, Docket
No. EL00-95;
which we refer to as the California Refund Case. A part of that
proceeding related to APXs involvement in those markets.
On January 5, 2007, APX, we and certain other parties, whom
we refer to as the Settling Parties, signed an APX Settlement
and Release of Claims Agreement, or the APX Settlement
Agreement, and filed such agreement along with a Joint Offer of
Settlement and Motion for Expedited Consideration with FERC in
the California Refund Case. The APX Settlement Agreement, among
other things, established a mechanism for allocating refunds
owed to APX and to resolve certain other matters and claims
related to APXs participation in the CPX and CAISO
centralized spot markets for wholesale electricity from
May 1, 2000 through June 20, 2001. The APX Settlement
Agreement became effective on March 1, 2007.
Under the APX Settlement Agreement, several Settling Parties are
entitled to payments from APX, with Commerce expected to receive
up to approximately $6.5 million. We received
$5.1 million of the settlement payment in April 2007 and
received the remaining $1.4 million in August 2007. By
entering into the APX Settlement Agreement, claims against us by
any party to the APX Settlement Agreement for refunds,
disgorgement of profits or other monetary or non-monetary
remedies for APX-related claims shall be deemed resolved with
prejudice and settled insofar as APX remains a net payment
recipient (as that term is defined in the APX Settlement
Agreement) in the proceeding at FERC.
24
In addition, the APX Settlement Agreement resolves and
terminates certain disputes pending before FERC and the United
States Court of Appeals for the Ninth Circuit relating to
APXs actions in the PX and CAISO centralized spot markets
for wholesale electricity, as well as disputes among
participants in the APX market and the appropriate allocation of
monies due among the APX participants insofar as APX continues
to be a net refund recipient (as that term is defined in the APX
Settlement Agreement) during the settlement period.
The Settlement Agreement is subject to possible court review. We
could be required to return or redistribute some or all of the
funds received under the Settlement Agreement. Also see
Part 1, Item 1. Business Governmental
Regulation Electricity California.
Lawrence
Clayton, Jr.
On August 5, 2007, we received a statement of claims
against us, which also references certain of our officers and
directors, on behalf of Lawrence Clayton, Jr., the former Senior
Vice President, Chief Financial Officer and Secretary of the
Company, in connection with Mr. Claytons termination
on July 25, 2007. In his statement of claims,
Mr. Clayton disputes the basis for his termination. The
principal relief sought by Mr. Clayton is a lump sum
payment of approximately $1.6 million. In accordance with
the dispute resolution procedure set forth in his employment
agreement with the Company, a mediator has been selected for the
resolution of this dispute and a mediation session has been
scheduled to be held in November 2007. In the event that the
mediation is not successful, the parties have agreed to binding
arbitration pursuant to the Employment Dispute Rules of Judicial
Arbitration and Mediation Services, Inc. We believe that no
severance payments or other obligations were due to
Mr. Clayton upon his termination and the Company has not
accrued for such payments or any other
litigation-related
amounts. We intend to vigorously defend Mr. Claytons
claims.
Other
Matters
We currently are, and from time to time may become, involved in
litigation concerning claims arising out of our operations in
the normal course of business. While we cannot predict the
ultimate outcome of our pending matters or how they will affect
our results of operations or financial position, our management
currently does not expect any of the legal proceedings to which
we are currently a party, including the
above-referenced
claims raised by Mr. Clayton, to have a material adverse
effect on our results of operations or financial position.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matters were submitted to security holders in the fourth
quarter of fiscal 2007.
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Market
Information
On July 8, 2004, our common stock began trading on the
American Stock Exchange under the symbol EGR. The
following table sets forth, the high and low sales price per
share of common stock for the periods indicated, as reported on
the American Stock Exchange:
|
|
|
|
|
|
|
|
|
Fiscal Year Ending July 31, 2006
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
1.80
|
|
|
$
|
1.32
|
|
Second Quarter
|
|
$
|
1.68
|
|
|
$
|
1.20
|
|
Third Quarter
|
|
$
|
1.51
|
|
|
$
|
0.82
|
|
Fourth Quarter
|
|
$
|
1.62
|
|
|
$
|
1.05
|
|
25
|
|
|
|
|
|
|
|
|
Fiscal Year Ending July 31, 2007
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
1.49
|
|
|
$
|
1.01
|
|
Second Quarter
|
|
$
|
1.75
|
|
|
$
|
1.32
|
|
Third Quarter
|
|
$
|
3.25
|
|
|
$
|
1.37
|
|
Fourth Quarter
|
|
$
|
2.35
|
|
|
$
|
1.71
|
|
On October 16, 2007, the high and low sales price per share
on the American Stock Exchange for our common stock was $2.23
and $2.15, respectively.
Holders
On October 16, 2007, there were 1,600 holders of record of
our Common Stock.
Dividend
Policy
We have not declared or paid a cash dividend on our common
stock, and we do not anticipate paying any cash dividends for
the foreseeable future. We presently intend to retain earnings
to grow our customer base, finance future operations, and make
capital investments.
Our asset-based credit facility restricts our ability to pay
cash dividends on our common stock and restricts the ability of
our principal operating subsidiary Commerce Energy to pay
dividends to us without the lenders consent. See
Credit Facility within Managements Discussion
and Analysis of Financial Condition and Results of Operations in
Part II, Item 7 of this Annual Report on
Form 10-K
and Note 4 to the Notes to the Consolidated Financial
Statements.
Equity
Compensation Plan Information
Information concerning securities authorized for issuance under
our equity compensation plans is set forth in Part III,
Item 12 of this Annual Report on
Form 10-K
under the caption. Securities Authorized for Issuance
under Equity Compensation Plans, and that information is
incorporated herein by reference.
Recent
Sales of Unregistered Securities
None.
Purchase
of Equity Securities
None.
26
Performance
Graph
The following performance graph shall not be deemed incorporated
by reference by any general statement incorporating by reference
this Annual Report on
Form 10-K
into any filing under the Securities Act of 1933, as amended, or
under the Securities Exchange Act of 1934, as amended, except to
the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed
filed under such Acts.
The Common Stock commenced trading on the American Stock
Exchange on July 8, 2004. The last trading day of the
Companys fiscal year 2007 was July 31, 2007.
Comparison of Initial Trading Period Cumulative Return The
comparisons in this table are required by the SEC and,
therefore, are not intended to forecast or be indicative of
possible future performance of the Common Stock.
The performance graph below illustrates a comparison of
cumulative total returns based on an initial investment of $100
in the Common Stock as traded on the American Stock Exchange
from July 31, 2004 to July 31, 2007, as compared with
the S&P 500 Stock Index and the Utility Select Sector Index
for the same period. The Utility Select Sector Index is a
modified market capitalization based index intended to track the
movement of companies that are components of the S&P 500
index and are utilities. Utilities include communications
services, electrical power providers and natural gas
distributors.
This performance chart assumes:
|
|
|
|
|
$100 invested on July 31, 2004 in our Common Stock compared
with a $100 investment in the S&P 500 Stock Index and in
the Utility Select Sector Index.
|
|
|
|
All dividends are reinvested.
|
Value of
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Commerce Energy Group, Inc. Common Stock
|
|
$
|
100.00
|
|
|
$
|
90.30
|
|
|
$
|
83.64
|
|
|
$
|
127.27
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
112.02
|
|
|
$
|
115.88
|
|
|
$
|
132.09
|
|
Utilities Select Sector Index
|
|
$
|
100.00
|
|
|
$
|
133.80
|
|
|
$
|
140.49
|
|
|
$
|
157.48
|
|
27
|
|
Item 6.
|
Selected
Financial Data.
|
The selected financial data in the following table sets forth
(a) balance sheet data as of July 31, 2007 and 2006,
and statements of operations data for the fiscal years ended
July 31, 2007, 2006 and 2005 derived from our audited
consolidated financial statements, which were audited by an
independent registered public accounting firm, for the fiscal
year ended July 31, 2005, and audited by Hein &
Associates LLP, independent registered public accounting firm,
for the fiscal year ended July 31, 2007 and 2006, which are
included elsewhere in this filing, and (b) balance sheet
data as of July 31, 2005, 2004 and 2003, and statements of
operations data for the fiscal years ended July 31, 2004
and 2003, derived from our audited consolidated financial
statements, which were audited by an independent registered
public accounting firm, which are not included in this filing.
The information below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II,
Item 7 of this Annual Report on
Form 10-K
and our consolidated financial statements and the related notes
thereto set forth herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Amounts in thousands except per share information)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
371,614
|
|
|
$
|
247,080
|
|
|
$
|
253,853
|
|
|
$
|
210,623
|
|
|
$
|
165,526
|
|
Direct energy costs
|
|
|
314,371
|
|
|
|
218,289
|
|
|
|
225,671
|
|
|
|
191,180
|
|
|
|
128,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57,243
|
|
|
|
28,791
|
|
|
|
28,182
|
|
|
|
19,443
|
|
|
|
37,347
|
|
Operating expenses
|
|
|
47,933
|
|
|
|
32,170
|
|
|
|
35,585
|
|
|
|
33,313
|
|
|
|
22,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
9,310
|
|
|
|
(3,379
|
)
|
|
|
(7,403
|
)
|
|
|
(13,870
|
)
|
|
|
14,615
|
|
Initial formation litigation expenses
|
|
|
|
|
|
|
|
|
|
|
(1,601
|
)
|
|
|
(1,562
|
)
|
|
|
(4,415
|
)
|
Recovery of (provision for) impairment on investments
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
(7,135
|
)
|
|
|
|
|
Loss on termination of Summit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,904
|
)
|
|
|
|
|
Loss on equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(567
|
)
|
Minority interest share of loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,185
|
|
|
|
187
|
|
ACN arbitration settlement
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,296
|
|
|
|
1,140
|
|
|
|
890
|
|
|
|
549
|
|
|
|
715
|
|
Interest expense
|
|
|
(1,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for (benefit from) income taxes
|
|
|
5,653
|
|
|
|
(2,239
|
)
|
|
|
(6,114
|
)
|
|
|
(22,737
|
)
|
|
|
10,535
|
|
Provision for (benefit from) income taxes
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
(1,017
|
)
|
|
|
5,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,531
|
|
|
$
|
(2,239
|
)
|
|
$
|
(6,114
|
)
|
|
$
|
(21,720
|
)
|
|
$
|
5,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,906
|
|
|
|
30,419
|
|
|
|
30,946
|
|
|
|
28,338
|
|
|
|
27,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,044
|
|
|
|
30,419
|
|
|
|
30,946
|
|
|
|
28,338
|
|
|
|
30,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Amounts in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
38,863
|
|
|
$
|
32,253
|
|
|
$
|
36,719
|
|
|
$
|
58,105
|
|
|
$
|
56,411
|
|
Total assets
|
|
$
|
116,576
|
|
|
$
|
99,076
|
|
|
$
|
102,632
|
|
|
$
|
110,823
|
|
|
$
|
125,870
|
|
Stockholders equity
|
|
$
|
70,520
|
|
|
$
|
66,333
|
|
|
$
|
70,061
|
|
|
$
|
74,106
|
|
|
$
|
93,017
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
|
We are an independent marketer of electricity and natural gas to
end-user customers. As of July 31, 2007, we provided retail
electricity and natural gas to residential, commercial,
industrial and institutional customers in ten states. Our
principal operating subsidiary, Commerce Energy, Inc., is
licensed by the Federal Energy Regulatory Commission, or FERC,
and by state regulatory agencies as an unregulated retail
marketer of natural gas and electricity.
We were founded in 1997 as a retail electricity marketer in
California. As of July 31, 2007, we supplied electricity to
approximately 136,200 customers in California, Maryland,
Michigan, New Jersey, Pennsylvania and Texas; and natural gas to
approximately 59,300 customers in California, Florida, Georgia,
Maryland, Nevada, Ohio and Pennsylvania.
The electricity and natural gas we sell to our customers is
purchased from third-party suppliers under both short-term and
long-term contracts. We do not own electricity generation or
transmission facilities, natural gas producing properties or
pipelines. The electricity and natural gas we sell is generally
metered and delivered to our customers by local utilities. The
local utilities also provide billing and collection services for
many of our customers on our behalf. Additionally, to facilitate
load shaping and demand balancing for our customers, we buy and
sell surplus electricity and natural gas from and to other
market participants when necessary. We utilize third-party
facilities for the storage of our natural gas.
The growth of our retail business depends upon a number of
factors, including the degree of deregulation in each state, our
ability to acquire new customers and retain existing customers
and our ability to acquire energy for our customers at
competitive prices and on favorable credit terms.
APX
Settlement
On January 5, 2007, APX, we and certain other parties
signed an APX Settlement and Release of Claims Agreement, or the
APX Settlement Agreement, which among other things, established
a mechanism for allocating refunds owed to APX and resolved
certain other matters and claims related to APXs
participation in the PX and CAISO centralized spot markets for
wholesale electricity from May 1, 2000 through
June 20, 2001. Under the APX Settlement Agreement, Commerce
and certain other parties were entitled to receive payments from
APX, with Commerce expected to receive up to approximately
$6.5 million. Subsequently, in April 2007, we received a
payment of $5.1 million and the remaining settlement
payment of $1.4 million in August 2007.
HESCO
Customer Acquisition
Effective September 1, 2006, the Company acquired from
Houston Energy Services Company, L.L.C., or HESCO certain assets
consisting principally of contracts with end-use customers in
California, Florida, Nevada, Kentucky and Texas consuming
approximately 12 billion cubic feet of natural gas
annually. The acquisition price of approximately
$4.1 million in cash and $0.2 million in assumption of
liabilities was allocated to customer contracts and is being
amortized over an estimated life of four years.
ACN
Energy Transaction
On February 9, 2005, we acquired certain assets of ACN
Utility Services, Inc. or ACNU, a subsidiary of American
Communications Network, Inc. or ACN, and its retail electricity
business in Texas and Pennsylvania and its retail natural gas
business in California, Georgia, Maryland, New York, Ohio and
Pennsylvania. The aggregate
29
purchase price was $14.5 million in cash and
930,233 shares of our common stock, valued at
$2.0 million. The common stock payment was contingent upon
ACN meeting certain sales requirements during the year following
the acquisition date. These sales requirements were not met and
the shares were cancelled in April 2006. As a result, both
goodwill and common stock were reduced by $2.0 million. We
refer to this acquisition as the ACN Energy Transaction and the
assets acquired as the ACN Energy Assets.
ACN Energy Assets included approximately 80,000 residential and
small commercial customers, natural gas inventory associated
with utility and pipeline storage and transportation agreements
and natural gas and electricity supply, scheduling and capacity
contracts, software and other infrastructure. No cash or
accounts receivables were acquired in the transaction and none
of ACNUs legal liabilities were assumed. The ACN Energy
Assets purchased and the operating results generated from the
ACN Energy Transaction have been included in our operations as
of February 1, 2005, the effective date of the acquisition.
Market
and Regulatory
As of July 31, 2007, we served electricity and gas
customers in 10 states, operating within the jurisdictional
territory of 22 different local utilities or LDCs. Among other
things, tariff filings by these LDCs for changes in their
allowed billing rate to their customers in the markets in which
we operate, significantly impact the viability of our sales and
marketing plans and our overall operating and financial results.
Although regulatory requirements are determined by each state
jurisdiction, and administered and monitored by state regulatory
commissions, typically known as the PUC, operating rules and
rate filings for each LDC even within the same state, are
unique. Accordingly, we generally treat each LDC distribution
territory as a distinct market.
Electricity
As of July 31, 2007, we marketed electricity in 12 LDC
markets within the 6 states of California, Maryland,
Michigan, New Jersey, Pennsylvania, and Texas.
On April 1, 1998, we began supplying customers in
California with electricity as an Electric Service Provider, or
ESP. On September 20, 2001, the California Public Utility
Commission, or CPUC, issued a ruling suspending the right of
Direct Access, which allowed electricity customers to buy their
power from a supplier other than the electric utilities. This
suspension, although permitting us to keep current direct access
customers and to solicit direct access customers served by other
ESPs, prohibits us from soliciting new non-direct access
customers indefinitely.
Currently, several important rules are under review by the CPUC,
including the Resource Adequacy Requirement and the Renewable
Portfolio Standard. Additional costs to serve customers in
California are anticipated from these proceedings; however, the
CPUC decisions will determine the allocation of costs across all
market participants. We cannot currently estimate the impact
that these issues and anticipated additional costs may have on
our future financial results.
In connection with FERCs determination of the amounts of
refunds due to California energy buyers for purchases made in
the spot markets operated by the CAISO and the California PX
during the period October 2, 2000 through June 20,
2001, referred to as the refund period, FERC has
issued dozens of orders, most of which have been taken up on
appeal before the United States Court of Appeals for the Ninth
Circuit. Two of the cases,
Lockyer v. FERC
and
CPUC v. FERC
each present issues which may have an
adverse financial impact upon us; however, at this time, we are
unable to predict either the outcome of the proceedings or the
ultimate financial effect on us.
Lockyer v. FERC.
On September 9,
2004, the Ninth Circuit issued a decision on the California
Attorney Generals challenge to the validity of FERCs
market-based rate system. This case was originally presented to
FERC upon complaint that the adoption and implementation of
market based rate authority was flawed. FERC dismissed the
complaint after sellers refiled reports of sales in the CAISO
and the California PX spot markets and bilateral sales to
California Department of Water Resources during 2000 and 2001.
The Ninth Circuit upheld FERCs authority to authorize
sales of electric energy at market-based rates, but found that
the requirement that sales at market-based rates be reported
quarterly to FERC for individual transactions is integral to a
market-based rate regime. The State of California, among others,
has publicly interpreted the decision as providing authority to
FERC to order refunds for different time frames and based on
different rationales than are currently pending in the
30
California Refund Proceedings, discussed in the immediately
proceeding paragraph The decision remands to FERC the
question of whether, and in what circumstances, to impose
refunds or other remedies for any alleged failure to report
sales transactions to FERC. On December 28, 2006, several
energy sellers filed a petition for a writ of certiorari to the
U.S. Supreme Court. The U.S. Supreme Court denied the
petition. We cannot predict the scope or nature of, or ultimate
resolution of this case.
CPUC v. FERC.
On August 2, 2006,
after reviewing certain FERC decisions in the California Refund
Proceedings, the Ninth Circuit decided that FERC erred in
excluding potential relief for alleged tariff violations related
to transactions in the CAISO and the California PX markets for
periods that pre-dated October 2, 2000 and additionally
ruled that FERC should consider remedies for certain bilateral
transactions with the California Department of Water Resources
previously considered outside the scope of the proceedings. The
decision may expose Commerce to claims or liabilities for
transactions outside the previously defined refund
period. At this time, the ultimate financial outcome for
us is unclear.
There are proceedings and cases in other states in which we sell
electricity, that could impact our financial results, but we are
actively engaged in advocacy or coalition groups to mitigate any
adverse policy outcomes.
Natural
Gas
As of July 31, 2007, we marketed natural gas in 13 LDC
markets within the seven states of California, Florida, Georgia,
Maryland, Nevada, Ohio and Pennsylvania. Due to significant
increases in the price of natural gas, a number of LDCs have
filed or communicated expectations of filing for approval of
rate increases to their customers. Although the impact of these
filings cannot currently be estimated, they are not anticipated
to adversely impact our financial results.
In 1997, natural gas choice programs began in Ohio. We provide
gas service to residential and small commercial customers in the
Dominion East Ohio, or DEO, and Columbia Gas of Ohio service
areas.
DEO will exit the merchant function in Ohio, and its plan was
approved by the Public Utilities Commission of Ohio, or PUCO,
earlier this year. The plan was divided into two sections, Phase
I and Phase II. In Phase I, suppliers and marketers bid for
supply only. In Phase II, suppliers and marketers will bid to
serve any bundled customers remaining with DEO. On
August 29, 2006, DEO conducted an auction for pricing of
its natural gas wholesale supply of natural gas for the time
period October 2006 through August 2008.
The auction participants will bid a monthly retail price
adjustment to be added to the monthly NYMEX settlement price.
The sum of these will become the Standard Offer Service, or SOS,
price that will replace the current Gas Cost Recovery, or GCR,
rate. The GCR rate has traditionally been calculated on a
monthly basis using imbalances from prior months. The new SOS
rate will more closely reflect true market costs.
It is expected that DEO will be submitting an application to the
PUCO by October 31, 2007 for Phase II.
31
Results
of Operations
The following table summarizes the results of our operations for
fiscal 2007, fiscal 2006, and fiscal 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Dollars
|
|
|
% Revenue
|
|
|
Dollars
|
|
|
% Revenue
|
|
|
Dollars
|
|
|
% Revenue
|
|
|
Retail electricity sales
|
|
$
|
236,627
|
|
|
|
64
|
%
|
|
$
|
176,290
|
|
|
|
71
|
%
|
|
$
|
186,389
|
|
|
|
73
|
%
|
Natural gas sales
|
|
|
126,028
|
|
|
|
34
|
%
|
|
|
61,701
|
|
|
|
25
|
%
|
|
|
25,476
|
|
|
|
10
|
%
|
Excess energy sales(1)
|
|
|
1,535
|
|
|
|
|
|
|
|
7,627
|
|
|
|
3
|
%
|
|
|
40,061
|
|
|
|
16
|
%
|
APX settlement
|
|
|
6,525
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
899
|
|
|
|
|
|
|
|
1,462
|
|
|
|
1
|
%
|
|
|
1,927
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
371,614
|
|
|
|
100
|
%
|
|
|
247,080
|
|
|
|
100
|
%
|
|
|
253,853
|
|
|
|
100
|
%
|
Direct energy costs
|
|
|
314,371
|
|
|
|
85
|
%
|
|
|
218,289
|
|
|
|
88
|
%
|
|
|
225,671
|
|
|
|
89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57,243
|
|
|
|
15
|
%
|
|
|
28,791
|
|
|
|
12
|
%
|
|
|
28,182
|
|
|
|
11
|
%
|
Selling and marketing expenses
|
|
|
10,642
|
|
|
|
3
|
%
|
|
|
5,231
|
|
|
|
2
|
%
|
|
|
4,081
|
|
|
|
1
|
%
|
General and administrative expenses
|
|
|
37,291
|
|
|
|
10
|
%
|
|
|
26,939
|
|
|
|
11
|
%
|
|
|
31,504
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
9,310
|
|
|
|
2
|
%
|
|
$
|
(3,379
|
)
|
|
|
(1
|
)%
|
|
$
|
(7,403
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Electricity supply greater than retail electricity demand which
is sold back into the wholesale market.
|
Fiscal
Year Ended July 31, 2007 Compared to Fiscal Year Ended
July 31, 2006
Operating results for fiscal 2007 reflect income from operations
of $9.3 million compared to a loss of $3.4 million for
fiscal 2006. The principal reasons for the increase in income
from operations was a $28.5 million increase in gross
profit and partially offset by a $15.7 million increase in
total operating expenses, comprised of selling and marketing
expenses and general and administrative expenses. Our net income
for fiscal 2007 was $5.5 million, compared to a net loss of
$2.2 million in fiscal 2006, reflecting the improvement in
operating results.
Gross profit increased $28.5 million to $57.2 million
for fiscal 2007 from $28.8 million for fiscal 2006. Gross
profit for fiscal 2007 includes $6.5 million for the APX
Settlement. Gross profit from electricity totaled
$46.6 million for fiscal 2007 compared to
$22.9 million for fiscal 2006, reflecting the impact of
customer growth in the Texas and Maryland markets. Gross profit
for natural gas totaled $10.6 million for fiscal 2007
compared to $5.9 million for fiscal 2006. The increase in
gross profit from natural gas reflected the impact of
(i) customer growth in the Ohio markets; (ii) gross
margin contribution from the commercial and industrial natural
gas customers acquired in the September 2006 HESCO acquisition;
and (iii) a mark-to-market loss incurred in the second
quarter of fiscal 2006 on natural gas supply contracts.
32
Net
revenue
The following table summarizes net revenues for fiscal 2007 and
2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dollars
|
|
|
% Revenue
|
|
|
Dollars
|
|
|
% Revenue
|
|
|
Retail Electricity Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
$
|
102,357
|
|
|
|
28
|
%
|
|
$
|
24,886
|
|
|
|
10
|
%
|
California
|
|
|
58,152
|
|
|
|
16
|
%
|
|
|
67,114
|
|
|
|
27
|
%
|
Pennsylvania/New Jersey
|
|
|
46,025
|
|
|
|
12
|
%
|
|
|
63,200
|
|
|
|
26
|
%
|
Maryland
|
|
|
21,005
|
|
|
|
6
|
%
|
|
|
20
|
|
|
|
|
|
Michigan and Other States
|
|
|
9,088
|
|
|
|
2
|
%
|
|
|
21,070
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Electricity Sales
|
|
|
236,627
|
|
|
|
64
|
%
|
|
|
176,290
|
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Natural Gas Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
34,193
|
|
|
|
9
|
%
|
|
|
25,449
|
|
|
|
10
|
%
|
California
|
|
|
22,187
|
|
|
|
6
|
%
|
|
|
22,375
|
|
|
|
9
|
%
|
Georgia
|
|
|
2,758
|
|
|
|
1
|
%
|
|
|
8,853
|
|
|
|
4
|
%
|
HESCO Customers
|
|
|
64,838
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
All Other States
|
|
|
2,052
|
|
|
|
1
|
%
|
|
|
5,024
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Natural Gas Sales
|
|
|
126,028
|
|
|
|
34
|
%
|
|
|
61,701
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess Energy Sales
|
|
|
1,535
|
|
|
|
|
|
|
|
7,627
|
|
|
|
3
|
%
|
APX settlement
|
|
|
6,525
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
899
|
|
|
|
|
|
|
|
1,462
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
371,614
|
|
|
|
100
|
%
|
|
$
|
247,080
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues increased $124.5 million, or 50%, to
$371.6 million for fiscal 2007 from $247.1 million for
fiscal 2006. The increase in net revenues was driven primarily
by a 34% increase in electricity sales, a 104% increase in
natural gas sales and the APX Settlement. Higher electricity
sales reflects the impact of a 300% increase in sales volumes in
Texas due to customer growth, partly offset by lower retail
sales in the Pennsylvania/New Jersey and Michigan markets
resulting from customer attrition. Higher natural gas sales
primarily reflect the impact of the September 2006 acquisition
of the HESCO customers.
Retail electricity sales increased $60.3 million to
$236.6 million for fiscal 2007 from $176.3 million for
fiscal 2006 reflecting both the impact of 16% higher sales
prices, and a 16% increase in sales volume. For fiscal 2007, we
sold 2,057 million kilowatt hours, or kWh, at an average
retail price per kWh of $0.115, as compared to
1,767 million kWh sold at an average retail price per kWh
of $0.099 in fiscal 2006. Excess electricity sales for fiscal
2007 decreased $6.1 million compared to fiscal 2006
reflecting the impact of shorter term forward supply commitments
due primarily to higher wholesale electricity prices and
increased price volatility.
Natural gas sales increased $64.3 million to
$126.0 million for fiscal 2007 from $61.7 million for
fiscal 2006 reflecting the impact of sales to customers acquired
in the September 2006 the HESCO acquisition. In fiscal 2007, we
sold 14.8 million dekatherms, or DTH, at an average retail
price per DTH of $8.51, as compared to 5.2 million DTH,
sold at an average retail price per DTH of $12.00 during fiscal
2006. From the date of the HESCO acquisition in September 2006
through July 31, 2007, natural gas sales to the customers
that we acquired in that acquisition totaled $64.8 million
on sales volume of 8.8 million DTH or $7.37 per DTH.
We had approximately 136,200 and 80,000 retail electricity
customers at both July 31, 2007 and 2006, respectively, and
approximately 59,300 and 57,000 natural gas customers at
July 31, 2007 and 2006, respectively.
33
Direct
energy costs
Direct energy costs, which are recognized concurrently with
related energy sales, include the commodity cost of natural gas
and electricity, electricity transmission costs from the ISOs,
transportation costs from LDCs and pipelines, other fees and
costs incurred from various energy-related service providers and
energy-related taxes the majority of which cannot be passed
directly through to the customer.
Direct energy costs for fiscal 2007 totaled $198.9 million
and $115.4 million for electricity and natural gas,
respectively, compared to $162.5 million and
$55.8 million, respectively, for fiscal 2006. The increase
in electricity costs is primarily due to a 16% increase in sales
volume and an 11% increase in price. Electricity costs averaged
$0.097 per kWh for fiscal 2007 compared to $0.087 per kWh for
fiscal 2006. The increase in natural gas costs is primarily due
to a 184% increase in sales volume reflecting the impact of the
HESCO acquisition offset by a 28% decrease in price. Direct
energy costs for natural gas averaged $7.79 per DTH for fiscal
2007 as compared to $10.85 per DTH in fiscal 2006.
Operating
expenses
Selling and marketing expenses were $10.6 million for
fiscal 2007, an increase of $5.4 million from
$5.2 million for fiscal 2006, reflecting the impact of
higher cost of advertising and sales programs, telemarketing,
third-party commissions and direct mail costs related to the
Companys increased customer acquisition initiatives. These
higher costs due to increased customer acquisition initiatives
were partly offset by lower payroll costs.
General and administrative expenses were $37.3 million for
fiscal 2007, an increase of $10.4 million, from
$26.9 million for fiscal 2006, reflecting higher customer
service, and information technology personnel costs, incentive
compensation costs, and increased consulting expenses.
Other
expenses
On June 11, 2007, Commerce Energy and ACN entered into an
agreement settling all arbitration claims and disputes. The
total agreed upon settlement of $3.9 million was paid and
recorded in April 2007. Related legal fees of $0.7 million
were included in general and administrative expenses.
Interest
income
Our interest income was $1.3 million for fiscal 2007, an
increase of $0.2 million from $1.1 million in fiscal
2006. The increase was primarily higher market yields realized
on investments offset in part by lower investable balances.
Interest
Expense
Our interest expense was $1.1 million for fiscal 2007,
primarily due to recording all costs of our new credit facility
as interest expense in accordance with FAS 91.
Income
before Provision for Income Taxes
Our income before provision for income taxes was
$5.7 million for fiscal 2007 an increase of
$7.9 million, from $2.2 million loss for fiscal 2006,
as a result of the items discussed above.
Provision
for Income Taxes
We have a provision for income taxes for fiscal 2007 of
$0.1 million, compared to none from the prior year. This
amount reflects the application of Alternative Minimum Tax to
the portion of our current year tax basis income which cannot be
offset by our tax loss carryforwards. As a result, our effective
income tax rate for fiscal 2007 was 2.2% compared to 0.0% for
fiscal 2006.
34
Year
Ended July 31, 2006 Compared to Year Ended July 31,
2005
Operating results for fiscal 2006 reflect a loss from operations
of $3.4 million compared to a loss of $7.4 million for
fiscal 2005. The principal reasons for the decrease in the loss
from operations was a $0.6 million increase in gross profit
and a $3.5 million decrease in total operating expenses,
comprised of selling and marketing expenses, and general and
administrative expenses. Our net loss for fiscal 2006 was
$2.2 million, compared to a net loss of $6.1 million
in fiscal 2005, reflecting the reduction in the loss from
operations.
Gross profit for fiscal 2006 was $28.8 million, a 2%
increase compared to gross profit of $28.2 million in
fiscal 2005. Gross profit for fiscal 2005 included a gain of
$7.2 million from the sale of electricity supply contracts
in Pennsylvania. Gross profit from electricity sales for fiscal
2006 was down slightly from fiscal 2005, as the impact of higher
gross margins on lower electricity sales volumes, due primarily
to customer attrition, in our Pennsylvania and Michigan markets
was less than the prior year. The lower gross profit from
electricity was offset by a $1.3 million increase in gross
profit from natural gas operations, reflecting a full year of
operations in fiscal 2006 as compared to six months in fiscal
2005.
Net
revenue
The following table summarizes net revenues for fiscal 2006 and
2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Dollars
|
|
|
% Revenue
|
|
|
Dollars
|
|
|
% Revenue
|
|
|
Retail Electricity Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
67,114
|
|
|
|
27
|
%
|
|
$
|
64,186
|
|
|
|
25
|
%
|
Texas
|
|
|
24,886
|
|
|
|
10
|
%
|
|
|
9,386
|
|
|
|
3
|
%
|
Pennsylvania/New Jersey
|
|
|
63,200
|
|
|
|
26
|
%
|
|
|
76,063
|
|
|
|
30
|
%
|
Maryland
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michigan and Other States
|
|
|
21,070
|
|
|
|
8
|
%
|
|
|
36,754
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Electricity Sales
|
|
|
176,290
|
|
|
|
71
|
%
|
|
|
186,389
|
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
22,375
|
|
|
|
9
|
%
|
|
|
7,902
|
|
|
|
3
|
%
|
Ohio
|
|
|
25,449
|
|
|
|
10
|
%
|
|
|
10,782
|
|
|
|
4
|
%
|
Georgia
|
|
|
8,853
|
|
|
|
4
|
%
|
|
|
4,314
|
|
|
|
2
|
%
|
All Other States
|
|
|
5,024
|
|
|
|
2
|
%
|
|
|
2,478
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Natural Gas Sales
|
|
|
61,701
|
|
|
|
25
|
%
|
|
|
25,476
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess Electricity Sales
|
|
|
7,627
|
|
|
|
3
|
%
|
|
|
40,061
|
|
|
|
16
|
%
|
Other
|
|
|
1,462
|
|
|
|
1
|
%
|
|
|
1,927
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
247,080
|
|
|
|
100
|
%
|
|
$
|
253,853
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues for fiscal 2006 were $247.1 million, a 3% or
$6.8 million decrease from fiscal 2005. The decrease in net
revenue was primarily attributable to:
(i) a $32.4 million decrease in excess energy sales
reflecting the impact of shorter-term forward supply commitments
resulting from significant increases in the volatility and price
of wholesale electricity and the conversion of many retail
customers to month-to-month variable priced sales contracts.
(ii) excess energy sales during fiscal 2005 including
$9.3 million realized on the January 2005 sale of
Pennsylvania electricity supply contracts back to the original
supplier;
(iii) a $10.1 million decrease in retail electricity
sales due to the impact of customer attrition and related lower
sales volumes in the in Pennsylvania/New Jersey and Michigan
markets, partly offset by increased sales volumes in Texas in
fiscal 2006 due to a full year of operations and customer
growth; and
35
(iv) a $36.2 million increase in natural gas sales due
to a full year of operations as compared to six months of
operations in fiscal 2005.
Retail electricity sales for fiscal 2006 were
$176.3 million, a 5% decrease from fiscal 2005 reflecting a
33% decline in electric sales volumes partly offset by higher
retail sales prices. In fiscal 2006, we sold 1,767 million
kWh, at an average retail price per kWh of $0.099, as compared
to 2,631 million kWh sold at an average retail price per
kWh of $0.071 in fiscal 2005. California sales volumes decreased
to 759 million kWh (average sales price per kWh of $0.088)
in fiscal 2006 as compared to 819 million kWh (average
price per kWh of $0.078) in fiscal 2005 due principally to
normal customer attrition. Pennsylvania and New Jerseys
combined sales volumes in fiscal 2006 decreased 50% to
565 million kWh (average price per kWh of $0.112) as
compared to 1,137 million kWh (average price of $0.067) in
fiscal 2005. Sales volumes in Michigan in fiscal 2006 decreased
58% to 253 million kWh (average price per kWh of $0.083) as
compared to 603 million kWh (average price per kWh of
$0.061) in fiscal 2005. Sales volumes declines in both our
Pennsylvania/New Jersey and Michigan markets reflect the impact
of high customer attrition resulting from unfavorable
competitive and regulatory changes leading to the return of
customers to the incumbent utility. Texas sales volumes in
fiscal 2006 increased to 190 million kWh (average sales
price per kWh of $0.131) as compared to 72 million kWh in
fiscal 2005 (average price per kWh of $0.130) reflecting the
full year impact of the customers acquired in February 2005 and
the impact of sales, marketing and customer acquisition
initiatives in this market during the second half of fiscal 2006.
Natural gas sales for fiscal 2006 were $61.7 million, an
increase of $36.2 million, or 142%, compared to 2005,
reflecting a full year of these operations compared to only six
months during fiscal 2005. During fiscal 2006, we sold
approximately 5.1 million DTH at an average price of $12.00
per DTH as compared to 2.5 million at an average price of
$10.26 per DTH in fiscal 2005.
We had approximately 80,000 retail electricity customers at both
July 31, 2006 and 2005 and approximately 57,000 and 60,000
natural gas customers at July 31, 2006 and July 31,
2005, respectively.
Direct
energy costs
Direct energy costs for fiscal 2006 totaled $218.3 million,
a decrease of $7.4 million or 3% from fiscal 2005, and was
comprised of $162.5 million for electricity and
$55.8 million for natural gas. Electricity cost decreased
21% from fiscal 2005 due primarily to a 33% decline in retail
sales volumes and lower excess energy sold. The average cost of
electricity increased to $0.087 per kWh for fiscal 2006 as
compared to $0.065 per kWh for fiscal 2005. The decrease in the
total cost of electricity during fiscal 2006 was largely offset
by a 170% increase in the cost of natural gas, reflecting a 107%
increase in retail sales volumes due to a full year of natural
gas operations in fiscal 2006 as compared to six months of
operations in fiscal 2005 and an increase in the cost of natural
gas supplies for fiscal 2006 to $10.85 per DTH compared to $8.42
per DTH for fiscal 2005.
Operating
expenses
Selling and marketing expenses were $5.2 million for fiscal
2006, an increase of $1.1 million from $4.1 million
for fiscal 2005, reflecting the impact of higher advertising,
marketing, customer acquisition and telemarketing expenses.
These higher costs were attributable to increased customer
acquisition initiatives were partly offset by lower payroll
costs.
General and administrative expenses were $26.9 million for
fiscal 2006, a decrease of $4.6 million, from
$31.5 million for fiscal 2005. A decrease of
$4.5 million in severance costs related to former executive
officers in fiscal 2005, and lower legal and bad debt expenses
were partly offset by increased expenses related to a full year
of operations of the ACN Energy Assets in fiscal 2006 as
compared to six months of operations in fiscal 2005.
Other
expenses
In July 2005, we sold our entire stock holdings in Turbocor for
$2.0 million in cash resulting in recovery of previous
provision for impairment as we then had no basis in Turbocor.
There were no similar transactions in fiscal 2006. Additionally,
in fiscal 2005, we incurred $1.6 million of initial
formation litigation costs related to Commonwealth Energy
Corporations (our predecessor Company) formation. Initial
formation litigation expenses
36
include legal and litigation costs associated with the initial
capital raising. There were no such expenses in fiscal 2006.
Interest
income, net
Our interest income, net was $1.1 million for fiscal 2006,
an increase of $0.2 million from $0.9 million in
fiscal 2005. The increase in interest income was primarily due
to higher market yields realized on investments offset in part
by lower investable balances.
Benefit
from Income Taxes
We reflected no benefit for income taxes for fiscal 2006 as a
valuation allowance equal to the net deferred tax assets has
been provided due to the uncertainty of future realization of
the remaining net deferred tax asset at both July 31, 2006
and 2005.
Liquidity
and Capital Resources
The following table summarizes our liquidity measures:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
6,559
|
|
|
$
|
22,941
|
|
Working capital
|
|
$
|
38,863
|
|
|
$
|
32,253
|
|
Current ratio (current assets to current liabilities)
|
|
|
1.8:1.0
|
|
|
|
2.0:1.0
|
|
Restricted cash
|
|
$
|
10,457
|
|
|
$
|
17,117
|
|
Short term borrowings
|
|
|
|
|
|
|
|
|
Letters of credit outstanding
|
|
$
|
19,334
|
|
|
$
|
24,053
|
|
Consolidated
Cash Flows
The following table summarizes our statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(16,050
|
)
|
|
$
|
6,063
|
|
|
$
|
(3,561
|
)
|
Investing activities
|
|
|
(8,229
|
)
|
|
|
(4,742
|
)
|
|
|
28,012
|
|
Financing activities
|
|
|
7,897
|
|
|
|
(11,724
|
)
|
|
|
(1,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(16,382
|
)
|
|
$
|
(10,403
|
)
|
|
$
|
22,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our principal sources of liquidity to fund ongoing operations
have been existing cash and cash equivalents on hand, cash
generated from operations and our credit facility which
increases our borrowing capacity. Based upon our current level
of operations and business conditions, we believe these sources
will be sufficient to fund our expected capital expenditures and
to meet our working capital requirements along with other cash
needs over the next twelve months. We would need to add to our
capital resources in fiscal 2008 if we expand our business,
either from internal growth or acquisitions, if energy prices
increase materially, or if energy industry volatility and/or
uncertainty creates additional credit requirements. Cash used in
operating activities for fiscal 2007 was $16.1 million,
compared to cash provided by operations of $6.1 million in
the prior year. For fiscal 2007, cash used in operating
activities was comprised primarily of net income of
$5.5 million, an increase of accounts payable of
$11.1 million, offset by an increase of $38.7 million
in accounts receivable, net, including a provision for doubtful
accounts. These changes were primarily in support of our
increased sales and customer acquisition initiatives including
the customers acquired in the HESCO acquisition. For fiscal
2006, cash provided by operating activities was comprised
primarily of a decrease of $8.4 million in prepaid expenses
and other assets offset by an increase of
37
$2.8 million in accounts receivable, net, including
provisions for doubtful accounts. This was primarily due to
increased use of letters of credit under our new credit facility
to replace deposits previously used to secure energy supply.
Cash used in investing activities was $8.2 million in
fiscal 2007, as compared to $4.7 million used in investing
activities in fiscal 2006. The cash used in investing activities
in fiscal 2007 was spent equally for the upgrades in our key
customer billing, risk management and customer contact platforms
and for the purchase of the HESCO customer list. The cash used
in fiscal 2006 was primarily for other upgrades in the
previously discussed platforms.
Cash provided by financing activities during fiscal 2007 was
$7.9 million, as compared to cash used in financing
activities of $11.7 million during fiscal 2006. In fiscal
2007, restricted cash decreased by $6.7 million primarily
due to transitioning cash-secured letters of credit to our new
credit facility.
Credit terms from our suppliers often require us to post
collateral against our energy purchases and against our
mark-to-market exposure with certain of our suppliers. As of
July 31, 2007, we had $10.5 million in restricted cash
primarily in connection with a $10 million requirement of
our new credit facility. We also have $3.5 million in
deposits pledged as collateral to our energy suppliers in
connection with energy purchase agreements.
As of July 31, 2007, cash and cash equivalents decreased to
$6.6 million compared with $22.9 million at
July 31, 2006. This decrease of $16.3 million was used
primarily to fund accounts receivable growth to support our
increasing customer load. Restricted cash and cash equivalents
at July 31, 2007 was $17.0 million, compared to
$40.1 million at July 31, 2006, for a decrease of
$23.0 million. This decrease was also primarily due to our
accounts receivable growth and to a lesser extent the purchase
of HESCO customer lists and transitioning cash-secured letters
of credit to our new credit facility.
Credit
Facility
In June 2006, Commerce and Commerce Energy entered into a Loan
and Security Agreement, or the Credit Facility, with Wachovia
Capital Finance Corporation (Western), or the Agent, for up to
$50 million. The three-year Credit Facility is secured by
substantially all of the Companys assets and provides for
issuance of letters of credit and for revolving credit loans,
which we may use for working capital and general corporate
purposes. The availability of letters of credit and loans under
the Credit Facility is limited by a calculated borrowing base
consisting of the majority of the Companys cash on deposit
with the Agent and the Companys receivables and natural
gas inventories. As of July 31, 2007, letters of credit
issued under the facility totaled $18.9 million, and there
were no outstanding borrowings. Fees for letters of credit
issued range from 1.50 to 1.75 percent per annum, depending
on the level of Excess Availability, as defined in the Credit
Facility. We also pay an unused line fee equal to
0.375 percent of the unutilized credit line. Generally,
outstanding borrowings under the Credit Facility are priced at a
domestic bank rate plus 0.25 percent or LIBOR plus
2.75 percent.
The Credit Facility contains covenants, subject to specific
exceptions, restricting Commerce, the Company and its
subsidiaries from: (i) incurring additional indebtedness;
(ii) granting certain liens; (iii) disposing of
certain assets; (iv) making certain restricted payments;
(v) entering into certain other agreements; and
(vi) making certain investments. The Credit Facility also
restricts our ability to pay cash dividends on our common stock;
restricts Commerce Energy from making cash dividends to the
Company without the consent of the Agent and The CIT
Group/Business Credit, Inc., or, collectively, the Lenders; and
limits the amount of our annual capital expenditures to
$3.5 million without the consent of the Lenders. We must
also maintain a minimum of $10 million of Eligible Cash
Collateral, as defined in the Credit Facility, at all times.
In September 2006, the Company and Commerce Energy entered into
a First Amendment to Loan and Security Agreement and Waiver, or
the First Amendment, pursuant to which the Lenders waived prior
or existing instances of covenant non-compliance relating to the
maintenance of Eligible Cash Collateral, as defined in the
Credit Facility, capital expenditures and the notification to
the Lenders of the grant of certain liens to a natural gas
supplier. Pursuant to the First Amendment, the Lenders also
agreed to certain prospective waivers of covenants in the Credit
Facility to enable Commerce Energy to consummate the HESCO
acquisition of customers in compliance with the Credit Facility.
38
In October 2006, the Company and Commerce Energy entered into a
Second Amendment to Loan and Security Agreement and Waiver, or
the Second Amendment, pursuant to which the Lenders waived prior
or existing instances of covenant non-compliance relating to the
maintenance of a minimum Fixed Charge Coverage Ratio and a
minimum amount of Excess Availability. The Lenders also agreed
in the Second Amendment to defer prospective compliance with the
Fixed Charge Coverage Ratio covenant and to reduce and
restructure the amount of Excess Availability that Commerce will
be required to maintain through April 2007.
On March 15, 2007, the Company and Commerce Energy entered
into a Third Amendment to Loan and Security Agreement and
Waiver, or the Third Amendment, pursuant to which the Lenders
waived prior or existing instances of covenant non-compliance
relating to the maintenance of a minimum Fixed Charge Coverage
Ratio and a minimum amount of Excess Availability. The Lenders
also agreed in the Third Amendment to extend the period of time
during which the minimum amount of Excess Availability that
Commerce Energy will be required to maintain established by the
Second Amendment will be applicable.
On June 26, 2007, the Company and Commerce Energy entered
into a Fourth Amendment to Loan and Security Agreement with the
Agent, pursuant to which the Agent agreed to allow the Company
to increase its Capital Expenditures, as defined in the Credit
Facility, for fiscal 2007 and beyond to $6.0 million.
On August 1, 2007, the Company and Commerce Energy entered
into a Fifth Amendment to Loan and Security Agreement and
Waiver, with the Agent and the CIT Business Credit
Group/Business Credit, Inc. pursuant to which the Lenders agreed
to temporarily reduce and restructure the amount of Excess
Availability required to be maintained by Commerce Energy.
On September 20, 2007, the Company, Commerce Energy entered
into a letter agreement with the Agent and the CIT Business
Credit Group/Business Credit, Inc., pursuant to which Commerce
Energy was permitted during the period from September 20,
2007 until October 5, 2007, to exceed its Gross Borrowing
Base, as defined in the letter agreement. In addition, during
the same time period, the amount of Excess Availability required
to be maintained by Commerce was temporarily reduced and
restructured, and the letter agreement established the amount of
Excess Availability that Commerce Energy is required to maintain
under the Credit Facility for the period beginning
October 6, 2007.
Net cash of $7.9 million was provided by financing
activities for the year ending July 31, 2007 compared to
net cash of $11.7 million used in the year ending
July 31, 2006, reflecting the change in restricted cash and
cash equivalents used to secure a performance bond in
Pennsylvania and $2.3 million of cash used in the year
ending July 31, 2006 to repurchase Company stock in
connection with a settlement agreement with former executive
officers, partially offset by proceeds from the exercise of
stock options of $1.2 million.
Supply
Agreements
Tenaska
Power Services Co.
In August 2005, the Company entered into several agreements with
Tenaska Power Services Co. or Tenaska, for the supply of the
majority of Commerce Energys wholesale electricity supply
needs in Texas. Pursuant to an EEI Master Power Purchase and
Sale Agreement dated August 1, 2005 between Commerce Energy
and Tenaska, or the Master Agreement, Tenaska agreed to supply
electricity to Commerce Energy as set forth under the Master
Agreement.
In connection with Tenaskas supply of electricity to
Commerce Energy, Commerce Energy and Tenaska entered into an
agreement dated August 1, 2005, which we refer to as the
QSE Agreement. Under the QSE Agreement, Tenaska agreed to serve
as Commerce Energys exclusive provider of qualified
scheduling services and marketing services with respect to
electric energy within the region of Texas administered by the
Electric Reliability Council of Texas.
A blocked account control agreement with lockbox services, dated
August 1, 2005, or the Tenaska Lockbox Agreement, by and
among Commerce Energy, Tenaska and U.S. Bank National
Association established a lockbox and a related account to be
maintained at U.S Bank for deposit by Commerce Energy of all
revenues received from certain electricity end-use customers in
Texas. We refer to this account as the U.S. Bank Lockbox
Account. Until
39
Tenaska provides notice to U.S. Bank to the contrary, funds
in the Tenaska Lockbox Account are to be disbursed as Commerce
Energy may direct.
Commerce Energy and Tenaska also entered into a security
agreement, or the Tenaska Security Agreement, dated
August 1, 2006, as amended on March 7, 2006 and
June 22, 2006. To secure Commerce Energys performance
and compliance with its obligations under the Master Agreement,
the QSE Agreement, the Tenaska Security Agreement, the Tenaska
Lockbox Agreement and the related transaction documents,
Commerce Energy granted to Tenaska a continuing security
interest in Commerce Energys interest in the
U.S. Bank Lockbox Account, Commerces Energys
contracts with certain retail electricity sales customers and
the revenues and accounts receivable resulting from such
contracts. In addition, Commerce Energy agreed to deposit all
revenues received from certain electric energy customers into
the U.S. Bank Lockbox Account and to maintain a minimum
deposit amount in the Tenaska Lockbox Account of $100,000.
Tenaska agreed to provide credit to Commerce Energy in an amount
not to exceed $22 million. As of July 31, 2007,
Tenaska extended approximately $22.0 million of credit to
Commerce Energy under this arrangement.
On August 1, 2005, Tenaska and the Company entered into a
Guaranty Agreement, pursuant to which it, as the parent company
of Commerce Energy, unconditionally guaranteed to Tenaska full
and prompt payment of all indebtedness and obligations owed to
Tenaska.
Pacific
Summit Energy LLC
In September 2006, Commerce Energy entered into several
agreements with Pacific Summit Energy LLC, or Pacific Summit,
for the supply of natural gas to serve end-use customers that we
acquired in connection with the HESCO acquisition. Pursuant to a
base contract for sale and purchase of natural gas, dated
September 20, 2006 between Commerce Energy and Pacific
Summit, or the Base Contract, Pacific Summit agreed to supply
natural gas to Commerce Energy as set forth under the Base
Contract.
Pursuant to an operating agreement, dated September 20,
2006 between Commerce Energy and Pacific Summit, or the
Operating Agreement, Pacific Summit agreed to sell to Commerce
Energy natural gas for resale to designated customers that
Commerce Energy acquired from HESCO. We refer to these customers
as the Acquired Customers. Commerce Energy agreed to purchase
all of its natural gas requirements for the Acquired Customers
exclusively from Pacific Summit, and Pacific Summit agreed to
meet the demand for natural gas for such customers at prices to
be set in separate transaction confirmations according to market
prices. Credit is regularly extended to Commerce Energy by
Pacific Summit, and Commerce Energy agreed to enter into a
lockbox agreement and a security agreement with Pacific Summit
to secure payment of amounts owed to Pacific Summit under the
Operating Agreement. As of July 31, 2007, Pacific Summit
extended approximately $12.0 million of credit to Commerce
Energy under the Operating Agreement.
A blocked account control agreement with lockbox services, dated
September 20, 2006, or the Pacific Summit Lockbox
Agreement, by and among Commerce Energy, Pacific Summit and
Wachovia Bank NA established a lockbox and a related account to
be maintained at Wachovia Bank NA for deposit by Commerce Energy
of all revenues received from the Acquired Customers. We refer
to this account as the Wachovia Lockbox Account.
Commerce Energy and Pacific Summit entered into a security
agreement dated September 20, 2006, or the Pacific Summit
Security Agreement. To secure Commerce Energys performance
and compliance with its obligations under the Base Contract, the
Operating Agreement, the Pacific Summit Security Agreement, the
Pacific Summit Lockbox Agreement and related transaction
documents, Commerce Energy granted to Pacific Summit a
continuing security interest in Commerce Energys interest
in the Wachovia Lockbox Account, Commerces Energys
contracts with the Acquired Customers and the revenues and
accounts receivable resulting from such contracts. In addition,
under the Pacific Summit Security Agreement, Commerce Energy
agreed to maintain a minimum deposit amount in the Wachovia
Lockbox Account. The Pacific Summit Security Agreement also
provided for monthly withdrawals from the Wachovia Lockbox
Account, with payments to be made first to Pacific Summit for
amounts due and payable, and second to Commerce Energy for
amounts exceeding the Adjusted Minimum Deposit Amount, as
defined in the Pacific Summit Security Agreement.
40
Planned
capital expenditures
Our planned capital expenditures for fiscal 2008 are
approximately $6.0 million and are comprised of carryover
expenditures related to key upgrades of our risk management,
customer billing and customer load forecasting systems and other
information systems and hardware upgrades related to improved
customer order entry and increased customer service. These
expenditures are expected to be pro rata throughout the year and
funded out of working capital.
Off-Balance
sheet arrangements
We have no off-balance sheet arrangements and have no
transactions involving unconsolidated, limited purpose entities.
Contractual
obligations
As of July 31, 2007, we had commitments of
$63.1 million for energy purchase, transportation and
capacity contracts. These contracts are with various suppliers
and extend through June 2008.
Our most significant operating lease pertains to our corporate
office facilities. All of our other operating leases pertain to
various equipment, technology and secondary office facilities.
Certain of these operating leases are non-cancelable and contain
clauses that pass through increases in building operating
expenses. We incurred aggregate rent expense under operating
leases of $1.2 million, $1.3 million and
$1.2 million during fiscal 2007, 2006 and 2005,
respectively.
The following table shows our contractual commitments for energy
purchase and operating leases as of July 31, 2007 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Energy purchases
|
|
$
|
63,098
|
|
|
$
|
63,098
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
1,905
|
|
|
|
1,289
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,003
|
|
|
$
|
64,387
|
|
|
$
|
616
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, as of July 31, 2007, $19.3 million of
letters of credit have been issued to energy suppliers and
others pursuant to the terms of our credit facility and
$7.8 million in surety bonds have been issued.
Seasonal
Influences
Demand for electricity and natural gas is continually influenced
by both seasonal and abnormal weather patterns. To the extent
that one or more of our markets experiences a period of
unexpected weather, we may be required to either procure
additional energy to service our customers or to sell surplus
energy in the open market. Generally, unexpectedly higher or
lower than normal energy demand from our customers increases the
relative cost of our energy supplies.
Critical
Accounting Policies and Estimates
The preparation of this Annual Report on
Form 10-K
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our financial
statements, and the reported amount of revenue and expenses
during the reporting period. Actual results may differ from
those estimates and assumptions. In preparing our financial
statements and accounting for the underlying transactions and
balances, we apply our accounting policies as disclosed in our
notes to the consolidated financial statements. The accounting
policies discussed below are those that we consider to be
critical to an understanding of our financial statements because
their application places the most significant demands on our
ability to judge the effect of inherently uncertain matters on
our financial results. For all of these policies, we caution
that future events rarely develop exactly as forecast, and the
best estimates routinely require adjustment.
41
|
|
|
|
|
Accounting for Derivative Instruments and Hedging Activities
We purchase substantially all of our power and
natural gas under forward physical delivery contracts for supply
to our retail customers. These forward physical delivery
contracts are defined as commodity derivative contracts under
Statement of Financial Accounting Standard, or SFAS No.
133, Accounting for Derivative Instruments and Hedging
Activities. Using the exemption available for qualifying
contracts under SFAS No. 133, we apply the normal purchase
and normal sale accounting treatment to a majority of our
forward physical delivery contracts. Accordingly, we record
revenue generated from customer sales as energy is delivered to
our retail customers and the related energy cost under our
forward physical delivery contracts is recorded as direct energy
costs when received from our suppliers. We use financial
derivative instruments (such as swaps, options and futures) as
an effective way of assisting in managing our price risk in
energy supply procurement. For forward or future contracts that
do not meet the qualifying criteria for normal purchase, normal
sale accounting treatment, we elect cash flow hedge accounting,
where appropriate.
|
We also utilize other financial derivatives, primarily swaps,
options and futures to hedge our commodity price risks. Certain
derivative instruments, which are designated as economic hedges
or as speculative, do not qualify for hedge accounting treatment
and require current period mark to market accounting in
accordance with SFAS No. 133, with fair market value
being used to determine the related income or expense that is
recorded each quarter in the statement of operations. As a
result, the changes in fair value of derivatives that do not
meet the requirements of normal purchase and normal sale
accounting treatment or cash flow hedge accounting are recorded
in operating income (loss) and as a current or long-term
derivative asset or liability. The subsequent changes in the
fair value of these contracts could result in operating income
(loss) volatility as the fair value of the changes are recorded
on a net basis in direct energy costs in our consolidated
statement of operations for each period.
As a result of a sale on January 28, 2005 of two
significant electricity forward physical delivery contracts (on
a net cash settlement basis) back to the original supplier, the
normal purchase and normal sale exemption under
SFAS No. 133 was no longer available for our
Pennsylvania market (PJM-ISO). Accordingly, for the period from
February 2005 through July 2006, we designated forward physical
delivery contracts entered into for our Pennsylvania electricity
market as cash flow hedges, whereby market to market accounting
gains or losses were deferred and reported as a component of
Other Comprehensive Income (Loss) until the time of physical
delivery. Effective August 1, 2006, the normal purchase and
normal sale exemption has been reinstated for our Pennsylvania
market.
|
|
|
|
|
Utility and independent system operator costs
Included in direct energy costs, along with the
cost of energy that we purchase, are scheduling costs,
Independent System Operator, or ISO, fees, interstate pipeline
costs and utility service charges. The actual charges and
certain energy costs are not finalized until subsequent
settlement processes are performed for all distribution system
participants. Prior to the completion of settlements (which may
take from one to several months), we estimate these costs based
on historical trends and preliminary settlement information. The
historical trends and preliminary information may differ from
actual information resulting in the need to adjust previous
estimates.
|
|
|
|
Allowance for doubtful accounts
We maintain
allowances for doubtful accounts for estimated losses resulting
from non-payment of customer billings. If the financial
conditions of certain of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.
|
|
|
|
Net revenue and unbilled receivables
Our
customers are billed monthly at various dates throughout the
month. Unbilled receivables represent the estimated sale amount
for power delivered to a customer at the end of a reporting
period, but not yet billed. Unbilled receivables from sales are
estimated based upon the amount of power delivered, but not yet
billed, multiplied by the estimated sales price per unit.
|
|
|
|
Inventory
Inventory consists of natural gas
in storage as required by state regulators and contracted
obligations under customer choice programs. Inventory is stated
at the lower of cost or market.
|
42
|
|
|
|
|
Customer Acquisition Cost
Direct Customer
acquisition costs paid to third parties and directly related to
specific new customers are deferred and amortized over the life
of the initial customer contract, typically one year.
|
|
|
|
Legal matters
From time to time, we may be
involved in litigation matters. We regularly evaluate our
exposure to threatened or pending litigation and other business
contingencies and accrue for estimated losses on such matters in
accordance with SFAS No. 5, Accounting for
Contingencies. As additional information about current or
future litigation or other contingencies becomes available,
management will assess whether such information warrants the
recording of additional expense relating to our contingencies.
Such additional expense could potentially have a material
adverse impact on our results of operations and financial
position.
|
Recent
Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement
No. 115
. SFAS No. 159 permits entities
to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be
measured at fair value. This statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently
evaluating the impact this statement will have on its financial
statements.
In September 2006, the SEC staff published
SAB No. 108,
Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
. SAB 108 addresses
quantifying the financial statement effects of misstatements and
considering the effects of prior year uncorrected errors on the
statements of operations as well as the balance sheets.
SAB No. 108 does not change the requirements under
SAB No. 99 regarding qualitative considerations in
assessing the materiality of misstatements. The Company adopted
SAB No. 108 during the fourth quarter of fiscal year
2007, and the adoption had no impact on its results of
operations or financial condition as of and for the fiscal year
ended July 31, 2007.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which provides
guidance for using fair value to measure assets and liabilities.
The pronouncement clarifies (1) the extent to which
companies measure assets and liabilities at fair value;
(2) the information used to measure fair value; and
(3) the effect that fair value measurements have on
earnings. SFAS No. 157 will apply whenever another
standard requires (or permits) assets or liabilities to be
measured at fair value. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact this statement will have on
its financial statements.
In June 2006, the FASB issued FIN 48,
Accounting
for Uncertainty in Income Taxes
, an interpretation of
SFAS No. 109,
Accounting for Income
Taxes
. The interpretation contains a two-step approach
to recognizing and measuring uncertain tax positions accounted
for in accordance with SFAS No. 109. The provisions
are effective for the Company as of August 1, 2007. The
Company is currently evaluating the impact this statement will
have on its financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Our activities expose us to a variety of market risks
principally from the change in and volatility of commodity
prices. We have established risk management policies and
procedures designed to manage these risks with a strong focus on
the retail nature of our business and to reduce the potentially
adverse effects these risks may have on our operating results.
Our Board of Directors and the Audit Committee of the Board
oversee the risk management program, including the approval of
risk management policies and procedures. This program is
predicated on a strong risk management focus combined with the
establishment of an effective system of internal controls. We
have a Risk Oversight Committee, or ROC, that is responsible for
establishing risk management policies, reviewing procedures for
the identification, assessment, measurement and management of
risks, and the monitoring and reporting of risk exposures. The
ROC is comprised of all key members of senior management and is
chaired by the Vice President, Chief Risk Officer.
43
Commodity
Risk Management
Commodity price and volume risk arise from the potential for
changes in the price of, and transportation costs for,
electricity and natural gas, the volatility of commodity prices,
and customer usage fluctuations due to changes in weather
and/or
customer usage patterns. A number of factors associated with the
structure and operation of the energy markets significantly
influence the level and volatility of prices for energy
commodities. These factors include seasonal daily and hourly
changes in demand, extreme peak demands due to weather
conditions, available supply resources, transportation
availability and reliability within and between geographic
regions, procedures used to maintain the integrity of the
physical electricity system during extreme conditions, and
changes in the nature and extent of federal and state
regulations. These factors can affect energy commodity and
derivative prices in different ways and to different degrees.
Supplying electricity and natural gas to our retail customers
requires us to match the projected demand of our customers with
contractual purchase commitments from our suppliers at fixed or
indexed prices. We primarily use forward physical energy
purchases and derivative instruments to minimize significant,
unanticipated earnings fluctuations caused by commodity price
volatility. Derivative instruments are used to limit the
unfavorable effect that price increases will have on electricity
and natural gas purchases, effectively fixing the future
purchase price of electricity or natural gas for the applicable
forecasted usage and protecting the Company from significant
price volatility. Derivative instruments measured at fair market
value are recorded on the balance sheet as an asset or
liability. Changes in fair market value are recognized currently
in earnings unless the instrument has met specific hedge
accounting criteria. Subsequent changes in the fair value of the
derivative assets and liabilities designated as a cash flow
hedge are recorded on a net basis in Other Comprehensive Income
(Loss) and subsequently reclassified as direct energy cost in
the statement of operations as the energy is delivered. While
some of the contracts we use to manage risk represent
commodities or instruments for which prices are available from
external sources, other commodities and certain contracts are
not actively traded and are valued using other pricing sources
and modeling techniques to determine expected future market
prices, contract quantities, or both. We use our best estimates
to determine the fair value of commodity and derivative
contracts we hold and sell. These estimates consider various
factors including closing exchange and over-the-counter price
quotations, time value, volatility factors and credit exposure.
We do not engage in trading activities in the wholesale energy
market other than to manage our direct energy cost in an attempt
to improve the profit margin associated with the requirements of
our retail customers.
With most electricity and natural gas customers, we have the
ability to change prices with short notice; and, therefore, the
impact on gross profits from increases in energy prices is not
material for these customers. However, sharp and sustained price
increases could result in customer attrition without
corresponding price increases by local utilities and other
competitors. Approximately 55% of our electricity customers and
33% of our natural gas customers are subject to multi-month
fixed priced unhedged contracts and, accordingly a $10 per
megawatt hour increase in the cost of purchased power and a
$1.00 per mmbtu increase in the cost of purchased natural gas
could result in an estimated $1,564,000 decrease in gross profit
for power, and an estimated $954,000 decrease in gross profit
for natural gas, respectively, for fiscal 2008.
Credit
Risk
Our primary credit risks are exposure to our retail customers
for default on their contractual obligations. Given the high
credit quality of the majority of our energy suppliers, credit
risk resulting from failure of our suppliers to deliver or
perform on their contracted energy commitments is not considered
significant.
The retail credit default or nonpayment risk is managed through
established credit policies which actively require screening of
customer credit prior to contracting with a customer,
potentially requiring deposits from customers and actively
discontinuing business with customers that do not pay as
contractually obligated. Retail credit quality is dependent on
the economy and the ability of our customers to manage through
unfavorable economic cycles and other market changes. If the
business environment were to be negatively affected by changes
in economic or other market conditions, our retail credit risk
may be adversely impacted.
Counterparty credit risks result primarily from credit extended
to us for our purchases of energy from our suppliers. Favorable
credit terms from our suppliers make it easier to procure
wholesale energy to service our customers; however, adverse
market conditions or poor financial performance by us may result
in a reduction or
44
elimination of available unsecured counterparty credit lines.
Additionally, we have significant amounts of energy commitments
to our contracted term customers that we have hedged forward,
often for several months. A significant decrease in energy
prices could adversely impact our cash collateral requirements.
Interest
Rate Risk
Since we had no short or long-term debt outstanding at
July 31, 2007, our only exposure to interest rate risks is
limited to our investment of excess cash balances in
interest-bearing instruments. We generally invest cash
equivalents in short-term credit instruments consisting
primarily of high credit quality, short-term money market funds
and insured, re-marketable government agency securities with
interest rate reset maturities of 90 days or less. We do
not expect any material loss from our investments and we believe
that our potential interest rate exposure is not material. As
our practice has been, and currently continues to be, to only
invest in high-quality debt instruments with maturities or
remarketing dates of 90 days or less, we currently are not
materially susceptible to interest rate risks.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The financial statement information, including the reports of
the independent registered public accounting firms, required by
this Item 8 is set forth on pages F-1 to F-28 of this
Annual Report on
Form 10-K
and is hereby incorporated into this Item 8 by reference.
The Quarterly Financial Information required by this Item 8
is set forth on
page F-28
(Note 16 to the Notes to Consolidated Financial Statements)
of this Annual Report on
Form 10-K
and is hereby incorporated into this Item 8 by reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures.
Our Chief Executive Officer and our Interim Chief Financial
Officer have concluded, based on their evaluations of the end of
the period covered by this report, that our disclosure controls
and procedures (as defined in
Rule 13a-15(e)
or
15d-15(e)
under the Securities Exchange Act of 1934, as amended) are
effective to ensure that all information required to be
disclosed by us in the reports filed or submitted by us under
the Securities Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SECs
rules and forms and include controls and procedures designed to
ensure that information required to be disclosed by us in such
reports is accumulated and communicated to our management,
including the Chief Executive Officer and the Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Changes
in Internal Controls.
In connection with the above-referenced evaluation, no change in
our internal control over financial reporting occurred during
the fourth quarter of fiscal 2007 that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
45
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
Information
About Our Directors
Our Certificate of Incorporation and Bylaws provide for a
classified Board of Directors. The number of
authorized directors is currently six. At present, there are two
Class I directors, whose terms expire at the next annual
meeting of stockholders; two Class II directors, whose
terms expire at the Companys annual meeting of
stockholders to be held after the completion of fiscal 2008; and
two Class III directors, whose terms expire at the
Companys annual meeting of stockholders to be held after
the completion of fiscal 2009. The following table sets forth
information regarding our directors, including their ages as of
October 16, 2007, and business experience during the past
five years. Each of our directors has served continuously as one
of our directors since the date indicated in his biography below.
|
|
|
|
|
|
|
Name and Position
|
|
Age
|
|
Principal Occupation and Other Information
|
|
Class I Directors
|
|
|
|
|
|
|
Steven S. Boss
|
|
|
61
|
|
|
Mr. Boss has served as a director of the Company since July 2005
and was appointed Chief Executive Officer of the Company in
August 2005. Since August 2005, Mr. Boss also has served as a
director and President of the Companys principal operating
subsidiary, Commerce Energy, Inc., and as a director and Chief
Executive Officer of Skipping Stone Inc., another wholly-owned
subsidiary of the Company.
|
|
|
|
|
|
|
From 2003 to August 2005, Mr. Boss practiced law, specializing
in the representation of energy companies and commercial energy
users. He also has significant operating experience in the
retail energy industry. From 2000 to 2003, he served as
President of Energy Buyers Network LLC, an energy consulting
firm that provided regulatory representation and structured
direct-access energy transactions for commercial energy users.
|
|
|
|
|
|
|
Before that, Mr. Boss served as President of Sierra Pacific
Energy Company and Nevada Power Services, both of which were
non-regulated energy services operating subsidiaries of Sierra
Pacific Resources. He also served as President and Chief
Executive Officer of Sunrise Energy Services Inc, an independent
natural gas marketing company with shares listed on the American
and London Stock Exchanges.
|
|
|
|
|
|
|
He earned a Bachelor of Science degree in Aerospace Engineering
from the University of Texas, a Juris Doctorate from the
University of Southern California and has been a member of the
California State Bar since 1974.
|
Gary J. Hessenauer
|
|
|
52
|
|
|
Mr. Hessenauer has served as a director of the Company since
August 2005. He is a member of the Audit and Compensation
Committees and serves as the Chair of the Strategic
Opportunities Committee of the Board.
|
|
|
|
|
|
|
Since July 2007, Mr. Hessenauer has served as Chief Executive
Officer of Applied Utility Systems, Inc. or Applied Utility, a
provider of emissions control solutions for the energy sector.
Applied Utility is a subsidiary of Catalytic Solutions, Inc. In
addition, since 2003, Mr. Hessenauer has been an investor
and advisor to early stage companies. From 2002 to 2003, Mr.
Hessenauer served as President and Chief Executive Officer of
Sixth Dimension, an energy technology company that developed
solutions for real-time monitoring and control of dispersed
energy assets.
|
46
|
|
|
|
|
|
|
Name and Position
|
|
Age
|
|
Principal Occupation and Other Information
|
|
|
|
|
|
|
|
Prior to that, he served as Senior Vice President of Sempra
Energy Solutions, a retail energy services provider that also
provided non-regulated energy marketing and trading services.
Sempra Energy Solutions was a subsidiary of Sempra Energy, a
large distributor of natural gas and electricity that is listed
on the New York Stock Exchange.
|
|
|
|
|
|
|
Previously, he served in management positions with a number of
public and private companies. These positions included Vice
President, Marketing and Sales for the retail energy services
subsidiary of Edison International; Corporate Area General
Manager of Multiple Business Unit Development Operations for
General Electric Company; and Regional Sales Manager for General
Electric Companys Electrical Distribution and Control
business unit.
|
|
|
|
|
|
|
Mr. Hessenauer holds a bachelors degree in Mechanical
Engineering from the U.S. Naval Academy and completed Stanford
Universitys executive business program.
|
Class II Directors
|
|
|
|
|
|
|
Mark S. Juergensen
|
|
|
47
|
|
|
Mr. Juergensen has served as a director of the Company since
December 2003. He also served as a director of Commonwealth
Energy Corporation, the predecessor corporation to the Company,
from May 2003 to July 2004. Mr. Juergensen is a member of the
Audit, Compensation, and Strategic Opportunities Committees of
the Board and is the Chair of the Nominating and Corporate
Governance Committee. He also has served as a director of
Commerce Energy, Inc. from May 2003 to August 2005 and as a
director of Skipping Stone Inc. and Utilihost, Inc., both
subsidiaries of the Company from August 2005 to January 2006.
|
|
|
|
|
|
|
Mr. Juergensen has served as a director of Sterling Energy
International, Inc., a private management service company in the
power generation industry since 2003. He has also served as a
managing director of CleanTech Energy, Inc., an energy
technology investment and advisory firm, since January 2007. In
addition, he is on the Board and is the past president of the
Board of the Los Angeles Power Association, a non-profit
corporation focused on Southern California energy supply issues.
He is also a member of the Board and Chairman of Nominations of
CleanTech San Diego, a non-profit organization committed to
form and foster an energy and environmental technology cluster
in the San Diego region which promotes a clean and
sustainable future.
|
|
|
|
|
|
|
From June 2000 to January 2007, he served as Vice President and
Co-Founder of Predict Power, an energy solution software
company. From February 1995 to June 2000, he served in multiple
management positions, including as a commercial Manager, for
Solar Turbines, Caterpillars gas turbine division. From
February 1992 to February 1995, he served as Director of
Management Services for Sterling Energy International, a power
generation management consulting firm he co-founded.
|
47
|
|
|
|
|
|
|
Name and Position
|
|
Age
|
|
Principal Occupation and Other Information
|
|
|
|
|
|
|
|
Mr. Juergensen received a bachelors degree in electrical
engineering from the University of Southern California and is a
graduate of its NROTC program. He is a retired senior Navy
Officer after 22 years of active and reserve service.
|
Charles E. Bayless
|
|
|
64
|
|
|
Mr. Bayless has served as a director of the Company since July
2004. He is a member of the Audit, Nomination and Corporate
Governance and Strategic Opportunities Committees of the Board.
|
|
|
|
|
|
|
Mr. Bayless has been the Provost of the West Virginia University
Institute of Technology since April 2005. Mr. Bayless held the
position of Chief Executive Officer and President of Illinova
and Illinois Power from July 1998 until September 1999 and
served as Chairman of Illinova and Illinois Power from August
1998 until his retirement in December 1999. Prior to that, he
was Chairman, President and Chief Executive Officer of Tucson
Electric Power. Mr. Bayless served as a Director of Illinova and
Illinois Power from 1998 until the closing of the merger with
Dynegy Inc. in February 2000, and served as a director of Dynegy
Inc. from February 2000 until May 2006.
|
|
|
|
|
|
|
Mr. Bayless received his Bachelor of Science degree in
Electrical Engineering from West Virginia Institute of
Technology. He earned a Masters of Science degree in Electrical
Engineering with a focus in Power Engineering, and a Juris
Doctorate degree, both from West Virginia University. Mr.
Bayless also holds a Master of Business Administration from the
Graduate School of Business Administration, University of
Michigan.
|
Class III Directors
|
|
|
|
|
|
|
Dennis R. Leibel
|
|
|
63
|
|
|
Mr. Leibel has served as a director of the Company since
December 2005. He is a member of the Audit and Strategic
Opportunities Committees of the Board and is the chair of the
Compensation Committee.
|
|
|
|
|
|
|
Mr. Leibel has served as a founding partner of Esquire
Associates LLC, a financial advisory and consulting firm, since
1998. Mr. Leibel is also a private investor and previously
served as a senior financial and legal executive with AST
Research Inc. and Smith International, Inc.
|
|
|
|
|
|
|
He has been a member of the board of directors of Microsemi
Corporation since May 2002 and served as its chairman since July
2004. He has also served on the board of directors of DPAC
Technologies Corp., a device networking and connectivity
solutions company, since February 2006.
|
|
|
|
|
|
|
Mr. Leibel holds a bachelors degree in accounting from
Brooklyn College, a Juris Doctorate degree from Brooklyn Law
School and a master of law degree in taxation from Boston
University School of Law. He is a certified public accountant
and a member of New York State Bar.
|
Robert C. Perkins
|
|
|
68
|
|
|
Mr. Perkins has been the Chairman of the Board of Directors of
the Company since May 2005 and a director of the Company since
December 2003.
|
48
|
|
|
|
|
|
|
Name and Position
|
|
Age
|
|
Principal Occupation and Other Information
|
|
|
|
|
|
|
|
He also served as a director of Commonwealth Energy Corporation,
the predecessor corporation to the Company, from 1999 to January
2006. Mr. Perkins is a member of the Compensation, Nominating
and Corporate Governance and Strategic Opportunities Committees
of the Board and is the Chair of the Audit Committee.
|
|
|
|
|
|
|
Mr. Perkins has served as Chairman and Chief Executive Officer
of Hospital Management Services, a provider of financial and
management consulting services to hospitals and similar
institutions since June 1969.
|
|
|
|
|
|
|
Mr. Perkins received his Bachelor of Science degree in
accounting from Bob Jones University.
|
There are no arrangements or other understandings pursuant to
which any of the persons listed in the table above was selected
as a director or nominee.
Information
with Respect to Our Executive Officers
Information regarding our executive officers is included in
Item 1C of Part I of this Annual Report on
Form 10-K
under the caption Executive Officers of the
Registrant, and is hereby incorporated herein by reference.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors
and executive officers, and persons who beneficially own more
than 10% of a registered class of our equity securities to file
with the SEC initial reports of ownership and reports of changes
in ownership of our common stock and other equity securities.
Officers, directors and beneficial owners of more than 10% of
our common stock are required by SEC regulations to furnish us
with copies of all Section 16(a) forms they file.
To our knowledge, based solely on our review of the copies of
such reports furnished to us and written representations that no
other reports were required during fiscal 2007, and except as
disclosed in the following paragraph, our officers, directors
and beneficial owners of more than 10% of our common stock
complied with all Section 16(a) filing requirements during
fiscal 2007.
Each of the following non-employee directors made a late filing
of a Form 4 under Section 16(a) of the Exchange Act
that related to the award of the shares of restricted stock
regarding director compensation in January 2007: Charles E.
Bayless, Mark S. Juergensen, Dennis R. Leibel and Robert C.
Perkins.
Code of
Ethics
We have adopted a Code of Business Conduct and Ethics that
applies to all of our directors, officers and employees
including our principal executive officer, principal financial
officer and principal accounting officer and all of our other
officers and employees. In the event that we make any amendment
to, or grant any waiver of, a provision of the Code of Business
Conduct and Ethics that applies to our principal executive
officer, principal financial officer or principal accounting
officer, we intend to disclose such amendment or waiver by
including such information as an exhibit in future filings.
Audit
Committee and Audit Committee Financial Expert
Charles E. Bayless, Gary J. Hessenauer, Mark S. Juergensen,
Dennis R. Leibel and Robert C. Perkins are the members of our
Audit Committee. Our Board of Directors has determined that each
member of the Audit Committee is independent as
defined under the rules of the SEC and the American Stock
Exchange. In addition, the Board of Directors has determined
that Mr. Perkins, the Chairman of the Audit Committee, is
an audit committee financial expert as defined under
the rules of the SEC.
49
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Item 11.
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Executive
Compensation.
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Compensation
Discussion and Analysis for Named Executive Officers
Overview
Compensation Objectives
The primary objective of the compensation committee of our board
of directors with respect to executive compensation is to
attract, retain and motivate the best possible executive talent.
The focus is to tie short and long-term cash and equity
incentives to the achievement of measurable corporate objectives
and to align executives incentives with stockholder value
creation. To achieve these objectives, the compensation
committee has adopted a compensation approach that ties a
portion of the executives overall compensation to our
operational performance and a portion to their attainment of
individually-assigned goals designed to expand our business and
improve our internal structures and processes.
We must match market cash compensation levels and satisfy the
day-to-day financial requirements of our executive officer
candidates through competitive base salaries, cash bonuses and
equity grants. We compete for key personnel on (i) the
basis of our vision of future success, (ii) our culture and
company values, (iii) the cohesiveness and productivity of
our teams, and (iv) the excellence of our technical and
management personnel. In all of these areas, we compete with
other energy companies, where there is significant competition
for talented employees. While the Company places an emphasis on
recruiting in the national energy sector for senior and key
executive talent, it also recruits from a broader all
industry group of public and private companies based
primarily in Southern California and Texas, the two principal
markets in which we operate. Accordingly, our compensation
philosophy has been to maintain an aggressive and flexible pay
posture for total compensation, as well as other components of
total compensation. In addition, with the same competitive pay
issues to consider, our compensation committee has developed
incentive bonus and equity plans designed to align stockholder
and employee interests.
We have adopted an approach to compensation comprised of a mix
of short- and long-term components and a mix of cash and equity
elements in proportions we believe will provide the proper
incentives, reward our senior management team and help us
achieve the following goals:
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offer base compensation sufficient to attract, retain and
motivate a high quality management team;
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foster a goal-oriented, highly motivated management team whose
participants have a clear understanding of business objectives
and shared corporate values;
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provide variable compensation components (including short and
long-term incentive awards) that are aligned with our business
objectives and the interests of our stockholders;
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provide a competitive benefits package; and
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control costs in each facet of our business to maximize our
efficiency.
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The compensation of our executive officers is based in part on
the terms of employment agreements and offer letters we entered
into with several of our executive officers, which set forth the
initial base salaries and initial option grants for our
executive officers, as well as the terms of our cash bonus
plans. See Employment Agreements and Cash
Bonus Plans below.
In our fiscal year ended July 31, 2007, or fiscal 2007, we
believe that our compensation offering for executive officer
talent of base salary, bonus plan and equity grant provided a
competitive compensation package to attract, retain and motivate
quality management talent. The establishment of financial
targets as our goals in the Bonus Program for fiscal 2007
reinforced two other compensation goals; namely, alignment of
our executive officers compensation with our business
objectives and the interests of our stockholders and the
fostering of a goal-oriented, highly motivated management team
whose participants have a clear understanding of business
objectives and shared corporate values. In fiscal 2007, we
achieved our stretch financial target under the Bonus Program,
thereby creating a higher bonus potential for each of the
eligible executive officers. These same two compensation goals
also were important in the decision to grant options and shares
of restricted stock to the new senior vice president and general
counsel who was hired during the fiscal 2007, the only equity
grants made to executive officers in fiscal 2007. These grants
are discussed in this Compensation Discussion and Analysis under
the caption Equity-Based Incentives. The individual
performance goals set by the chief executive officer and the
compensation committee
50
for the named executive officers that were used to calculate
bonus amounts under the Bonus Program for fiscal 2007 were
designed to link the executive officers bonus with our
performance and the attainment of individual goals within that
framework of corporate growth. Targeted objectives for the chief
executive officer and the other executive officers under the
Bonus Program fell into the following categories: financial
performance, investor awareness, and increase in customer
growth, risk management, and leadership.
Role
of Our Compensation Committee
Our compensation committee approves, administers and interprets
our executive compensation and benefit policies. Our
compensation committee was appointed by our board of directors,
and consists entirely of directors who are outside
directors for purposes of Section 162(m) of the
Internal Revenue Code, as amended, or the Code, and
non-employee directors for purposes of
Rule 16b-3
under the Exchange Act. Our compensation committee is comprised
of Gary J. Hessenauer, Mark S. Juergensen, Dennis R. Leibel and
Robert C. Perkins. Mr. Leibel is our compensation committee
chairperson.
The compensation committee considers recommendations from Steven
S. Boss, our chief executive officer, in determining executive
compensation. While Mr. Boss discusses his recommendations
with the compensation committee, he does not participate in
determining his own compensation. In making his recommendations,
Mr. Boss receives input from our Human Resources department
and has access to third-party compensation surveys such as the
2007 Employers Group Compensation Survey and on-line
compensation data of publicly-traded companies. This information
is also available to our compensation committee. None of our
other executive officers participate in the compensation
committees discussions regarding executive compensation.
The compensation committee does not delegate any of its
functions to others in determining executive compensation. The
compensation committee considers the business goals set for that
year, as well as changes in corporate market focus and goals for
the next fiscal year. The compensation committee reviews with
our management the business plans for the new fiscal year
relative to the prior fiscal year.
Our compensation committee has taken the following steps to
ensure that our approach to executive compensation and benefits
is consistent with both our compensation philosophy and our
corporate governance guidelines:
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evaluated our compensation practices and assisted in developing
and implementing the executive compensation philosophy;
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developed recommendations with regard to executive compensation
structures that were reviewed and approved by our compensation
committee and board of directors;
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established a practice of prospectively reviewing the
performance and determining the compensation earned, paid or
awarded to our chief executive officer independent of input from
him; and
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established a policy to review on an annual basis the
performance of our other executive officers with assistance from
our chief executive officer and determining what we believe to
be appropriate total compensation.
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Components
of our Compensation Approach
Our compensation approach consists of five components:
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base salary;
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annual cash bonuses;
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discretionary bonuses;
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equity-based incentives; and
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other benefits.
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We chose to build our executive compensation approach around
these elements because we believe that together they have been
and will continue to be effective in achieving our overall
objectives. We utilize short-term
51
compensation, including base salary and cash bonuses, to
motivate and reward our key executives. The use and weight of
each compensation element is based on a subjective determination
by the compensation committee of the importance of each element
in meeting our overall objectives. We believe that the
proportion of compensation at risk should increase as an
employees level of responsibility increases. We believe
that, in addition to base salaries and bonuses, restricted stock
awards and other equity-based awards are the primary
compensation-related motivator in attracting and retaining
qualified employees. Although our compensation committee has in
the past engaged the services of compensation consultants, in
fiscal 2007, the compensation committee did not engage in the
services of a compensation consultant with the exception of
structuring our Bonus Program, described below. We have not
benchmarked any element of our compensation as it pertains to
our executives in fiscal 2007.
Base Salary.
Base salaries will typically be
used to recognize the experience, skills, knowledge and
responsibilities required of each executive officer, as well as
competitive market conditions. The base salary of our named
executive officers will be reviewed on an annual basis and
adjustments are made to reflect performance-based factors, as
well as competitive conditions. We do not apply specific
formulas to determine increases.
In fiscal 2007, Thomas S. Ulry, our senior vice president, sales
and marketing, received a $25,000 annual increase in base salary
from $228,000 to $253,000 and Nick Cioll, our vice president,
chief risk officer, received a $20,000 annual increase in base
salary from $152,500 to $172,500, each effective October 1,
2006, in recognition of their superior performance in fiscal
2006 and, in the case of Mr. Cioll, also in recognition of
his recent promotion to his current position. In fiscal 2007, we
hired Erik A. Lopez, Sr. as our senior vice president and
general counsel. The compensation committee established a base
salary for Mr. Lopez of $265,000. Among the factors that
the compensation committee considered in the course of
establishing that base salary were on-line salary data, a
third-party compensation survey and the potential earnings
potential that Mr. Lopez may have been foregoing from his
prior employment. We also entered into an agreement with Tatum
LLC to engage the services of J. Robert Hipps as our interim
chief financial officer at $37,500 per month for a minimum
period of three months. The terms of such agreement with Tatum
were believed by the compensation committee to be market, based
upon Mr. Hipps qualifications and experience.
In fiscal 2007, Mr. Clayton incurred costs for
long-distance travel commuting expenses in the amount of $59,274
in connection with commuting from his home in Texas to our
corporate headquarters in Costa Mesa, California. We paid these
non-reimbursable costs to Mr. Clayton and added such costs
to his base salary.
Annual Cash Bonuses.
We believe that as an
employees level of responsibility increases, a greater
portion of the individuals cash compensation should be
variable and linked to both quantitative and qualitative
expectations, including key operational and strategic metrics.
To that end, in fiscal 2007, we established annual cash Bonus
Program which is administered by the compensation committee.
These bonuses, if earned, are paid after the end of the fiscal
year. All of our named executive officers, with the exception J.
Robert Hipps, were eligible to participate in the Bonus Program
in fiscal 2007; however, in order to vest in a bonus amount, an
executive officer must be an active employee on the date the
bonus is paid. Mr. Hipps was not eligible to participate
because he was not an employee during the first nine months of
the fiscal year.
For fiscal 2007, bonus payments to our chief executive officer
and the other executive officers were based on meeting
and/or
exceeding Company financial goals set by the compensation
committee and achieving other business goals set for the
respective executives by the compensation committee. Pursuant to
the terms of the Bonus Program, the bonus award for each
executive officer was calculated based upon the product of
(i) the named executive officers base annual salary
as of April 30, 2007, (ii) the named executive
officers potential bonus percentage assigned by the
compensation committee to the level of such employee
(
i.e.
,
20-70%
for
the chief executive officer and
12-40%
for
the other executive officers), and (ii) the named executive
officers earned bonus percentage based upon the attainment
of certain individual business goals set by the compensation
committee with recommendations by the chief executive officer;
and reduced (but not below zero) by amounts, if any, from the
Companys commission incentive program. Messrs. Boss,
Ulry or Cioll were not eligible to participate in the
Companys commission incentive program.
52
Under the Bonus Program, a participants potential bonus
percentage is determined based upon the Companys net
income which is defined under the Bonus Program to mean net
income from operations, including interest income and expense,
for any fiscal year after bonus accruals under the Bonus Program
are deducted. At the beginning of each fiscal year, the
compensation committee establishes four levels of net income
goals and assigns potential bonus percentages for each such
corresponding level. In fiscal 2007, we attained net income as
defined in the Bonus Program of $3.6 million. At that level
of net income, the applicable bonus percentage for the chief
executive officer was 30% and 18% for the other executive
officers. At the time the compensation committee set the
Level II target, it believed attainment of the goal to be
achievable, but somewhat of a stretch. Levels I,
II, III and IV of the net income goals under the Bonus
Program were set at $1.35, $3.0, $4.0 and $5.0 million,
respectively. In addition to a bonus payment, if the
Level IV target had been exceeded, the Committee could have
established a bonus pool and distributed it among the bonus
groups, including the named executive officers, as the Committee
determine in its sole discretion.
In determining the earned bonus percentage, the compensation
committee assigned to the chief executive officer and each of
the other executive officers specific individual objectives in
several of the following categories: increase in overall Company
financial performance; increase in investor awareness; financial
risk management; peer and leadership development; and customer
maintenance and growth. Each category was assigned a specific
percentage weight at the commencement of the Plan. In
establishing the performance objectives of the executive
officers, the chief executive officer and members of the
executive team made recommendations, which were approved by
members of the compensation committee. Each executive, including
each executive officer, had individual objectives for the year
which were designed to contribute to the achievement of our
corporate objectives. For purposes of determining whether our
executive officers met each of the individual goals and
objectives assigned to them, the compensation committee met with
our chief executive officer and then deliberated among
themselves without the chief executive officer present.
Messrs. Boss, Ulry and Cioll each had individual objectives
that the Company reach $1.35 million in net income which
was met and exceeded by 168%. The weighting for that factor
among the three executive officers was 70% for Mr. Boss,
40% for Mr. Ulry and 40% for Mr. Cioll. Mr. Boss
also had individual objectives relating to increasing
institutional or strategic investors and each of the three named
executive officers were assigned internal leadership goals.
Mr. Ulry was also assigned Company performance objectives
to (i) improve profitability by originated gross margin of
$18 million, a goal exceeded by 172%; (ii) increase
customer growth by at least 98,000 new customer accounts, a goal
exceeded by 120%; and (iii) achieve at least an 80%
customer renewal rate, a goal also met. Mr. Cioll was
assigned several individual projects related to improving the
risk management operation of the business. In fiscal 2007, the
earned bonus percentages for Steven S. Boss, our chief executive
officer, Thomas L. Ulry, our senior vice president, sales and
marketing, and Nick Cioll, our vice president, chief risk
officer, were 90%, 100% and 85%, respectively. The reason for
Mr. Boss not realizing the maximum earned bonus percentage
was a subjective determination by the compensation committee
regarding progress made on team building initiatives and the
reason for Mr. Cioll not realizing his maximum earned bonus
percentage was a determination by the compensation committee
that certain elements of the new risk management program were
not operational and a subjective determination relating to
certain new risk management reports. As a result,
Mr. Bosss bonus for fiscal 2007 was $111,242 or 27%
of his base salary as of April 30, 2007,
Mr. Ulrys bonus for fiscal 2007 was $45,538, or 18%
of his base salary as of April 30, 2007 and Mr. Cioll
bonus for fiscal 2007 was $26,392, or 15.3% of his base salaries
as of April 30, 2007. The bonus amounts for
Messrs. Boss, Ulry and Cioll which relate to fiscal 2007
have not been paid. To receive the bonus payment, each named
executive officer must be an active employee of the Company and
be in good standing on the date the bonus is paid, which is
expected to be in November 2007.
We have not paid any significant signing or promotion bonuses to
our named executive officers, nor have we guaranteed any future
bonuses to our named executive officers.
Discretionary Bonuses.
The compensation
committee has the discretion to award discretionary bonuses to
named executive officers. In fiscal 2007, the compensation
committee awarded discretionary bonus to Thomas L. Ulry and Nick
Cioll in the amount of $25,000 and $20,000, respectively, in
recognition of their outstanding contributions in fiscal 2006.
In awarding the amount of the bonus, the compensation committee
recognized the more senior position of Mr. Ulry and the
importance of the sales function of the Company as one of the
key drivers to increase stockholder value.
53
Equity-Based Incentives.
Salaries and bonuses
are intended to compensate our named executive officers for
short-term performance. We also have adopted an equity incentive
approach intended to reward longer-term performance and to help
align the interests of our named executive officers with those
of our stockholders. We believe that long-term performance is
achieved through an ownership culture that rewards performance
by our named executive officers through the use of equity
incentives. Our equity incentive plans have been established to
provide our employees, including our named executive officers,
with incentives to help align those employees interests
with the interests of our stockholders. Our equity incentive
plans have provided the principal method for our named executive
officers to acquire equity interests in our company.
The size and terms of the initial option grant and restricted
share award made to each executive officer upon joining us are
primarily based on competitive conditions applicable to the
executive officers specific position and are set forth in
the executive officers employment agreement or offer
letter from us. In addition, the compensation committee
considers the number of options and restricted shares owned by
other executives in comparable positions within our company.
The equity awards we make to our named executive officers will
be driven by our sustained, performance over time, our named
executive officers ability to impact our results that
drive stockholder value, their level of responsibility within
our company, their potential to fill roles of increasing
responsibility, and competitive equity award levels for similar
positions in comparable companies. Equity forms a key part of
the overall compensation for each executive officer and will be
considered each year as part of the annual performance review
process and incentive payout calculation.
We do not have a policy regarding the granting of equity, or the
purchase and retention of equity, by our named executive
officers.
During fiscal 2007, we made one stock option award in the
aggregate amount of 45,000 shares of our common stock and
one restricted stock award in the aggregate amount of
60,000 shares of our common stock to our then newly-hired
senior vice president, general counsel under our 2006 Stock
Incentive Plan. The amount of the stock option grant and the
restricted stock award was the result of negotiations with the
executive officer during the hiring process in order to both
recruit the executive officer to his current position and
incentivize him to increase stockholder value over the life of
the awards. The option was granted at the fair market value on
the date of grant which is the closing price on the American
Stock Exchange. The option and the shares of restricted stock
vest over a three-year period with one third vesting on each
anniversary of the commencement date of employment. All equity
awards to our employees, including named executive officers, and
to our directors have been granted and reflected in our
consolidated financial statements, based upon the applicable
accounting guidance, with the exercise price equal to the fair
market value on the grant date based on the valuation determined
by the compensation committee of our board of directors.
In fiscal 2007, we also amended the employment agreements and
the related restricted stock agreements for two named executive
officers establishing a positive net income performance target
for fiscal 2007 for the vesting of 75,000 shares of
restricted stock for Steven S. Boss, our chief executive
officer, and 15,000 shares of restricted stock for Lawrence
Clayton, Jr., our former chief financial officer. In
selecting such performance target, the compensation committee,
believed the target to be easily attainable. Pursuant to
Mr. Boss employment agreement, upon joining the
Company in August 2005, he was awarded 200,000 shares of
restricted stock; 50,000 shares of which vested upon his
first anniversary with us; and 150,000 shares which vested
over the next three years in 50,000 share increments based
upon the achievement of performance targets for fiscal 2006,
2007 and 2008 established by the compensation committee. During
fiscal 2006, the compensation committee did not set any
performance targets for vesting. The parties rectified the
failure of one tranche of restricted shares to have the
opportunity to vest by entering into the amendment which
provided that 75,000 shares of restricted stock shall vest
if we achieved positive net income, as defined in GAAP, in
fiscal 2007 and 75,000 shares of restricted stock shall
vest based upon the achievement of performance targets to be
established by the compensation committee for the fiscal year
ending July 31, 2008. For each tranche of restricted shares
to vest, Mr. Boss must be an employee of us at the time we
file our respective annual reports on
Form 10-K
with the SEC. See Employment Agreements.
Other Benefits.
We have a 401(k) plan in which
substantially all of our employees are entitled to participate.
Employees contribute their own funds, as salary deductions, on a
pre-tax basis. Contributions may be made up to
54
plan limits, subject to government limitations. The plan permits
us to make matching contributions if we choose and we have
historically provided matching contributions of up to three
percent, based on 50% of employees contributions of up to
6% of defined compensation. We also offer an Amended and
Restated 2005 Employee Stock Purchase Plan, or the ESPP, which
became effective in July 2006. The ESPP, which has been approved
by our board of directors and our stockholders, provides for
eligible employees to purchase our common stock through payroll
deductions. The ESPP generally allows employees to elect to
purchase our common stock each month in an amount not to exceed
an annual rate of accrual of $25,000 per calendar year in fair
value of our common stock at the lower of the first or last
days closing price for each months offering period,
less a discount of 15%. The ESPP does not discriminate between
executive and non-executive employees. We provide health care,
dental, vision and life insurance, employee assistance plans and
both short- and long-term disability, accidental death and
dismemberment benefits to all full-time employees, including our
named executive officers. We believe these benefits are
comparable with companies with which we compete for employees.
These benefits are available to all employees, subject to
applicable laws. Certain of these plans require varying levels
of employee contributions including deductibles and co-pays
depending on the plans chosen by the employee. These
contributions are the same for all employees including our named
executive officers.
Severance
and Termination Protection
Employment and Letter Agreements.
Under their
employment and letter agreements, respectively,
Messrs. Boss and Ulry are entitled to certain severance and
change of control benefits, the terms of which are described in
detail below under Employment Contracts and
Letter Agreements.
Acceleration of Vesting of Equity-Based
Awards.
In the event of a change in control of
us, certain provisions of our 1999 Equity Incentive Plan and the
2006 Stock Incentive Plan allow, at the discretion of the
compensation committee for up to the full acceleration of
unvested equity awards in the event an acquirer neither assumes
awards outstanding under these plans nor issues our award
holders substitute equity awards. See Employee Benefit
Plans below.
Accounting
and Tax Considerations
Effective August 5, 2005, we adopted the fair value
provisions of Financial Accounting Standards Board Statement
No. 123(R) (revised 2004), Share-Based Payment,
or SFAS 123(R). Under SFAS 123(R), we are required to
estimate and record an expense for each award of equity
compensation (including stock options) over the vesting period
of the award.
Internal Revenue Code Section 162(m) limits the amount that
we may deduct for compensation paid to our chief executive
officer and to each of our four most highly compensated officers
to $1,000,000 per person, unless certain exemption requirements
are met. Exemptions to this deductibility limit may be made for
various forms of performance-based compensation. In
the past, annual cash compensation to our named executive
officers has not exceeded $1,000,000 per person, so the
compensation has been deductible. In addition to salary and
bonus compensation, upon the exercise of stock options that are
not treated as incentive stock options, the excess of the
current market price over the option price, or option spread, is
treated as compensation, and accordingly, in any year, such
option exercise may cause an officers total compensation
to exceed $1,000,000. Under certain regulations, option spread
compensation from options that meet certain requirements will
not be subject to the $1,000,000 cap on deductibility, and in
the past we have granted options that met those requirements.
The compensation committee has not yet established a policy for
determining which forms of incentive compensation awarded to our
named executive officers shall be designed to qualify as
performance-based compensation. To maintain
flexibility in compensating our named executive officers in a
manner designed to promote our objectives, the compensation
committee has not adopted a policy that requires all
compensation to be deductible. However, the compensation
committee intends to evaluate the effects of the compensation
limits of Section 162(m) on any compensation it proposes to
grant, and the compensation committee intends to provide future
compensation in a manner consistent with our best interests and
those of our stockholders.
55
Financial
Restatements
Our compensation committee does not have an established practice
regarding the adjustment or recovery of awards or payment if the
relevant performance measures upon which they are based are
restated or otherwise adjusted in a manner that would reduce the
size of an award or payment previously made. The board of
directors will determine whether to seek recovery of incentive
compensation under the Bonus Program in the event of a financial
restatement or similar event based on the facts and
circumstances surrounding a financial or similar event, should
one occur. Among the key factors that the compensation committee
will consider is whether the executive officer engaged in fraud
or misconduct that resulted in need for a restatement.
Summary
Compensation Table
The following table provides information regarding the
compensation earned during the fiscal year ended July 31,
2007 by our chief executive officer, our interim chief financial
officer, our former chief financial officer and our three other
most highly compensated executive officers who were employed by
us as of July 31, 2007. We refer to these executive
officers as our named executive officers.
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Non-Equity
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Incentive
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Plan
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Stock
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Option
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Compen-
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All Other
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Fiscal
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Salary
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Bonus
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Awards
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Awards
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sation
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Compensation
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Total
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Name and Principal Position(s)
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Year
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($)
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($)
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($)(1)
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($)(2)
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($)(3)
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($)4)
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($)
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Steven S. Boss
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2007
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$
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412,000
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$
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100,084
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$
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141,120
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$
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111,242
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$
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764,446
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Chief Executive Officer
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Lawrence Clayton, Jr.
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2007
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$
|
334,274
|
(6)
|
|
|
|
|
|
$
|
24,730
|
(7)
|
|
$
|
14,083
|
|
|
|
|
|
|
|
|
|
|
$
|
373,087
|
|
Chief Financial Officer(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Robert Hipps
|
|
|
2007
|
|
|
$
|
2,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,769
|
|
Interim Chief Financial Officer(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas L. Ulry
|
|
|
2007
|
|
|
$
|
248,192
|
|
|
|
|
|
|
$
|
17,744
|
|
|
|
|
|
|
$
|
45,538
|
(9)
|
|
|
|
|
|
$
|
311,474
|
|
Senior Vice President, Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nick Cioll
|
|
|
2007
|
|
|
$
|
168,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,392
|
(10)
|
|
|
|
|
|
$
|
195,046
|
|
Vice President, Chief Risk Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik A. Lopez, Sr.
|
|
|
2007
|
|
|
$
|
86,635
|
|
|
|
|
|
|
$
|
17,675
|
|
|
$
|
9,628
|
|
|
|
|
|
|
|
|
|
|
$
|
113,938
|
|
Senior Vice President, General Counsel(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts reflect the amount of stock awards we recognized, or
expensed, during fiscal 2007, calculated in accordance with
SFAS No. 123(R). See Note 2 to the Notes to
Consolidated Financial Statements for a discussion of
assumptions made in determining the grant date fair value and
compensation expense of our restricted stock awards.
|
|
(2)
|
|
Amounts reflect the amount of stock options expensed in 2007,
based on the vesting of grants made during or prior to fiscal
2007 as compensation costs for financial reporting purposes in
accordance with SFAS No. 123R. See Note 2 to the
Notes to Consolidated Financial Statements for a discussion of
assumptions made in determining the grant date fair value and
compensation expense of our stock options.
|
|
(3)
|
|
Consists of bonus payments earned for fiscal 2007 under the
Commerce Energy Group, Inc. Bonus Program. To receive the bonus
amounts shown, each named executive officer must be an active
employee of the Company in good standing on the date the bonus
is paid, which is anticipated to be in November 2007.
|
|
(4)
|
|
Under the rules of the SEC, the Company is required to identify
by type all perquisites and other personal benefits for a named
executive officer only if the total value for that individual
equals or exceeds $10,000, and to report and quantify each
perquisite or personal benefit only if the value thereof exceeds
the greater of $25,000 or 10% of the total amount of perquisites
and personal benefits for that individual.
|
|
(5)
|
|
Mr. Clayton served as our Chief Financial Officer until
July 25, 2007.
|
|
(6)
|
|
Includes $59,274 in non-reimbursable long-distance commuting
expenses paid to Mr. Clayton.
|
|
(7)
|
|
In connection with Mr. Claytons departure, we have
remitted payment to Mr. Clayton for the repurchase of the
30,000 shares of unvested restricted stock. The closing of
the repurchase transaction is pending the resolution
|
56
|
|
|
|
|
of the current employment dispute between Mr. Clayton and
the Company. The vesting of all 30,000 shares would have
been subject to the achievement of performance targets. In
fiscal 2007, the performance target for 15,000 shares was
the Companys attainment of positive net income, a goal
which it attained; for fiscal 2008, a financial target has not
to date been set by the Compensation Committee. Please see
Note 2 to the Notes to Consolidated Financial Statements
for a discussion regarding the valuation of such
performance-based shares.
|
|
(8)
|
|
Mr. Hipps began serving as our Interim Chief Financial
Officer on July 30, 2007. Mr. Hipps compensation
arrangement is discussed below under
Employment Letter Agreements.
|
|
(9)
|
|
Does not include a discretionary bonus payment of $25,000 in
fiscal 2007 awarded by the Compensation Committee to
Mr. Ulry in recognition for superior performance during
fiscal 2006.
|
|
(10)
|
|
Does not include a discretionary bonus payment of $20,000 that
was awarded by the Compensation Committee to Mr. Cioll in
recognition for superior performance during fiscal 2006.
|
|
(11)
|
|
Mr. Lopez served as our Senior Vice President, General
Counsel, between March 26, 2007 and October 5, 2007 at
an annual base salary of $265,000.
|
Grants
of Plan-Based Awards in Fiscal 2007
The following table presents information concerning grants of
plan-based awards to each of the named executive officers during
the year ended July 31, 2007. The exercise price per share
of each option granted to our named executive officers was equal
to the fair market value of our common stock, as determined by
our compensation committee on the date of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
|
Estimated Future Payouts Under
|
|
|
|
|
|
|
Non-Equity Incentive Plan Awards(1)
|
|
|
Equity Incentive Plan Awards(2)
|
|
|
|
Grant
|
|
|
Threshold
|
|
|
Target I
|
|
|
Target II
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
Name
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
(#)
|
|
|
Steven S. Boss
|
|
|
1/25/2007
|
|
|
$
|
74,161
|
|
|
$
|
111,242
|
|
|
$
|
166,862
|
|
|
$
|
259,564
|
|
|
|
|
|
|
|
150,000 (3
|
)
|
|
|
|
|
Lawrence Clayton, Jr.
|
|
|
1/25/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000(4
|
)
|
|
|
|
|
J. Robert Hipps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Ulry
|
|
|
1/25/2007
|
|
|
$
|
20,359
|
|
|
$
|
45,538
|
|
|
$
|
68,248
|
|
|
$
|
101,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nick Cioll
|
|
|
1/25/2007
|
|
|
$
|
17,594
|
|
|
$
|
26,392
|
|
|
$
|
36,655
|
|
|
$
|
58,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik A. Lopez, Sr.
|
|
|
3/27/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Awards:
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Awards:
|
|
|
Number of
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Number of
|
|
|
Securities
|
|
|
Exercise
|
|
|
of Stock
|
|
|
|
|
|
|
Shares of
|
|
|
Underlying
|
|
|
Price per
|
|
|
and Option
|
|
Name
|
|
Grant Date
|
|
|
Stock (#)
|
|
|
Options (#)
|
|
|
Share ($/Sh)
|
|
|
Awards ($)(5)
|
|
|
Steven S. Boss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Lawrence Clayton, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Robert Hipps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Ulry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nick Cioll
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik A. Lopez, Sr.
|
|
|
3/27/2007
|
|
|
|
60,000
|
(6)
|
|
|
|
|
|
$
|
2.56
|
|
|
$
|
153,600
|
|
|
|
|
3/27/2007
|
|
|
|
|
|
|
|
45,000
|
(7)
|
|
$
|
2.56
|
|
|
$
|
83,745
|
|
|
|
|
(1)
|
|
Represents awards under the Companys Bonus Program for
fiscal 2007 under various scenarios. Pursuant to the terms of
the Bonus Program, the bonus award for certain of the named
executive officers is calculated as the product of the named
executive officers base annual salary as of April 30,
2007, multiplied by (i) the named executive officers
potential bonus percentage assigned by the compensation
committee, and (ii) the named executive officers
earned bonus percentage. The potential bonus percentage is a
factor based upon the Companys net income. At the
beginning of fiscal 2007, the compensation committee established
four levels of net income targets and assigned potential bonus
percentages applicable to the named executive officers for each
corresponding level. For the chief executive officer,
Mr. Boss, the potential bonus percentages for the
|
57
|
|
|
|
|
Threshold, Target I, Target II and Maximum categories
were 20%, 30%, 45% and 70%, and the potential bonus percentages
for the other named executive officers were 12%, 18%, 25% and
40%. The earned bonus percentage is a factor based upon the
attainment of certain individual business goals assigned by the
compensation committee. Based upon an evaluation of the
attainment of such goals, the earned bonus percentages for
Messrs. Boss, Ulry and Cioll were 90%, 100% and 85%.
|
|
|
|
Amounts shown under the Threshold, Target I, Target II
and Maximum columns correspond to the four levels of net income
goals for fiscal 2007, which were, respectively,
$1.35 million, $3.0 million, $4.0 million and
$5.0 million. Amounts shown in each column reflect the
bonus that would have been earned by the respective named
executive officer under the Bonus Program had the Company
achieved the applicable net income target. We assumed that the
earned bonus percentage for each of the named executive officers
in fiscal 2007 remained constant in each of the four target
income scenarios. The Target 1 column sets forth the bonus
amounts actually earned for fiscal 2007 based on the
Companys net income as defined in the Bonus Plan of
$3.6 million Lawrence Clayton, Jr., J. Robert Hipps and
Erik A. Lopez, Sr. each are not eligible to receive a bonus
under the Bonus Program. Messrs. Clayton and Lopez are no
longer employees of the Company and thus would not be entitled
to receive a bonus because they would not meet the vesting
requirements of the Bonus Program. Mr. Hipps did not meet
the eligibility requirements under the Bonus Program.
|
|
(2)
|
|
Represents performance-based shares of restricted stock awarded
under the Companys 1999 Equity Incentive Plan.
|
|
(3)
|
|
The award, granted under the 1999 Equity Incentive Plan
described herein, is exercisable with respect to
75,000 shares upon our achievement of net income for fiscal
2007 and confirmation of such net income as set forth in this
Annual Report on
Form 10-K.
Vesting for the remaining 75,000 shares will be determined
based on the achievement of performance targets for fiscal 2008
that have not to date been set by the Compensation Committee.
|
|
(4)
|
|
Under the terms of Mr. Claytons amended employment
agreement and amended restricted stock agreement, the award,
granted under the 1999 Equity Incentive Plan, was exercisable
with respect to 15,000 shares upon our achievement of net
income for fiscal 2007 and confirmation of such net income as
set forth in this Annual Report on
Form 10-K,
with vesting of the remaining 15,000 shares based on the
achievement of performance targets for fiscal 2008 that have not
yet been set by the Compensation Committee. Subsequent to
Mr. Claytons departure from the Company on
July 25, 2007, we have remitted payment to Mr. Clayton
for the repurchase of his 30,000 shares of restricted stock
for $0.001 per share pursuant to the terms of his restricted
stock agreement. The closing of the repurchase transaction is
pending the resolution of the current employment dispute between
Mr. Clayton and the Company.
|
|
(5)
|
|
Amounts reflect the total fair value of stock awards or stock
options granted in fiscal 2007, calculated in accordance with
SFAS No. 123(R).
|
|
(6)
|
|
The award, granted under the 2006 Stock Incentive Plan, vested
as to 20,000 shares on March 26, 2008 and as to 20,000
on each of the first two anniversaries thereafter under its
original terms. Pursuant to a separation agreement and general
release dated October 5, 2007; such vesting was amended as
follows: 10,000 shares of such restricted stock were
forfeited and 50,000 shares of restricted stock will vest
as of January 2, 2008.
|
|
(7)
|
|
The options shares, granted under the 2006 Stock Incentive Plan,
vested as to 15,000 shares on March 26, 2008 and as to
15,000 shares on each of the first two anniversaries
thereafter under its original terms. Under our separation
agreement with Mr. Lopez, his option to purchase all such
45,000 shares was canceled.
|
58
Outstanding
Equity Awards at July 31, 2007
The following table presents the outstanding equity awards held
by each of the named executive officers as of the fiscal year
ended July 31, 2007, including the value of the stock
awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Number of
|
|
|
Payout Value of
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Unearned
|
|
|
Unearned
|
|
|
|
Underlying Unexercised Options at
|
|
|
Option
|
|
|
Option
|
|
|
Shares of
|
|
|
Shares of
|
|
|
Shares That
|
|
|
Shares
|
|
|
|
July 31, 2007 (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Stock Not Vested
|
|
|
Stock Not
|
|
|
Have Not
|
|
|
That Have
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date
|
|
|
(#)
|
|
|
Vested ($)(1)
|
|
|
Vested (#)
|
|
|
Not Vested ($)
|
|
|
Steven S. Boss
|
|
|
200,000
|
|
|
|
100,000
|
(2)
|
|
$
|
1.80
|
|
|
|
07/31/2015
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
(3)
|
|
$
|
315,000
|
|
|
|
|
50,000
|
|
|
|
|
|
|
$
|
1.80
|
|
|
|
07/22/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence Clayton, Jr.(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Robert Hipps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J. Ulry
|
|
|
100,000
|
|
|
|
|
|
|
$
|
3.50
|
|
|
|
03/02/2015
|
|
|
|
20,000
|
(5)
|
|
$
|
42,000
|
|
|
|
|
|
|
|
|
|
Nick Cioll
|
|
|
85,000
|
|
|
|
|
|
|
$
|
1.92
|
|
|
|
07/27/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik A. Lopez, Sr.(6)
|
|
|
|
|
|
|
45,000
|
|
|
$
|
2.56
|
|
|
|
03/27/2013
|
|
|
|
60,000
|
|
|
$
|
126,000
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Market value based on our common stocks closing price of
$2.10 on July 31, 2007, the last day of fiscal 2007.
|
|
(2)
|
|
These option shares became exercisable on August 1, 2007.
|
|
(3)
|
|
The award is exercisable with respect to 75,000 shares upon
our achievement of net income for fiscal 2007 and confirmation
of such net income as set forth in this Annual Report on
Form 10-K.
Vesting for the remaining 75,000 shares will be determined
based on the achievement of performance targets for fiscal 2008
that have not to date been set by the Compensation Committee.
|
|
(4)
|
|
Prior to his departure on July 25, 2007, Mr. Clayton
held options to purchase a total of 120,000 shares of our
common stock, 40,000 of which were exercisable and 80,000 of
which were not. As a result of Mr. Claytons
termination, all stock option shares held by Mr. Clayton,
including those that were exercisable, were terminated. In
addition, subsequently, we have remitted payment to
Mr. Clayton for the repurchase of 30,000 shares of
unvested restricted stock previously held by Mr. Clayton.
The closing of the repurchase transaction is pending the
resolution of the current employment dispute between
Mr. Clayton and the Company.
|
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(5)
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Of these restricted stock shares, 10,000 will vest on
January 1, 2008 and 10,000 will vest on January 1,
2009.
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(6)
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Under the terms of a separation agreement with Mr. Lopez
dated October 5, 2007, 10,000 shares of restricted
stock were forfeited pursuant to their original terms. The
vesting relating to the remaining 50,000 shares of
restricted stock was amended so that such shares will vest as of
January 2, 2008, and the option to purchase
45,000 shares of our common stock was canceled pursuant to
its terms.
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Option
Exercises in Fiscal 2007
The following table presents certain information concerning the
exercise of options and the vesting of stock awards by each of
our named executive officers during fiscal 2007.
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Option Awards
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Stock Awards
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Number of Shares
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Number of Shares
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Acquired
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Value Realized
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Acquired
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Value Realized
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Name
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on Exercise (#)
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on Exercise ($)
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on Exercise (#)
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on Vesting ($)
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Steven S. Boss
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50,000
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$
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69,500
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Lawrence Clayton, Jr.
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15,000
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$
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24,300
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J. Robert Hipps
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Thomas J. Ulry
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10,000
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$
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14,600
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Nick Cioll
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15,000
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$
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15,600
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Erik A. Lopez, Sr.
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59
Pension
Benefits
None of our named executive officers participates in or has
account balances in qualified or non-qualified defined benefit
plans sponsored by us.
Nonqualified
Contribution Plans
None of our named executive officers participate in or have
account balances in non-qualified defined contribution plans
maintained by us. The compensation committee, which is comprised
solely of outside directors as defined for purposes
of Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the Code, may elect to provide our officers and
other employees with non-qualified defined contribution benefits
if the compensation committee determines that doing so is in our
best interests.
Deferred
Compensation
None of our named executive officers participates in or has
account balances in deferred compensation plans or arrangements
maintained by us.
Employment
Agreements
Steven S.
Boss
On August 1, 2005, we entered into an employment agreement
with Steven S. Boss, our Chief Executive Officer, which was most
recently amended on January 25, 2007. The employment agreement,
as amended, has no specific term and is subject to termination
by either the Company or Mr. Boss without cause upon
60 days written notice.
The amended employment agreement sets forth Mr. Boss
base salary as $412,000 per year, which is subject to periodic
review and to increase (but not decrease) by our board of
directors or compensation committee. With respect to fiscal year
2006, the employment agreement provided for Mr. Boss
eligibility for consideration for an incentive bonus calculated
between 50% and 150% of base salary based upon achievement of
objectives established by the Compensation Committee. For fiscal
2007 and each fiscal year thereafter, Mr. Boss is eligible
to participate in the Companys Bonus Program.
Pursuant to the employment agreement, Mr. Boss was granted
an option to purchase 300,000 shares of our common stock at
an exercise price equal to $1.80 per share, with vesting as to
100,000 shares upon hire and as to 100,000 shares on
each of the first two anniversaries thereafter. In addition,
pursuant to an amendment to the employment agreement dated
January 25, 2007, and a restricted stock agreement dated
August 1, 2005 and amended as of January 25, 2007,
Mr. Boss was granted 200,000 shares of restricted
stock, 50,000 shares of which vested (the Companys
right to repurchase terminated) on August 1, 2006. Pursuant
to the amended employment agreement and the amended restricted
stock agreement, the remaining 150,000 shares vest as
follows: (i) 75,000 of the restricted shares shall vest
(the Companys right to repurchase shall terminate) upon
the date on which the Company files its annual report on
Form 10-K
with the SEC indicating that the Company achieved net income
(defined in accordance with generally accepted accounting
principles) for fiscal 2007, and (ii) 75,000 of the
restricted shares shall vest (the Companys right to
repurchase shall terminate) upon the date on which the Company
files its annual report on
Form 10-K
with the SEC indicating in the financial statements contained
therein that the Company achieved the performance target(s)
established by the Compensation Committee for fiscal 2008.
The employment agreement provides that if Mr. Boss is
terminated without cause (as defined below) or if he resigns for
good reason (as defined below), Mr. Boss will be entitled
to severance equal to 12 months of his then-current base
salary payable over a
12-month
period, plus 12 months accelerated vesting of outstanding
unvested stock options and restricted stock, plus reimbursement
of insurance premiums for health coverage for two months. If
Mr. Boss is terminated for cause (as defined below), he
would receive earned but unpaid base salary and accrued but
unpaid vacation, but no further compensation or severance
payment of any kind.
60
For purposes of Mr. Boss agreement:
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cause
generally means: (i) a material
breach of the employment agreement, or of a Company policy or
law applicable to the Company, (ii) demonstrated and
material neglect of duties or failure to perform material duties
following written notice and a reasonable cure period,
(iii) misconduct, dishonesty, self-dealing, fraud or
similar conduct, or (iv) conviction of a crime or plea of
guilty or
nolo contendere
, with limited exceptions.
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good reason
generally means (i) a
reduction in Mr. Boss salary or benefits, except as
part of a general change in compensation benefits for similarly
situated executives, (ii) a failure by us to comply with
the material provisions of the employment agreement or
(iii) within 180 days of a change in control, as
defined below;
provided
, that the Company has a period of
20 days after receipt of written notice from the executive
to cure an event or condition described in clause (i) or
(ii).
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A
change in control
generally means
(i) the acquisition by any person or group of our
securities, after which such person or group owns more than 50%
of our outstanding voting stock, (ii) a merger or
consolidation involving the Company which results in the holders
of the Companys outstanding voting securities immediately
prior to such transaction failing to hold more than 50% of the
outstanding voting power of the corporation resulting from such
merger or consolidation, or (iii) the acquisition or sale
of all or substantially all of our assets in a transaction or
series of transactions.
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Under the employment agreement, Mr. Boss agreed not to
solicit the Companys employees, customers, clients or
suppliers during his employment and for a period of one year
after any period in which severance payments are received, and
not to compete with the Company during his employment and any
period in which severance payments are received. Further, the
employment agreement obligates Mr. Boss to refrain from
disclosing any of our proprietary information received during
the course of employment and, with some exceptions, to assign to
us any inventions conceived or developed during the course of
employment. As a condition to Mr. Boss receiving severance
benefits under the employment agreement, he would need to sign a
release in a form customarily used by the Company for such
purposes, and reaffirm the confidentiality, non-solicitation and
non-competition agreements contained in his employment
agreement. Finally, pursuant to the employment agreement, we
entered into our standard form of indemnification agreement with
Mr. Boss.
Lawrence
Clayton, Jr.
On December 1, 2005, we entered into an employment
agreement with Mr. Clayton, our former Chief Financial
Officer, which was amended most recently on January 25,
2007. Under the terms of the employment agreement,
Mr. Clayton received an annual base salary of $275,000.
With respect to fiscal year 2006, Mr. Clayton was eligible
to receive an incentive bonus for the fiscal 2006 if the Company
reached certain financial objectives determined by the Board,
and for fiscal 2007 and each fiscal year thereafter,
Mr. Clayton would have been eligible to participate in the
Companys Bonus Program.
On December 1, 2005, pursuant to the terms of the
employment agreement and the stock option agreement, we granted
to Mr. Clayton an option to purchase 120,000 shares of
our common stock, which option vests in equal amounts on each of
the first three anniversaries of the date of the grant. In
addition, pursuant to the amended employment agreement and a
restricted stock agreement dated December 1, 2005 and
amended as of January 25, 2007, Mr. Clayton was
granted 45,000 shares of restricted stock,
15,000 shares of which vested (the Companys right to
repurchase terminated) on December 1, 2006. Pursuant to the
employment agreement and a stock agreement, each as amended, the
remaining 30,000 shares vest as follows: (i) 15,000 of
the restricted shares shall vest (the Companys right to
repurchase shall terminate) upon the date on which the Company
files its annual report on
Form 10-K
with the SEC indicating that the Company achieved net income
(defined in accordance with generally accepted accounting
principles) for fiscal 2007, and (ii) 15,000 of the
restricted shares shall vest (the Companys right to
repurchase shall terminate) upon the date on which the Company
files its annual report on
Form 10-K
with the SEC indicating in the financial statements contained
therein that the Company achieved the performance target(s)
established by the Compensation Committee for fiscal 2008.
The employment agreement provided that if
Mr. Claytons employment was terminated by the Company
without cause or if he resigned for good reason,
Mr. Clayton would be entitled to severance, as long as
Mr. Clayton
61
did not accept other employment, equal to 12 months base
salary, payable in six equal installments commencing on the
first business day after six months from the date of the
termination, or the severance period, plus reimbursement of the
cost of continuation coverage under COBRA for 12 months and
12 months accelerated vesting of outstanding options and
restricted stock. If Mr. Clayton is terminated for cause
(as defined below), he would receive earned but unpaid base
salary and accrued but unpaid vacation, but no further
compensation or severance payment of any kind. For purposes of
Mr. Claytons employment agreement, the terms
cause and good reason have the same
meanings given above under the description of
Mr. Boss employment agreement.
Under the employment agreement, Mr. Clayton agreed not to
solicit customers or employees of the Company during his
employment with the Company and for a period of one year after
the end of the Severance Period. The employment agreement
further provided that Mr. Clayton would not accept
employment with, or otherwise engage in, any business that
competes with the Company during his employment or any period
during which he is receiving severance payments from the
Company. As a condition to Mr. Clayton receiving severance
benefits under the employment agreement, he would need to sign a
release in a form customarily used by the Company for such
purposes, and reaffirm the confidentiality, non-solicitation and
non-competition agreements contained in his employment
agreement. Finally, in accordance with the employment agreement,
we entered into our standard form of indemnification agreement
with Mr. Clayton.
Pursuant to his employment agreement, Mr. Clayton was
awarded a relocation payment in the amount of $20,000, and
reimbursement for documented relocation expenses up to an
additional $80,000. An amendment to the employment agreement
dated November 30, 2006 clarified that reimbursements for
any living expenses (including reasonable travel expenses)
incurred by Mr. Clayton in Southern California after
January 1, 2007 would draw on the above-referenced $80,000
relocation expense provision.
On July 23, 2007, the Companys Board terminated
Mr. Claytons employment and position as the
Companys Senior Vice President, Chief Financial Officer
and Secretary of the Company, effective July 25, 2007.
Erik A.
Lopez, Sr.
On March 26, 2007, we entered into an employment agreement
with Erik A. Lopez, Sr. The employment agreement has no
specific term and is subject to termination by either the
Company or Mr. Lopez, Sr. without cause upon
60 days written notice.
The employment agreement set forth Mr. Lopezs base
salary as $265,000 per year, which is subject to periodic review
and to increase (but not decrease) by our board of directors or
compensation committee. The employment agreement also provided
for Mr. Lopezs eligibility to participate in the
Companys Bonus Program beginning with fiscal 2007 and for
each year thereafter during the term of the employment agreement.
Pursuant to the employment agreement, Mr. Lopez was granted
an option to purchase 45,000 shares of our common stock at
an exercise price equal to $2.56 per share, with
15,000 shares subject to such option vesting on
March 26, 2008, and 15,000 shares vesting on each of
the first two anniversaries thereafter. In addition, pursuant to
the employment agreement and a restricted stock agreement,
Mr. Lopez was granted 60,000 shares of restricted
stock, with 20,000 shares vesting as of March 26,
2008, and 20,000 shares vesting on each of the first two
anniversaries thereafter.
The employment agreement provided that if Mr. Lopez is
terminated without cause or if he resigns for good reason,
Mr. Lopez would be entitled to severance, as long as he did
not accept other employment, equal to 12 months of his
then-current base salary, payable as to 50% of such amount six
months after the termination date and the balance paid in equal
monthly installments thereafter, plus reimbursement of the cost
of continuation coverage under COBRA for 12 months and
12 months accelerated vesting of outstanding unvested stock
options and restricted stock. If Mr. Lopez is terminated
for cause (as defined below), he would receive earned but unpaid
base salary and accrued but unpaid vacation, but no further
compensation or severance payment of any kind.
For purposes of Mr. Lopezs agreement,
cause generally means: (i) a material breach of
the employment agreement, or of a Company policy or law
applicable to the Company, (ii) demonstrated and material
neglect of duties or failure to perform material duties
following written notice and a reasonable cure period,
(iii) misconduct that is serious in nature, dishonesty,
self-dealing, fraud or similar conduct related to
Mr. Lopezs conduct, (iv) having
62
been convicted of or entered a plea of nolo contendere with
respect to a felony or a crime involving fraud, dishonesty or
moral turpitude, or (v) having engaged in intentional
misconduct which materially damages the Company under certain
circumstances. With respect to Mr. Lopezs employment
agreement, the terms good reason and change of
control have the same meanings set forth above under the
description of Mr. Boss employment agreement.
Under the employment agreement, Mr. Lopez agreed not to
solicit the Companys employees, customers, clients or
suppliers during the term of his employment and for a period of
one year thereafter, and not to compete with the Company during
the term of his employment and any period in which severance
payments are received. Further, the employment agreement
obligates Mr. Lopez to refrain from disclosing any of our
proprietary information received during the course of employment
and, with some exceptions, to assign to us any inventions
conceived or developed during the course of employment. As a
condition to Mr. Lopez receiving severance benefits under
the employment agreement, he would need to sign a release in a
form customarily used by the Company for such purposes, and
reaffirm the confidentiality, non-solicitation and
non-competition agreements contained in his employment
agreement. Finally, pursuant to the employment agreement, we
entered into our standard form of indemnification agreement with
Mr. Lopez.
Separation
Agreement with Mr. Lopez
Effective October 5, 2007, Mr. Lopez resigned from his
position as Senior Vice President and General Counsel and left
the Company. In connection with his departure, we entered into a
separation agreement and general release dated October 5,
2007 with Mr. Lopez. Under the terms of the separation
agreement, on October 9, 2007, we paid to Mr. Lopez a
severance payment in the amount of $200,000, one business day
after confirmation of Mr. Lopezs written
communication to the Occupational Health and Safety
Administration (OSHA) informing OSHA that all of his disputes
with the Company have been fairly resolved and withdrawing his
complaint filed with OSHA. Mr. Lopez agreed to a general
release of all claims against us and our representatives.
Pursuant to the separation agreement, Mr. Lopezs
option to purchase 45,000 shares of our commons stock was
canceled. In addition, the parties agreed that 10,000 of the
60,000 shares of unvested restricted stock held by
Mr. Lopez would be forfeited and that the remaining shares
of restricted stock will vest on January 2, 2008. In order
to facilitate the payment terms of the separation agreement, on
October 5, 2007, we entered into an amendment to
Mr. Lopezs employment agreement to take into account
recent changes under Internal Revenue Code Section 409A. On
October 26, 2007, OSHA notified the Company that it was
closing its investigation of the OSHA complaint relating to
Mr. Lopez.
Offer
Letters with Other Executives
J. Robert
Hipps
On July 27, 2007, we entered into an Interim Executive
Services Agreement with Tatum, LLC dated July 25, 2007 to
engage Mr. Hipps as our Interim Chief Financial Officer.
The interim services agreement provides that Mr. Hipps will
become an employee of the Company, subject to the supervision
and direction of the chief executive officer and the Board.
Under the agreement, Tatum has no control or supervision over
Mr. Hipps, as long as he is performing services under the
Interim Services Agreement. The term of the interim services
agreement is for a minimum of three months, provided that either
party may terminate the agreement earlier with 30 days
written notice to the other party, and provided further that we
may terminate the agreement immediately for cause based on the
performance of Mr. Hipps.
Pursuant to the interim services agreement, we pay $37,500 per
month, 80% of which is paid directly to Mr. Hipps as salary
through the Companys payroll system and 20% of which is
paid to Tatum. The interim services agreement provides an option
for us during the term of the agreement to hire Mr. Hipps
on a permanent basis, upon entering into another form of
agreement with Tatum, which must provide for the payment of
additional placement fees to Tatum. In connection with entering
into the interim services agreement, the Company entered into
its standard form of Indemnification Agreement with
Mr. Hipps.
Thomas L.
Ulry
On May 31, 2005, we entered into an employment letter
agreement with Thomas Ulry, our Senior Vice President, Sales and
Marketing. The letter agreement set Mr. Ulrys annual
base salary at $225,000, and provided
63
for a discretionary annual bonus, as determined by the
Compensation Committee. In addition, the agreement provides for
other standard employee benefits including medical, dental and
insurance benefits and the right to participate in our 401(k)
Plan. Finally, the agreement provides that if we were to
terminate Mr. Ulry without cause during the first year
after May 31, 2005, Mr. Ulry would be entitled to one
years annual base salary, and if we were to terminate him
without cause at any time thereafter, Mr. Ulry would be
entitled to an amount equal to his monthly salary for up to six
months or until he finds other employment, whichever is first to
occur.
Pursuant to the letter agreement, Mr. Ulry was awarded an
option to purchase 100,000 shares of our common stock at an
exercise price of $3.50 per share, vesting in equal annual
installments over four years. In addition, Mr. Ulry was
awarded the right to reimbursement of actual relocation benefits
not to exceed $40,000.
On October 19, 2006, the Compensation Committee increased
Mr. Ulrys annual base salary by $25,000 effective
October 1, 2006.
Cash
Bonus Plan
On January 25, 2007, upon the recommendation of the
Compensation Committee of the board of directors (or the board),
adopted the Commerce Energy Group, Inc. Bonus Program, which was
amended and restated effective March 27, 2007 (as amended
and restated, the Bonus Plan).
Background.
We established the Plan to provide
employees with an increased awareness and ongoing interest in
our success. The Plan is a broad-based plan designed to ensure
that the executives, management and staff employees are
appropriately awarded for both corporate and individual
performance. In developing this bonus program, consideration was
given to the existing salary levels and total compensation of
the executives and other employees. The structure of this cash
bonus program was determined to be an efficient employee
incentive and appropriate to preserve shareholder interests.
Administration.
The Plan is administered by
the Compensation Committee. The Compensation Committee has the
right to construe the Bonus Plan, to interpret any provision of
the Bonus Plan, to make rules relating to the Plan and to
determine any factual question arising in connection with the
operation of the Bonus Plan.
Eligibility.
An employee must commence
full-time employment with us within the first nine months of a
fiscal year (August 1 through April 30) to be eligible to
participate in the Bonus Program for that fiscal year. Employees
who participate in one or more of our commission incentive
programs are also eligible for a bonus under the Bonus Plan,
although reduced (but not below zero) by any amounts received
under any of our commission incentive programs for the same
fiscal year. Part-time employees and contractors are not
eligible to participate in the Bonus Plan.
Determination of Bonus.
The Bonus Plan is not
effective with respect to any fiscal year in which we do not
achieve positive net income from operations (after deducting
bonuses accrued under the Bonus Plan). Pursuant to the terms of
the Bonus Program, the bonus award for each participant is
calculated based upon the product of (i) the
participants base annual salary as of April 30, 2007;
(ii) the participants potential bonus percentage
assigned by the compensation committee to four levels of
employee classification (
i.e.,
the chief executive
officer, other executive officers; management, and staff), and
(iii) the participants earned bonus percentage based
upon the attainment of certain individual goals set by the
compensation committee for the executives, the executives with
respect to the management and the executives and management with
respect to the staff; then reduced (but not below zero) by any
amounts from the Companys commission incentive program.
Under the Bonus Program, a participants potential bonus
percentage is determined based upon the Companys net
income. At the beginning of each fiscal year, the compensation
committee establishes four levels of net income targets and
assigns potential bonus percentages for each such corresponding
level for each employee group, chief executive officer,
executive officers, management and staff.
In determining the earned bonus percentage, the compensation
committee assigned to the chief executive officer and each of
the other executive officers specific individual objectives in
several of the following categories: increase in overall Company
financial performance; increase in investor awareness; financial
risk management, peer and leadership development; and customer
maintenance and growth. Each category was assigned a specific
64
percentage weight at the commencement of the Plan. In
establishing the performance objectives of the executive
officers, the chief executive officer and members of the
executive team make recommendations, which are approved by
members of the compensation committee. Each executive, including
each executive officer, had individual objectives for the year
which were designed to contribute to the achievement of our
corporate objectives. For purposes of determining whether our
executive officers met each of the individual goals and
objectives assigned to them, the compensation committee met with
our chief executive officer and then deliberated among
themselves without the chief executive officer present. In
determining the earned bonus percentage for management and staff
personnel, a similar procedure occurs with their direct reports.
Each employee has business goals and a potential bonus payout
commensurate with her or his level in the Company.
The compensation committee, in its discretion, may establish a
bonus pool to be allocated to non-executive eligible employees
if we achieve net income from operations, including interest
income and expense, but fall short of our threshold financial
target. In the event that we surpass our most aggressive
financial target, the compensation committee may establish a
bonus pool to be allocated to employees in the discretion of the
compensation committee, including the chief executive officer
and the other executive officers.
For fiscal 2008, the compensation committee has not set the four
levels of net income targets and has not assigned the potential
bonus percentages for each corresponding level of employee.
Timing of Payment and Vesting.
In fiscal years
where bonuses are earned under the Bonus Program, payouts will
be in a lump sum payment after the fiscal year audit to which
the bonus relates is completed and the individual evaluation
process to determine the earned bonus percentage has been
finalized. To receive a benefit under the Bonus Program for a
particular fiscal year, a participant must complete at least
three months of service and must be an active employee in good
standing on the date the bonus is paid.
Amendment.
The Board or the Compensation
Committee has the unilateral right to amend, suspend or
terminate the Bonus Plan at any time with respect to all or some
employees and with respect to any unearned or unvested bonus
that is or could become payable. If such amendment or
termination would have a material and adverse affect on an
employees earned, but unvested bonus, the written consent
of the affected employee is required.
Employee
Benefit Plans
Commerce
Energy Group, Inc. 2006 Stock Incentive Plan
Purpose.
The purpose of our 2006 Stock
Incentive Plan, or the SIP, is to attract, retain and motivate
select employees, officers, directors and consultants of the
Company and its affiliates and to provide incentives and rewards
for superior performance.
Shares Subject to the SIP.
The SIP provides
that no more than 1,453,334 shares of our common stock may
be issued pursuant to awards under the SIP provided that we
shall not make additional awards under the Commonwealth Energy
Corporation 1999 Equity Incentive Plan. These shares shall be
authorized but unissued shares. The number of shares available
for awards, as well as the terms of outstanding awards, is
subject to adjustment as provided in the SIP for stock splits,
stock dividends, recapitalizations and other similar events. We
have registered the shares of our common stock available for
issuance under the SIP on a registration statement on
Form S-8
filed with the SEC.
Shares of our common stock that are subject to any award that
expires, or is forfeited, cancelled or becomes unexercisable
will again be available for subsequent awards, except as
prohibited by law. In addition, shares that the Company refrains
from delivering pursuant to an award as payment of either the
exercise price of an award or applicable withholding and
employment taxes will be available for subsequent awards.
Administration.
Either the board of directors
or a committee appointed by the board is authorized to
administer the SIP. The board of directors and any committee
exercising discretion under the SIP from time to time are
referred to as the Committee. The Compensation
Committee of the board of directors currently acts as the
Committee for purposes of the SIP. The board of directors may at
any time appoint additional members to the Committee, remove and
replace members of the Committee with or without cause, and fill
vacancies on the
65
Committee. To the extent permitted by law, the Committee may
authorize one or more persons who are reporting persons for
purposes of
Rule 16b-3
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act, or other officers, to make awards to directors,
officers or employees who are not reporting persons for purposes
of
Rule 16b-3
under the Exchange Act, or other officers whom we have
specifically authorized to make awards. With respect to
decisions involving an award intended to satisfy the
requirements of Section 162(m) of the Code, the Committee
is to consist of two or more directors who are outside
directors for purposes of that Code section.
Subject to the terms of the SIP, the Committee has express
authority to determine the directors, employees and consultants
who will receive awards, the number of shares of our common
stock, units or share appreciation rights (SARs) to
be covered by each award, and the terms and conditions of
awards. The Committee has broad discretion to prescribe, amend
and rescind rules relating to the SIP and its administration,
and to interpret and construe the SIP and the terms of all award
agreements. Within the limits of the SIP, the Committee may
accelerate the vesting of any award, allow the exercise of
unvested awards, and may modify, replace, cancel or renew them.
In addition, the Committee may under certain circumstances buy
out options or SARs or, subject to stockholder approval, reduce
the exercise price for outstanding options or SARs.
The SIP provides that we will indemnify members of the Committee
and their delegates against any claims, liabilities or costs
arising from the good faith performance of their duties under
the SIP. The SIP releases these individuals from liability for
good faith actions associated with the SIPs administration.
Eligibility.
The Committee may grant options
that are intended to qualify as incentive stock options, or
ISOs, only to employees, and may grant all other Awards to
directors, employees and consultants. The SIP and the discussion
below use the term participant to refer to a
director, employee or consultants who has received an award. The
SIP provides that no more than 1,000,000 shares of our
common stock may be issued during any calendar year to any
participant under the SIP pursuant to options and SARs Awards
under the SIP.
Options.
Options granted under the SIP provide
participants with the right to purchase shares of our common
stock at a predetermined exercise price. The Committee may grant
options that are intended to qualify as ISOs or options that are
not intended to so qualify, or Non-ISOs. The SIP also provides
that ISO treatment may not be available for options that become
first exercisable in any calendar year to the extent the value
of the underlying shares that are the subject of the option
exceeds $100,000 (based upon the fair market value of the shares
of our common stock on the option grant date).
Share Appreciation Rights (SARs).
A SAR
generally permits a participant who receives it to receive, upon
exercise, cash
and/or
shares of our common stock equal in value to the excess of
(i) the fair market value, on the date of exercise, of the
shares of our common stock with respect to which the SAR is
being exercised, over (ii) the exercise price of the SAR
for such shares. The Committee may grant SARs in tandem with
options or independently of them. SARs that are independent of
options may limit the value payable on its exercise to a
percentage, not exceeding 100%, of the excess value.
Exercise Price for Options and SARs.
The
exercise price of ISOs, Non-ISOs, and SARS may not be less than
100% of the fair market value on the grant date of the shares of
our common stock subject to the award. The exercise price of
ISOs may not be less than 110% of the fair market value on the
grant date of the underlying shares of our common stock subject
to the award for participants who own more than ten percent of
our shares of our common stock on the grant date. Neither the
Company nor the Committee shall, without shareholder approval,
allow for a repricing within the meaning of the federal
securities laws applicable to proxy statement disclosures.
Exercise of Options and SARs.
To the extent
exercisable in accordance with the agreement granting them, an
option or SAR may be exercised in whole or in part, and from
time to time during its term; subject to earlier termination
relating to a holders termination of employment or
service. With respect to options, the Committee has the
discretion to accept payment of the exercise price in any of the
following forms, or combination of them: cash or check in
U.S. dollars, certain shares of our common stock, and
cashless exercise under a program the Committee approves.
The term over which participants may exercise options and SARs
may not exceed ten years from the date of grant (five years in
the case of ISOs granted to employees who, at the time of grant,
own more than 10% of the Companys outstanding shares of
common stock).
66
Restricted Shares, Restricted Share Units, Unrestricted
Shares and Deferred Share Units.
Under the SIP,
the Committee may grant restricted shares that are forfeitable
until certain vesting requirements are met, may grant restricted
share units which represent the right to receive shares of our
common stock after certain vesting requirements are met, and may
grant unrestricted shares as to which the participants
interest is immediately vested. For restricted awards, the SIP
provides the Committee with discretion to determine the terms
and conditions under which a participants interests in
such awards become vested. The SIP provides for deferred share
units in order to permit certain directors, consultants or
select members of management to defer their receipt of
compensation payable in cash or shares of our common stock
(including shares that would otherwise be issued upon the
vesting of restricted shares and restricted share units).
Deferred share units represent a future right to receive shares
of our common stock.
Whenever shares of our common stock are released pursuant to
these awards, the participant will be entitled to receive
additional shares of our common stock that reflect any stock
dividends that the Companys stockholders received between
the date of the award and issuance or release of the shares of
our common stock. Likewise, a participant will be entitled to
receive a cash payment reflecting cash dividends paid to our
stockholders during the same period. Such cash dividends will
accrue interest, at 5% per annum, from their payment date to our
stockholders until paid in cash when the shares of our common
stock to which they relate are either released from restrictions
in the case of restricted shares or issued in the case of
restricted share units.
Performance Awards.
The SIP authorizes the
Committee to grant performance-based awards in the form of
performance units that the Committee may or may not designate as
performance compensation awards that are intended to
be exempt from Code section 162(m) limitations. In either
case, performance awards vest and become payable based upon the
achievement, within the specified period of time, of performance
objectives applicable to the individual, the Company or any
affiliate. Performance awards are payable in shares of our
common stock, cash or some combination of the two, subject to an
individual participant limit of 1,000,000 shares of our
common stock and $1,000,000 in cash. The Committee decides the
length of performance periods, but the periods may not be less
than one fiscal year of the Company.
With respect to performance compensation awards, the SIP
requires that the Committee specify in writing the performance
period to which the Award relates, and an objective formula by
which to measure whether and the extent to which the award is
earned on the basis of the level of performance achieved with
respect to one or more performance measures. Once established
for a performance period, the performance measures and
performance formula applicable to the award may not be amended
or modified in a manner that would cause the compensation
payable under the award to fail to constitute performance-based
compensation under Code Section 162(m).
Under the SIP, the possible performance measures for performance
compensation awards include basic, diluted or adjusted earnings
per share; sales or revenue; earnings before interest, taxes and
other adjustments (in total or on a per share basis); basic or
adjusted net income; returns on equity, assets, capital, revenue
or similar measure; economic value added; working capital; total
stockholder return; and product development, product market
share, research, licensing, litigation, human resources,
information services, mergers, acquisitions, and sales of assets
of affiliates or business units. Each measure will be, to the
extent applicable, determined in accordance with generally
accepted accounting principles as consistently applied by us (or
such other standard applied by the Committee) and, if so
determined by the Committee, and in the case of a performance
compensation award, to the extent permitted under Code
section 162(m), adjusted to omit the effects of
extraordinary items, gain or loss on the disposal of a business
segment, unusual or infrequently occurring events and
transactions and cumulative effects of changes in accounting
principles. Performance measures may vary from performance
period to performance period and from participant to
participant, and may be established on a stand-alone basis, in
tandem or in the alternative.
Transferability.
Awards may not be sold,
pledged, assigned, hypothecated, transferred or disposed of
other than by will or the laws of descent and distribution,
except to the extent the Committee permits lifetime transfers to
charitable institutions, certain family members or related
trusts or as otherwise approved by the Committee.
Certain Corporate Transactions.
The Committee
shall equitably adjust the number of shares covered by each
outstanding award, and the number of shares that have been
authorized for issuance under the SIP but as to which no awards
have yet been granted or that have been returned to the SIP upon
cancellation, forfeiture or expiration of an award, as well as
the price per share covered by each such outstanding award, to
reflect any increase
67
or decrease in the number of issued shares resulting from a
stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the shares of our common
stock, or any other increase or decrease in the number of issued
shares effected without receipt of consideration by us. In the
event of any such transaction or event, the Committee may
provide in substitution for any or all outstanding options under
the SIP such alternative consideration (including securities of
any surviving entity) as it may in good faith determine to be
equitable under the circumstances and may require in connection
therewith the surrender of all options so replaced. In any case,
such substitution of securities will not require the consent of
any person who is granted options pursuant to the SIP.
In addition, in the event or in anticipation of a change in
control (as defined in the SIP), the Committee may at any time
in its sole and absolute discretion and authority, without
obtaining the approval or consent of our stockholders or any
participant with respect to his or her outstanding awards
(except to the extent an award provides otherwise), take one or
more of the following actions: (a) arrange for or otherwise
provide that each outstanding award will be assumed or
substituted with a substantially equivalent award by a successor
corporation or a parent or subsidiary of such successor
corporation; (b) accelerate the vesting of awards for any
period (and may provide for termination of unexercised options
and SARs at the end of that period) so that awards shall vest
(and, to the extent applicable, become exercisable) as to the
shares of our common stock that otherwise would have been
unvested and provide that repurchase rights of the Company with
respect to shares of our common stock issued upon exercise of an
award shall lapse as to the shares of our common stock subject
to such repurchase right; (c) arrange or otherwise provide
for payment of cash or other consideration to participants in
exchange for the satisfaction and cancellation of outstanding
awards; or (d) terminate upon the consummation of the
transaction, provided that the Committee may in its sole
discretion provide for vesting of all or some outstanding awards
in full as of a date immediately prior to consummation of the
change of control. To the extent that an award is not exercised
prior to consummation of a transaction in which the award is not
being assumed or substituted, such award shall terminate upon
such consummation.
Notwithstanding the above, in the event a participant holding an
award assumed or substituted by the successor corporation in a
change in control is involuntarily terminated (as defined in the
SIP) by the successor corporation in connection with, or within
12 months following consummation of, the change in control,
then any assumed or substituted award held by the terminated
participant at the time of termination shall accelerate and
become fully vested (and exercisable in full in the case of
options and SARs), and any repurchase right applicable to any
shares of our common stock shall lapse in full. The acceleration
of vesting and lapse of repurchase rights provided for in the
previous sentence shall occur immediately prior to the effective
date of the Participants termination.
In the event of any distribution to our stockholders of
securities of any other entity or other assets (other than
dividends payable in cash or our stock) without receipt of
consideration by us, the Committee may, in its discretion,
appropriately adjust the price per share covered by each
outstanding award to reflect the effect of such distribution.
Finally, if we dissolve or liquidate, all awards will
immediately terminate, subject to the ability of the board to
exercise any discretion that the board may exercise in the case
of a change in control.
Term of SIP; Amendments and Termination.
The
term of the SIP is ten years from the date of stockholder
approval. The board of directors may from time to time, amend,
alter, suspend, discontinue or terminate the SIP; provided that
no amendment, suspension or termination of the SIP shall
materially and adversely affect awards already granted unless it
relates to an adjustment pursuant to certain transactions that
change our capitalization or it is otherwise mutually agreed
between the participant and the Committee. In addition, the
Committee may not cancel an outstanding option that is
underwater for the purpose of reissuing the option to the
participant at a lower exercise price or granting a replacement
award of a different type. Notwithstanding the foregoing, the
Committee may amend the SIP to eliminate provisions which are no
longer necessary as a result of changes in tax or securities
laws or regulations, or in the interpretation thereof.
Termination, Rescission and Recapture.
Each
award under the SIP is intended to align the participants
long-term interest with our interests. If the participant
engages in certain activities (such as disclosure of
confidential or proprietary information without appropriate
authorization, breaches certain agreements relating to the
protection of our intellectual property, solicits our
non-administrative employees to leave the Company or renders
services to an organization or business which is, or working to
become, competitive to us), either during employment or after
68
employment with us terminates for any reason, the participant is
deemed to be acting contrary to our long-term interests. In such
cases, except as otherwise expressly provided in the award
Agreement, we may terminate any outstanding, unexercised,
unexpired, unpaid, or deferred awards, rescind any exercise,
payment or delivery pursuant to the award, or recapture any
shares of our common stock (whether restricted or unrestricted)
or proceeds from the participants sale of Shares issued
pursuant to the award.
Internal Revenue Code Section 409A
Requirements.
Certain awards under the SIP may be
considered nonqualified deferred compensation for
purposes of Section 409A of the Code, or Section 409A,
which imposes certain requirements on compensation that is
deemed under Section 409A to involve nonqualified deferred
compensation. Among other things, the requirements relate to the
timing of elections to defer, the timing of distributions and
prohibitions on the acceleration of distributions. Failure to
comply with these requirements (or an exception from such
requirements) may result in the immediate taxation of all
amounts deferred under the nonqualified deferred compensation
plan for the taxable year and all preceding taxable years, by or
for any participant with respect to whom the failure relates,
the imposition of an additional 20% income tax on the
participant for the amounts required to be included in gross
income and the possible imposition of penalty interest on the
unpaid tax. Generally, Section 409A does not apply to
incentive awards that are paid at the time the award vests.
Likewise, Section 409A typically does not apply to
restricted stock. Section 409A may, however, apply to
incentive awards the payment of which is delayed beyond the
calendar year in which the award vests. Treasury regulations
generally provide that the type of awards provided under the SIP
will not be considered nonqualified deferred compensation.
However, to the extent that Section 409A applies to an
award issued under the SIP, the SIP and all such awards will, to
the extent practicable, be construed in accordance with
Section 409A. Under the SIP, the Committee has the
discretion to grant or to unilaterally modify any award issued
under the SIP in a manner that conforms with the requirements of
Section 409A with respect to deferred compensation or voids
any participant election to the extent it would violate
Section 409A. The Committee also has sole discretion to
interpret the requirements of the Code, including
Section 409A, for purposes of the SIP and all awards issued
under the SIP.
1999
Equity Incentive Plan
In connection with our 2004 merger with Commonwealth Energy
Corporation, or Commonwealth, we assumed the Commonwealth Energy
Corporation 1999 Equity Incentive Plan, which Commonwealth
amended and restated effective May 9, 2003 (as amended and
restated, the EIP).
Background.
The purpose of the EIP is to
provide incentives to attract, retain and motivate employees,
officers, directors, consultants, independent contractors and
advisors whose present and potential contributions are important
to our success, by offering them an opportunity to participate
in our future performance through awards of options, restricted
stock awards and stock bonuses.
Shares Subject to the EIP.
The EIP provides
that no more than 7,000,000 shares of our common stock may
be issued pursuant to awards under the EIP. Although we still
have awards outstanding under the EIP, we agreed not to issue
any additional awards under the EIP when our stockholders
approved the SIP on January 26, 2006. The number of shares
available for awards, as well as the terms of outstanding
awards, is subject to adjustment for stock splits, stock
dividends, recapitalizations and other similar events. We have
registered the shares of our common stock available for issuance
under the EIP on a registration statement on
Form S-8
filed with the SEC.
Administration.
Either the board or our
Compensation Committee may administer the EIP. Subject to the
terms of the EIP, the board has express authority to determine
who will receive awards, the number of shares of our common
stock or other consideration subject to each Award, and the
terms and conditions of the awards. The board of directors has
broad discretion to prescribe, amend and rescind rules relating
to the EIP and its administration, to interpret and construe the
EIP and the terms of all award agreements, and to take all
actions necessary or advisable to administer the EIP. The board
may cancel certain awards and grant in substitution new awards
covering the same or different number of shares but with an
exercise price per share based on the fair market value per
share of our common stock on the new option grant date. The
board may also buy back a previously granted award from a
participant.
69
Eligibility.
The board may grant ISOs only to
employees, including officers and directors who are employees,
and may grant all other awards to officers, directors,
consultants, independent contractors and advisors. The EIP and
the discussion below use the term participant to
refer to each such person who has received an award.
Options.
Options granted under the EIP provide
participants with the right to purchase shares of our common
stock at a predetermined exercise price. The board may grant
options that are intended to qualify as ISOs or Non-ISOs. The
EIP also provides that ISO treatment may not be available for
options that become first exercisable in any calendar year to
the extent the value of the underlying shares that are the
subject of the option exceeds $100,000 (based upon the fair
market value of the shares of our common stock on the option
grant date).
The exercise price for Non-ISOs shall not be less than 85% of
the underlying common stocks fair market value on the
grant date. The exercise price for ISOs shall not be less than
100% of the underlying common stocks fair market value on
the grant date. However, with respect to any Award to a
participant owning more than 10% of our common stock on the
grant date (a 10% Holder), the exercise price of
ISOs may not be less than 110% of the underlying common
stocks fair market value on the grant date.
Options shall be exercisable within the times set forth in the
agreement granting such option subject to the following
limitations: (i) no option will be exercisable after the
expiration of 10 years from the options grant date;
(ii) options other than Non-ISOs granted to our officers,
consultants, or members of the board or any of our
subsidiaries boards, shall be exercisable at the rate of
at least 20% per year of the shares granted under the option
over five years from the date the option is granted, with the
initial vesting to occur one year after the options grant
date; and (iii) no ISO granted to a 10% holder will be
exercisable after the expiration of five years from the date the
ISO is granted.
To the extent exercisable in accordance with the agreement
granting them and subject to earlier termination relating to the
termination of a participants employment or service,
options may be exercised only by delivery to us of the purchase
price and a written stock option exercise agreement in a form
approved by the board, stating the number of shares being
purchased, any restrictions imposed on the shares to be
purchased, and such representations and agreements regarding
participants investment intent, access to information and
such other matters that we may require or desire to comply with
securities laws. The board may specify a reasonable minimum
number of shares that may be purchased on any exercise of an
option, provided such minimum will not prevent a participant
from exercising the option for the full number of shares for
which it is then exercisable.
Following the termination of a participants employment or
service, we may extend the period of time that an option is
exercisable and allow such terminated participant to exercise
options that had not vested at the time such participant was
terminated.
The board may modify, extend or renew outstanding options and
authorize the grant of new options, except to the extent such
action impairs without participants consent such
participants rights under a previously issued option. The
board may by written notice to affected participants without
their consent reduce the exercise price of outstanding options.
Restricted Stock.
Under the EIP, the board may
grant awards of restricted stock that are forfeitable until
certain requirements are met. The board has discretion with
respect to the vesting of restricted stock. The purchase price
for the restricted stock grants shall not be less than 85% of
the fair market value on the grant date, except that the
purchase price for any restricted stock Award granted to a 10%
holder will not be less than 110% of the fair market value on
the grant date. The participant will not be able to sell,
transfer, pledge or assign the restricted stock during a
restriction period established by the board. The board may
provide for the lapse of such restrictions in installments and
may accelerate or waive the restrictions, in whole or in part,
based upon the completion of a specified number of years of
service, subject to any requirements under law. Except with
respect to the transfer restrictions, the participant will have
all the rights of a shareholder, including the right to vote the
shares and receive cash dividends.
Except as otherwise provided or in the Boards discretion,
upon the participants termination, (i) we shall have
the right for 90 days following the termination, to
repurchase restricted stock that is unvested or still subject to
restriction for the same price paid by participant for such
shares; provided however that our right to repurchase at the
70
price paid by the participant shall lapse at the rate of at
least 20% of the restricted stock per year over five years from
the date the Award is granted, and (ii) any other
restricted stock will be forfeited.
Stock Bonuses.
A stock bonus is an
award of shares, which may consist of restricted stock, for
service rendered. A stock bonus will be awarded pursuant to an
Award agreement and will comply with the terms and conditions of
the EIP. Stock bonuses may be awarded pursuant to a
performance stock bonus agreement, whereby the board
will agree to grant a stock bonus of a certain number of shares
upon the completion of certain performance goals that the board
may adjust to account for changes in law, accounting and tax
rules and to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
We may pay the stock bonuses in cash or whole shares, either in
lump sums or installments, with interest or dividend equivalent,
and all as the board determines.
Payment for Share Purchases.
Payment for
shares purchased pursuant to the EIP may be in cash, by check
or, subject to certain conditions in the EIP, where expressly
approved by the board and permitted by law (i) by
cancellation of indebtedness, (ii) by surrender of shares,
(iii) by tender of full recourse promissory note,
(iv) by waiver of compensation due or accrued to a
participant for service rendered, (v) with respect only to
purchase upon exercise of an option, and provided a public
market for our shares exists, through a same day
sale commitment or through a margin
commitment, or (vi) by any combination of the foregoing. We
may help a participant (other than an executive officer or a
member of our board) pay for shares purchased by guaranteeing a
loan by a participant to a third party lender.
Transferability.
Awards granted under the EIP,
and any interests therein, will not be transferable or
assignable by participant, and may not be made subject to
execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution. During the
participants lifetime, only the participant will be
eligible to exercise an award.
Certain Corporate Transactions.
In the event
of certain change in control Corporate Transactions
(as defined in the EIP), the EIP and any Award under the EIP
shall terminate after the Participant has been given, for the
period of 10 days before the effective date of the
Corporate Transaction, the right to exercise any unexpired Award
in full or in part, but only to the extent such Award has vested
or then vests and has not previously been exercised. However,
the EIP and the Awards under the EIP shall not terminate or
accelerate if the successor corporation or a parent or
subsidiary thereof (a Successor Corporation) assumes
the Awards. Nothing in the EIP or any Award shall be construed
to limit our ability to enter into Corporate Transactions or
reorganize, adjust or liquidate our capital or business
structure.
The board may at the time the award is granted or at any time
while the award is outstanding, provide for the awards
automatic acceleration (in whole or in part) upon a Corporate
Transaction, including the vesting and termination of our
repurchase right. Any accelerated ISO, shall only remain an ISO
to the extent the $100,000 limitation is not exceeded. With
respect to any amounts about the $100,000 limitation, the ward
shall be a Non-ISO.
Amendment or Termination of EIP.
Unless the
board elects to terminate the EIP sooner, the EIP will terminate
10 years from the date the Board approved the EIP. The
board may at any time amend the plan in any respect.
Potential
Payments upon Termination or Change in Control
Set forth below are descriptions and quantitative summaries of
the elements of compensation that would be paid to our named
executive officers who were employed by the Company at the end
of the fiscal year and entitled to such benefits under
post-employment and change in control scenarios. Also summarized
below are arrangements relating to former executive officers.
As of July 31, 2007, several of our named executive
officers were subject to agreements which contained severance
provisions. Mr. Boss employment agreement provides
that if Mr. Boss is terminated without cause or
if he resigns for good reason, (as those terms are
defined above under Employment Agreements),
Mr. Boss will be entitled to severance equal to
12 months of his then-current base salary payable over a
12-month
period, plus 12 months accelerated vesting of outstanding
unvested stock options and restricted stock, plus reimbursement
of insurance premiums for health coverage for two months.
71
Under the terms of our employment letter agreement with
Mr. Ulry, he would be entitled to an amount equal to his
monthly salary for up to six months (or until he finds other
employment, if earlier), if we were to terminate him without
cause.
The tables below estimate amounts of (i) salary and
benefits payable and (ii) the acceleration of options and
restricted stock outstanding for our named executive officers,
in each case assuming that a hypothetical termination or change
in control occurred on July 31, 2007. We have estimated the
market value of the stock options and restricted stock in the
tables below based on the closing price of $2.10 per share on
July 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Termination by Us
|
|
|
|
|
|
Without Cause/ Resignation
|
|
Executive Officer
|
|
Benefit Upon Termination
|
|
by Executive for Good Reason
|
|
|
Steven S. Boss
|
|
Salary Cash Payment
|
|
$
|
412,000
|
|
|
|
Continuation of Benefits
|
|
|
2,934
|
|
|
|
Accelerated Vesting of Options
|
|
$
|
30,000
|
|
|
|
Accelerated Vesting of Restricted Stock
|
|
$
|
157,500
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
602,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik A. Lopez, Sr.
|
|
Salary Cash Payment
|
|
$
|
265,000
|
|
|
|
Continuation of Benefits
|
|
$
|
17,606
|
|
|
|
Accelerated Vesting of Options
|
|
$
|
|
|
|
|
Accelerated Vesting of Restricted Stock
|
|
$
|
42,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
324,606
|
|
|
|
|
|
|
|
|
Thomas J. Ulry
|
|
Salary Cash Payment
|
|
$
|
126,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
Change in
|
|
|
|
|
|
Change in
|
|
|
Control in
|
|
|
Change in
|
|
|
Control in
|
|
|
|
|
|
Control
|
|
|
which
|
|
|
Control in
|
|
|
which
|
|
|
|
Acceleration of
|
|
in which
|
|
|
Compensation
|
|
|
which
|
|
|
Compensation
|
|
|
|
Vesting Upon
|
|
Compensation
|
|
|
Committee
|
|
|
Compensation
|
|
|
Committee
|
|
|
|
Change in Control
|
|
Committee
|
|
|
Does Not
|
|
|
Committee
|
|
|
Does Not
|
|
|
|
Under Equity
|
|
Accelerates
|
|
|
Accelerate
|
|
|
Accelerates
|
|
|
Accelerate
|
|
Executive Officer
|
|
Benefit Plans(1)
|
|
Options
|
|
|
Options
|
|
|
Restricted Stock
|
|
|
Restricted Stock
|
|
|
Steven S. Boss
|
|
Accelerated Vesting of
Restricted Stock
|
|
$
|
105,000
|
|
|
$
|
75,000
|
|
|
$
|
315,000
|
|
|
$
|
157,500
|
|
Thomas J. Ulry
|
|
Accelerated Vesting of
Restricted Stock
|
|
|
|
|
|
|
|
|
|
$
|
42,000
|
|
|
|
|
|
Erik A. Lopez, Jr.
|
|
Accelerated Vesting of
Restricted Stock
|
|
|
|
|
|
|
|
|
|
$
|
126,000
|
|
|
$
|
42,000
|
|
|
|
|
(1)
|
|
For Mr. Boss and Mr. Ulry benefits related to awards
granted under the 1999 Equity Incentive Plan. For Mr. Lopez
benefits relate to awards granted under the 2006 Stock Incentive
Plan.
|
Arrangements
with Former Executive Officers
In connection with Mr. Lopezs resignation from the
Company, we entered into a separation agreement and general
release with him dated October 5, 2007. Under the terms of
the separation agreement, on October 9, 2007, we paid to
Mr. Lopez a severance payment in the amount of $200,000,
after confirmation of Mr. Lopezs written
communication to the Occupational Health and Safety
Administration (OSHA) informing OSHA that all his disputes with
the Company had been fairly resolved. In addition, pursuant to
the separation agreement, the vesting terms relating to
60,000 shares of unvested restricted stock held by
Mr. Lopez were amended such that 10,000 of the
60,000 shares were forfeited and the remaining
50,000 shares of restricted stock will vest on
January 2, 2008. On October 26, 2007, OSHA notified
the Company that it was closing its investigation of the OSHA
complaint relating to Mr. Lopez.
72
In connection with Mr. Claytons termination effective
July 25, 2007, no severance payments have been made or
accrued pursuant to Mr. Claytons employment agreement
or otherwise.
401(k)
Plan
We maintain a retirement plan, the 401(k) Plan, which is
intended to be a tax-qualified retirement plan. The 401(k) Plan
covers substantially all of our employees. Participants may
elect to defer a percentage of their eligible pretax earnings
each year up to the maximum contribution permitted by the Code.
Each participants interests in his or her deferrals are
100% vested when contributed. The 401(k) Plan permits us to make
matching contributions if we choose and we have historically
provided matching contributions of up to three percent, based on
50% of the employees contributions of up to 6% of defined
compensation. The 401(k) Plan is intended to qualify under
Sections 401(a) and 501(a) of the Code. As such,
contributions to the 401(k) Plan and earnings on those
contributions are not taxable to participants until distributed
from the 401(k) Plan, and all contributions are deductible by us
when made.
Non-Employee
Director Compensation
We operate under a non-employee director compensation policy
amended and restated as of January 25, 2007. Under this
policy, our non-employee directors receive cash compensation and
equity awards, as described below. This policy may be changed by
our board of directors from time to time.
Cash Compensation.
Each non-employee director
is paid a quarterly retainer of $8,000, a fee of $1,000 for each
Board meeting which the Board member attends in person and a fee
of $750 for each Board meeting which the Board member attends
telephonically. The non-executive Chairman of the Board also
receives a supplemental quarterly retainer of $4,000. Directors
who served on Board committees (other than the chairman of such
committee) are paid $750 for each committee meeting the Board
member attends in person and a fee of $500 for each committee
meeting which the Board member attends telephonically. Committee
chairpersons are paid $1,000 for each committee meeting the
chairperson attends, whether in person or telephonically. On
days on which there are more than one committee meeting that a
board member attends, the Board member shall be paid for only
one meeting. In addition, each non-employee director is entitled
to receive reimbursement for reasonable travel expenses for each
Board or Board committee meeting that such non-employee director
attends in person if the director resides 25 miles or more
from the site of the meeting.
Equity-Based Awards.
Our policy provides for
equity awards to non-employee directors as follows:
|
|
|
|
|
Initial Grant of Restricted Stock.
On the date
of the initial appointment or election of each non-employee
director to the Board, he or she receives 20,000 restricted
shares of the Companys restricted stock. Such shares vest
in full on the first day of the month in which the one year
anniversary of the date of issuance occurs, with any unvested
shares being forfeited to the Company if the Board members
service is terminated.
|
|
|
|
Annual Grant of Restricted Stock.
In addition,
on the date of each annual meeting of stockholders at which
directors are elected, each non-employee director who is either
re-elected as a non-employee director or who continues in office
as an incumbent non-employee director, will be issued
20,000 shares of restricted stock. Such shares vest in full
on January 1 of the next succeeding calendar year after the date
of issuance, with any unvested shares being forfeited to the
Company if the Board members service is terminated.
|
We currently anticipate making future awards to our non-employee
directors under our 2006 Stock Incentive Plan. For a more
detailed description of this plan, see Employee Benefit
Plans 2006 Stock Incentive Plan.
73
The following table sets forth summary information concerning
compensation paid or accrued for services rendered to us in all
capacities to the members of our board of directors (other than
Mr. Boss who is a named executive officer) for the fiscal
year ended July 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
Name
|
|
in Cash ($)
|
|
|
Awards ($)(1)
|
|
|
Awards ($)(2)
|
|
|
Compensation ($)
|
|
|
Total ($)
|
|
|
Charles E. Bayless
|
|
$
|
61,528
|
|
|
$
|
23,165
|
|
|
$
|
12,070
|
|
|
$
|
|
|
|
$
|
96,763
|
|
Gary J. Hessenauer
|
|
$
|
60,750
|
|
|
$
|
23,165
|
|
|
$
|
12,070
|
|
|
$
|
|
|
|
$
|
95,985
|
|
Mark S. Juergensen
|
|
$
|
63,492
|
|
|
$
|
23,165
|
|
|
$
|
12,070
|
|
|
$
|
|
|
|
$
|
98,727
|
|
Dennis R. Leibel
|
|
$
|
60,250
|
|
|
$
|
23,165
|
|
|
$
|
12,070
|
|
|
$
|
|
|
|
$
|
95,485
|
|
Robert C. Perkins
|
|
$
|
84,000
|
|
|
$
|
23,165
|
|
|
$
|
12,070
|
|
|
$
|
|
|
|
$
|
119,235
|
|
|
|
|
(1)
|
|
The value reported above in the Stock Awards column
is the amount we recognized for stock awards during fiscal 2007
for each director calculated in accordance with
SFAS No. 123(R). See Note 12 to the Notes to
Consolidated Financial Statements for a discussion of
assumptions made in determining the grant date fair value and
compensation expense of our restricted stock awards.
|
|
(2)
|
|
The value reported above in the Option Award column is the
amount we recognized for stock options during fiscal 2007 for
each director calculated in accordance with
SFAS No. 123(R). See Note 2 to the Notes to
Consolidated Financial Statements for a discussion of
assumptions made in determining the stock option expense.
|
Compensation
Committee Interlocks and Insider Participation
In fiscal 2007, our compensation committee consisted of Gary J.
Hessenauer, Mark S. Juergensen, Dennis R. Leibel and Robert
C. Perkins. No member of our compensation committee is
currently, or has been at any time, one of our officers or
employees or an officer or employee of one of our subsidiaries,
is or was a participant in a related party
transaction in fiscal 2007, or has served as a member of the
board of directors or compensation committee of any entity that
has one or more officers serving as a member of our board of
directors or compensation committee.
Compensation
Committee Report
The compensation committee, comprised of independent directors,
reviewed and discussed the section of this annual report on
Form 10-K
under Item 11. Executive Compensation, entitled
Compensation Discussion and Analysis for Named Executive
Officers with the Companys management. Based on this
review and discussion, the compensation committee has
recommended to the Board of Directors that the Compensation
Discussion and Analysis as it appears on pages 50 to 74 herein
be included in this annual report on
Form 10-K
and the proxy statement filed on Schedule 14A relating to
the Annual Meeting of Stockholders relating to fiscal 2007.
Commerce Energy Group, Inc. Compensation
Committee
Dennis R. Leibel, Chairman
Gary J. Hessenauer
Mark S. Juergensen
Robert C. Perkins
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information with respect to each person specified is as
supplied or confirmed by such person, based upon statements
filed with the SEC, or based upon our actual knowledge.
74
Beneficial
Ownership Table
The following table sets forth certain information about the
beneficial ownership of our common stock as of October 16,
2007 by:
|
|
|
|
|
each person known by us to own beneficially more than 5% of our
outstanding common stock;
|
|
|
|
each of our current directors;
|
|
|
|
our chief executive officer and the other named executive
officers listed in the Summary Compensation Table in
Part III, Item 11. Executive Compensation of this
annual report on
Form 10-K; and
|
|
|
|
all of our current directors and executive officers as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC based upon voting or investment power over the
securities.
Shares and share percentages beneficially owned are based upon
the number of shares of common stock outstanding on
October 16, 2007, together with options, warrants or other
convertible securities that are exercisable for such respective
securities within 60 days of October 16, 2007 for each
stockholder. Under the rules of the SEC, beneficial ownership
includes shares over which the named stockholder exercises
voting
and/or
investment power. Shares of common stock subject to options,
warrants or other convertible securities that are currently
exercisable or will become exercisable within 60 days of
October 16, 2007 are deemed outstanding for computing the
respective percentage ownership of the person holding the
option, warrant or other convertible security, but are not
deemed outstanding for purposes of computing the respective
percentage ownership of any other person. Unless otherwise
indicated in the footnotes below, we believe that the persons
and entities named in the table have sole voting and investment
power with respect to all shares beneficially owned, subject to
applicable community property laws. The inclusion of shares in
the table does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of the
shares. The information with respect to each person is as
supplied or confirmed by such person, based upon statements
filed with the SEC or based upon the actual knowledge of the
Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Amount and Nature of
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Right to
|
|
|
Percent of
|
|
Name
|
|
Owned
|
|
|
Acquire(1)
|
|
|
Class
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel Zeff(2)
|
|
|
3,195,916
|
(3)
|
|
|
|
|
|
|
10.5
|
%
|
Ian B. Carter(4)
|
|
|
250,000
|
|
|
|
2,500,000
|
|
|
|
8.4
|
%
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles E. Bayless
|
|
|
132,000
|
|
|
|
120,000
|
|
|
|
*
|
|
Steven S. Boss
|
|
|
225,000
|
|
|
|
350,000
|
|
|
|
1.9
|
%
|
Lawrence Clayton, Jr.(5)
|
|
|
63,709
|
|
|
|
|
|
|
|
*
|
|
Nick Cioll
|
|
|
15,000
|
|
|
|
85,000
|
|
|
|
*
|
|
Gary J. Hessenauer
|
|
|
30,000
|
|
|
|
70,000
|
|
|
|
*
|
|
J. Robert Hipps
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Mark S. Juergensen
|
|
|
50,000
|
|
|
|
157,500
|
|
|
|
*
|
|
Dennis R. Leibel
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
*
|
|
Erik A. Lopez, Sr.
|
|
|
50,000
|
|
|
|
|
|
|
|
*
|
|
Robert C. Perkins
|
|
|
235,000
|
|
|
|
470,000
|
|
|
|
2.3
|
%
|
Thomas L. Ulry
|
|
|
40,000
|
|
|
|
100,000
|
|
|
|
*
|
|
All Directors and Executive Officers as a group (10 persons)
|
|
|
870,709
|
|
|
|
1,372,500
|
|
|
|
6.7
|
%
|
|
|
|
*
|
|
Indicates beneficial ownership of less than 1% of the issued and
outstanding class of securities.
|
75
|
|
|
(1)
|
|
Represents shares of our common stock issuable upon exercise of
stock options or upon conversion of other convertible securities
held by such persons that are exercisable within 60 days of
October 16, 2007.
|
|
(2)
|
|
Ownership of these shares was reported on a Form 4 filed on
October 17, 2007 jointly by Mr. Zeff, Zeff Holding
Company LLC (Zeff Holding), Zeff Capital
Partners, I, LLP (Zeff Capital), and Spectrum
Galaxy Fund, Ltd. (Spectrum). Spectrum has sole
voting and investment power with respect to
1,379,684 shares, which powers are exercisable by
Mr. Zeff as investment manager. Zeff Capital has sole
voting and investment power with respect to
1,816,232 shares, which powers are exercisable by
Mr. Zeff as the sole manager of Zeff Holding, which is the
general partner of Zeff Capital. The mailing address of each
Mr. Zeff, Zeff Holding, Zeff Capital and Spectrum is: 50
California St., Suite 1500, San Francisco, CA 94111.
|
|
(3)
|
|
Represents holdings as of August 10, 2007 as disclosed in a
Schedule 13D/A filed with the SEC under the Exchange Act.
|
|
(4)
|
|
The mailing address of such stockholder is:
P.O. Box 538, 1100 Irvine Blvd., Tustin, California
92780.
|
|
(5)
|
|
Does not include 30,000 shares of unvested restricted common
stock that the Company has remitted to Mr. Clayton for
repurchase. The closing of the repurchase transaction is pending
the resolution of the current employment dispute between
Mr. Clayton and the Company.
|
Securities
Authorized for Issuance under Equity Compensation Plan
The Company has two equity compensation plans, the Commerce
Energy Group, Inc. 2006 Stock Incentive Plan and the
Commonwealth 1999 Equity Incentive Plan, both of which have been
approved by our stockholders. We do not have any other equity
compensation plans, with the exception of one-time grants of
warrants or options made by our Board of Directors from time to
time.
The following table sets forth information regarding the number
of shares of our common stock that may be issued pursuant to our
equity compensation plans or arrangements as of the end of
fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Future Issuance Under
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column(a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
4,382,874
|
(1)
|
|
$
|
2.25
|
|
|
|
988,334
|
(2)
|
Equity compensation plans not approved by security holders
|
|
|
2,600,000
|
(3)
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,982,874
|
|
|
$
|
2.33
|
|
|
|
988,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents shares of common stock that may be issued pursuant to
outstanding options granted under the Commonwealth 1999 Equity
Incentive Plan and the Commerce Energy Group, Inc. 2006 Stock
Incentive Plan.
|
|
(2)
|
|
Represents shares of common stock that may be issued pursuant to
options available for future grant under the Commonwealth 1999
Equity Incentive Plan and the Commerce Energy Group, Inc. 2006
Stock Incentive Plan.
|
|
(3)
|
|
Represents shares of common stock that may be issued pursuant to
options available for future grant under the following
individual plans: options to purchase 2,500,000 shares
granted to Ian B. Carter, the Companys former Chairman and
Chief Executive Officer; options to purchase 100,000 shares
granted to Robert C. Perkins, the Companys Chairman. (See
Note 14 Stock Options to the Notes to Consolidated
Financial Statements).
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Transactions
with Related Persons, Promoters and Certain Control
Persons.
In October 2007, we entered into a separation agreement and
general release with Erik A. Lopez, Sr., our former Senior
Vice President and General Counsel and at the same time amended
our employment agreement with
76
Mr. Lopez. Please see the discussion under Item 11.
Executive Compensation under the caption Separation
Agreement with Mr. Lopez; which is incorporated by
reference into this section.
Indemnification
Agreements
We have entered into indemnification agreements with each of our
directors and executive officers, in addition to the
indemnification provided for in our amended and restated
certificate of incorporation and amended and restated bylaws.
These indemnification agreements generally require us to
indemnify each director and executive officer to the fullest
extent authorized, permitted or required by the provisions of
our amended and restated certificate of incorporation, our
amended and restated bylaws and the Delaware General Corporation
Law, as the same may be amended from time to time; provided,
however, that we generally do not have such indemnification
obligations if the director or executive officer initiates a
proceeding against us. In addition, we generally have agreed to
indemnify our directors and executive officers against expenses,
judgments and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed
proceeding, subject to certain limitations.
Review,
Approval or Ratification of Transactions with Related
Persons.
As provided by our Audit Committee charter, our Audit Committee
must review and approve in advance any related party
transaction. In approving or rejecting a proposed related party
transaction, our Audit Committee shall consider the relevant
facts and circumstances available and deemed relevant to the
Audit Committee, including, but not limited to the risks, costs
and benefits to us, the terms of the transaction, the
availability of other sources for comparable services or
products, if applicable, and the impact on a directors
independence. Our Audit Committee shall approve only those
related party transactions that, in light of known
circumstances, are in, or are not inconsistent with, our best
interests, as our audit committee determines in the good faith
exercise of its discretion. All of our directors, officers and
employees are required to report to our audit committee any such
related party transaction for approval prior to its completion.
Director
Independence.
The Board of Directors has affirmatively determined that the
following five members of the Board of Directors are
independent as that term is defined by the American
Stock Exchange Company Guide: Charles E. Bayless, Gary J.
Hessenauer, Mark S. Juergensen, Dennis R. Leibel and Robert C.
Perkins. Mr. Steven S. Boss, our Chief Executive Officer,
is our only non-independent director. The Board of Directors has
established three standing committees, an Audit Committee, a
Compensation Committee and a Nominations and Corporate
Governance Committee. The Board also has formed a Strategic
Opportunities Committee. All the members of each of the
aforementioned committees are independent under
applicable rules of the SEC and the American Stock Exchange
Company Guide.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The following table sets forth the fees billed to us by our
independent registered public accounting firms for each of the
last two fiscal years, respectively.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
Audit Fees
|
|
$
|
463,000
|
|
|
$
|
454,000
|
|
Audit-Related Fees
|
|
|
8,000
|
|
|
|
|
|
Tax Fees
|
|
|
|
|
|
|
|
|
All Other Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
471,000
|
|
|
$
|
454,000
|
|
|
|
|
|
|
|
|
|
|
Audit Fees:
This category includes the audit
of our annual consolidated financial statements, the review of
financial statements included in our quarterly reports on
Form 10-Q
and services that are normally provided by the
77
independent registered public accounting firm in connection with
statutory and regulatory filings or engagements for those fiscal
years.
Audit Related Fees:
This category consists of
assurance and related services that were reasonably related to
the performance of the audit or review of our financial
statements and which are not reported above under Audit
Fees.
Tax Fees.
This category consists of
professional services rendered for tax services, including tax
compliance, tax advice and tax planning.
All Other Fees.
This category consists of fees
for other advisory services.
The Audit Committee of our Board of Directors has established a
practice that requires the Committee and, under certain limited
circumstances, the Chairman of our Audit Committee, to
pre-approve any audit or permitted non-audit services to be
provided to us by our independent registered public accounting
firm, Hein & Associates LLP, in advance of such
services being provided to us.
Under the SEC rules, subject to certain
de minimis
criteria, pre-approval is required for all professional
services rendered by our independent registered public
accounting firm. We are in compliance with these SEC rules.
Item 15.
Exhibits
and Financial Statement Schedules.
(a)(1)
Index to Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
(a)(2)
Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is presented in the consolidated financial
statements or the notes thereto.
(b)
Exhibits.
The exhibits listed below
are hereby filed with the SEC as part of this Annual Report on
Form 10-K.
We will furnish a copy of any exhibit upon request, but a
reasonable fee will be charged to cover our expense in
furnishing such exhibit.
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Commerce
Energy Group, Inc., previously filed with the SEC on
July 6, 2004 as Exhibit 3.3 to Commerce Energy Group,
Inc.s Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock of Commerce Energy Group, Inc. dated
July 1, 2004, previously filed with the SEC on July 6,
2004 as Exhibit 3.4 to Commerce Energy Group, Inc.s
Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of Commerce Energy Group, Inc.,
previously filed with the SEC on July 6, 2004 as
Exhibit 3.6 to Commerce Energy Group, Inc.s
Registration Statement on
Form 8-A
and incorporated herein by reference.
|
78
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
4
|
.1
|
|
Rights Agreement, dated as of July 1, 2004, entered into
between Commerce Energy Group, Inc. and Computershare
Trust Company, as rights agent, previously filed with the
SEC on July 6, 2004 as Exhibit 10.1 to Commerce Energy
Group, Inc.s Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
4
|
.2
|
|
Form of Rights Certificate, previously filed with the SEC on
July 6, 2004 as Exhibit 10.2 to Commerce Energy Group,
Inc.s Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
Material Contracts Relating to Management Compensation Plans
or Arrangements
|
|
|
|
|
|
|
10
|
.1
|
|
Commonwealth Energy Corporation 1999 Equity Incentive Plan,
previously filed with the SEC on October 8, 2003 as
Exhibit 4.1 to Commonwealth Energy Corporations
Registration Statement on
Form S-8
and incorporated herein by reference.
|
|
10
|
.2
|
|
Form of Stock Option Agreement pursuant to Commonwealth Energy
Corporation 1999 Equity Incentive Plan, previously filed with
the SEC on November 15, 2004 as Exhibit 10.9 to
Commerce Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.3
|
|
Commerce Energy Group, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC on February 1, 2006 as
Exhibit 99.2 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.4
|
|
Form of a Stock Option Award Agreement for U.S. Employees
pursuant to the Commerce Energy Group, Inc. 2006 Stock Incentive
Plan, previously filed with the SEC on April 20, 2006 as
Exhibit 4.10 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.5
|
|
Form of a Non-Qualified Stock Option Agreement for Non-Employee
Directors pursuant to the Commerce Energy Group, Inc. 2006 Stock
Incentive Plan, previously filed with the SEC on April 20,
2006 as Exhibit 4.11 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.6
|
|
Form of a Restricted Share Award Agreement for U.S. Employees
pursuant to the Commerce Energy Group, Inc. 2006 Stock Incentive
Plan, previously filed with the SEC on April 20, 2006 as
Exhibit 4.12 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.7
|
|
Form of a Restricted Share Unit Award Agreement pursuant to the
Commerce Energy Group, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.14 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.8
|
|
Form of a SAR Award Agreement pursuant to the Commerce Energy
Group, Inc. 2006 Stock Incentive Plan, previously filed with the
SEC on April 20, 2006 as Exhibit 4.15 to Commerce
Energy Group, Inc.s Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.9
|
|
Form of Performance Unit and Performance Stock Award pursuant to
the Commerce Energy Group, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.16 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.10
|
|
Form of Deferral Election Agreement for Deferred Share Units to
the Commerce Energy Group, Inc. pursuant to the Commerce Energy
Group, Inc. 2006 Stock Incentive Plan, previously filed with the
SEC on April 20, 2006 as Exhibit 4.17 to Commerce
Energy Group, Inc.s Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.11
|
|
Amended and Restated Form of Non-Qualified Stock Option Award
Agreement (for Non-Employee Directors) pursuant to the Commerce
Energy Group, Inc. 2006 Stock Incentive Plan, previously filed
with the SEC on May 18, 2006 as Exhibit 99.2 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.12
|
|
Form of Restricted Share Award Agreement (for Non-Employee
Directors) pursuant to the Commerce Energy Group, Inc. 2006
Stock Incentive Plan, previously filed with the SEC on
April 20, 2006 as Exhibit 4.13 to Commerce Energy
Group, Inc.s Registration Statement on
Form S-8
(File
No. 333-133442)
filed with the SEC on April 20, 2006 and incorporated
herein by reference.
|
79
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.13
|
|
Form of Restricted Share Award Agreement (for Non-Employee
Directors) pursuant to the Commerce Energy Group, Inc. 2006
Stock Incentive Plan, Initial Grant, previously filed with the
SEC on May 18, 2006 as Exhibit 99.4 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.14
|
|
Commerce Energy Group, Inc. Amended and Restated 2005 Employee
Stock Purchase Plan, previously filed with the SEC on
February 1, 2006 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.15
|
|
Form of Subscription Agreement for the Commerce Energy Group,
Inc. Amended and Restated 2005 Employee Stock Purchase Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.7 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.16
|
|
Form of Notice of Withdrawal for the Commerce Energy Group, Inc.
Amended and Restated 2005 Employee Stock Purchase Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.8 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.17
|
|
Commerce Energy Group, Inc. Bonus Program, effective
January 25, 2007, previously filed with the SEC on
January 31, 2007 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.18
|
|
Commerce Energy Group, Inc. Bonus Program as amended by first
amendment, effective March 27, 2007, previously filed with
the SEC on June 14, 2007 as Exhibit 10.7 to Commerce
Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.19
|
|
Commerce Energy Group, Inc. Amended and Restated Non-Employee
Director Compensation Policy, effective January 27, 2006,
previously filed with the SEC on February 1, 2006 as
Exhibit 99.3 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.20
|
|
Commerce Energy Group, Inc. Amended and Restated Non-Employee
Director Compensation Policy, effective May 12, 2006,
previously filed with the SEC on May 18, 2006 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.21
|
|
Commerce Energy Group, Inc. Amended and Restated Non-Employee
Director Compensation Policy, effective January 25, 2007,
previously filed with the SEC on January 31, 2007 as
Exhibit 99.6 to Commerce Energy Group Inc.s Current Report
on Form
8-K
and incorporated herein by reference.
|
|
10
|
.22
|
|
Stock Option Agreement dated as of August 29, 2003 between
Robert C. Perkins and Commonwealth Energy Corporation,
previously filed with the SEC on November 15, 2004 as
Exhibit 10.13 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.23
|
|
Stock Option Agreement dated as of August 29, 2003 between
Robert C. Perkins and Commonwealth Energy Corporation,
previously filed with the SEC on November 15, 2004 as
Exhibit 10.14 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.24
|
|
Indemnification Agreement dated as of November 1, 2000
between Commonwealth Energy Corporation and Ian B. Carter, with
Schedule attached thereto of other substantially identical
Indemnification Agreements, which differ only in the respects
set forth in such Schedule, previously filed with the SEC on
November 15, 2004 as Exhibit 10.16 to Commerce Energy
Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.25
|
|
Indemnification Agreement dated as of July 1, 2004 between
Commerce Energy Group, Inc. and Ian Carter, with Schedule
attached thereto of other substantially identical
Indemnification Agreements, which differ only in the respects
set forth in such Schedule, previously filed with the SEC on
November 15, 2004 as Exhibit 10.17 to Commerce Energy
Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.26
|
|
Confidential Settlement Agreement and General Release dated as
of April 21, 2005 by and among Ian B. Carter, Commerce
Energy, Inc. and Commerce Energy Group, Inc., previously filed
with the SEC on April 22, 2005 as Exhibit 10.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
80
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.27
|
|
Stock Option Agreement dated April 29, 2005 by and between
Ian B. Carter and Commerce Energy Group, Inc., previously filed
with the SEC on October 31, 2005 as Exhibit 10.33 to
Commerce Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.28
|
|
Executive Employment Agreement dated April 1, 2004 between
Commonwealth Energy Corporation, Commerce Energy Group, Inc. and
Peter Weigand, previously filed with the SEC on April 5,
2004 as Exhibit 10.6 to Amendment No. 3 to Commerce
Energy Groups Registrants Statement on
Form S-4
and incorporated herein by reference.
|
|
10
|
.29
|
|
Amendment No. 1 to Executive Employment Agreement dated
November 17, 2005, by and among Commerce Energy Group,
Inc., Commerce Energy, Inc. and Peter Weigand, previously filed
with the SEC on November 23, 2005 as Exhibit 99.4 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.30
|
|
Settlement Agreement and General Release dated November 17,
2005 by and among Peter Weigand, Commerce Energy Group, Inc. and
Commerce Energy, Inc., previously filed with the SEC on
November 23, 2005 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.31
|
|
Executive Employment Agreement dated April 1, 2004 between
Commonwealth Energy Corporation, Commerce Energy Group, Inc. and
Richard L. Boughrum, previously filed with the SEC on
April 5, 2004 as Exhibit 10.7 to Amendment No. 3
to Commerce Energy Groups Registrants Statement on
Form S-4
and incorporated herein by reference.
|
|
10
|
.32
|
|
Amendment No. 1 to Executive Employment Agreement dated
November 17, 2005, by and among Commerce Energy Group,
Inc., Commerce Energy, Inc. and Richard L. Boughrum, previously
filed with the SEC on November 23, 2005 as
Exhibit 99.11 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.33
|
|
Settlement Agreement and General Release dated November 17,
2005 by and among Richard L. Boughrum, Commerce Energy Group,
Inc. and Commerce Energy, Inc., previously filed with the SEC on
November 23, 2005 as Exhibit 99.8 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.34
|
|
Employment Offer Letter Agreement between Commerce Energy Group,
Inc. and Thomas Ulry dated May 31, 2005, previously filed
with the SEC on October 31, 2005 as Exhibit 10.30 to
Commerce Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference
|
|
10
|
.35
|
|
Letter from Thomas Ulry to Commerce Energy Group, Inc. dated
October 28, 2005 regarding the May 31, 2005 Employment
Offer Letter Agreement, previously filed with the SEC on
October 31, 2005 as Exhibit 10.31 to Commerce Energy
Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.36
|
|
Settlement Agreement and General Release dated November 17,
2005, by and among Commerce Energy Group, Inc., Commerce Energy,
Inc. and Eric Alam, previously filed with the SEC on
November 23, 2005 as Exhibit 99.13 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.37
|
|
Agreement and Release dated November 17, 2005, by and
among, Commerce Energy Group, Inc., Commerce Energy, Inc., Paul,
Hastings, Janofsky & Walker LLP, Eric Alam, Bruno
Kvetinskas, Greg Lander and Peter Weigand, previously filed with
the SEC on November 23, 2005 as Exhibit 99.7 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.38
|
|
Executive Employment Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.39
|
|
Amendment No. 1 to Employment Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Steven S. Boss, previously filed with the SEC on
January 31, 2007 as Exhibit 99.2 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference
|
|
10
|
.40
|
|
Stock Option Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.2 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
81
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.41
|
|
Restricted Stock Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.3 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.42
|
|
Amendment No. 1 to Restricted Stock Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Steven S. Boss, previously filed with the SEC on
January 31, 2007 as Exhibit 99.3 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference
|
|
10
|
.43
|
|
Indemnification Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.4 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.44
|
|
Employment Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.45
|
|
Amendment No. 1 to Employment Agreement dated
November 30, 2006, by and between Commerce Energy Group,
Inc. and Lawrence Clayton, Jr., previously filed with the SEC on
March 19, 2007 as Exhibit 10.1 to Commerce Energy
Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.46
|
|
Amendment No. 2 to Employment Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Lawrence Clayton, Jr., previously filed with the SEC on
January 31, 2007 as Exhibit 99.4 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.47
|
|
Stock Option Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.2 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.48
|
|
Restricted Stock Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.3 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.49
|
|
Amendment No. 1 to Restricted Stock Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Lawrence Clayton, Jr., previously filed with the SEC on
January 31, 2007 as Exhibit 99.5 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.50
|
|
Indemnification Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.4 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.51
|
|
Settlement Agreement and General Release by and among Andrew V.
Coppola, Commerce Energy, Inc. and Commerce Energy Group, Inc.,
previously filed with the SEC on April 18, 2006 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.52
|
|
Employment Agreement dated March 26, 2007 between Commerce
Energy Group, Inc. and Erik A. Lopez, Sr., previously filed with
the SEC on June 14, 2007 as Exhibit 10.3 to Commerce
Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.53
|
|
Amendment No. 1 to Employment Agreement dated
October 5, 2007 by and between Commerce Energy Group, Inc.
and Erik A. Lopez, Sr.
|
|
10
|
.54
|
|
Stock Option Award Agreement dated March 27, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
filed with the SEC on June 14, 2007 as Exhibit 10.5 to
Commerce Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.55
|
|
Restricted Share Award Agreement dated March 27, 2007
between Commerce Energy Group, Inc. and Erik A. Lopez, Sr.,
previously filed with the SEC on June 14, 2007 as
Exhibit 10.5 to Commerce Energy Group, Inc.s
Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.56
|
|
Indemnification Agreement dated March 26, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
filed with the SEC on June 14, 2007 as Exhibit 10.4 to
Commerce Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.57
|
|
Separation Agreement and General Release dated October 5,
2007 by and between Commerce Energy Group, Inc. and Erik A.
Lopez, Sr.
|
82
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.58
|
|
Interim Executive Services Agreement by and between Commerce
Energy Group, Inc. and Tatum, LLC regarding J. Robert Hipps
dated July 25, 2007, previously filed with the SEC on
July 27, 2007 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference
|
|
10
|
.59
|
|
Indemnification Agreement between Commerce Energy Group, Inc.
and J. Robert Hipps dated July 25, 2007, previously filed
with the SEC on July 27, 2007 as Exhibit 99.2 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
Other Material Contracts
|
|
|
|
|
|
|
10
|
.60
|
|
Registration Rights Agreement by and among Commonwealth Energy
Corporation and the holders of Skipping Stone Inc. common stock
dated March 29, 2004, previously filed with the SEC on
April 5, 2004 as Exhibit 2.5 to Amendment No. 3
to Commerce Energy Group, Inc.s Registration Statement on
Form S-4
and incorporated herein by reference.
|
|
10
|
.61
|
|
Consent to Sublease and Sublease Agreement dated May 28,
2004 between E*Trade Consumer Finance Corporation and
Commonwealth Energy Corporation, previously filed with the SEC
on November 15, 2004 as Exhibit 10.25 to Commerce
Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.62
|
|
Agreement To Provide QSE and Marketing Services dated
August 1, 2005 between Commerce Energy, Inc. and Tenaska
Power Services Co.
|
|
10
|
.63
|
|
Security Agreement dated August 1, 2005 between Commerce
Energy, Inc. and Tenaska Power Services Co.
|
|
10
|
.64
|
|
Blocked Account Control Agreement (with Lockbox Services) dated
August 2005 by and among Commerce Energy, Inc., Tenaska Power
Services Co. and U.S. Bank National Association Depository Bank.
|
|
10
|
.65
|
|
Master Power Purchase and Sale Agreement dated August 1,
2005 between Commerce Energy, Inc. and Tenaska Power Services Co.
|
|
10
|
.66
|
|
Guaranty Agreement dated August 1, 2005 by Commerce Energy
Group, Inc. in favor of Tenaska Power Services Co.
|
|
10
|
.67
|
|
First Amendment to Security Agreement between Commerce Energy,
Inc. and Tenaska Power Services Co., effective as of
March 7, 2006.
|
|
10
|
.68
|
|
Loan and Security Agreement by and among Commerce Energy, Inc.,
as Borrower, and Commerce Energy Group, Inc., as Guarantor, and
Wachovia Capital Finance Corporation (Western), as Agent, and
the Lenders From Time to Time Party Thereto, as Lenders, dated
June 8, 2006, previously filed with the SEC on
June 12, 2006 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.69
|
|
Guaranty dated June 8, 2006 by Commerce Energy Group, Inc.,
as Guarantor, to Wachovia Capital Finance Corporation (Western),
as Agent, previously filed with the SEC on June 12, 2006 as
Exhibit 99.2 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.70
|
|
First Amendment to Loan and Security Agreement and Waiver dated
September 20, 2006 among Commerce Energy Group, Inc.,
Commerce Energy, Inc., Wachovia Capital Finance Corporation
(Western) and The CIT Group/Business Credit, Inc., previously
filed with the SEC on September 26, 2006 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.71
|
|
Second Amendment to Loan and Security Agreement and Waiver dated
October 26, 2006 among Commerce Energy Group, Inc.,
Commerce Energy, Inc., Wachovia Capital Finance Corporation
(Western) and The CIT Group/Business Credit, Inc., previously
filed with the SEC on October 30, 2006 as
Exhibit 10.91 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.72
|
|
Third Amendment to Loan and Security Agreement and Waiver dated
March 15, 2007 among Commerce Energy Group, Inc., Commerce
Energy, Inc., Wachovia Capital Finance Corporation (Western) and
The CIT Group/Business Credit, Inc., previously filed with the
SEC on March 19, 2007 as Exhibit 10.9 to Commerce
Energy Group, Inc.s Quarterly Report on
Form 10-Q
for the Quarterly Period Ended January 31, 2007
|
83
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.73
|
|
Fourth Amendment to Loan and Security Agreement and Waiver dated
June 26, 2007 among Commerce Energy Group, Inc., Commerce
Energy, Inc., Wachovia Capital Finance Corporation (Western) and
The CIT Group/Business Credit, Inc.
|
|
10
|
.74
|
|
Fifth Amendment to Loan and Security Agreement and Waiver dated
August 1, 2007 among Commerce Energy Group, Inc., Commerce
Energy, Inc., Wachovia Capital Finance Corporation (Western) and
The CIT Group/Business Credit, Inc., previously filed with the
SEC on August 2, 2007 as Exhibit 99.1 to Commerce
Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.75
|
|
Letter Agreement, dated September 20, 2007, by and among
Commerce Energy Group, Inc., Commerce Energy, Inc., Wachovia
Capital Finance Corporation (Western), as Agent and Lender and
The CIT Group/Business Credit, Inc., as Lender, previously filed
with the SEC on September 25, 2007 as Exhibit 99.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.76
|
|
Second Amendment to Security Agreement between Commerce Energy,
Inc. and Tenaska Power Services Co., effective as of
June 22, 2006.
|
|
10
|
.77
|
|
Asset Purchase Agreement dated September 20, 2006 between
Houston Energy Services Company, L.L.C. and Commerce Energy,
Inc., previously filed with the SEC on September 26, 2006
as Exhibit 2.1 to Commerce Energy Group, Inc.s
Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.78
|
|
Transition Services Agreement dated September 20, 2006
among Commerce Energy, Inc. and Houston Energy Services Company,
L.L.C., previously filed with the SEC on September 26, 2006
as Exhibit 2.2 to Commerce Energy Group, Inc.s
Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.79
|
|
Guaranty Agreement dated September 20, 2006 among Commerce
Energy, Inc., Thomas L. Goudie, James Bujnoch, Jr., Gary
Hollowell, Dustin Roach, Steve Loy and Arnold Perez, previously
filed with the SEC on September 26, 2006 as
Exhibit 2.3 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.80
|
|
Gas Supply Agreement dated September 20, 2006 by and among
Pacific Summit Energy LLC and Commerce Energy, Inc. and Houston
Energy Services Company, LLC.
|
|
10
|
.81
|
|
Operating Agreement dated September 20, 2006 between
Pacific Summit Energy LLC and Commerce Energy, Inc.
|
|
10
|
.82
|
|
Security Agreement dated September 20, 2006 between Pacific
Summit Energy LLC and Commerce Energy, Inc.
|
|
10
|
.83
|
|
Blocked Account Control Agreement (with Lockbox Services) dated
September 20, 2006 by and among Commerce Energy, Inc.,
Pacific Summit Energy LLC and Wachovia Bank NA.
|
|
10
|
.84
|
|
Base Contract for Sale and Purchase of Natural Gas dated
September 20, 2006 between Commerce Energy, Inc. and
Pacific Summit Energy LLC.
|
|
10
|
.85
|
|
APX Settlement and Release of Claims Agreement dated as of
January 5, 2007 by and among the Settling Parties,
including Commonwealth Energy Corporation (n/k/a Commerce
Energy, Inc.), previously filed with the SEC on March 19,
2007 as Exhibit 10.2 to Commerce Energy Group, Inc.s
Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.86
|
|
First Amendment to Master Power Purchase and Sale Agreement
between Commerce Energy, Inc. and Tenaska Power Services, Co.
dated May 25, 2007.
|
|
10
|
.87
|
|
Settlement Agreement and Mutual Release dated June 11, 2007
among Commerce Energy Group, Inc., Commerce Energy, Inc., Peter
Weigand and American Communications Network, Inc., previously
filed with the SEC on June 12, 2007 as Exhibit 99.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
14
|
.1
|
|
Commerce Energy Group, Inc. Code of Business Conduct and Ethics,
previously filed with the SEC on November 15, 2004 as
Exhibit 14.1 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
for the year ended July 31, 2004 and incorporated herein by
reference.
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Hein & Associates LLP, independent
registered public accounting firm.
|
|
23
|
.2
|
|
Consent of Ernst & Young, LLP, independent registered
public accounting firm.
|
84
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
31
|
.1
|
|
Principal Executive Officer Certification required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
31
|
.2
|
|
Principal Financial Officer Certification required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
32
|
.1
|
|
Principal Executive Officer Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Principal Financial Officer Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Confidential treatment has been requested with respect to
certain provisions of this agreement. Omitted portions have been
filed separately with the SEC.
|
85
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
|
COMMERCE ENERGY GROUP, INC.
|
|
|
|
Date: October 29, 2007
|
|
By:
/s/
STEVEN
S.
BOSS
Steven
S. Boss
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ STEVEN
S. BOSS
Steven
S. Boss
|
|
Chief Executive Officer and a Director (Principal Executive
Officer)
|
|
October 29, 2007
|
|
|
|
|
|
/s/ J.
ROBERT HIPPS
J.
Robert Hipps
|
|
Interim Chief Financial Officer
(Principal Financial Officer)
|
|
October 29, 2007
|
|
|
|
|
|
/s/ KENNETH
L. ROBINSON
Kenneth
L. Robinson
|
|
Corporate Controller
(Principal Accounting Officer)
|
|
October 29, 2007
|
|
|
|
|
|
/s/ CHARLES
E. BAYLESS
Charles
E. Bayless
|
|
Director
|
|
October 29, 2007
|
|
|
|
|
|
/s/ DENNIS
R. LEIBEL
Dennis
R. Leibel
|
|
Director
|
|
October 29, 2007
|
|
|
|
|
|
/s/ GARY
J. HESSENAUER
Gary
J. Hessenauer
|
|
Director
|
|
October 29, 2007
|
|
|
|
|
|
/s/ MARK
S. JUERGENSEN
Mark
S. Juergensen
|
|
Director
|
|
October 29, 2007
|
|
|
|
|
|
/s/ ROBERT
C. PERKINS
Robert
C. Perkins
|
|
Chairman of the Board and a Director
|
|
October 29, 2007
|
86
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Commerce Energy
Group, Inc.:
We have audited the accompanying consolidated balance sheets of
Commerce Energy Group, Inc. as of July 31, 2007 and 2006
and the related consolidated statements of operations,
stockholders equity and cash flows for the years then
ended. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. We were not
engaged to perform an audit of the Companys internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Commerce Energy Group, Inc.
as of July 31, 2007 and 2006 and the consolidated results
of their operations and their cash flows for the years then
ended, in conformity with U.S. generally accepted
accounting principles.
/s/
HEIN &
ASSOCIATES LLP
Irvine, California
October 24, 2007
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Commerce Energy
Group, Inc.:
We have audited the accompanying consolidated statements of
operations, stockholders equity and cash flows of Commerce
Energy Group, Inc. (formerly Commonwealth Energy Corporation)
for the year ended July 31, 2005. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements of Commerce Energy
Group, Inc. referred to above present fairly, in all material
respects, the consolidated results of its operations and its
cash flows for the year ended July 31, 2005, in conformity
with U.S. generally accepted accounting principles.
/s/
ERNST &
YOUNG LLP
Orange County, California
October 25, 2005
F-2
COMMERCE
ENERGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
365,089
|
|
|
$
|
247,080
|
|
|
$
|
253,853
|
|
APX settlement
|
|
|
6,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
371,614
|
|
|
|
247,080
|
|
|
|
253,853
|
|
Direct energy costs
|
|
|
314,371
|
|
|
|
218,289
|
|
|
|
225,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57,243
|
|
|
|
28,791
|
|
|
|
28,182
|
|
Selling and marketing expenses
|
|
|
10,642
|
|
|
|
5,231
|
|
|
|
4,081
|
|
General and administrative expenses
|
|
|
37,291
|
|
|
|
26,939
|
|
|
|
31,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
9,310
|
|
|
|
(3,379
|
)
|
|
|
(7,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial formation litigation expenses
|
|
|
|
|
|
|
|
|
|
|
(1,601
|
)
|
Recovery of (provision for) impairment on investments
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
ACN arbitration settlement
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,296
|
|
|
|
1,140
|
|
|
|
890
|
|
Interest expense
|
|
|
(1,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expenses
|
|
|
(3,657
|
)
|
|
|
1,140
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
5,653
|
|
|
|
(2,239
|
)
|
|
|
(6,114
|
)
|
Provision for income taxes
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,531
|
|
|
$
|
(2,239
|
)
|
|
$
|
(6,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.18
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,906
|
|
|
|
30,419
|
|
|
|
30,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,044
|
|
|
|
30,419
|
|
|
|
30,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
COMMERCE
ENERGY GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,559
|
|
|
$
|
22,941
|
|
Accounts receivable, net
|
|
|
65,231
|
|
|
|
30,650
|
|
Inventory
|
|
|
5,905
|
|
|
|
4,578
|
|
Prepaid expenses and other current
|
|
|
7,224
|
|
|
|
6,827
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
84,919
|
|
|
|
64,996
|
|
Restricted cash
|
|
|
10,457
|
|
|
|
17,117
|
|
Deposits
|
|
|
1,906
|
|
|
|
2,506
|
|
Property and equipment, net
|
|
|
8,662
|
|
|
|
5,866
|
|
Goodwill
|
|
|
4,247
|
|
|
|
4,801
|
|
Other intangible assets
|
|
|
6,385
|
|
|
|
3,790
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
116,576
|
|
|
$
|
99,076
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
37,926
|
|
|
$
|
26,876
|
|
Accrued liabilities
|
|
|
8,130
|
|
|
|
5,867
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
46,056
|
|
|
|
32,743
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock 150,000 shares authorized with
$0.001 par value and 30,383 and 29,632 shares issued
and outstanding in fiscal 2007 and 2006, respectively
|
|
|
60,599
|
|
|
|
58,849
|
|
Other comprehensive income (loss)
|
|
|
(823
|
)
|
|
|
2,271
|
|
Retained earnings
|
|
|
10,744
|
|
|
|
5,213
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
70,520
|
|
|
|
66,333
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
116,576
|
|
|
$
|
99,076
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
COMMERCE
ENERGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerce Energy Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at July 31, 2004
|
|
|
30,519
|
|
|
$
|
60,540
|
|
|
$
|
13,566
|
|
|
$
|
|
|
|
$
|
74,106
|
|
Exercise of stock options
|
|
|
102
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Repurchase of common shares
|
|
|
(120
|
)
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
(251
|
)
|
Issuance of stock
|
|
|
5
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Amortization of unearned restricted stock
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
256
|
|
Issuance of stock in connection with ACN acquisition
|
|
|
930
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(6,114
|
)
|
|
|
|
|
|
|
(6,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2005
|
|
|
31,436
|
|
|
|
62,609
|
|
|
|
7,452
|
|
|
|
|
|
|
|
70,061
|
|
Exercise of stock options
|
|
|
221
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Repurchase of common shares
|
|
|
(1,469
|
)
|
|
|
(2,204
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,204
|
)
|
Issuance of stock
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of dissenters rights stock
|
|
|
(55
|
)
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
(106
|
)
|
Issuance of restricted stock
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned share based compensation
|
|
|
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
386
|
|
Amortization of unearned restricted stock
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Cancellation of stock in connection with ACN acquisition
|
|
|
(930
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
(2,239
|
)
|
|
|
2,271
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006
|
|
|
29,632
|
|
|
|
58,849
|
|
|
|
5,213
|
|
|
|
2,271
|
|
|
|
66,333
|
|
Exercise of stock options
|
|
|
535
|
|
|
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
1,196
|
|
Issuance of restricted stock
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned share based compensation
|
|
|
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
Amortization of unearned restricted stock
|
|
|
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
5,531
|
|
|
|
(3,094
|
)
|
|
|
2,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007
|
|
|
30,383
|
|
|
$
|
60,599
|
|
|
$
|
10,744
|
|
|
$
|
(823
|
)
|
|
$
|
70,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
COMMERCE
ENERGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,531
|
|
|
$
|
(2,239
|
)
|
|
$
|
(6,114
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,736
|
|
|
|
856
|
|
|
|
1,216
|
|
Amortization
|
|
|
1,656
|
|
|
|
1,140
|
|
|
|
888
|
|
Amortization of deferred loan costs
|
|
|
162
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
4,169
|
|
|
|
2,813
|
|
|
|
2,305
|
|
Stock-based compensation charge
|
|
|
554
|
|
|
|
539
|
|
|
|
256
|
|
Deferred income tax provision
|
|
|
|
|
|
|
|
|
|
|
74
|
|
Impairment of Summit Energy investments
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Loss on disposition of property and equipment
|
|
|
|
|
|
|
|
|
|
|
165
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(38,750
|
)
|
|
|
(5,620
|
)
|
|
|
1,096
|
|
Prepaid expenses and other assets
|
|
|
(3,144
|
)
|
|
|
8,402
|
|
|
|
695
|
|
Accounts payable
|
|
|
11,051
|
|
|
|
1,251
|
|
|
|
(4,952
|
)
|
Accrued liabilities and other
|
|
|
985
|
|
|
|
(1,079
|
)
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(16,050
|
)
|
|
|
6,063
|
|
|
|
(3,561
|
)
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,532
|
)
|
|
|
(4,714
|
)
|
|
|
(1,025
|
)
|
Reimbursement from state on renewable energy asset
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Purchase of intangible assets
|
|
|
(4,453
|
)
|
|
|
(28
|
)
|
|
|
|
|
Sale of intangibles customer contracts sold
|
|
|
756
|
|
|
|
|
|
|
|
|
|
Business acquisition, net of cash required
|
|
|
|
|
|
|
|
|
|
|
(14,525
|
)
|
Sale of short-term investments
|
|
|
|
|
|
|
|
|
|
|
43,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(8,229
|
)
|
|
|
(4,742
|
)
|
|
|
28,012
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(2,310
|
)
|
|
|
(251
|
)
|
Sale of common stock
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Credit line commitment fee
|
|
|
41
|
|
|
|
(530
|
)
|
|
|
|
|
Proceeds from exercises of stock options
|
|
|
1,196
|
|
|
|
11
|
|
|
|
54
|
|
Decrease (increase) in restricted cash
|
|
|
6,660
|
|
|
|
(8,895
|
)
|
|
|
(1,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
7,897
|
|
|
|
(11,724
|
)
|
|
|
(1,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(16,382
|
)
|
|
|
(10,403
|
)
|
|
|
22,591
|
|
Cash and cash equivalents at beginning of year
|
|
|
22,941
|
|
|
|
33,344
|
|
|
|
10,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
6,559
|
|
|
$
|
22,941
|
|
|
$
|
33,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
891
|
|
|
$
|
|
|
|
$
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
COMMERCE
ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share and per kWh amounts)
Commerce Energy Group, Inc. or Commerce is a diversified
independent energy marketer of electricity and natural gas.
Commerce provides retail electricity and natural gas to its
residential, commercial, industrial and institutional customers,
and provides consulting and information services to
energy-related organizations. Commerce is a holding company that
operates through its wholly-owned operating subsidiaries:
Commerce Energy Inc. or Commerce Energy, and Skipping Stone Inc.
or Skipping Stone. As used in these consolidated financial
statements, the term the Company refers to Commerce
and its wholly-owned subsidiaries.
Commerce Energy provides electricity to its customers in the
deregulated California, Pennsylvania, Michigan, New Jersey,
Maryland and Texas electricity markets. Commerce Energy is
licensed by the Federal Energy Regulatory Commission or FERC, as
a power marketer. In addition to the states in which the Company
currently operates, Commerce Energy is also licensed, certified,
or otherwise qualified by applicable state agencies to supply
retail electricity in Illinois, New York, Ohio and Virginia.
Commerce Energy also provides natural gas to customers in
California, Florida, Georgia, Maryland, Nevada, Ohio, and
Pennsylvania. Skipping Stone provides
energy-related
consulting services and information to utilities, generators,
pipelines, wholesale merchants and investment banks.
The Companys common stock trades on the American Stock
Exchange under the symbol EGR.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Consolidation
The Companys consolidated financial statements include its
two wholly-owned operating subsidiaries: Commerce Energy and
Skipping Stone. All material inter-company balances and
transactions have been eliminated in consolidation.
Use of
Estimates and Assumptions
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make certain
estimates and assumptions that affect the reported amounts and
timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and the disclosure of
contingent assets and liabilities. These estimates and
assumptions are based on the Companys historical
experience as well as managements future expectations. As
a result, actual results could materially differ from
managements estimates and assumptions. The Companys
management believes that its most critical estimates herein
relate to independent system operator costs, transportation and
delivery costs, allowance for doubtful accounts, unbilled
receivables, inventory valuation, customer acquisition costs,
accounting for derivative instruments and hedging activities,
and loss contingencies.
Reclassifications
The Company has reclassified certain prior fiscal year amounts
in the accompanying consolidated financial statements to be
consistent with the current fiscal year presentation.
Non-cash
items
In the fiscal year ended July 31, 2005 (fiscal
2005), the Company issued $2,000 of its common stock
(930 shares) in connection with the acquisition of certain
assets from ACN Utility Services, Inc. This stock transaction
was reversed in the fiscal year ended July 31, 2006
(fiscal 2006) (see Note 3). Also in fiscal
2005, the Company retired $4,562 of property and equipment and
the related $4,398 of accumulated depreciation with a net book
value of $165.
F-7
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
and Cost Recognition
Energy sales are recognized as electricity and natural gas is
delivered to the Companys customers.
Direct energy costs, which are recognized concurrently with
related energy sales, include the commodity cost of purchased
electricity and natural gas, transportation and transmission
costs associated with energy delivery, fees incurred from
various energy-related service providers and energy-related
taxes that cannot be passed directly through to the customer.
Fees and charges from the Independent System Operators or ISOs,
and the Local Distribution Companies or LDCs, are determined by
the ISO or LDC based upon each days system-wide
activities. The Company estimates and accrues for these fees
based on activity levels, preliminary settlements and other
available information. Final determination and settlement of
these charges may take from one to three months and they are
adjusted when they become available. The Companys
customers billings may also include charges for the
transmission and distribution of the commodity for which the
utility is ultimately responsible and separately itemized taxes
for which the customer is responsible. These amounts are
excluded from the Companys net revenue. In Texas, the
Company bills customers for transmission and distribution
charges which Commerce is responsible for both collecting from
the customers, and remitting to the utilities. As a result,
these transmission and distribution charges are included in both
revenue and direct energy costs.
The Companys net revenue is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Retail electricity sales
|
|
$
|
237,526
|
|
|
$
|
177,752
|
|
|
$
|
188,316
|
|
Excess energy sales
|
|
|
1,535
|
|
|
|
7,627
|
|
|
|
40,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total electricity sales
|
|
|
239,061
|
|
|
|
185,379
|
|
|
|
228,377
|
|
Retail natural gas sales
|
|
|
126,028
|
|
|
|
61,701
|
|
|
|
25,476
|
|
APX settlement
|
|
|
6,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
371,614
|
|
|
$
|
247,080
|
|
|
$
|
253,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skipping Stone revenues, after inter-company eliminations, for
the fiscal years ended July 31, 2007, 2006 and 2005 were
$899, $1,462 and $1,927, respectively, representing less than 1%
of total net revenue for each fiscal period.
Sales commission expense payable based on customer billings is
recognized in the same period as the related revenue. Commission
expense is recorded in selling and marketing expenses.
Direct customer acquisition costs paid to third parties and
directly related to specific new customers are deferred and
amortized over the life of the initial customer contract,
typically one year.
Major
Customer and Suppliers
No individual customer accounted for ten percent or more of the
Companys consolidated net revenue in fiscal 2007, 2006 or
2005.
The Company utilizes a diversified selection of energy
suppliers. In fiscal 2007, the Company had three significant
suppliers, one of which accounted for 25%, and two suppliers for
10% each, of direct energy cost. The Company believes there are
numerous other suppliers that could be substituted should these
suppliers become unavailable or non-competitive.
Operating
Expenses
Selling and marketing expenses consist principally of costs
incurred for sales and marketing personnel, commissions and
customer acquisition costs paid to third parties and promotional
and advertising activities.
F-8
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising costs are expensed as incurred and were $1,184, $479
and $26 for fiscal 2007, 2006 and 2005, respectively.
General and administrative expenses consist principally of costs
incurred for all other corporate personnel, rent, utilities,
telecommunications, insurance, legal fees, and other corporate
costs including provisions made for uncollectible accounts
receivable, the depreciation and amortization of both tangible
and intangible assets, and stock-based compensation (see below
for details regarding stock-based compensation charges).
Earnings
(Loss) Per Common Share
Income (loss) per common share Basic has been
computed by dividing net income (loss) available to common
stockholders, after any preferred stock dividends, by the
weighted average number of common shares outstanding during the
fiscal year. Income (loss) per common share Diluted
has been computed by giving additional effect in the denominator
to the dilution that would have occurred under the treasury
stock and
if-converted
methods, as applicable, had outstanding stock options been
exercised into additional common shares. For the fiscal years
ended 2006 and 2005, assumed exercises or conversions have been
excluded in computing the diluted loss per share since there
were net losses for those fiscal years and their inclusion would
have been anti-dilutive.
Stock-Based
Compensation
Effective in the first quarter of fiscal 2006, the Company
adopted Statement of Financial Accounting Standards No. 123
(revised 2004),
Share-Based Payments
(SFAS 123R) which revises
SFAS No. 123,
Accounting for
Stock-Based
Compensation
and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees.
SFAS 123R
requires all share-based payments to employees, including grants
of employee stock options and restricted stock, be measured at
fair value and expensed in the consolidated statement of
operations over the service period (generally the vesting
period). The Company uses the Black-Scholes option valuation
model to value stock options. As a result of the adoption of
SFAS 123R, using the modified prospective application, the
Company is required to record compensation expense for all
awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at
the date of adoption. The Company recognized a pre-tax (tax
effect minimal) charge associated with the expensing of stock
options vested for fiscal 2007 of $213, which is included in
general and administrative expenses. As of July 31, 2007,
there was $66 of total unrecognized compensation cost related to
the non-vested outstanding stock options, which is expected to
be recognized over the period August 2007 through March 2010.
Pro forma information regarding earnings (loss) per share is
required by SFAS No. 123 and has been determined as if
the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123 for fiscal year
2005.
Stock-based awards have been valued using the Black-Scholes
option pricing model. Among other things, the Black-Scholes
model considers the expected volatility of the Companys
stock price, determined in accordance with
SFAS No. 123, in arriving at an option valuation.
Estimates and other assumptions necessary to apply the
Black-Scholes
model may differ significantly from assumptions used in
calculating the value of options granted under the minimum value
method.
F-9
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of options granted is estimated on the date of
grant based on the weighted-average assumptions in the table
below. The assumption for the expected life is based on
evaluations of historical and expected future exercise behavior.
The risk-free interest rate is based on the U.S. Treasury
rates at the date of the grant with maturity dates approximately
equal to the expected life at the grant date. The historical
stock volatility of the Companys common stock is used as
the basis for the volatility assumption.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average risk-free interest rate
|
|
|
4.8
|
%
|
|
|
4.9
|
%
|
|
|
5.0
|
%
|
Average expected life in years
|
|
|
3.8
|
|
|
|
4.9
|
|
|
|
6.0
|
|
Expected dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Volatility
|
|
|
72.0
|
%
|
|
|
77.2
|
%
|
|
|
82.5
|
%
|
If the fair values of the options granted during fiscal 2005 had
been recognized as compensation expense on a straight-line basis
over the vesting period of the grant, stock-based compensation
costs would have impacted our net loss and loss per common share
as follows:
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
Ended July 31,
|
|
|
|
2005
|
|
|
Net loss as reported
|
|
$
|
(6,114
|
)
|
Add: Stock-based employee compensation expense included in net
loss, net of related tax effects
|
|
|
256
|
|
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(2,977
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(8,835
|
)
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
Basic and diluted pro forma
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
Restricted
Stock
In fiscal 2007, the company granted 230 shares of
restricted stock to its employees and directors. These
restricted shares vest in accordance with the terms of various
written agreements from September 25, 2007 to
March 26, 2010. The total compensation cost recognized in
fiscal year 2007 for the stock-based compensation awards was
$341. As of July 31, 2007, the total unrecognized
compensation cost relating to non-vested restricted stock was
$471 and will be recognized over the period of August 1,
2007 through March 26, 2010.
In fiscal 2004, pursuant to the terms of an employment
agreement, the Company granted 150 shares of restricted
common stock to its then Chief Financial Officer, which were to
vest equally over the first three anniversary dates of
employment, beginning April 1, 2005. The Company recorded
$288 of deferred stock-based compensation as a result of the
restricted stock grant. Total compensation cost recognized in
the fiscal year 2005 for this stock-based employee compensation
award was $256. The fiscal 2005 expense reflects the
acceleration of vesting under the terms of his contract
Cash
and Cash Equivalents
Cash equivalents consist primarily of investments in highly
rated liquid instruments (typically large money market mutual
funds). The Company maintains its cash and cash equivalents with
highly rated financial institutions, thereby minimizing any
associated credit risks.
F-10
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liquidity
The Companys principal sources of liquidity to fund
ongoing operations have been existing cash and cash equivalents
on hand, cash generated from operations and our credit facility
which increases our borrowing capacity. Based upon our level of
operations and business conditions at July 31, 2007,
management forecasts that these sources will be sufficient to
fund our expected capital expenditures and to meet our working
capital requirements along with other cash needs through fiscal
2008. However, the Company would need to add to its capital
resources in fiscal 2008 if we expand our business, either from
internal growth or acquisitions, if energy prices increase
materially, or if energy industry volatility and/or uncertainty
creates additional credit requirements.
Accounts
Receivable
The Companys accounts receivable consist of billed and
unbilled receivables from customers. The Companys
customers are billed monthly at various dates throughout the
month. Unbilled receivables represent the amount of electricity
and natural gas delivered to customers as of the end of the
period but not yet billed. Unbilled receivables are estimated by
the Company based on the number of units of electricity and
natural gas delivered but not yet billed, multiplied by the
current customer average sales price per unit.
Credit
Risk and Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts, which
represents managements estimate of probable losses
inherent in the accounts receivable balance based on known
troubled accounts, historical experience, account aging and
other currently available information (see Note 9).
The Companys exposure to credit risk concentration is
limited primarily to those local utilities that collect and
remit receivables on a daily basis, from the Companys
individually insignificant and geographically dispersed
customers. The Company regularly monitors the financial
condition of each such local utility and currently believes that
its susceptibility to any individually significant write-offs as
a result of concentrations of customer accounts receivable with
those local utilities is remote.
Inventory
Inventory represents natural gas in storage and is stated at the
lower of weighted average cost or market.
Deferred
Income Taxes
Deferred income tax assets and liabilities are recognized for
the expected future income tax benefits or consequences, based
on enacted laws, of temporary timing differences between tax and
financial statement reporting. During fiscal 2007, 2006 and
2005, the Company established valuation allowances to reserve
its net deferred tax assets, as management believes it is not
certain that the Company will realize the tax benefits in the
foreseeable future. The provision for taxes in fiscal 2007 is
based on the Alternative Minimum Tax on tax-based income that
statutorily cannot be offset by the Companys tax
carryforwards.
Comprehensive
Income (Loss)
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income
(SFAS 130) establishes standards for reporting
and displaying comprehensive income and its components in the
Companys consolidated financial statements. Comprehensive
income is defined in SFAS 130 as the change in equity (net
assets) of a business enterprise during a period from certain
transactions and other events and circumstances and is comprised
of net income and other comprehensive income (loss).
F-11
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income (loss)
|
|
$
|
5,531
|
|
|
$
|
(2,239
|
)
|
|
$
|
(6,114
|
)
|
Changes in fair value of cash flow hedges
|
|
|
(3,094
|
)
|
|
|
2,271
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,437
|
|
|
$
|
32
|
|
|
$
|
(6,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) included in
stockholders equity totaled $(823), $2,271 and $0 at
July 31, 2007, July 31, 2006 and July 31, 2005,
respectively.
Restricted
Cash and Energy Deposits
Cash and cash equivalents, which the Company currently cannot
access, are pledged as collateral for energy purchase
obligations or as required under the Companys credit
facility (see Note 4). The Company also has energy deposits
pledged as collateral with suppliers for certain purchase
obligations. They are classified as current or long-term
depending on the duration and nature of the deposit requirement.
Property
and Equipment
Property and equipment are recorded at cost. Maintenance and
repairs which do not extend the useful life of the related
property or equipment are charged to operations as incurred.
Depreciation of property and equipment has been computed using
the straight-line method over estimated economic useful lives of
three to five years.
Certain software development and implementation costs to install
third party software on significant projects for internal use,
consisting of direct internal labor costs and third-party system
application development costs, are capitalized. Once the
application is placed in service these capitalized costs are
amortized using the straight-line method over estimated economic
lives of five years.
Goodwill
Goodwill represents the excess of the acquisition cost over the
net assets acquired. Skipping Stone was acquired in fiscal 2004
and resulted in $587 of goodwill. The acquisition, in fiscal
2005, of certain assets of ACN Utilities, Inc. or ACN, (see
Note 3) resulted in the recording of $4,214 in
goodwill, net of $2,000 in Commerce stock that was not earned.
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, goodwill is no longer amortized
but is subject to periodic impairment testing. For the goodwill
related to the Skipping Stone and ACN acquisitions, the Company
initially retained independent outside valuation specialists to
value the initial intangible assets associated with the
acquisitions. The resulting goodwill was reevaluated each year
at the acquisitions anniversary and it was determined that
no impairments have occurred.
In January 2007, the Company divested approximately 7,000 of its
natural gas customers in Georgia and New York markets
resulting in reductions in goodwill of $554, and other
intangibles of $201.
Goodwill activity is set forth below:
|
|
|
|
|
|
|
Goodwill
|
|
|
Balance at July 31, 2005
|
|
$
|
6,801
|
|
Return of ACN shares held in escrow
|
|
|
(2,000
|
)
|
|
|
|
|
|
Balance at July 31, 2006
|
|
|
4,801
|
|
Sale of natural gas customers
|
|
|
(554
|
)
|
|
|
|
|
|
Balance at July 31, 2007
|
|
$
|
4,247
|
|
|
|
|
|
|
F-12
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Intangible Assets
Direct costs incurred in acquiring intangible assets have been
capitalized. Intangible assets represent the Companys
1-800-Electric telephone number, rights to internet domain
names, and certain assets acquired as part of the Skipping
Stone, ACN and HESCO acquisitions, including customer lists,
software and other intangibles. Each intangible asset is being
or has been amortized over the shorter of its contractual or
estimated economic useful life, which collectively range from
two years to indefinite lives in the case of operating licenses.
Due to the divesture of natural gas customers as noted above in
Goodwill, other intangibles were reduced by $201.
Aggregate amortization expense for these intangible assets was
$1,656, $1,112 and $888 for fiscal 2007, 2006 and 2005,
respectively. Other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31, 2007
|
|
|
|
Useful Life
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer lists
|
|
|
3-15
|
|
|
$
|
6,340
|
|
|
$
|
1,800
|
|
|
$
|
4,540
|
|
Software
|
|
|
2-5
|
|
|
|
1,810
|
|
|
|
1,435
|
|
|
|
375
|
|
Licenses
|
|
|
Indefinite
|
|
|
|
759
|
|
|
|
|
|
|
|
759
|
|
Other intangibles
|
|
|
1-20
|
|
|
|
1,828
|
|
|
|
1,117
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,737
|
|
|
$
|
4,352
|
|
|
$
|
6,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31, 2006
|
|
|
|
Useful Life
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer lists
|
|
|
3-15
|
|
|
$
|
2,000
|
|
|
$
|
607
|
|
|
$
|
1,393
|
|
Software
|
|
|
2-5
|
|
|
|
1,810
|
|
|
|
1,214
|
|
|
|
596
|
|
Licenses
|
|
|
Indefinite
|
|
|
|
923
|
|
|
|
|
|
|
|
923
|
|
Other intangibles
|
|
|
1-20
|
|
|
|
1,828
|
|
|
|
950
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,561
|
|
|
$
|
2,771
|
|
|
$
|
3,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The future aggregate amortization expense for intangibles is as
follows:
|
|
|
|
|
Fiscal Year Ending July 31,
|
|
|
|
|
2008
|
|
$
|
1,599
|
|
2009
|
|
|
1,393
|
|
2010
|
|
|
1,317
|
|
2011
|
|
|
314
|
|
2012 and beyond
|
|
|
1,003
|
|
|
|
|
|
|
|
|
$
|
5,626
|
|
|
|
|
|
|
Impairment
of Long-Lived Assets
Management evaluates each of the Companys long-lived
assets for impairment by comparing the related estimated future
cash flows, on an undiscounted basis, to its net book value. If
impairment is indicated, the net book value is reduced to an
amount equal to the estimated future cash flows, on an
appropriately discounted basis.
F-13
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The Companys financial instruments consist primarily of
cash and cash equivalents, accounts receivable and accounts
payable. The carrying amounts of these financial instruments are
reflected in the accompanying consolidated balance sheets at
cost, which is considered by management to approximate their
fair values due to their very short-term nature.
Segment
Reporting
The Companys chief operating decision-makers work together
to allocate resources and assess the performance of the
Companys business. These members of senior management
currently manage the Companys business, assess its
performance, and allocate its resources as the single operating
segment of energy retailing. Skipping Stones revenue, net
of inter-company eliminations, accounted for less than 1% of
total net revenue during fiscal 2007 and 2006, and geographic
information is not material.
Accounting
for Derivatives Instruments and Hedging Activities
The Companys activities expose it to a variety of market
risks, principally from fluctuating commodity prices. Management
has established risk management policies and procedures designed
to reduce the potentially adverse effects that the price
volatility of these markets may have on its operating results.
The Companys risk management activities, including the use
of derivative instruments such as forward physical delivery
contracts and financial swaps, options and futures contracts,
are subject to the management, direction and control of an
internal risk oversight committee. The Company maintains
commodity price risk management strategies that use these
derivative instruments, within approved risk tolerances, to
minimize significant, unanticipated earnings fluctuations caused
by commodity price volatility.
Supplying electricity and natural gas to retail customers
requires the Company to match customers projected demand
with long-term and short-term commodity purchases. The Company
purchases substantially all of its power and natural gas
utilizing forward physical delivery contracts. These physical
delivery contracts are defined as commodity derivative contracts
under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Using the exemption
available for qualifying contracts under SFAS No. 133,
the Company applies the normal purchase and normal sale
accounting treatment to its forward physical delivery contracts.
Accordingly, the Company records revenue generated from customer
sales as energy is delivered to retail customers and the related
energy under the forward physical delivery contracts is recorded
as direct energy costs as received from suppliers.
In January 2005, the Company sold two significant electricity
forward physical delivery contracts (on a net cash settlement
basis) back to the original supplier in connection with a
strategic realignment of its customer portfolio in the
Pennsylvania electricity market or PJM-ISO, which resulted in a
gain of $7,200 in the second quarter of fiscal 2005. As a result
of that sale, the normal purchase and normal sale exemption was
not utilized for PJM-ISO for the period of January 2005 through
August 2006.
For forward or future contracts that do not meet the qualifying
criteria for normal purchase, normal sale accounting treatment,
the Company elects cash flow hedge accounting, where
appropriate. Under cash flow hedge accounting, the fair value of
the contract is recorded as a current or long-term derivative
asset or liability. Subsequent changes in the fair value of the
derivative assets and liabilities are recorded on a net basis in
Accumulated other comprehensive income or OCI, and reflected as
direct energy cost in the statement of operations as the related
energy is delivered.
F-14
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts recorded in Accumulated OCI at July 31, 2007
and July 31, 2006 related to cash flow hedges are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current assets
|
|
$
|
|
|
|
$
|
1,817
|
|
Current liabilities
|
|
|
(671
|
)
|
|
|
(362
|
)
|
Deferred gains/(losses)
|
|
|
(152
|
)
|
|
|
816
|
|
Hedge ineffectiveness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income/(loss)
|
|
$
|
(823
|
)
|
|
$
|
2,271
|
|
|
|
|
|
|
|
|
|
|
Certain financial derivative instruments (such as swaps, options
and futures), designated as fair-value hedges, economic hedges
or as speculative, do not qualify or meet the requirements for
normal purchase, normal sale accounting treatment or cash flow
hedge accounting and are recorded currently in operating income
or loss and as a current or long-term derivative asset or
liability depending on their term. The subsequent changes in the
fair value of these contracts may result in operating income or
loss volatility as the fair value of the changes are recorded on
a net basis in direct energy cost in the consolidated statements
of operations for each fiscal period. At July 31, 2007 and
2006, the impact of financial derivatives accounted for as
mark-to-market resulted in expense of $260 and $1,700,
respectively, and resulted primarily from economic hedging
related to the Companys natural gas portfolio. The
notional value of all derivatives accounted for as
mark-to-market that was outstanding at July 31, 2007 was
$2,218.
As of July 31, 2007, the Company had no derivative assets
included in Prepaid expenses and other, and $671 of total
derivative liabilities included in Accrued liabilities.
Recent
Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement
No. 115
. SFAS No. 159 permits entities
to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be
measured at fair value. This statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently
evaluating the impact this statement may have on its financial
statements.
In September 2006, the SEC staff published
SAB No. 108,
Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
. SAB 108 addresses
quantifying the financial statement effect of misstatements and
considering the effects of prior year uncorrected errors on the
statements of operations as well as the balance sheets.
SAB No. 108 does not change the requirements under
SAB No. 99 regarding qualitative considerations in
assessing the materiality of misstatements. The Company adopted
SAB No. 108 during the fourth quarter of fiscal year
2007, and the adoption had no impact on its results of
operations or financial condition as of and for the fiscal year
ended July 31, 2007.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which provides
guidance for using fair value to measure assets and liabilities.
The pronouncement clarifies (1) the extent to which
companies measure assets and liabilities at fair value;
(2) the information used to measure fair value; and
(3) the effect that fair value measurements have on
earnings. SFAS No. 157 will apply whenever another
standard requires (or permits) assets or liabilities to be
measured at fair value. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact this statement will have on
its financial statements.
In June 2006, the FASB issued FIN 48,
Accounting
for Uncertainty in Income Taxes
, an interpretation of
SFAS No. 109,
Accounting for Income
Taxes
. The interpretation contains a two-step approach
to recognizing and
F-15
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The provisions are effective for
the Company as of August 1, 2007. The Company is currently
evaluating the impact this statement will have on its financial
statements.
ACN
Utility Services, Inc.
On February 9, 2005, the Company acquired certain assets of
ACN Utility Services, Inc. or ACN, a subsidiary of American
Communications Network, Inc. (the Parent), and its
retail electricity and natural gas sales business. ACN sold
retail electricity in Texas and Pennsylvania and sold retail
natural gas in California, Georgia, Maryland, New York, Ohio and
Pennsylvania. The aggregate purchase price was $14,500 in cash
and 930 shares of the Companys common stock, valued
at $2,000. In addition, as part of the initial purchase price,
the Company was required to fund $2,542 of collateralized
letters of credit on the closing date to guarantee our
performance to various third parties. The common stock payment
was contingent upon meeting certain sales requirements during
the year following the acquisition date. These sales
requirements were not met and the shares were cancelled in April
2006. As a result, both goodwill and common stock were reduced
by $2,000.
The assets acquired included approximately 80 natural
gas-and-electricity
residential and small commercial customers, natural gas
inventory associated with utility and pipeline storage and
transportation agreements and natural gas and electricity
supply, scheduling and capacity contracts, software and other
infrastructure. No cash or accounts receivables were acquired in
the transaction, and none of ACNs liabilities were
assumed. The assets purchased and the operating results
generated from the acquisition have been included in the
Companys operations as of February 1, 2005, the
effective date of the acquisition.
Immediately following the acquisition, the Company engaged the
services of a professional appraiser to assist in determining
the value of separately identifiable intangible assets acquired
in connection with the acquisition of ACN. The following table
presents the results of the valuation:
|
|
|
|
|
Category of intangible assets:
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
Customer list
|
|
$
|
860
|
|
Software
|
|
|
750
|
|
|
|
|
|
|
Total
|
|
$
|
1,610
|
|
|
|
|
|
|
Intangible asset not subject to amortization:
|
|
|
|
|
Licenses
|
|
$
|
900
|
|
|
|
|
|
|
The intangible assets are included in Other intangible
assets in the accompanying consolidated balance sheet at
July 31, 2006 and are being amortized over lives that range
from three years to five years (for intangibles subject to
amortization) and indefinite for licenses.
The amount of goodwill created as a result of this transaction
is summarized as follows:
|
|
|
|
|
Purchase price
|
|
$
|
16,525
|
|
Amount assigned to the net assets acquired
|
|
|
8,209
|
|
Amount assigned to intangible assets
|
|
|
2,510
|
|
|
|
|
|
|
Goodwill created (excluding $408 of acquisition costs)
|
|
$
|
5,806
|
|
|
|
|
|
|
Goodwill was reduced by $2,000 subsequent to the acquisition as
discussed above (see Note 15).
F-16
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Houston
Energy Services Company, LLC
On September 20, 2006, the Company entered into an Asset
Purchase Agreement with HESCO, a Texas limited liability
company, to acquire certain assets of HESCO, consisting of
contracts with end-users of natural gas in California, Florida,
Nevada, Kentucky and Texas. The Company acquired the HESCO
Assets for $4,300, of which $4,100 was cash and $200 was the
assumption of liabilities.
|
|
4.
|
Credit
Facility and Supply Agreements
|
Wachovia
Capital Finance Corporation (Western)
In June 2006, Commerce and Commerce Energy entered into a Loan
and Security Agreement, or the Credit Facility, with Wachovia
Capital Finance Corporation (Western), or the Agent, for up to
$50 million. The three-year Credit Facility is secured by
substantially all of the Companys assets and provides for
issuance of letters of credit and for revolving credit loans,
which we may use for working capital and general corporate
purposes. The availability of letters of credit and loans under
the Credit Facility is limited by a calculated borrowing base
consisting of the majority of the Companys cash on deposit
with the Agent and the Companys receivables and natural
gas inventories. As of July 31, 2007, letters of credit
issued under the facility totaled $18.9 million, and there
were no outstanding borrowings. Fees for letters of credit
issued range from 1.50 to 1.75 percent per annum, depending
on the level of Excess Availability, as defined in the Credit
Facility. We also pay an unused line fee equal to
0.375 percent of the unutilized credit line. Generally,
outstanding borrowings under the Credit Facility are priced at a
domestic bank rate plus 0.25 percent or LIBOR plus
2.75 percent.
The Credit Facility contains covenants, subject to specific
exceptions, restricting Commerce, the Company and its
subsidiaries from: (i) incurring additional indebtedness;
(ii) granting certain liens; (iii) disposing of
certain assets; (iv) making certain restricted payments;
(v) entering into certain other agreements; and
(vi) making certain investments. The Credit Facility also
restricts our ability to pay cash dividends on our common stock;
restricts Commerce Energy from making cash dividends to the
Company without the consent of the Agent and The CIT
Group/Business Credit, Inc., or, collectively, the Lenders; and
limits the amount of our annual capital expenditures to
$3.5 million without the consent of the Lenders. We must
also maintain a minimum of $10 million of Eligible Cash
Collateral, as defined in the Credit Facility, at all times.
From September 2006 through September 2007, the Company and
Commerce Energy have entered into five amendments and a
modification to the Loan and Security Agreement with the Agent
and Lenders, several of which involved waivers of prior or
existing instances of covenant non-compliance relating to the
maintenance of Eligible Cash Collateral, capital expenditures
and notification requirements (First Amendment), maintenance and
deferral of prospective compliance, of minimum Fixed Charge
Coverage Rates and maintenance of the minimum Excess
Availability Ratio (Second and Third Amendments). In addition,
pursuant to the First Amendment, the Agent and Lender agreed to
certain prospective waivers of covenants in the Credit Facility
to enable Commerce Energy to consummate the HESCO acquisition of
customers. In the Fourth Amendment, the amount allowable under
the Credit Facilitys capital expenditures covenant was
increased to $6.0 million. In the Second, Third and Fifth
Amendment and in the Modification Agreement, each addressed
reducing
and/or
restructuring the Excess Availability covenant in the Credit
Facility to accommodate Commerce Energys business. In the
Modification Agreement, the Agent and the Lenders also permitted
Commerce Energy for a period from September 20, 2007 to
October 5, 2007 to exceed its Gross Borrowing Base, as
defined in such Agreement.
Tenaska
Power Services Co.
In August 2005, the Company entered into a Security Agreement
(with subsequent minor amendments), a Blocked Account Control
Agreement, An Agreement to Provide QSE and Marketing Services,
and a Guaranty Agreement with Tenaska Power Services Co. or
Tenaska, whereby Tenaska and the Company entered into a
commercially standard lockbox agreement for Tenaska to supply
the Company with the majority of its wholesale electricity
supply needs in Texas. Under the agreement, the Companys
Texas customers pay into the lockbox that is used to pay Tenaska
for the
F-17
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
electricity supplies. Tenaska also extends credit to the Company
to buy electricity supplies and the Company in turn pledges
funds in the lockbox, its related accounts receivables and
customers contracts as security. Tenaska also serves as the
Companys QSE, or Qualified Scheduling Agent, in Texas
under a related agreement. At July 31, 2007, Tenaska had
extended approximately $22.0 million of credit to the
Company under this arrangement.
Pacific
Summit Energy LLC.
In September 2006, the Company entered into Security Blocked
Account Control, Gas Supply, and Operating Agreements with
Pacific Summit Energy LLC or Pacific Summit, whereby Pacific
Summit and the Company entered into a commercially standard
lockbox agreement for Pacific Summit to supply the Company with
all of its natural gas for customers that the Company acquired
with the HESCO acquisition. Under the agreement, these customers
remit into the lockbox used to pay Pacific Summit for natural
gas supplies. Pacific Summit also extends credit to the Company
to buy natural gas supplies secured by funds in the lockbox,
related accounts receivable and a $3.5 million letter of
credit. At July 31, 2007, Pacific Summit had extended
approximately $12.0 million of credit to the Company under
this arrangement.
The Company currently serves electricity and natural gas
customers in 10 states, operating within the jurisdictional
territory of 22 different local utilities. Although regulatory
requirements are determined at the individual state, and
administered and monitored by the Public Utility Commission, or
PUC, of each state, operating rules and rate filings for each
utility are unique. Accordingly, the Company generally treats
each utility distribution territory as a distinct market. Among
other things, tariff filings by local distribution companies, or
LDCs, for changes in their allowed billing rate to customers in
the markets in which the Company operates, significantly impact
the viability of the Companys sales and marketing plans,
and its overall operating and financial results.
Electricity
Currently, the Company sells electricity in 12 LDC markets
within the 6 states of California, Pennsylvania, Michigan,
Maryland, New Jersey and Texas.
On April 1, 1998, the Company began supplying customers in
California with electricity as an Electric Service Provider, or
ESP, under Direct Access rules. On September 20, 2001, the
California Public Utility Commission, or CPUC, issued a ruling
suspending the right of Direct Access. This suspension, although
permitting the Company to keep current direct access customers
and to solicit direct access customers served by other ESPs,
prohibits the Company from soliciting new non-DA customers
indefinitely.
Currently, several important issues are under review by the
CPUC, including a Resource Adequacy Requirement and a Renewable
Portfolio Standard. Additional costs to serve customers in
California are anticipated from these proceedings. However, the
CPUC decisions will determine the distribution of those costs
across all load serving entities and ultimately financial
impact, if any, on the Company.
Proposition 80, an initiative on the November 8, 2005
California special election ballot, would have banned
electricity customers from buying their power from a supplier
other than the LDC, except for those already doing so. This
initiative was defeated by the state electorate.
The current rate cap in Michigan on residential customers will
be lifted as of January 1, 2006. A primary component of the
rate increase is a shifting of rate responsibility away from
commercial customers, whose rates are likely to decrease in
January in spite of much higher wholesale energy costs. This may
have a negative impact on the Companys ability to retain
or acquire new commercial customers in the state.
F-18
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In California, the FERC and other regulatory and judicial bodies
continue to examine the behavior of market participants during
the California Energy Crisis of 2000 and 2001 and to recalculate
what market clearing prices should have or might have been under
alternative scenarios of behavior by market participants (see
Note 15).
There are no current rate cases or filings in the other states
that are anticipated to impact the Companys financial
results.
Natural
Gas
Currently, the Company actively markets natural gas in 13 LDC
markets within the 7 states of California, Georgia,
Maryland, Florida, Nevada, Ohio and Pennsylvania. Due to recent
and significant increases in the price of natural gas, a number
of LDCs have filed or communicated expectations of filing for
approval of rate increases to their customers. These filings are
not anticipated to adversely impact the Companys financial
results.
|
|
6.
|
Interest
Income and Expense
|
Interest income, net of interest expense, was $243, $1,140 and
$890 in fiscal 2007, 2006 and 2005, respectively. Interest
expense was $1,053 in fiscal 2007, due primarily to the
classification of a variety of fees, including letter of credit
costs as interest expense related to the Companys new
credit facility.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
101
|
|
|
$
|
|
|
|
$
|
74
|
|
State
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
122
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
122
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current provision is a result of the application of
Alternative Minimum Tax on that portion of our tax basis income
that statutorily cannot be offset by tax loss carryforwards.
A reconciliation of the federal statutory income tax rates to
the Companys effective income tax rates follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State income taxes, net of federal benefit
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in valuation allowance
|
|
|
(37.0
|
)
|
|
|
30.6
|
|
|
|
38.3
|
|
Permanent item
|
|
|
(.9
|
)
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
|
|
|
|
6.2
|
|
|
|
(3.6
|
)
|
Other
|
|
|
2.2
|
|
|
|
(1.8
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
2.2
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
760
|
|
|
$
|
586
|
|
Reserves and accruals
|
|
|
1,031
|
|
|
|
598
|
|
Net operating loss carryforwards
|
|
|
5,293
|
|
|
|
7,901
|
|
Allowance for doubtful accounts
|
|
|
1,991
|
|
|
|
2,025
|
|
Capital losses
|
|
|
730
|
|
|
|
730
|
|
Unrealized losses
|
|
|
2,529
|
|
|
|
1,056
|
|
AMT tax credit
|
|
|
348
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
12,682
|
|
|
|
13,122
|
|
Valuation allowance
|
|
|
(8,647
|
)
|
|
|
(9,578
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets, net
|
|
|
4,035
|
|
|
|
3,544
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(2,832
|
)
|
|
|
(2,017
|
)
|
State income taxes
|
|
|
(738
|
)
|
|
|
(946
|
)
|
Acquired intangibles
|
|
|
(465
|
)
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(4,035
|
)
|
|
|
(3,544
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance decrease equal to the net deferred tax
asset, has been provided as management believes it is more
likely than not that the Company will not realize the benefits
of the remaining net deferred tax asset at July 31, 2007.
The effective decrease in the valuation allowance for the fiscal
year 2007 was $931.
At July 31, 2007 the Company had net operating loss
carryforwards of approximately $9,660 and $12,762 for federal
and state income tax purposes, respectively, that begin to
expire in years 2018 and 2008, respectively. Of these losses,
$794 of the federal net operating loss carryforwards are subject
to an annual limitation due to the change of
ownership provision of the Tax Reform Act of 1986. As a
result of this annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to
reduce future income tax liabilities. The Company has also
incurred capital losses of $1,632 which are available to offset
capital gains generated by the Company. These losses begin to
expire in 2009.
|
|
8.
|
Income
(Loss) Per Common Share
|
Income (loss) per common share has been computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,531
|
|
|
$
|
(2,239
|
)
|
|
$
|
(6,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) Basic and Diluted
|
|
$
|
5,531
|
|
|
$
|
(2,239
|
)
|
|
$
|
(6,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average outstanding common shares Basic
|
|
|
29,906
|
|
|
|
30,419
|
|
|
|
30,946
|
|
Weighted-average of all diluted stock options after repurchase
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average outstanding common shares Diluted
|
|
|
30,044
|
|
|
|
30,419
|
|
|
|
30,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For fiscal 2007, 2006 and 2005, there were 6,983, 7,744 and
8,872, respectively, of common shares attributable to
outstanding stock options were excluded from the calculation of
diluted earnings per share because the effect of their inclusion
would have been anti-dilutive. For fiscal 2006 and 2005, assumed
in-the-money stock option exercises have been excluded in
computing the diluted loss per share as there was a net loss.
Their inclusion would reduce the loss per share and be
anti-dilutive. If the assumed exercises had been used, fully
diluted shares outstanding for fiscal 2006 and 2005 would have
been 30,594 and 31,299, respectively.
9. Accounts
Receivable, Net
Accounts receivable, net, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Billed
|
|
$
|
44,693
|
|
|
$
|
21,768
|
|
Unbilled
|
|
|
24,963
|
|
|
|
13,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,656
|
|
|
|
35,150
|
|
Less allowance for doubtful accounts
|
|
|
(4,425
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
65,231
|
|
|
$
|
30,650
|
|
|
|
|
|
|
|
|
|
|
The following schedules set forth the activity in the
Companys allowance for doubtful accounts for the reported
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance, beginning of year
|
|
$
|
4,500
|
|
|
$
|
5,498
|
|
|
$
|
3,193
|
|
Provisions charged to operations
|
|
|
4,169
|
|
|
|
2,813
|
|
|
|
3,092
|
|
Write-offs
|
|
|
(4,244
|
)
|
|
|
(3,811
|
)
|
|
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
4,425
|
|
|
$
|
4,500
|
|
|
$
|
5,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has granted security interests in its Michigan,
Texas and certain commercial and industrial (primarily in
Florida and California) accounts receivable as security for
payment of energy purchases. All the remaining accounts
receivable are pledged under the Companys $50 million
credit facility (see Note 4).
|
|
10.
|
Restricted
Cash and Energy Deposits
|
The Company has cash and energy deposits related to outstanding
letters of credit or cash deposited as collateral to secure
performance under energy purchase contracts as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Restricted cash investments pledged as collateral for letters of
credit to secure the purchase of energy and operating performance
|
|
$
|
10,457
|
|
|
$
|
17,117
|
|
Energy deposits pledged as collateral to secure the purchase of
energy
|
|
|
3,472
|
|
|
|
3,852
|
|
|
|
|
|
|
|
|
|
|
Total restricted cash, cash equivalents and energy deposits
|
|
$
|
13,929
|
|
|
$
|
20,969
|
|
|
|
|
|
|
|
|
|
|
The Company had $19,334 and $24,053 in outstanding letters of
credit at July 31, 2007 and 2006, respectively,
(Note 4).
F-21
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During fiscal 2005 the Company had three investments in
early-stage, energy related entities incurring operating losses,
which are expected to continue, at least in the near term:
Encorp, Inc. or Encorp, Turbocor B.V. or Turbocor and Power
Efficiency Corporation or PEC. At July 31, 2005, the
Company sold its interest in Turbocor for $2,000 resulting in a
gain of an equal amount. Each remaining company has limited
working capital and as a result, continuing operations will be
dependent upon their securing additional financing to meet their
respective capital needs until positive cash flow is achieved.
The Company has no obligation and currently no intention to
invest additional funds into these companies. The investments in
these companies have been reduced to nominal amounts.
|
|
12.
|
Property
and Equipment, Net
|
Property and equipment, net, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Information technology equipment, systems and software
|
|
$
|
11,662
|
|
|
$
|
4,965
|
|
Office furniture and equipment
|
|
|
1,342
|
|
|
|
1,056
|
|
Renewable energy assets
|
|
|
249
|
|
|
|
249
|
|
Leasehold improvements
|
|
|
317
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,570
|
|
|
|
6,411
|
|
Less: accumulated depreciation
|
|
|
(6,145
|
)
|
|
|
(4,417
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,425
|
|
|
|
1,994
|
|
Projects in progress (primarily technology systems and software)
|
|
|
1,237
|
|
|
|
3,872
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
$
|
8,662
|
|
|
$
|
5,866
|
|
|
|
|
|
|
|
|
|
|
The Companys retirement of the property and equipment was
insignificant for fiscal 2007.
Current accrued liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued legal expense
|
|
$
|
677
|
|
|
$
|
1,035
|
|
Energy taxes payable
|
|
|
1,319
|
|
|
|
688
|
|
Accrued energy related fees
|
|
|
843
|
|
|
|
1,759
|
|
Accrued compensation related expenses
|
|
|
2,455
|
|
|
|
665
|
|
Accrued audit fees
|
|
|
405
|
|
|
|
543
|
|
Other
|
|
|
2,431
|
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
8,130
|
|
|
$
|
5,867
|
|
|
|
|
|
|
|
|
|
|
Stock options granted after December 1999 will expire in October
2007 through March 2017.
The Companys 1999 Equity Incentive Plan or 1999 Plan,
which was approved by the Companys stockholders, initially
provided for the granting of up to 7,000 shares of Common
Stock. In addition, the Companys Board of Directors has
from time to time made individual grants of warrants or options
outside the 1999 Plan. In
F-22
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
January 2006, the Companys stockholders approved the 2006
Stock Incentive Plan or SIP, which provides for the issuance of
no more than 1,453 shares of Common Stock. In connection
with the adoption of the SIP, the Company has determined not to
make any additional awards under the 1999 Plan. At July 31,
2007, the Company had stock options, unexercised and
outstanding, that were granted under the 1999 Plan of
4,238 shares, SIP of 145 shares and 2,600 shares
outside the plan, respectively.
Stock option activity is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Fair Value of
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Average
|
|
|
Common
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Exercise Price
|
|
|
Stock
|
|
|
Balance at July 31, 2004
|
|
|
10,307
|
|
|
$
|
0.05 - $3.75
|
|
|
$
|
2.26
|
|
|
|
|
|
Options granted(1)
|
|
|
850
|
|
|
|
1.92 - 3.50
|
|
|
|
2.43
|
|
|
$
|
2.43
|
|
Options exercised
|
|
|
(102
|
)
|
|
|
0.50 - 1.92
|
|
|
|
1.92
|
|
|
|
|
|
Options cancelled
|
|
|
(1,881
|
)
|
|
|
1.92 - 2.50
|
|
|
|
2.18
|
|
|
|
|
|
Options expired
|
|
|
(302
|
)
|
|
|
1.86 - 2.75
|
|
|
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2005
|
|
|
8,872
|
|
|
$
|
0.05 - $3.75
|
|
|
$
|
2.24
|
|
|
|
|
|
Options granted(2)
|
|
|
570
|
|
|
|
1.17 - 1.80
|
|
|
|
1.65
|
|
|
$
|
1.65
|
|
Options exercised
|
|
|
(221
|
)
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
|
|
Options forfeited
|
|
|
(50
|
)
|
|
|
3.50
|
|
|
|
3.50
|
|
|
|
|
|
Options expired
|
|
|
(1,427
|
)
|
|
|
1.00 - 2.08
|
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006
|
|
|
7,744
|
|
|
$
|
1.00 - $3.75
|
|
|
$
|
2.32
|
|
|
|
|
|
Options granted(3)
|
|
|
45
|
|
|
|
2.56
|
|
|
|
2.56
|
|
|
$
|
2.56
|
|
Options exercised
|
|
|
(535
|
)
|
|
|
1.86 - 2.75
|
|
|
|
2.24
|
|
|
|
|
|
Options cancelled
|
|
|
(171
|
)
|
|
|
1.68 - 3.75
|
|
|
|
2.59
|
|
|
|
|
|
Options expired
|
|
|
(100
|
)
|
|
|
2.50
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007
|
|
|
6,983
|
|
|
$
|
1.00 - $3.75
|
|
|
$
|
2.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Options were granted with exercise prices greater than the fair
value of the Common Stock at respective dates of grant.
|
|
(2)
|
|
150 options were granted with exercise prices equal to, and 420
options were granted with exercise prices greater than, the fair
value of the Common Stock at respective dates of grant.
|
|
(3)
|
|
Options were granted with exercise price equal to the fair value
of the Common Stock at the date of grant.
|
The weighted average characteristics of stock options
outstanding as of July 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Contractual
|
|
|
Shares
|
|
|
Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$1.00 - $2.08
|
|
|
2,635
|
|
|
|
6.2
|
|
|
|
2,535
|
|
|
$
|
1.85
|
|
$2.50 - $2.50
|
|
|
2,700
|
|
|
|
2.4
|
|
|
|
2,700
|
|
|
|
2.50
|
|
$2.56 - $3.75
|
|
|
1,648
|
|
|
|
2.2
|
|
|
|
1,603
|
|
|
|
2.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,983
|
|
|
|
3.8
|
|
|
|
6,838
|
|
|
$
|
2.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During July 2005, the Company accelerated the vesting of 1,300
out-of-the-money options to reduce expected future reported
expense under FASB Statement No. 123R Share-Based
Payments.
Stock
Options Granted to the Companys Former Chairman and Chief
Executive Officer
On April 21, 2005, the Company entered into a Confidential
Settlement Agreement and General Release (the Settlement
Agreement) with director and former Chief Executive
Officer, Ian B. Carter. The Settlement Agreement provides for
payments to Mr. Carter totaling $3,000. In addition,
Mr. Carter retains an option to purchase 2,500 shares
of the Common Stock at $2.50 per share.
|
|
15.
|
Commitments
and Contingencies
|
Commitments
Employment
Contract Commitments
In August 2005, the Company entered into an employment agreement
with its Chief Executive Officer, Steven S. Boss, which was
amended in January 2007. Mr. Boss will receive an
annualized base salary of $412, with an incentive bonus between
50% and 150% of base salary. Mr. Boss was granted an option
to purchase 300 shares of the Companys common stock
at an exercise price equal to $1.80 per share, with vesting as
to 100 shares upon hire and as to 100 shares on each
of the first two anniversaries thereafter. Mr. Boss was
also granted 200 shares of restricted stock, which vest as
to 50 shares on the first anniversary of hire and, as
amended, as to 75 shares upon the achievement of
performance targets and upon the date of filing the
Companys annual report on
Form 10-K
for fiscal years 2007 and 2008, respectively. The agreement
provides that if Mr. Boss is terminated without cause or if
he resigns for good reason, Mr. Boss will be entitled to
severance equal to 12 months of his then current base
salary payable over a
12-month
period, plus 12 months accelerated vesting of outstanding
unvested stock options and restricted stock. In the event of a
change of control of the Company, Mr. Boss may resign for
good reason, as defined under the agreement, within
180 days after the change of control.
In December 2005, the Company entered into an employment
agreement with its former Chief Financial Officer, Lawrence
Clayton, Jr., which was amended in January 2007,
Mr. Clayton was to receive an annualized base salary of
$275, and be eligible to receive an incentive bonus if the
Company reaches certain financial objectives. Mr. Clayton
was granted an option to purchase 120 shares of Common
Stock at an exercise price equal to $1.80 per share, with
vesting as to 40 shares on each of the first three
anniversaries after the date of grant. Mr. Clayton was also
granted 45 shares of restricted stock, which vest as to
15 shares on first anniversary after the date of hire, and,
as amended, as to 15 shares upon achievement of performance
targets and upon the date of filing the Companys annual
report on
Form 10-K
for fiscal 2007 and 2008, respectively. The agreement provides
that, if Mr. Clayton is terminated without cause or if he
resigns for good reason, Mr. Clayton will be entitled to
severance equal to 12 months of his then current base
salary payable over a
6-month
period beginning on the six-month anniversary of the termination
date, plus 12 months accelerated vesting of outstanding
unvested stock options and restricted stock. In the event of a
change of control of the Company, Mr. Clayton may resign
for good reason, as defined under the agreement, within
180 days after the change of control. Mr. Clayton was
terminated in July 2007, and as a result his unvested stock
options were cancelled and we have remitted payment for the
repurchase of 30,000 shares of unvested restricted stock.
The closing of the repurchase transaction is pending the
resolution of the current employment dispute between
Mr. Clayton and the Company. The Company does not believe
it has any further financial obligations to Mr. Clayton.
In May 2005, the Company entered into an employment letter
agreement with Thomas L. Ulry, our Senior Vice President of
Sales and Marketing. The agreement provided for an annual base
salary of $228 and a grant of options to purchase
100 shares of our common stock at an exercise price of
$3.50 per share, vesting equally over four years. If the Company
terminates Mr. Ulry without cause, he would be entitled to
six months salary. On October 19, 2006 the Company
increased Mr. Ulrys annual base salary $25,000
effective October 1, 2006 and awarded Mr. Ulry a
$25,000 discretionary bonus.
F-24
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2007, the Company entered into an employment agreement
with its former Senior Vice President and General Counsel, Erik
A. Lopez, Sr. Mr. Lopez was to receive an annualized
base salary of $265, and be eligible to participate in the
Companys bonus program beginning with fiscal 2007.
Mr. Lopez was granted an option to purchase 45 shares
of Common Stock at an exercise price equal to $2.56 per share,
with vesting as to 15 shares on each of the first three
anniversaries after the date of grant. Mr. Lopez was also
granted 60 shares of restricted stock, vesting as to
20 shares on each of the first three anniversaries after
the date of grant. The agreement provides that, if
Mr. Lopez is terminated without cause or if he resigns for
good reason, Mr. Lopez will be entitled to severance equal
to 12 months of his then current base salary payable as to
50% of such amount six months after the termination date and the
balance paid in equal monthly installments thereafter, plus
12 months accelerated vesting of outstanding unvested stock
options and restricted stock. In the event of a change of
control of the Company, Mr. Lopez may resign for good
reason, as defined under the agreement, within 180 days
after the change of control. Mr. Lopez resigned from the
Company effective October 5, 2007.
Purchase
Commitments
As of September 20, 2007, the Company has entered into a
series of supply contracts to purchase electricity and natural
gas covering approximately 78% of the customers
fixed-price load requirements for peak period electricity, and
68% of fixed price natural gas requirements for fiscal 2008
based on the Companys forecasts. As of July 31, 2007,
the Company is committed to purchase fixed-price electricity and
natural gas of $44,300 and $18,800, respectively, during fiscal
2008.
Letters
of Credit and Surety Bonds
The Company has, as of July 31, 2007, Letters of Credit
totaling $19.3 million and surety bonds issued of
$7.8 million.
Operating
Leases
The Company leases its facilities as well as certain equipment
under operating leases. Certain of these operating leases are
non-cancelable and contain rent escalation clauses relating to
any increases to real property taxes and maintenance costs. The
Company incurred aggregate rent expense under operating leases
of $1,185, $1,255 and $1,191, in fiscal 2007, 2006 and 2005,
respectively.
The future aggregate minimum lease payments under operating
lease agreements in existence at July 31, 2007 are as
follows:
|
|
|
|
|
Fiscal Year Ending July 31,
|
|
|
|
|
2008
|
|
$
|
1,289
|
|
2009
|
|
|
445
|
|
2010 and after
|
|
|
171
|
|
|
|
|
|
|
|
|
$
|
1,905
|
|
|
|
|
|
|
Employee
Benefit Plan
The Company has a 401(k) retirement plan in which substantially
all full-time employees may participate. The Company contributes
$0.50 for each dollar of employee contribution up to a maximum
employer contribution of 3% of each participants annual
salary. The maximum employer contribution of 3% corresponds to
an employee contribution of 6% of annual salary. Employer
contributions totaled $260, $220 and $213 for the fiscal years
ending July 31, 2007, 2006 and 2005, respectively.
Employee
Stock Purchase Plan
In January 2006, the Board of Directors approved the Amended and
Restated 2005 Employee Stock Purchase Plan or ESPP. The Company
implemented the ESPP in July 2006. The ESPP provides for
eligible employees to
F-25
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purchase Common Stock through payroll deductions. The ESPP
allows employees to elect to purchase Common Stock each month in
an amount not to exceed an annual rate of accrual of $25 per
calendar year in fair value of Common Stock at the lower of the
first or last days closing price for each months
offering period, less a discount of 15%. There are other
restrictions and limitations and the ESPP is intended to comply
with Section 423 of the Internal Revenue Code, which allows
employees to buy Common Stock at a discount on a tax-favored
basis. The Company purchases the required shares of stock in the
open market and records expense for the difference between the
amount contributed by the employees and its cost of the stock.
For fiscal year 2007, 49 shares have been purchased by
employees under the ESPP.
2006
Stock Incentive Plan
At the 2005 annual meeting of our stockholders, the
Companys stockholders approved the 2006 Stock Incentive
Plan or the SIP. The SIP allows grants pursuant to a variety of
awards, including options, share appreciation rights, restricted
shares, restricted share units, deferred share units and
performance-based awards in the form of stock appreciation
rights, deferred shares and performance units. The SIP provides
that no more than 1,453 shares of the Companys common
stock may be issued pursuant to Awards under the SIP;
988 shares remain available under the Plan at July 31,
2007. Awards under the SIP may be made to key employees and
directors of the Company or any of its subsidiaries whose
participation in the SIP is determined to be in the best
interests of the Company by the Compensation Committee of the
Board of Directors (see Note 14).
Regulatory
Proceedings
The Company is an independent energy marketer of retail electric
power and natural gas to residential, commercial and industrial
customers across numerous states. Market rules and regulations
locally, regionally and state to state change periodically.
These changes will likely have an impact upon our business; some
may be material and others may not. Some changes may lead to new
or enhanced business opportunities, some changes may result in a
negative impact to our business. As such, there is no way to
impute an exact effect through a cost benefit analysis, because
there are many variables.
The regulatory process does allow for some participation, and
the Company engages in that participation, however, such
participation provides no assurance as to the outcome of such
proceedings.
The Company is not currently under any enforcement action.
However, the Company is a party to a number of Federal Energy
Regulatory Commission or FERC and California ISO proceedings
related to the California Energy Crisis of 2000 and 2001. The
FERC and other regulatory judicial bodies continue to examine
the behavior of market participants during that energy crisis
and may recalculate what market clearing prices should have or
might have been under alternative scenarios of behavior by
market participants. In the event the historical costs of market
operations were to be reallocated among market participants, the
Company can not predict whether the results would be favorable
or unfavorable for the Company, nor can it predict the amount of
any such adjustments.
Litigation
The current status of previously reported legal proceedings
involving the Company is as follows:
ACN
On February 24, 2006, American Communications Network, or
ACN, had delivered to the Company an arbitration demand claim,
alleging that Commerce Energy, Inc. was liable for significant
actual, consequential and punitive damages and restitution on a
variety of causes of action including anticipatory breach of
contract, unjust enrichment, tortuous interference with
prospective economic advantage and prima facie tort with respect
to alleged future commissions arising after their termination of
the Sales Agency Agreement effective February 9, 2006. ACN,
Commerce Energy, Inc. and the Company entered into the Sales
Agency Agreement in connection with the
F-26
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys purchase of certain assets of ACN and certain of
its subsidiaries in February 2005. This claim was delivered via
mail to the Company but was not filed with the American
Arbitration Association (AAA).
On March 23, 2006, the Company filed a Demand for
Arbitration with the AAA in New York of this dispute with ACN
asserting claims for declaratory relief, material breach of
contract and breach of the implied covenant of good faith and
fair dealing. This Demand for Arbitration seeks compensatory
damages in an amount to be determined at the arbitration. On
May 4, 2006, ACN filed with the AAA in New York its Demand
for Arbitration of this dispute with Commerce Energy, Inc. In
its Demand, ACN alleges claims against Commerce Energy, Inc. for
breach of contract and breach of implied duty of good faith and
fair dealing, seeking damages and restitution in amounts to be
determined at the hearing.
On June 11, 2007, the Company, Commerce Energy, Peter
Weigand, an individual, and ACN, entered into a Settlement
Agreement and Mutual Release or the Settlement Agreement.
Pursuant to the Settlement Agreement, Commerce and ACN mutually
released all claims against one another, and Commerce made a
cash payment of $3.9 million to ACN. In addition, the
Company, Commerce Energy and ACN have filed with the American
Arbitration Association a Stipulation to Dismiss All Claims with
Prejudice relating to the pending arbitration proceeding between
the Company, Commerce Energy and ACN, Case No. 13 198 Y
00688 06. Pursuant to the Settlement Agreement, the Company and
Commerce Energy have no future financial or other obligations to
ACN, other than customary covenants set forth in the Settlement
Agreement.
California
Refund Case
During 2000 and 2001, we bought, sold and scheduled power in the
California wholesale energy markets through the markets and
services of APX, Inc. (APX). As a result of a
complaint filed at FERC by San Diego Gas and Electric Co.
in August 2000 and a line of subsequent FERC orders, we became
involved in proceedings at FERC related to sales and schedules
in the California Power Exchange Corporation, or PX, and the
California Independent System Operator Corporation, or CAISO,
markets, Docket
No. EL00-95;
which we refer to as the California Refund Case. A part of that
proceeding related to APXs involvement in those markets.
On January 5, 2007, APX, we and certain other parties, whom
we refer to as the Settling Parties, signed an APX Settlement
and Release of Claims Agreement, or the APX Settlement
Agreement, and filed such agreement along with a Joint Offer of
Settlement and Motion for Expedited Consideration with FERC in
the California Refund Case. The APX Settlement Agreement, among
other things, established a mechanism for allocating refunds
owed to APX and to resolve certain other matters and claims
related to APXs participation in the PX and CAISO
centralized spot markets for wholesale electricity from
May 1, 2000 through June 20, 2001. The APX Settlement
Agreement became effective on March 1, 2007.
Under the APX Settlement Agreement, several Settling Parties are
entitled to payments from APX, with Commerce expected to receive
up to approximately $6,500. We received $5,100 of the settlement
payment in April 2007 and received the remaining $1,400 in
August 2007. By entering into the APX Settlement Agreement,
claims against us by any party to the APX Settlement Agreement
for refunds, disgorgement of profits or other monetary or
non-monetary remedies for APX-related claims shall be deemed
resolved with prejudice and settled insofar as APX remains a net
payment recipient (as that term is defined in the APX Settlement
Agreement) in the proceeding at FERC.
In addition, the APX Settlement Agreement resolves and
terminates certain disputes pending before FERC and the United
States Court of Appeals for the Ninth Circuit relating to
APXs actions in the PX and CAISO centralized spot markets
for wholesale electricity, as well as disputes among
participants in the APX market and the appropriate allocation of
monies due among the APX participants insofar as APX continues
to be a net refund recipient (as that term is defined in the APX
Settlement Agreement) during the settlement period.
The Settlement Agreement is subject to possible court review. We
could be required to return or redistribute some or all of the
funds received under the Settlement Agreement.
F-27
COMMERCE
ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Lawrence
Clayton, Jr.
On August 5, 2007, we received a statement of claims
against us, which also references certain of our officers and
directors, on behalf of Lawrence Clayton, Jr., the former Senior
Vice President, Chief Financial Officer and Secretary of the
Company, in connection with Mr. Claytons termination
on July 25, 2007. In his statement of claims,
Mr. Clayton disputes the basis for his termination. The
principal relief sought by Mr. Clayton is a lump sum
payment of approximately $1.6 million. In accordance with
the dispute resolution procedure set forth in his employment
agreement with the Company, a mediator has been selected for the
resolution of this dispute and a mediation session has been
scheduled to be held in November 2007. In the event that the
mediation is not successful, the parties have agreed to binding
arbitration pursuant to the Employment Dispute Rules of Judicial
Arbitration and Mediation Services, Inc. We believe that no
severance payments or other obligations were due to
Mr. Clayton upon his termination and the Company has not
accrued for such payments or any other
litigation-related
amounts. We intend to vigorously defend Mr. Claytons
claims.
The Company currently, and from time to time may become,
involved in litigation concerning claims arising out of the
operations in the normal course of business. The Company is
currently not involved in any legal proceedings including the
above-referenced claims raised by Mr. Clayton, that are
expected, individually or in the aggregate, to have a material
adverse effect on the Companys results of operations or
financial position.
|
|
16.
|
Quarterly
Financial Information (Unaudited)
|
The following is the Companys quarterly financial
information for fiscal 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
July 31
|
|
|
April 30
|
|
|
January 31
|
|
|
October 31
|
|
|
Year ended July 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
371,614
|
|
|
$
|
107,888
|
|
|
$
|
100,575
|
|
|
$
|
92,644
|
|
|
$
|
70,507
|
|
Direct energy costs
|
|
|
314,371
|
|
|
|
92,862
|
|
|
|
82,946
|
|
|
|
78,112
|
|
|
|
60,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57,243
|
|
|
|
15,026
|
|
|
|
17,629
|
|
|
|
14,532
|
|
|
|
10,056
|
|
Net income
|
|
|
5,531
|
|
|
|
1,065
|
|
|
|
1,543
|
|
|
|
2,539
|
|
|
|
384
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.18
|
|
|
|
0.04
|
|
|
|
0.05
|
|
|
|
0.09
|
|
|
|
0.01
|
|
Diluted
|
|
|
0.18
|
|
|
|
0.03
|
|
|
|
0.05
|
|
|
|
0.09
|
|
|
|
0.01
|
|
Year ended July 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
247,080
|
|
|
$
|
52,303
|
|
|
$
|
57,755
|
|
|
$
|
72,654
|
|
|
$
|
64,368
|
|
Direct energy costs
|
|
|
218,289
|
|
|
|
43,626
|
|
|
|
49,643
|
|
|
|
68,892
|
|
|
|
56,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,791
|
|
|
|
8,677
|
|
|
|
8,112
|
|
|
|
3,762
|
|
|
|
8,240
|
|
Net income (loss)
|
|
|
(2,239
|
)
|
|
|
651
|
|
|
|
1,002
|
|
|
|
(4,112
|
)
|
|
|
220
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.07
|
)
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
(0.13
|
)
|
|
|
0.01
|
|
Year ended July 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
253,853
|
|
|
$
|
65,831
|
|
|
$
|
68,478
|
|
|
$
|
61,048
|
|
|
$
|
58,496
|
|
Direct energy costs
|
|
|
225,671
|
|
|
|
60,930
|
|
|
|
60,767
|
|
|
|
52,639
|
|
|
|
51,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,182
|
|
|
|
4,901
|
|
|
|
7,711
|
|
|
|
8,409
|
|
|
|
7,161
|
|
Net loss
|
|
|
(6,114
|
)
|
|
|
(2,405
|
)
|
|
|
(1,319
|
)
|
|
|
(2,342
|
)
|
|
|
(48
|
)
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.20
|
)
|
|
|
(0.08
|
)
|
|
|
(0.04
|
)
|
|
|
(0.08
|
)
|
|
|
(0.00
|
)
|
F-28
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Commerce
Energy Group, Inc., previously filed with the SEC on
July 6, 2004 as Exhibit 3.3 to Commerce Energy Group,
Inc.s Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
3
|
.2
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock of Commerce Energy Group, Inc. dated
July 1, 2004, previously filed with the SEC on July 6,
2004 as Exhibit 3.4 to Commerce Energy Group, Inc.s
Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of Commerce Energy Group, Inc.,
previously filed with the SEC on July 6, 2004 as
Exhibit 3.6 to Commerce Energy Group, Inc.s
Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
4
|
.1
|
|
Rights Agreement, dated as of July 1, 2004, entered into
between Commerce Energy Group, Inc. and Computershare
Trust Company, as rights agent, previously filed with the
SEC on July 6, 2004 as Exhibit 10.1 to Commerce Energy
Group, Inc.s Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
4
|
.2
|
|
Form of Rights Certificate, previously filed with the SEC on
July 6, 2004 as Exhibit 10.2 to Commerce Energy Group,
Inc.s Registration Statement on
Form 8-A
and incorporated herein by reference.
|
|
Material Contracts Relating to Management Compensation Plans
or Arrangements
|
|
10
|
.1
|
|
Commonwealth Energy Corporation 1999 Equity Incentive Plan,
previously filed with the SEC on October 8, 2003 as
Exhibit 4.1 to Commonwealth Energy Corporations
Registration Statement on
Form S-8
and incorporated herein by reference.
|
|
10
|
.2
|
|
Form of Stock Option Agreement pursuant to Commonwealth Energy
Corporation 1999 Equity Incentive Plan, previously filed with
the SEC on November 15, 2004 as Exhibit 10.9 to
Commerce Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.3
|
|
Commerce Energy Group, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC on February 1, 2006 as
Exhibit 99.2 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.4
|
|
Form of a Stock Option Award Agreement for U.S. Employees
pursuant to the Commerce Energy Group, Inc. 2006 Stock Incentive
Plan, previously filed with the SEC on April 20, 2006 as
Exhibit 4.10 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.5
|
|
Form of a Non-Qualified Stock Option Agreement for Non-Employee
Directors pursuant to the Commerce Energy Group, Inc. 2006 Stock
Incentive Plan, previously filed with the SEC on April 20,
2006 as Exhibit 4.11 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.6
|
|
Form of a Restricted Share Award Agreement for U.S. Employees
pursuant to the Commerce Energy Group, Inc. 2006 Stock Incentive
Plan, previously filed with the SEC on April 20, 2006 as
Exhibit 4.12 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.7
|
|
Form of a Restricted Share Unit Award Agreement pursuant to the
Commerce Energy Group, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.14 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.8
|
|
Form of a SAR Award Agreement pursuant to the Commerce Energy
Group, Inc. 2006 Stock Incentive Plan, previously filed with the
SEC on April 20, 2006 as Exhibit 4.15 to Commerce
Energy Group, Inc.s Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.9
|
|
Form of Performance Unit and Performance Stock Award pursuant to
the Commerce Energy Group, Inc. 2006 Stock Incentive Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.16 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.10
|
|
Form of Deferral Election Agreement for Deferred Share Units to
the Commerce Energy Group, Inc. pursuant to the Commerce Energy
Group, Inc. 2006 Stock Incentive Plan, previously filed with the
SEC on April 20, 2006 as Exhibit 4.17 to Commerce
Energy Group, Inc.s Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.11
|
|
Amended and Restated Form of Non-Qualified Stock Option Award
Agreement (for Non-Employee Directors) pursuant to the Commerce
Energy Group, Inc. 2006 Stock Incentive Plan, previously filed
with the SEC on May 18, 2006 as Exhibit 99.2 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.12
|
|
Form of Restricted Share Award Agreement (for Non-Employee
Directors) pursuant to the Commerce Energy Group, Inc. 2006
Stock Incentive Plan, previously filed with the SEC on
April 20, 2006 as Exhibit 4.13 to Commerce Energy
Group, Inc.s Registration Statement on
Form S-8
(File
No. 333-133442)
filed with the SEC on April 20, 2006 and incorporated
herein by reference.
|
|
10
|
.13
|
|
Form of Restricted Share Award Agreement (for Non-Employee
Directors) pursuant to the Commerce Energy Group, Inc. 2006
Stock Incentive Plan, Initial Grant, previously filed with the
SEC on May 18, 2006 as Exhibit 99.4 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.14
|
|
Commerce Energy Group, Inc. Amended and Restated 2005 Employee
Stock Purchase Plan, previously filed with the SEC on
February 1, 2006 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.15
|
|
Form of Subscription Agreement for the Commerce Energy Group,
Inc. Amended and Restated 2005 Employee Stock Purchase Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.7 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference.
|
|
10
|
.16
|
|
Form of Notice of Withdrawal for the Commerce Energy Group, Inc.
Amended and Restated 2005 Employee Stock Purchase Plan,
previously filed with the SEC on April 20, 2006 as
Exhibit 4.8 to Commerce Energy Group, Inc.s
Registration Statement on
Form S-8
(File
No. 333-133442)
and incorporated herein by reference
|
|
10
|
.17
|
|
Commerce Energy Group, Inc. Bonus Program, effective
January 25, 2007, previously filed with the SEC on
January 31, 2007 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.18
|
|
Commerce Energy Group, Inc. Bonus Program as amended by first
amendment, effective March 27, 2007, previously filed with
the SEC on June 14, 2007 as Exhibit 10.7 to Commerce
Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.19
|
|
Commerce Energy Group, Inc. Amended and Restated Non-Employee
Director Compensation Policy, effective January 27, 2006,
previously filed with the SEC on February 1, 2006 as
Exhibit 99.3 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.20
|
|
Commerce Energy Group, Inc. Amended and Restated Non-Employee
Director Compensation Policy, effective May 12, 2006,
previously filed with the SEC on May 18, 2006 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.21
|
|
Commerce Energy Group, Inc. Amended and Restated Non-Employee
Director Compensation Policy, effective January 25, 2007,
previously filed with the SEC on January 31, 2007 as
Exhibit 99.6 to Commerce Energy Group Inc.s Current Report
on Form
8-K
and incorporated herein by reference.
|
|
10
|
.22
|
|
Stock Option Agreement dated as of August 29, 2003 between
Robert C. Perkins and Commonwealth Energy Corporation,
previously filed with the SEC on November 15, 2004 as
Exhibit 10.13 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.23
|
|
Stock Option Agreement dated as of August 29, 2003 between
Robert C. Perkins and Commonwealth Energy Corporation,
previously filed with the SEC on November 15, 2004 as
Exhibit 10.14 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.24
|
|
Indemnification Agreement dated as of November 1, 2000
between Commonwealth Energy Corporation and Ian B. Carter, with
Schedule attached thereto of other substantially identical
Indemnification Agreements, which differ only in the respects
set forth in such Schedule, previously filed with the SEC on
November 15, 2004 as Exhibit 10.16 to Commerce Energy
Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.25
|
|
Indemnification Agreement dated as of July 1, 2004 between
Commerce Energy Group, Inc. and Ian Carter, with Schedule
attached thereto of other substantially identical
Indemnification Agreements, which differ only in the respects
set forth in such Schedule, previously filed with the SEC on
November 15, 2004 as Exhibit 10.17 to Commerce Energy
Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.26
|
|
Confidential Settlement Agreement and General Release dated as
of April 21, 2005 by and among Ian B. Carter, Commerce
Energy, Inc. and Commerce Energy Group, Inc., previously filed
with the SEC on April 22, 2005 as Exhibit 10.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.27
|
|
Stock Option Agreement dated April 29, 2005 by and between
Ian B. Carter and Commerce Energy Group, Inc., previously filed
with the SEC on October 31, 2005 as Exhibit 10.33 to
Commerce Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.28
|
|
Executive Employment Agreement dated April 1, 2004 between
Commonwealth Energy Corporation, Commerce Energy Group, Inc. and
Peter Weigand, previously filed with the SEC on April 5,
2004 as Exhibit 10.6 to Amendment No. 3 to Commerce
Energy Groups Registrants Statement on
Form S-4
and incorporated herein by reference.
|
|
10
|
.29
|
|
Amendment No. 1 to Executive Employment Agreement dated
November 17, 2005, by and among Commerce Energy Group,
Inc., Commerce Energy, Inc. and Peter Weigand, previously filed
with the SEC on November 23, 2005 as Exhibit 99.4 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.30
|
|
Settlement Agreement and General Release dated November 17,
2005 by and among Peter Weigand, Commerce Energy Group, Inc. and
Commerce Energy, Inc., previously filed with the SEC on
November 23, 2005 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.31
|
|
Executive Employment Agreement dated April 1, 2004 between
Commonwealth Energy Corporation, Commerce Energy Group, Inc. and
Richard L. Boughrum, previously filed with the SEC on
April 5, 2004 as Exhibit 10.7 to Amendment No. 3
to Commerce Energy Groups Registrants Statement on
Form S-4
and incorporated herein by reference.
|
|
10
|
.32
|
|
Amendment No. 1 to Executive Employment Agreement dated
November 17, 2005, by and among Commerce Energy Group,
Inc., Commerce Energy, Inc. and Richard L. Boughrum, previously
filed with the SEC on November 23, 2005 as
Exhibit 99.11 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.33
|
|
Settlement Agreement and General Release dated November 17,
2005 by and among Richard L. Boughrum, Commerce Energy Group,
Inc. and Commerce Energy, Inc., previously filed with the SEC on
November 23, 2005 as Exhibit 99.8 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.34
|
|
Employment Offer Letter Agreement between Commerce Energy Group,
Inc. and Thomas Ulry dated May 31, 2005, previously filed
with the SEC on October 31, 2005 as Exhibit 10.30 to
Commerce Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference
|
|
10
|
.35
|
|
Letter from Thomas Ulry to Commerce Energy Group, Inc. dated
October 28, 2005 regarding the May 31, 2005 Employment
Offer Letter Agreement, previously filed with the SEC on
October 31, 2005 as Exhibit 10.31 to Commerce Energy
Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.36
|
|
Settlement Agreement and General Release dated November 17,
2005, by and among Commerce Energy Group, Inc., Commerce Energy,
Inc. and Eric Alam, previously filed with the SEC on
November 23, 2005 as Exhibit 99.13 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.37
|
|
Agreement and Release dated November 17, 2005, by and
among, Commerce Energy Group, Inc., Commerce Energy, Inc., Paul,
Hastings, Janofsky & Walker LLP, Eric Alam, Bruno
Kvetinskas, Greg Lander and Peter Weigand, previously filed with
the SEC on November 23, 2005 as Exhibit 99.7 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.38
|
|
Executive Employment Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.39
|
|
Amendment No. 1 to Employment Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Steven S. Boss, previously filed with the SEC on
January 31, 2007 as Exhibit 99.2 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.40
|
|
Stock Option Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.2 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.41
|
|
Restricted Stock Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.3 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.42
|
|
Amendment No. 1 to Restricted Stock Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Steven S. Boss, previously filed with the SEC on
January 31, 2007 as Exhibit 99.3 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference
|
|
10
|
.43
|
|
Indemnification Agreement dated August 1, 2005 between
Commerce Energy Group, Inc. and Steven S. Boss, previously filed
with the SEC on August 2, 2005 as Exhibit 10.4 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.44
|
|
Employment Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.45
|
|
Amendment No. 1 to Employment Agreement dated
November 30, 2006, by and between Commerce Energy Group,
Inc. and Lawrence Clayton, Jr., previously filed with the SEC on
March 19, 2007 as Exhibit 10.1 to Commerce Energy
Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.46
|
|
Amendment No. 2 to Employment Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Lawrence Clayton, Jr., previously filed with the SEC on
January 31, 2007 as Exhibit 99.4 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.47
|
|
Stock Option Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.2 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.48
|
|
Restricted Stock Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.3 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.49
|
|
Amendment No. 1 to Restricted Stock Agreement dated
January 25, 2007 by and between Commerce Energy Group, Inc.
and Lawrence Clayton, Jr., previously filed with the SEC on
January 31, 2007 as Exhibit 99.5 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.50
|
|
Indemnification Agreement dated December 1, 2005 between
Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
previously filed with the SEC on December 6, 2005 as
Exhibit 99.4 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.51
|
|
Settlement Agreement and General Release by and among Andrew V.
Coppola, Commerce Energy, Inc. and Commerce Energy Group, Inc.,
previously filed with the SEC on April 18, 2006 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.52
|
|
Employment Agreement dated March 26, 2007 between Commerce
Energy Group, Inc. and Erik A. Lopez, Sr., previously filed with
the SEC on June 14, 2007 as Exhibit 10.3 to Commerce
Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.53
|
|
Amendment No. 1 to Employment Agreement dated
October 5, 2007 by and between Commerce Energy Group, Inc.
and Erik A. Lopez, Sr.
|
|
10
|
.54
|
|
Stock Option Award Agreement dated March 27, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
filed with the SEC on June 14, 2007 as Exhibit 10.5 to
Commerce Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.55
|
|
Restricted Share Award Agreement dated March 27, 2007
between Commerce Energy Group, Inc. and Erik A. Lopez, Sr.,
previously filed with the SEC on June 14, 2007 as
Exhibit 10.5 to Commerce Energy Group, Inc.s
Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.56
|
|
Indemnification Agreement dated March 26, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
filed with the SEC on June 14, 2007 as Exhibit 10.4 to
Commerce Energy Group, Inc.s Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.57
|
|
Separation Agreement and General Release dated October 5,
2007 by and between Commerce Energy Group, Inc. and Erik A.
Lopez, Sr.
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.58
|
|
Interim Executive Services Agreement by and between Commerce
Energy Group, Inc. and Tatum, LLC regarding J. Robert Hipps
dated July 25, 2007, previously filed with the SEC on
July 27, 2007 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference
|
|
10
|
.59
|
|
Indemnification Agreement between Commerce Energy Group, Inc.
and J. Robert Hipps dated July 25, 2007, previously filed
with the SEC on July 27, 2007 as Exhibit 99.2 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
Other Material Contracts
|
|
|
|
|
|
|
10
|
.60
|
|
Registration Rights Agreement by and among Commonwealth Energy
Corporation and the holders of Skipping Stone Inc. common stock
dated March 29, 2004, previously filed with the SEC on
April 5, 2004 as Exhibit 2.5 to Amendment No. 3
to Commerce Energy Group, Inc.s Registration Statement on
Form S-4
and incorporated herein by reference.
|
|
10
|
.61
|
|
Consent to Sublease and Sublease Agreement dated May 28,
2004 between E*Trade Consumer Finance Corporation and
Commonwealth Energy Corporation, previously filed with the SEC
on November 15, 2004 as Exhibit 10.25 to Commerce
Energy Group, Inc.s Annual Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.62
|
|
Agreement To Provide QSE and Marketing Services dated
August 1, 2005 between Commerce Energy, Inc. and Tenaska
Power Services Co.
|
|
10
|
.63
|
|
Security Agreement dated August 1, 2005 between Commerce
Energy, Inc. and Tenaska Power Services Co.
|
|
10
|
.64
|
|
Blocked Account Control Agreement (with Lockbox Services) dated
August 2005 by and among Commerce Energy, Inc., Tenaska Power
Services Co. and U.S. Bank National Association Depository Bank.
|
|
10
|
.65
|
|
Master Power Purchase and Sale Agreement dated August 1,
2005 between Commerce Energy, Inc. and Tenaska Power Services Co.
|
|
10
|
.66
|
|
Guaranty Agreement dated August 1, 2005 by Commerce Energy
Group, Inc. in favor of Tenaska Power Services Co.
|
|
10
|
.67
|
|
First Amendment to Security Agreement between Commerce Energy,
Inc. and Tenaska Power Services Co., effective as of
March 7, 2006.
|
|
10
|
.68
|
|
Loan and Security Agreement by and among Commerce Energy, Inc.,
as Borrower, and Commerce Energy Group, Inc., as Guarantor, and
Wachovia Capital Finance Corporation (Western), as Agent, and
the Lenders From Time to Time Party Thereto, as Lenders, dated
June 8, 2006, previously filed with the SEC on
June 12, 2006 as Exhibit 99.1 to Commerce Energy
Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.69
|
|
Guaranty dated June 8, 2006 by Commerce Energy Group, Inc.,
as Guarantor, to Wachovia Capital Finance Corporation (Western),
as Agent, previously filed with the SEC on June 12, 2006 as
Exhibit 99.2 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.70
|
|
First Amendment to Loan and Security Agreement and Waiver dated
September 20, 2006 among Commerce Energy Group, Inc.,
Commerce Energy, Inc., Wachovia Capital Finance Corporation
(Western) and The CIT Group/Business Credit, Inc., previously
filed with the SEC on September 26, 2006 as
Exhibit 99.1 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.71
|
|
Second Amendment to Loan and Security Agreement and Waiver dated
October 26, 2006 among Commerce Energy Group, Inc.,
Commerce Energy, Inc., Wachovia Capital Finance Corporation
(Western) and The CIT Group/Business Credit, Inc., previously
filed with the SEC on October 30, 2006 as
Exhibit 10.91 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
and incorporated herein by reference.
|
|
10
|
.72
|
|
Third Amendment to Loan and Security Agreement and Waiver dated
March 15, 2007 among Commerce Energy Group, Inc., Commerce
Energy, Inc., Wachovia Capital Finance Corporation (Western) and
The CIT Group/Business Credit, Inc., previously filed with the
SEC on March 19, 2007 as Exhibit 10.9 to Commerce
Energy Group, Inc.s Quarterly Report on
Form 10-Q
for the Quarterly Period Ended January 31, 2007
|
|
10
|
.73
|
|
Fourth Amendment to Loan and Security Agreement and Waiver dated
June 26, 2007 among Commerce Energy Group, Inc., Commerce
Energy, Inc., Wachovia Capital Finance Corporation (Western) and
The CIT Group/Business Credit, Inc.
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.74
|
|
Fifth Amendment to Loan and Security Agreement and Waiver dated
August 1, 2007 among Commerce Energy Group, Inc., Commerce
Energy, Inc., Wachovia Capital Finance Corporation (Western) and
The CIT Group/Business Credit, Inc., previously filed with the
SEC on August 2, 2007 as Exhibit 99.1 to Commerce
Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.75
|
|
Letter Agreement, dated September 20, 2007, by and among
Commerce Energy Group, Inc., Commerce Energy, Inc., Wachovia
Capital Finance Corporation (Western), as Agent and Lender and
The CIT Group/Business Credit, Inc., as Lender, previously filed
with the SEC on September 25, 2007 as Exhibit 99.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.76
|
|
Second Amendment to Security Agreement between Commerce Energy,
Inc. and Tenaska Power Services Co., effective as of
June 22, 2006.
|
|
10
|
.77
|
|
Asset Purchase Agreement dated September 20, 2006 between
Houston Energy Services Company, L.L.C. and Commerce Energy,
Inc., previously filed with the SEC on September 26, 2006
as Exhibit 2.1 to Commerce Energy Group, Inc.s
Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.78
|
|
Transition Services Agreement dated September 20, 2006
among Commerce Energy, Inc. and Houston Energy Services Company,
L.L.C., previously filed with the SEC on September 26, 2006
as Exhibit 2.2 to Commerce Energy Group, Inc.s
Current Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.79
|
|
Guaranty Agreement dated September 20, 2006 among Commerce
Energy, Inc., Thomas L. Goudie, James Bujnoch, Jr., Gary
Hollowell, Dustin Roach, Steve Loy and Arnold Perez, previously
filed with the SEC on September 26, 2006 as
Exhibit 2.3 to Commerce Energy Group, Inc.s Current
Report on
Form 8-K
and incorporated herein by reference.
|
|
10
|
.80
|
|
Gas Supply Agreement dated September 20, 2006 by and among
Pacific Summit Energy LLC and Commerce Energy, Inc. and Houston
Energy Services Company, LLC.
|
|
10
|
.81
|
|
Operating Agreement dated September 20, 2006 between
Pacific Summit Energy LLC and Commerce Energy, Inc.
|
|
10
|
.82
|
|
Security Agreement dated September 20, 2006 between Pacific
Summit Energy LLC and Commerce Energy, Inc.
|
|
10
|
.83
|
|
Blocked Account Control Agreement (with Lockbox Services) dated
September 20, 2006 by and among Commerce Energy, Inc.,
Pacific Summit Energy LLC and Wachovia Bank NA.
|
|
10
|
.84
|
|
Base Contract for Sale and Purchase of Natural Gas dated
September 20, 2006 between Commerce Energy, Inc. and
Pacific Summit Energy LLC.
|
|
10
|
.85
|
|
APX Settlement and Release of Claims Agreement dated as of
January 5, 2007 by and among the Settling Parties,
including Commonwealth Energy Corporation (n/k/a Commerce
Energy, Inc.), previously filed with the SEC on March 19,
2007 as Exhibit 10.2 to Commerce Energy Group, Inc.s
Quarterly Report on
Form 10-Q
and incorporated herein by reference.
|
|
10
|
.86
|
|
First Amendment to Master Power Purchase and Sale Agreement
between Commerce Energy, Inc. and Tenaska Power Services, Co.
dated May 25, 2007.
|
|
10
|
.87
|
|
Settlement Agreement and Mutual Release dated June 11, 2007
among Commerce Energy Group, Inc., Commerce Energy, Inc., Peter
Weigand and American Communications Network, Inc., previously
filed with the SEC on June 12, 2007 as Exhibit 99.1 to
Commerce Energy Group, Inc.s Current Report on
Form 8-K
and incorporated herein by reference.
|
|
14
|
.1
|
|
Commerce Energy Group, Inc. Code of Business Conduct and Ethics,
previously filed with the SEC on November 15, 2004 as
Exhibit 14.1 to Commerce Energy Group, Inc.s Annual
Report on
Form 10-K
for the year ended July 31, 2004 and incorporated herein by
reference.
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Hein & Associates LLP, independent
registered public accounting firm.
|
|
23
|
.2
|
|
Consent of Ernst & Young, LLP, independent registered
public accounting firm.
|
|
31
|
.1
|
|
Principal Executive Officer Certification required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
31
|
.2
|
|
Principal Financial Officer Certification required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
32
|
.1
|
|
Principal Executive Officer Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Principal Financial Officer Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Confidential treatment has been requested with respect to
certain provisions of this agreement. Omitted portions have been
filed separately with the SEC.
|
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