NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
Note
1. Summary of Significant Accounting Policies
Basis
of Presentation
The
unaudited condensed consolidated financial statements as of January 31, 2008 and
for the three and six months ended January 31, 2008 and 2007 of Commerce Energy
Group, Inc., or the Company, include its two wholly-owned subsidiaries: Commerce
Energy, Inc., or Commerce, and Skipping Stone Inc. All material inter-company
balances and transactions have been eliminated in consolidation. As used herein
and unless the context requires otherwise, the reference to the Company refers
to Commerce Energy Group, Inc. and its subsidiaries.
Preparation
of Interim Condensed Consolidated Financial Statements
These
interim condensed consolidated financial statements have been prepared by the
Company’s management, without audit, in accordance with accounting principles
generally accepted in the United States and, in the opinion of management,
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the Company’s consolidated financial position,
results of operations and cash flows for the periods presented. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted in these condensed
consolidated interim financial statements, although the Company believes that
the disclosures are adequate to make the information presented not misleading.
The condensed consolidated statements of operations, balance sheets, and
statements of cash flows for the interim periods presented herein are not
necessarily indicative of future financial results. These interim condensed
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and the notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended July 31,
2007.
Uses
of Estimates
The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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 disclosure of contingent assets
and liabilities. These estimates and assumptions are based on the Company’s
historical experience as well as management’s future expectations. As a result,
actual results could materially differ from management’s estimates and
assumptions. In preparing the financial statements and accounting for the
underlying transactions and balances, the Company applies accounting policies as
disclosed in the notes to the condensed consolidated financial statements. The
accounting policies relating to accounting for derivatives and hedging
activities, inventory, independent system operator costs, allowance for doubtful
accounts, revenue and unbilled receivables, and customer acquisition costs are
those that considered to be the most critical to an understanding of the
Company’s financial statements because their application places the most
significant demands on management’s ability to assess the effect of inherently
uncertain matters on financial results.
Reclassifications
Certain
amounts in the condensed consolidated financial statements for the comparative
prior fiscal period have been reclassified to be consistent with the current
fiscal period’s presentation.
Revenue
Recognition
Energy
revenues are recognized as the electricity and natural gas are delivered to the
Company’s customers.
|
|
Three Months Ended
January 31,
|
|
|
Six Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
electricity sales
|
|
$
|
68,835
|
|
|
$
|
50, 810
|
|
|
$
|
153,061
|
|
|
$
|
105,653
|
|
Retail
natural gas sales
|
|
|
39,557
|
|
|
|
41,834
|
|
|
|
60,929
|
|
|
|
57,499
|
|
Net
revenue
|
|
$
|
108,392
|
|
|
$
|
92,644
|
|
|
$
|
213,990
|
|
|
$
|
163,152
|
|
The Company purchases electricity and
natural gas utilizing forward physical delivery contracts based on
th
e projected usage of
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
its customers.
Stock-Based
Compensation
The total
compensation cost associated with stock options and restricted stock for the
three and six months ended January 31, 2008 was $94 and $283, respectively, and
for the three and six months ended January 31, 2007 were $132 and $266
respectively. These costs are included in general and administrative expenses.
In October 2007, the Company’s Senior Vice President and General Counsel
resigned. His separation agreement provided for the forfeiture of 10,000 shares
of his 60,000 unvested, restricted stock. The remaining 50,000 unvested shares
were accelerated to vest on January 2, 2008, which incurred additional
compensation cost of $93 through October 31, 2007.
The fair
value of options granted is estimated on the date of grant using the
Black-Scholes model based on the weighted-average assumptions in the table
below. The assumptions for the expected lives are 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
approximating the expected life at the grant date. The historical volatility of
the Company’s common stock is used as the basis for the expected
volatility.
|
|
Six
Months Ended
January
31,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
risk-free interest rate
|
|
|
3.67
|
%
|
|
|
4.8
|
%
|
Average
expected life in years
|
|
|
3.67
|
|
|
|
4.44
|
|
Expected
dividends
|
|
None
|
|
|
None
|
|
Expected
volatility
|
|
|
0.74
|
|
|
|
0.73
|
|
A summary
of option activity under the Company’s stock option plans, during the six months
ended January 31, 2008 is presented below.
|
|
Options Outstanding
|
|
|
|
Number of
Shares
(in
Thousands)
|
|
|
Exercise
Price
Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstanding as of July 31, 2007
|
|
|
6,983
|
|
|
$
|
1.00-$3.75
|
|
|
$
|
2.33
|
|
Options
expired
|
|
|
(757
|
)
|
|
$
|
2.75
|
|
|
$
|
2.75
|
|
Options
forfeited
|
|
|
(45
|
)
|
|
$
|
2.56
|
|
|
$
|
2.56
|
|
Options
outstanding as of January 31, 2008
(1)
|
|
|
6,181
|
|
|
$
|
1.00-$3.75
|
|
|
$
|
2.28
|
|
(1)
|
Options exercisable and
outstanding as of January 31, 2008 were
6,181 with weighted average
exercise price of $2.28 an
d an aggregate intrinsic value
of
$28.
|
As of
January 31, 2008, there was no unrecognized compensation cost relating to
unvested outstanding stock options as all options were vested. The total
unrecognized compensation cost relating to unvested restricted stock was $235
and will be recognized over the period of February 2008 through November 2009.
For the three and six months ended January 31, 2008, 55,000 shares of restricted
stock was issued. A total of 183,334 unvested restricted shares were outstanding
as of January 31, 2008, with a total market value of $941. These restricted
shares vest in accordance with the terms of various written agreements. At
January 31, 2008, 978,334 shares of the Company’s common stock may be issued
pursuant to awards under the Company’s 2006 Stock Incentive Plan.
Income
Taxes
The
Company has established valuation allowances to reserve its net deferred tax
assets due to the uncertainty that the Company will realize the related tax
benefits in the foreseeable future. At January 31, 2008, the Company had net
operating loss carryforwards of approximately $10.9 million and $12.9 million
for federal and state income tax purposes, respectively.
The
Company adopted the provisions of FIN 48 in August 2007. As of the date of
adoption, the Company had no unrecognized income tax benefits. Accordingly, the
annual effective tax rate will not be affected by the adoption of FIN 48.
Unrecognized tax benefits are not expected to increase or decrease within the
next 12 months as a result of the anticipated lapse of an applicable statue of
limitations. Interest and penalties related to unrecognized income tax benefits
will be accrued in interest expense and operating
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
expense,
respectively. The Company has not accrued interest or penalties as of the date
of adoption because they are not applicable.
The
Company may be audited by applicable federal and various state taxing
authorities in which the Company previously filed tax returns beginning with
fiscal 2002:
Jurisdictions
|
Tax
Years
|
|
Jurisdictions
|
Tax
Years
|
Federal
|
2003-2006
|
|
Ohio
|
2003-2006
|
California
|
2002-2006
|
|
Pennsylvania
|
2004-2006
|
Florida
|
2005-2006
|
|
Texas
|
2002-2006
|
Maryland
|
2003-2006
|
|
Virginia
|
2003-2006
|
Massachusetts
|
2003-2006
|
|
Wisconsin
|
2006
|
Michigan
|
2002-2006
|
|
Georgia
|
2006
|
Missouri
|
2003-2006
|
|
Kentucky
|
2006
|
New
Jersey
|
2002-2006
|
|
City
of Philadelphia
|
2003-2006
|
New
York
|
2003-2006
|
|
|
|
However,
because the Company had net operating losses and credits carried forward in
several of the jurisdictions including federal and California, certain items
attributable to closed tax years are still subject to adjustment by applicable
taxing authorities through an adjustment to tax attributes carried forward to
open years.
Comprehensive
Income (Loss)
Statement
of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” or
SFAS 130, establishes standards for reporting and displaying comprehensive
income and its components in the Company’s 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 (loss) and other
comprehensive income (loss).
The
components of comprehensive income are as follows:
|
|
Three
Months Ended
January
31,
|
|
|
Six
Months Ended
January
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$
|
(1,249
|
)
|
|
$
|
2,539
|
|
|
$
|
(2,336
|
)
|
|
$
|
2,922
|
|
Changes
in fair value of cash flow hedges
|
|
|
95
|
|
|
|
(131
|
)
|
|
|
883
|
|
|
|
(2,728
|
)
|
Comprehensive
income (loss)
|
|
$
|
(1,154
|
)
|
|
$
|
2,408
|
|
|
$
|
(1,453
|
)
|
|
$
|
194
|
|
Accumulated
other comprehensive income (loss) included in stockholders’ equity totaled $60
and $(823) at January 31, 2008 and July 31, 2007,
respectively.
Segment
Reporting
The
Company’s chief operating decision makers consist of members of senior
management that work together to allocate resources to, and assess the
performance of, the Company’s business. These members of senior management
currently manage the Company’s business, assess its performance, and allocate
its resources as the single operating segment of energy retailing.
Accounts
Receivable, Net
Accounts
receivable, net, is comprised of the following:
|
|
January
31,
2008
|
|
|
July 31,
2007
|
|
Billed
|
|
$
|
61,355
|
|
|
$
|
44,693
|
|
Unbilled
|
|
|
25,780
|
|
|
|
24,963
|
|
|
|
|
87,135
|
|
|
|
69,656
|
|
Less
allowance for doubtful accounts
|
|
|
(14,220
|
)
|
|
|
(4,425
|
)
|
Accounts
receivable, net
|
|
$
|
72,915
|
|
|
$
|
65,231
|
|
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
Inventory
Inventory
consists of natural gas in storage as required by obligations under customer
choice programs. Inventory is stated at the lower of weighted-average cost or
market.
New
Accounting Standards
In July
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
Company adopted FIN 48 during the first quarter of fiscal year 2008, and the
adoption had no impact on its financial statements.
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 evaluating
the impact this statement may have on its financial statements.
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 evaluating the impact this statement may
have on its financial statements.
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141R,
Business Combinations
, and
Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
,
an amendment of ARB No. 51
.
These new standards significantly change the accounting for and reporting of
business combination transactions and noncontrolling interests (previously
referred to as minority interests) in consolidated financial statements. Both
standards are effective for fiscal years beginning on or after December 15,
2008. The Company is currently evaluating the provisions of FAS 141(R) and FAS
160.
Note
2. Liquidity
The
Company believes that it will require additional capital resources in
fiscal 2008 to: (1) meet its credit facility requirement to have $10
million in excess availability at all times on and after July 1, 2008, (2) fund
expansion of the Company’s business, either from internal growth or acquisition,
(3) add liquidity if energy prices increase materially, and (4) respond to
increased energy industry volatility and/or uncertainty that create additional
funding requirements.
Note
3. Basic and Diluted Income (Loss) per Common Share
Basic
income (loss) per common share was computed by dividing net income (loss)
available to common stockholders, by the weighted average number of common
shares outstanding during the period. Diluted income per common share reflects
the potential dilution that would occur if all outstanding options or other
contracts to issue common stock were exercised or converted, and was computed by
dividing net income (loss) by the weighted average number of common shares plus
dilutive common equivalent shares outstanding, unless they were
anti-dilutive.
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
The
following is a reconciliation of the numerator, income (loss), and the
denominator, (common shares in thousands), used in the computation of basic and
diluted income (loss) per common share:
|
|
Three
Months Ended
January 31,
|
|
|
Six
Months Ended
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,249
|
)
|
|
$
|
2,539
|
|
|
$
|
(2,336
|
)
|
|
$
|
2,922
|
|
Net
income (loss) applicable to common stock —basic and
diluted
|
|
$
|
(1,249
|
)
|
|
$
|
2,539
|
|
|
$
|
(2,336
|
)
|
|
$
|
2,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
outstanding common shares — basic
|
|
|
30,397
|
|
|
|
29,687
|
|
|
|
30,391
|
|
|
|
29,663
|
|
Effect
of stock options
|
|
|
—
|
|
|
|
34
|
|
|
|
—
|
|
|
|
30
|
|
Weighted-average
outstanding common shares — diluted
|
|
|
30,397
|
|
|
|
29,721
|
|
|
|
30,391
|
|
|
|
29,693
|
|
Note
4. Market and Regulatory
The
Company currently serves electricity customers in six states across 12 utility
markets and gas customers in seven states across 13 utility markets and
collectively operates in ten states with authority to operate in an additional
four states. Regulatory requirements are determined at the individual state
level and administered and monitored by the Public Utility Commission, or PUC,
of each state. Operating rules and tariff filings by states and by utility
markets can significantly impact the viability of the Company’s sales and
marketing plans and its overall operating and financial results.
Note
5. 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.
Note
6. Contingencies
APX
Settlement
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 the Federal Energy Regulatory Commission, or
FERC, by San Diego Gas & 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, or CPX, and the California
Independent System Operator, or CAISO, markets. We refer to these proceedings as
the California Refund Cases. The APX Settlement, described below, is a part of
that proceeding relating to APX’s involvement in those markets.
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 APX’s 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. In April
2007, we received a payment of $5.1 million and in August 2007 we received
the remaining settlement payment of $1.4 million.
Certain
other aspects of the California Refund Case which may affect the Company remain
pending. The Company cannot at this time predict whether, or to what extent,
these proceedings will have an impact on its financial results.
Note
7. Derivative Financial Instruments
The
Company purchases substantially all of its power and natural gas utilizing
forward physical delivery contracts. These
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
physical
delivery contracts are defined as commodity derivative contracts under Statement
of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”). 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 when
received from suppliers.
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 (loss) (“OCI”), and reflected as direct energy cost in the statement of
operations as the related energy is delivered.
The amounts recorded in Accumulated OCI
at January 31, 2008 and July 31, 2007 related to cash flow hedges are summarized
in the following table:
|
|
January
31,
2008
|
|
|
July
31,
2007
|
|
Current
assets
|
|
$
|
60
|
|
|
$
|
—
|
|
Current
liabilities
|
|
|
—
|
|
|
|
(671
|
)
|
Deferred
gains/(losses)
|
|
|
—
|
|
|
|
(152
|
)
|
Hedge
ineffectiveness
|
|
|
—
|
|
|
|
—
|
|
Accumulated
other comprehensive income (loss)
|
|
$
|
60
|
|
|
$
|
(823
|
)
|
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 (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 (loss) volatility as the fair value of
the changes is recorded on a net basis in direct energy cost in the consolidated
statement of operations for each fiscal period. For the three and six months
ending January 31, 2008, the impact of financial derivatives accounted for as
mark-to-market resulted in a gain of $386 and a loss of $17, respectively, and
resulted mostly from economic hedging related to the Company’s natural gas
portfolio. The notional value of all derivatives accounted for as mark-to-market
which was outstanding at January 31, 2008 was $5,821.
As of
January 31, 2008, the Company had $60 of derivative assets included in Prepaid
expenses and other, and $0 of total derivative liabilities included in Accrued
liabilities.
Note
8. Credit Facility and Supply Agreements
Wachovia
Capital Finance
In June
2006, Commerce entered into a Loan and Security Agreement, or the Facility, with
Wachovia Capital Finance, or Wachovia, for up to $50 million. The
three-year Facility is secured by substantially all of the Company’s 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 Facility is currently limited by a
calculated borrowing base consisting of the Company’s receivables and natural
gas inventories. As of January 31, 2008, letters of credit issued under the
facility totaled $12.0 million, and outstanding borrowings were $3.0
million. Fees for letters of credit issued range from 1.75 to 2.00 percent
per annum, depending on the level of excess availability, as defined in the
Facility. We also pay an unused line fee equal to 0.375 percent of the
unutilized credit line. Generally, outstanding borrowings under the Facility are
priced at a domestic bank rate plus 0.25 percent or LIBOR plus
2.75 percent.
The
Facility contains typical covenants, subject to specific exceptions, restricting
the Company 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 Facility also restricts the Company’s
ability to pay cash dividends on its common stock; restricts Commerce from
making cash dividends to the Company without the consent of the Agent and the
Lenders and limits the amount of the Company’s annual capital
expenditures.
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
From
September 2006 through September 2007, the Company and Commerce 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, in 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
Facility’s capital expenditures covenant was increased to $6.0 million for
fiscal 2007 and $5.0 million for subsequent fiscal years. 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’s business. In the Modification Agreement, the Agent and
the Lenders also permitted Commerce for a period from September 20, 2007 to
October 5, 2007 to exceed its Gross Borrowing Base, as defined in the
Agreement.
The Sixth
Amendment executed on November 16, 2007, adjusted the required excess
availability required at all times to $2.5 million until July 1, 2008 at which
time it becomes and remains $10 million. It also eliminated the eligible cash
collateral covenant which previously required keeping $10 million cash on
deposit. The amendment revised the fixed charge coverage ratio, added
minimum EBITDA requirements and extended the maturity of the Facility from June
2009 to June 2010.
The most
recent amendment (the Seventh Amendment) was executed on March 12, 2008. This
Amendment waived certain covenant defaults relating to the failure of the
Company to comply with the minimum EBITDA covenant for the six months ending
January 31, 2008 as well as the requirement to transfer funds in the Company's
lockbox to a blocked account to be used to pay down the Credit Facility. The
Amendment also changes the pricing terms of the Credit Facility so that
borrowings under the Credit Facility are priced at a domestic bank rate plus
0.75 percent or LIBOR plus 3.25 percent per annum. Letters of credit fees now
range from 2.00 to 2.25 percent per annum, depending on the level of excess
availability. Each of these pricing terms is subject to a one-half of one
percent reduction if at the end of any twelve month period the Company's EBITDA
is in excess of $7 million and its Fixed Charge Coverage Ratio is at least 1.5
to 1 for such period.
The
Amendment eliminated the Fixed Charge Coverage Ratio for the twelve months
ending March, May, June and July 2008 and, based on the projections delivered to
the Agent by the Company, the Agent will then reasonably establish covenant
levels for the Fixed Charge Coverage Ratio for the twelve month period ending on
August 31, 2008 and for the twelve month period ending on the last day of each
month thereafter. The Amendment also lowered the minimum EBITDA covenant so that
the Company is required to have $3.5 million of EBITDA for the nine months
ending April 30, 2008 and $3.6 million of EBITDA for the 12 months ending July
31, 2008. Based on the projections delivered to the Agent by the Company, the
Agent will then reasonably establish covenant levels for the minimum EBITDA
needed for the twelve month period ending on August 31, 2008 and for the twelve
month period ending on the last day of each month thereafter. In addition, the
Capital Expenditure covenant was changed to increase from $5 million to $6
million the amount of Capital Expenditures allowed in any fiscal
year.
At
January 31, 2008, the Company had approximately $8.3 million of usable credit
availability under the Facility. As it is industry practice to pay energy bills
towards the end of the month; the remaining availability at the end of a month
is typically lower than most other times during a month.
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’s wholesale
electricity supply needs in Texas, utilizing commercially standard master
purchase and sale, a lockbox control, security and guaranty agreements. The
Company’s Texas customers pay into a designated account that is used to pay
Tenaska for the electricity. Tenaska also extends credit to the Company to buy
wholesale electricity supply secured by funds pledged by the Company in the
lockbox, its related accounts receivables and customers contracts. The Company
entered into a guaranty agreement, pursuant to which it, as the parent company
of Commerce, unconditionally guaranteed to Tenaska full and prompt payment of
all indebtedness and obligations owed to Tenaska. At January 31, 2008, Tenaska
had extended approximately $11.2 million of trade credit to the Company. Tenaska
also serves as the Company’s exclusive provider of qualified scheduling services
and marketing services in the region of Texas administered by the Electric
Reliability Council of Texas.
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
Pacific
Summit Energy LLC
In
September 2006, the Company entered into several agreements with Pacific Summit
LLC, or Pacific Summit, for the supply of natural gas to serve end-use customers
that we acquired in connection with the HESCO acquisition, utilizing operating,
lockbox control and security agreements. Under these agreements, these customers
remit payments into the lockbox used to pay Pacific Summit for natural gas
supplies. Pacific Summit also extends credit to the Company to buy wholesale
natural gas supplies, secured by funds pledged by the Company in the lockbox,
its related accounts receivable and a $3.5 million letter of credit. At
January 31, 2008, Pacific Summit had extended approximately
$5.7 million of trade credit to the Company under this
arrangement.
Note
9. Settlement Agreement
Lawrence
Clayton, Jr.
In
November 2007, the Company entered into a Settlement Agreement with Lawrence
Clayton, Jr., its former Senior Vice President, Chief Financial Officer and
Secretary. The Settlement Agreement provided for the Company to make a
lump-sum
settlement
payment to Mr. Clayton of $400 in January 2008 and for the parties to mutually
release all claims against each other. Of the aggregate amount of the settlement
payment, all but $120 was covered by insurance. Subsequent to Mr. Clayton’s
departure from the Company, we remitted payment to Mr. Clayton for the
repurchase of his 30,000 shares of restricted stock for par value per share
pursuant to the terms of his restricted stock agreement and all shares were
forfeited.
Note
10. Subsequent Events
Resignation
of Steven S. Boss
On
February 20, 2008, Steven S. Boss resigned as Chief Executive Officer, or CEO,
an employee and as a Director of the Company, as well as an employee, an officer
and a director of all of the Company’s subsidiaries and
affiliates. On the same date, the Company and Mr. Boss entered into a
Separation Agreement and General Release with Mr. Boss (the “Separation
Agreement”), which become effective February 28, 2008 (the “Effective Date”).
Pursuant to the Separation Agreement, as amended, Mr. Boss is entitled to (i) a
severance payment of $446 equal to thirteen (13) months of Mr. Boss’ base salary
as of the resignation date, paid in a lump sum March 11, 2008, and (ii) to
retain his group health coverage under COBRA for thirteen months at the
Company’s expense.
Under the
Separation Agreement, the Company also agreed to repurchase 75,000 shares of
unvested restricted Common Stock held by Mr. Boss, pursuant to the terms of the
Company’s 1999 Equity Incentive Plan at par value per share, with payment for
the repurchase being credited from the severance payment. The share repurchase
will reduce previously recognized compensation costs of $26 in the third quarter
of fiscal 2008. In addition, Mr. Boss agreed to sell to the Company 166,000
shares of Common Stock owned by him for a price of $1.26 per share, or $209 in
the aggregate. The stock transaction closed March 3, 2008.
Appointment
of Gregory L. Craig as Chairman and Chief Executive Officer
On
February 20, 2008, the Board of Directors of the Company appointed Gregory L.
Craig as the Company’s Chairman of the Board, Chief Executive Officer and a
Class III Director. Pursuant to an employment agreement with Mr. Craig dated
February 20, 2008 (the “Employment Agreement”), Mr. Craig will receive an annual
base salary of $450 and is eligible to participate in all executive bonus and
compensation plans of the Company, including the Bonus Program. In connection
with his employment, Mr. Craig was granted on February 20, 2008 a non-qualified
stock option to purchase 250,000 shares of Common Stock (the “Option”) at an
exercise price equal to $1.26 per share, equal to 100% of the fair market value
of a share of Common Stock on the date of grant, as defined in the Company’s
2006 Stock Incentive Plan. The Option was fully vested on the date of grant. Mr.
Craig also was awarded on February 20, 2008, 500,000 shares of restricted stock,
300,000 shares of which vested on the date of the award, with the remaining
200,000 shares vesting in two equal installments of 100,000 shares each on the
next two anniversary dates of the award. Stock-based compensation expense for
Mr. Craig’s stock option and restricted stock grants will be approximately $580
in the third quarter of fiscal 2008. The Employment Agreement has no specific
term and is subject to termination by either the Company or Mr. Craig without
cause upon 60 days written notice.
In the
event of a change in control (as defined in the Employment Agreement), Mr. Craig
will be entitled to receive a sale bonus in an amount equal to two percent (2%)
of the amount by which the Company’s market capitalization on the date of the
Change in Control exceeds $91.1 million.
COMMERCE
ENERGY GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) — (Continued)
(Dollars
In Thousands, Except Per Share Amounts)
(Unaudited)
Appointment
of Michael J. Fallquist as Chief Operating Officer
On March
7, 2008, the Board of Directors appointed Michael J. Fallquist as the Company’s
Chief Operating Officer, effective March 10, 2008. Pursuant to an employment
agreement dated March 10, 2008, Mr. Fallquist will receive an annual salary of
$225 and is eligible to participate in all executive bonus and compensation
plans of the Company, including the Bonus Program.
In
connection with Mr. Fallquist's employment, the Compensation Committee of the
Company, comprised of all independent directors, intends to grant, as soon as
the application to list 375,000 additional shares of the Company's common stock
is approved by the Amex, to Mr. Fallquist, an individual not previously an
employee or director of the Company, an option to purchase 125,000 shares of the
Company's common stock at a per share price equal to the last sale price of a
share of common stock on the date of grant, and award to Mr. Fallquist 250,000
shares of restricted stock. The option will vest in full on the date of grant
and will have a term of six years and the shares of restricted stock will vest
150,000 on the date of the award with the remaining shares vesting in equal
50,000 share increments on each of the first and second anniversary dates of the
award. To the extent that Mr. Fallquist voluntarily resigns without good reason
within the first twelve months of employment, he will be obligated to return to
the Company the 150,000 restricted shares, or if he sold such shares, the
proceeds of the sale.
The
option and the restricted shares will be issued to Fallquist as awards under an
exemption from an Amex Rule which requires that officers, directors, employees,
or consultants of companies may only acquire options or stock from option and
equity compensation plans which have been approved by the stockholders. Because
there were not a sufficient number of shares of common stock left in the
Company's 2006 Stock Incentive Plan, the Board approved a special Incentive Plan
for Mr. Fallquist with a maximum of 375,000 shares to accommodate the
above-referenced proposed option and restricted stock awards. Using this Amex
exemption, no stockholder approval is required for the Company to issue these
shares to Fallquist.