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UNITED STATES

FORM 10-K

(Mark One)

Commission File Number: 000-33069

COMMONWEALTH ENERGY

15901 Red Hill Avenue, Suite 100, Tustin, California 92780

Registrant’s telephone number, including area code (714) 258-0470

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

     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 x     No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Paragraph 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant’s 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.     o

      As of October 18, 2002, 27,334,032 shares of the registrant’s common stock were outstanding. There was no market for the registrant’s shares at such date.

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FORWARD-LOOKING STATEMENTS

      A number of the matters and subject areas discussed in this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, reflecting management’s current expectations. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may differ materially from our actual future experience involving any one or more of such matters and subject areas. We wish to caution readers that all statements other than statements of historical fact included in this Annual Report on Form 10-K regarding our financial position and strategy may constitute forward-looking statements. For example, statements herein relating to expansion opportunities for our subsidiaries, extension of our business model to new markets and industries, demand in the market for UtiliHost^TM services, completion of acquisitions of certain assets, growth of retail energy operations and demand for retail energy outsourcing and back office solutions are all forward-looking statements . When used in this document, the words “anticipate,” “believe,” “estimate,” “expects,” “intend,” “may,” “project,” “plan,” “should,” and similar expressions are intended to be among the statements that identify forward-looking statements. All of these forward-looking statements are based upon estimates and assumptions made by our management, which although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed on such estimates and statements. No assurance can be given that any of such estimates or statements will be realized and it is likely that actual results will differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include: (a) regulatory changes in the states in which we operate that could adversely affect our operations; (b) our continued ability to obtain and maintain licenses from the states in which we operate; (c) the competitive restructuring of retail marketing may prevent us from selling electricity in certain states; (d) our dependence upon a limited number of third parties to (i) generate and supply to us electricity and (ii) delay performance of, or fail to perform, their contracts with us; and (e) our dependence upon a limited number of utilities to (i) transmit and distribute the electricity we sell to our customers and (ii) delay performance of, or fail to perform, their contracts with us. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future experience and results to differ from our current expectations regarding the relevant matter of subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the rules and uncertainties described under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results” contained herein; however, the operations and results of our business also may be subject to the effect of other risks and uncertainties. Such risks and uncertainties include, but are not limited to, items described from time to time in our reports filed with the Securities and Exchange Commission. We assume no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.

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PART I

Item 1. Business

Overview

      Commonwealth Energy Corporation (“Commonwealth”) is a provider of retail electric power to residential, commercial, industrial and governmental customers in the deregulated California, Michigan and Pennsylvania electricity markets. We are licensed by the Federal Energy Regulatory Commission (“FERC”) as a power marketer and we are licensed to supply retail electric power by applicable state agencies in California, Pennsylvania, Michigan, New Jersey, New York, Texas and Ohio.

      Commonwealth does not have its own electricity generation facilities. The power we sell to our customers is purchased from third party power generators. The electric power sold by the Company to its retail customers is delivered to the Company’s customers by incumbent electric utilities. The incumbent electric utilities measure electric power usage by the Company’s customers and bill most of the Company’s customers on behalf of the Company. The Company plans to enter new deregulated electric power markets and to offer a variety of other energy-related products and services in the future. Commonwealth also sells electric power to wholesale customers in California and Pennsylvania. We use our best efforts to sell the surplus electric power unused by our retail customers to wholesale trading partners, as remaining electric power cannot be stored and will be wasted if not sold.

      Commonwealth Energy Corporation has three wholly-owned subsidiaries: electricAmerica, Inc., UtiliHost, Inc. and electric.com, Inc. Each of these subsidiaries is incorporated in the State of Delaware, but as of yet, none of them is operational. We also have made an investment in Summit Energy Ventures, LLC (“Summit”), a joint venture. The consolidated financial statements of the Company include the accounts of Summit and the Company’s wholly-owned subsidiaries. Commonwealth Energy Corporation was incorporated in California on August 15, 1997.

      As used in this Report, the terms “we,” “us,” “our,” “the Company” and “Commonwealth” refer to Commonwealth Energy Corporation and its wholly-owned subsidiaries.

Industry Background

      Prior to the inception of electricity deregulation in 1998, the retail electric service industry was controlled almost exclusively by utilities. Presently, twenty-four states and the District of Columbia have either enacted enabling legislation or issued a regulatory order to implement retail access. The local utility typically continues to provide transmission and distribution (delivery of energy) services. Retail access allows customers to choose their own supplier of generation energy services, but each state’s retail access schedule varies according to the legislative mandates or regulatory orders.

      As in other industries that have deregulated, competition in the electric service industry is intended to provide consumers with a choice of multiple suppliers that is expected to promote product differentiation, lowered costs and enhanced services. To obtain these features, customers may switch electric service from their utility to an alternative supplier.

      The electricity distribution infrastructure utilized by utility companies prior to deregulation of the energy industry remains the only current method of distribution to the end-use customer. Retail electricity suppliers use this established electricity network for the delivery of energy to their customers. The utility company is paid a fee for use of its wires. Fees paid to established utility companies for use of their infrastructure are collected by the respective independent system operator (“ISO”) or regional transmission organization (“RTO”) for a specific region or state. The ISO or RTO ensures that proper electricity reserve margins are in place at all times, as electricity must have supply and demand in near perfect balance to insure reliable service, and typically run 5% to 10% of prevailing wholesale electricity market prices.

      In addition to this basic service, some states allow the utility company to take on additional responsibilities, such as reading meters, generating bills to customers, collecting bills and taking requests for service

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      On September 20, 2001, the California Public Utilities Commission (the “CPUC”) issued a ruling suspending “direct access.” “Direct access” refers to the right of retail electricity suppliers like the Company to actively seek new customers in California from incumbent utilities or other electricity service providers. This ruling permits retail electricity suppliers to keep their current customer bases, but prohibits the Company from signing up new non-direct access customers for an undetermined period of time.

      Electric service providers procure inventory of power to deliver to retail customers from a variety of wholesale power producers, either through long term bi-lateral contracts with the generators or from the Independent System Operator on a short term basis. The power inventory obtained from the ISO is purchased and sold by the ISO to balance the market and make sure each corresponding sale of electricity is matched to a buyer of electricity. The function of the ISO is to provide system reliability to the market.

Core Products and Services

      Our business activities are comprised primarily of providing retail electricity services. Commencing in August 2001, we expanded our business offerings to include wholesale power sales. The following table shows, for the periods indicated, the percentage of our sales contributed by our principal products and services for the years ended July 31, 2000, 2001 and 2002.

Retail Electricity

      We sell electric power to retail and commercial end-user customers. This electric power is delivered to our customers by the incumbent utility distribution companies (“UDCs”) or electric distribution companies (“EDCs”) depending upon the jurisdiction. They measure electric power usage and bill most of our customers on our behalf. Three UDCs in California, one EDC in Pennsylvania and one UDC in Michigan conduct these activities on our behalf. In California, Pennsylvania and Michigan, the utility companies currently assist us with a portion of the preparation, mailing and collection of our bills to end-use customers. In addition, the utility companies are invoicing and collecting the charges and fees owed by us to them associated with those services as well as the right to use the distribution network.

      We offer electric service to customers on month-to-month or longer-term service contracts. The difference between the customers’ list price for energy and the sum of our wholesale electricity purchase cost and ancillary costs provide us a gross profit/loss margin.

Wholesale Power Procurement and Sales

      Due to the variable electricity usage patterns of our retail customers, we may hold “long” or “short” energy positions. A “long” position occurs when we have committed to purchase through long-term contracts more electricity than our customers need and a short position occurs when our customers’ needs exceed the amount of electricity we have committed to purchase through long-term contracts. In both situations, we utilize the wholesale electricity market to sell excess energy when we are “long” and buy additional electricity when we are “short.” In order to better manage and schedule our energy load and our wholesale power purchases, we have established a trading desk that buys and sells our electricity in various regional markets. Excess energy is sold to wholesale entities short on supply, while additional energy is procured from time to time when required to supply our customers’ usage.

      Purchases and sales in the wholesale market are regulated by FERC and reports are made on a regular basis to the U.S. Department of Energy. Typically, electricity is more expensive during peak hours, when

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Summit Energy Ventures, LLC

      In July 2001, we formed Summit Ventures, LLC (“Summit”), a joint venture with Steven Strasser. Summit was formed to enable Commonwealth to diversify our business by making investments in companies that manufacture products that conserve or manage electricity. Commonwealth made the initial capital contribution of $15 million into Summit, which to date represents the entire capital contribution to Summit. For purposes of financial reporting, the consolidated financial statements of the Company include the accounts of Summit as well as those of the Company’s wholly-owned subsidiaries.

      To date, Summit has invested a total of approximately $7.5 million in three companies:

	•	Envenergy, Inc. — Envenergy is a developer of software and hardware for energy and facility management. Envenergy’s products provide the infrastructure to collect information from separate facility systems (e.g., building automation, energy, lighting, access control, metering) and assimilate this raw data into useful information from which energy service companies, facility management providers, equipment and building automation system manufacturers and utilities can assess energy usage and costs. Summit currently owns approximately 8.7% of Envenergy.
	•	Turbocor, LLC — Turbocor, LLC owns 51% of Turbocor, B.V., which, in turn owns 58% of Turbocor, Inc. Turbocor, Inc. manufactures energy-efficient compressors, which features a drive shaft that floats in a magnetic field, for commercial heating, ventilating, air conditioning and refrigeration applications. Summit currently owns approximately 21.2% of Turbocor, LLC., which represents a 6.2% indirect interest in Turbocor, Inc.
	•	Power Efficiency Corporation — Power Efficiency Company designs, develops, assembles and markets its own branded solid state electronic products, called “Performance Controllers” that reduce energy consumption in alternating current (AC) induction motors. Summit currently owns approximately 28.0% of Power Efficiency Corporation.

      Our joint venture partner in Summit, Steven Strasser, is the president and sole shareholder in Northwest Power Management (“NPM”), the investment manager of Summit. NPM is responsible for managing the funds that we have invested in Summit. All investments must be approved by Summit’s investment committee, which is comprised of three individuals, all of whom are appointed by Commonwealth. NPM manages the investment until such time as a decision to sell is made. When a sale of an investment to a third-party buyer is proposed, we have the option to buy out Summit’s interest in a specific investment on the same terms as the third-party buyer. We pay an annual management fee of $700,000 to the investment manager.

      Commonwealth owns 100% of the preferred membership interest of Summit and 60% of the common membership interest. Steven Strasser owns the other 40% of the Common Membership Interest. Our preferred membership interest entitles us to a distribution preference equal to all of our initial invested capital plus an annual 10% preferred return before any funds are distributed to the holders of the common membership interests; net losses are allocated per capital contribution. In addition, Commonwealth, as the preferred member, has a right of first refusal in the event of any issuance’s of new members interests and the right to purchase any of the investments acquired by Summit at any time during the agreement on terms mutually agreeable to both the investment manager and us.

Managed Back Office Services

      We have developed software to better manage our electric service customers. TACT^TM (Trans-Action Control Technology) and TRIUMPH^TM (Total Resource Internet Utility Management Power Host) are proprietary software products that we have developed to provide services and manage back office processes.

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Product and Service Initiatives

      We are working to broaden the scope of the energy related services we provide to include energy efficient products, energy management programs and load aggregation. Each of these services are in the development stage and, as yet, have not begun to contribute materially to our financial results.

Load Aggregation

      Load aggregation is the process of combining customers with different electricity usage patterns into a portfolio of customers that can be serviced by our purchases of electric supply. We are currently discussing with several generators and utilities a comprehensive solution for cities and major commercial and industrial customers to meet their energy demands. We are able to assist cities to become municipal utilities or by providing them with all required energy procurement, energy management, customer service and back-office services. We also can provide similar services for major commercial and industrial customers to meet their electricity demand requirements. This program will allow us the opportunity to take a diversified approach to aggregating customers to sell them electricity and bill them through UtiliHost^TM. While we are currently discussing this program with several cities, to date, we have not entered into any contracts to provide load aggregation services.

Energy Efficient and Emergency Preparedness Products

      We sell energy efficient and emergency preparedness products, such as energy management controllers, compact fluorescent lamps, natural gas shut-off valves and other similar devices. These products are targeted to residential, commercial, industrial and governmental customers. We fulfill orders for products and ship most of these products through our warehouse, but some are fulfilled and delivered from the manufacturers or distributors. In either case, we collect payment from our customers and are compensated for order processing and procurement; however, in the case of orders fulfilled and shipped by the manufacturers or distributors, we do not retain payment for shipping costs. All deliveries of products are made only after payment by check or credit card is made from our customers.

Energy Management Programs

      Energy management programs consist of energy curtailment programs and distributed generation programs. Energy curtailment programs permit short-term curtailment or cessation of electric service at the discretion of the distributing company under certain circumstances, as specified in the service contract. These programs provide a win-win proposition for our customers and for us by creating a financial incentive for our customers to lower their electrical usage during certain times of the day. In connection with the reduction in energy usage by our customers, we also benefit because we are able to avoid the purchase of expensive power from other suppliers to meet our customers’ excess energy needs. The resulting savings from these energy management programs are shared between the customer and us. Our sales department markets these programs to commercial, industrial and governmental entities seeking to save energy costs by decreasing their energy usage during peak periods. The availability of curtailment programs is dependent upon the initiatives set by the ISO and/or the local distribution company. We are presently not involved in any energy curtailment programs; however, we plan to offer this service in the future if ISOs and/or local distribution companies continue these programs.

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      Distributed generation programs provide customers that have uninterruptible power requirement with on-site electric power generation. We offer to our customers the service of formulating reliable custom energy solutions by equipping them with an alternative, cost-effective source for electricity for seasonal or peak demand power. While we have offered these programs, to date, we have not installed any systems and these programs have not generated any revenues.

Our Customers and Markets

      We began providing electric service in April 1998 as one of more than 300 licensed electric service providers (“ESPs”) in the state of California by aggregating customers using our call center. As our customer base grew, we began to develop software solutions to better manage our back office customer service functions associated with servicing electricity accounts. We also began to provide service to larger commercial, industrial and governmental customers. We expanded our retail electricity services to end users in Pennsylvania in January, 2000 and in Michigan in August 2002. We also established a new tradename, “electricAmerica,” which we use in all markets in which we supply retail electric power, and began aggregating residential, commercial, industrial and governmental customers using our call center. Currently, we sell electric power to approximately 54,000 retail end-use customers in California, approximately 34,000 retail end-use customers in Pennsylvania. and approximately 200 retail customers in Michigan.

      In August 2002, we began servicing commercial and industrial customers in the Detroit Edison service territory of Michigan. We also established a sales office in the Detroit area.

      From time-to-time, we have purchased more electricity under our bilateral contracts with wholesale producers than is required by our retail customers. When this occurs, we sell our excess inventory of electricity to the local independent system operator, who matches our sale with a purchaser in need of excess electricity.

Our Suppliers

      To procure a supply of electricity for our retail electric service sales, we purchase electricity from third-party generators pursuant to a combination of long-term and short-term wholesale contracts and, prior to fiscal 2001, by spot purchases on regional power exchanges. During the four fiscal year period ending July 31, 2002, as a percentage of total electricity purchased, the amount of electricity that we purchased on the spot market has significantly declined from 84.3% in fiscal 1999 to 1.2% in fiscal 2002. This decline is the result of our entering into long-term and short-term contracts with wholesale power providers.

      Historically, the majority of our sales have come from the resale of electricity in California purchased under a contract with Calpine Power Services Company that expired in June 2002. During fiscal 2002, this contract accounted for 46% of the total energy supplied by us and comprised 52% of our revenue. This contract was not capable of renewal on terms as favorable to us as those contained in the original agreement. Beginning in July 2002, we have been purchasing electricity under two new contracts, one with Transalta Energy Marketing, Inc. and one with Reliant Energy Services, Inc. To the extent necessary, we continue to purchase electricity in the spot market from time-to-time in California.

      In Pennsylvania, we obtain most of the electricity we sell pursuant to two long-term contracts with Exelon Energy Services. Under those contracts, approximately 50% of our electricity supplied by Exelon is produced by an environmentally-friendly hydroelectric generation facility. To the extent necessary, we also purchase electricity in the spot market from time-to-time in Pennsylvania.

      In Michigan, we obtain most of our wholesale power from DTE Energy Trading, pursuant to a long-term contract.

      The California marketplace has evolved from a market driven, minute by minute trading forum, operated by the now bankrupt California Power Exchange, to a system which requires parties to obtain more of their power through the use of forward or advance purchase contracts. Power purchases are facilitated by the California Independent System Operator (“CAISO”), a market oversight body. CAISO is responsible for ensuring that all electricity put into the grid has a corresponding exit from the grid and for maintaining system reliability. This matching of power transactions is accomplished in a constant sequence of 15 minute

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      The price of electricity can fluctuate significantly. In an attempt to manage this risk, we enter into longer term wholesale power purchase agreements which allows us to purchase fixed daily quantities of electricity at fixed prices.

      During certain times and market conditions, such as when the supply of electricity is scarce, the wholesale price of electricity increases and allows us to resell the electricity that we purchased in excess of the amount needed to supply retail and commercial end-use customers, at higher prices to wholesale customers. This condition occurred in California during the summer of 2000 through the winter of 2001. Because of a number of circumstances existing at the time, including weather, market design and conditions and scarcity of supply, we were able to sell electricity into the wholesale market during this period for amounts far in excess of the price at which we purchased the electricity. This allowed us to obtain unusually high revenues and margins for that period. We do not expect this trend to continue and expect that California’s response to the energy crisis of the summer of 2000 through the winter of 2001 will prevent these conditions from recurring in the future.

Sales and Marketing

      We market supplies of electricity to end-user customers in the states of California, Pennsylvania and Michigan as “electricAmerica” through multiple channels. We acquire the vast majority of our customers through our in-house telemarketing group which handles inbound calls from customers and makes outbound calls to targeted customers. We have separated our sales employees into two units. We refer to the larger group as our “call center.” Our call center group is responsible for procuring orders from residential or small commercial customers. All customers acquired by the call center agree to our terms of service through a third party voice log system. This sign-up device simplifies the switching process for these customers and shortens the sales cycle.

      Our smaller group of telemarketers, which we refer to as “C&I Sales,” is responsible for targeting medium and large commercial, industrial and governmental customers through telephone solicitation as well as face to face meetings. Customers acquired by the C&I Sales group enter into individualized written contracts. For this reason, the sales cycle is typically longer because each agreement is usually customized to meet the customer’s needs. The C&I Sales group also works with third party energy consultants or energy service companies which manage the energy expenses for large commercial and industrial companies to acquire customers.

      We also use our electricAmerica website, www.electricAmerica.com, as a tool to help acquire customers. The website provides customers with detailed electric supply information in each territory that we serve and enables customers to complete forms online, send us e-mails or find our toll-free telephone number, 1-800-ELECTRIC.

      In California, due to the suspension of direct access on September 20, 2001, we are not allowed to acquire customers that were not with a direct access provider as of that date. This impaired our ability to locate and acquire customers, especially residential and small commercial customers in California. The suspension of direct access in California has impaired the C&I Sales group to a lesser degree because they have been able to acquire a few large customers from other direct access providers. Because the size of the market for potential customers was severely reduced by the suspension of direct access, we implemented a direct mail customer retention program to prevent customer attrition, reinforcing the reasons that our customers originally chose us as their source for electricity.

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      Our business prospects depend upon our ability to identify and enter into favorable energy markets and to achieve sufficient customer scale to create a profitable operating cost structure. Currently, we are:

	•	Selectively entering retail energy markets that have rate structures, market rules, consumer demographics, energy consumption patterns, access to favorable electricity supply and risk management profiles that are designed to enable us to provide savings and flexibility to our customers at an acceptable margin.
	•	Capitalizing on the brand recognition of “electric” through our web site at www.electricAmerica.com and through our inbound toll-free number, 1-800-ELECTRIC.
	•	Taking advantage of the increasing consumer acceptance of online commerce, both directly through our web sites (www.electricAmerica.com and www.electric.com) and through traditional channels.
	•	Developing strategic marketing alliances with established power suppliers to offer competitive electric products and services to, and management of, aggregations of customers.
	•	Offering additional products and services to our customers, such as energy efficiency and emergency-preparedness products.
	•	Positioning UtiliHostTM to be a source for our clients to outsource their energy related customer service management.

Competition

      We believe that as retail energy markets are opened to new participants and new services, competition will be intense in the markets where frameworks for deregulation create attractive opportunities for new entrants. In general, we believe our principal competitor in each market will be the incumbent utility in that market or its unregulated affiliate. Incumbent utilities may have informational advantages, high name recognition in their traditional service territory and long-established customer relationships. In addition to the utilities and their affiliates, we may face competition from a number of other energy service providers, including start-up companies focusing on Internet marketing and online service, other energy industry participants, and possibly other consumer-oriented service providers, any of whom may develop businesses that will compete with us, both in specific markets and nationally. Some of these competitors may be larger and better capitalized than we are.

      We generally compete for customers on the basis of price or by delivering more environmentally friendly (not derived from fossil-fuel sources) electricity than our competitors.

      We face competition in selling energy efficient and emergency preparedness products from many sources, including traditional hardware retailers and online energy product retailers.

      We face competition in managing back office services from application service providers, outsourcing vendors, utility billing vendors and large enterprise-wide software and systems integrators.

Seasonality

      Our revenues and operation margin are subject to fluctuations during the year; primarily due to the impact certain seasonal factors have on sales volumes and the wholesale prices of electricity. Electricity sales volumes and operating margins have been historically higher in the summer months than in the fall and spring months, reflecting increased demand due to increased cooling requirements and higher electricity sales tariffs rates. Additionally, electricity sales volumes and operating margins are modestly higher in the winter months than in the fall and spring months, due to increased demand for heating and lighting requirements.

Governmental Regulation

      We are subject to regulation by various federal, state and local governmental agencies. Our wholesale trading and marketing operations are subject to the jurisdiction of the Federal Energy Regulatory Commission (“FERC”) under the Federal Power Act. We make sales of electricity commerce at wholesale transactions

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      In states that have adopted deregulation, state public utility commissions (“PUCs”) have authority to license and regulate certain of the activities of electric supply retailers. Accordingly, we are subject to regulation by the PUC in each state in which we make retail sales of electric power. The requirements for licensing and the level of regulation varies from state to state. We are currently licensed by the applicable PUCs in California, Michigan, New Jersey, New York, Ohio, Pennsylvania, and Texas. These licenses permit us to sell electrical power to commercial, industrial, governmental and residential customers.

Employees

      As of July 31, 2002, we employed 158 full-time employees and 3 part-time employees, including: 22 in corporate administration, 13 in corporate finance, 86 in marketing and sales, and 40 in operations. None of the Company’s employees is covered by a collective bargaining agreement or is presently represented by a labor union. The Company has not experienced any work stoppages and considers its employee relations to be good.

Intellectual Property

      The Company’s strategy for protection of its trademarks is to routinely file U.S. federal and foreign trademark applications for the various word names and logos used to market its technology solutions to licensees and the general public. The duration of the U.S. and foreign registered trademarks can typically be maintained indefinitely, provided proper maintenance fees are paid and trademarks are continually used or licensed by the Company.

Item 2. Properties

      Our principal executive office is located in Tustin, California. This facility houses our administrative operations. The Company leases approximately 33,104 square feet of office space at these premises pursuant to a lease that expires on April 14, 2004.

      We lease additional office space for our operations in Cherry Hill, New Jersey. This additional space consists of 2,265 square feet pursuant to a lease that expires on June 30, 2005.

      We believe that our leased property is in good condition, is well maintained and is adequate for our current and immediately foreseeable operating needs.

Item 3. Legal Proceedings

      On August 16, 2001, Joseph P. Saline, one of our directors, filed an action in California Superior Court for Orange County (Case No. 01CC10657) seeking the production of certain corporate documents. We filed a motion seeking to limit Mr. Saline’s ability to distribute the corporate documents he was seeking. The trial court issued an order that prohibited Mr. Saline from disclosing or discussing those documents with anyone other than his attorney and other members of our Board of Directors. We provided Mr. Saline with copies of certain corporate documents under the protection of the court order. Mr. Saline filed an appeal, seeking to reverse the restrictions on his right to disclose or discuss the documents with third parties. On July 30, 2002, the California Court of Appeals reversed the order of the Superior Court that limited Mr. Saline’s ability to disseminate the documents.

      On October 29, 2001, Mr. Saline filed a civil claim against us in California Superior Court for Orange County (Case No. 01CC13887). In his complaint, Mr. Saline alleged that he is the holder of 352,000 shares of preferred stock, with two-for-one conversion and voting rights that differ with the rights set forth in the Certificate of Determination for our Series A Preferred Stock filed with the California Secretary of State. The Company answered and filed a cross-complaint for declaratory relief alleging that Mr. Saline violated federal securities laws, committed fraud and usurped a corporate opportunity in connection with certain purchases of

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      On February 23, 2001, thirteen former employees filed a lawsuit against us in the Superior Court of the State of California in the County of Orange Superior Court (case number 01CC02611). The complaint was filed by David James and twelve other former employees. The plaintiffs’ complaint alleges claims for (a) unfair business practices, (b) breach of contract, and (c) fraud and intentional deceit. The plaintiffs allege, in summary, that they were formerly employed by the Company and are owed commissions and stock options from the Company under their alleged employment agreements and based on alleged representations that were made to them in the course of their employment. The Company filed a cross-complaint against the original plaintiffs asserting claims for (a) breach of contract; (b) unfair business practices; (c) misappropriation of trade secrets; (d) intentional interference with prospective economic advantage; (e) negligent interference with prospective economic advantage; (f) conversion; (g) slander; (h) prohibitory injunctive relief; (i) mandatory injunctive relief; and (j) declaratory relief. These claims are based upon written confidentiality agreements signed by the majority of the plaintiffs which the Company believes have been breached by the plaintiffs who are alleged to be wrongfully soliciting the Company’s investors and clients utilizing proprietary company materials and information. In addition, the Company filed a first amended cross-complaint that asserts additional cross-claims against plaintiff David James for rescission and restitution, fraud, money had and received, unjust enrichment and declaratory relief. In summary, the new claims asserted against Mr. James allege that Mr. James’ alleged employment contract and stock options were void or voidable and subject to rescission based on misrepresentations made to the Company by Mr. James. The plaintiffs are seeking, among other relief, damages in the amount of up to $10 million, plus costs and attorney fees. Commonwealth believes that it has satisfied its contractual obligations with respect to the plaintiffs and that there is no factual basis for the plaintiffs’ claim for damages. Our cross-complaint seeks injunctive relief and damages. Commonwealth is vigorously defending this lawsuit.

      On February 1, 2002, Joseph Saline, Kevin Biswell, Joseph O’Gundiji and Michael Doak filed a complaint in California Superior Court for Orange County against us to determine the validity of the election of the Company’s directors at the annual meeting of shareholders held in November 2001. On May 15, 2002, we entered into a confidential working settlement agreement with the plaintiffs, pursuant to which the parties agreed, among other things (a) to set the exact number of directors within the established range at seven until at least the end of the terms of the directors elected at the Company’s next annual meeting of shareholders; (b) to a set of procedures for the appointment of two new mutually acceptable directors to the Board of Directors; (c) that Mr. Saline will be entitled to receive compensation for his service as a nonemployee director; (d) that Mr. Biswell will be appointed to our advisory committee; (e) to mediate the pending lawsuits between Mr. Saline and us; and (f) to dispute resolution procedures and to the payment of costs related the disputes. On June 5, 2002, the court issued an order approving and implementing the settlement agreement. Pursuant to the procedures agreed upon in the working settlement agreement, William Popejoy and Eugene Sullivan were appointed as members of the Board of Directors on September 13, 2002.

      On March 22, 2002, we filed a complaint against Mr. Saline (Case No. 02-02442, U.S. District Court Central District of California), which was amended on August 23, 2002, alleging that Mr. Saline violated federal securities laws, committed libel, committed unfair business practices and breached his fiduciary duties

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      We are currently, and from time to time may become, involved in litigation concerning claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, including the legal proceedings described above, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial position.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of the Company’s stockholders during the fourth quarter of Fiscal 2002.

PART II

Market Information

      There is currently no established public trading market for any class of our equity securities.

Holders

      As of October 18, 2002, there were approximately 2,574 holders of our Common Stock and 61 holders of our Series A Convertible Preferred Stock.

Dividend Policy

      Our Series A Convertible Preferred Sock provides for cumulative dividends that accrue at a rate of 10% per annum. During fiscal 2001 and fiscal 2002, we have declared and paid cash dividends of $216,548 and $30,195, respectively, on our Series A Convertible Preferred Stock. As of July 31, 2002, accrued cumulative unpaid dividends on our Series A Convertible Preferred Stock were $137,970.

      We have not declared or paid a cash dividend on our common stock, and we do not anticipate paying any cash dividend for the foreseeable future. We presently intend to retain earnings to finance future operations, expansion and capital investment.

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 Report, under the caption “Equity Compensation Plan Information,” and that information is incorporated herein by reference.

Recent Sales of Unregistered Securities

      We have sold or issued the following securities during fiscal 2002 in reliance upon the exemption from registration provided by Section 3(a)(11) of the Securities Act of 1933, as amended:

	•	In August and November 2001, we issued an aggregate of 10,000 shares of our common stock upon the exercise of employee stock options at a price per share of $0.01, receiving gross proceeds in the amount of $100 in cash.
	•	In January 2002, we issued 11,000 shares of our common stock upon the exercise of an employee stock option at a price per share of $0.05, receiving gross proceeds in the amount of $550 in cash.

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	•	In January 2002, we issued 20,000 shares of our common stock upon the exercise of a director’s stock option at a price per share of $1.00, receiving gross proceeds in the amount of $20,000 in cash.
	•	In July 2002, we issued 10,961 shares of our common stock upon the exercise of an employee stock option at a price per share of $0.50, receiving gross proceeds in the amount of $5,480 in cash.

      At the time of each sale, and for the most recent fiscal year immediately preceding each such sale, we were a California corporation, maintained our principal office in California, derived at least 80% of our gross revenues from operations within California, had at least 80% of our assets located in California, intended to use, and did use, at least 80% of the net proceeds from the sales of the securities in the operation of our business in California and had a reasonable basis for believing that each purchaser resided in, and was doing business in, California. In addition, none of the purchasers had given us notice of any resales of the securities to persons residing outside of California.

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Item 6. Selected Financial Data

      The following selected financial data as of and for the dates and periods indicated have been derived from our consolidated financial statements. The selected financial data with respect to the consolidated statement of operations data for the period August 15, 1997 (date of incorporation) through July 31, 1998 and each of the four years in the period ended July 31, 2002 and our consolidated balance sheet data at July 31, 1998, 1999, 2000, 2001 and 2002 set forth below are derived from audited consolidated financial statements of the Company. The consolidated financial statements as of July 31, 2001 and 2002 and for each of the three years in the period ended July 31, 2002 and the independent auditors’ report thereon, are included elsewhere herein.

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	Because there is no established trading market in shares of our common stock, in each of fiscal 2001 and 2002, we valued our shares for financial reporting purposes at $3.05 per share and $1.86 per share, respectively. The stock-based compensation charges for the unvested portion of these performance-based options in fiscal 2001 was reversed in fiscal 2002.
(2)	No cash dividends have been paid on our common stock. Our convertible preferred stock provides for cumulative dividends, which accrue at the rate of 10% per annum and are payable at the discretion of our Board of Directors. Such dividends have been accrued as follows:

(3)	Per share information and weighted average shares outstanding for the period from August 15, 1997 through July 31, 1998 and for the years ended July 31, 1999 and 2000 have been restated to reflect the resolution of the status of our common stock issued to our founder as more fully disclosed in Notes 1 and 11 of the Notes to Consolidated Financial Statements included elsewhere herein.

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      Our primary business has been the sale of electric power to retail and commercial end-users in California and, beginning in January 2000, in Pennsylvania and the sale of electric power to wholesale customers in California and Pennsylvania. We are licensed by FERC as a power marketer and by the California, Michigan, Pennsylvania, New Jersey, New York, Texas and Ohio public utilities commissions as an electric services or electric generation supplier.

      As of July 31, 2002, we delivered electricity to approximately 89,000 customers in California and Pennsylvania. The growth of this business depends upon the deregulated status of each state, the availability of cost-effective energy purchases to us and the acquisition of retail or commercial customers by us.

      We do not have our own electricity generation facilities. The power we sell to our customers is purchased from third-party power generators. During fiscal 2000, in both California and Pennsylvania, we purchased electricity both under long-term contracts and in the spot market. By the end of fiscal 2001 and throughout most of fiscal 2002, substantially all of our electricity was purchased under long-term contracts.

Critical Accounting Policies and Estimates

      Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period.

      The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

	•	Independent system operator costs — Included in direct energy costs along with electric power purchased and scheduling coordination costs are the independent system operator (“ISO”) fees. The actual ISO costs are not finalized until a settlement process by the ISO is performed of each day’s activities of all grid participants. Prior to the completion of settlement, we estimate these costs based on historical trends and preliminary settlement information. The historical trends and preliminary information may differ from actual fees resulting in the need to record additional costs.
	•	Allowance for doubtful accounts — We maintain allowances for doubtful accounts for estimated losses resulting from non-payment of customer billings. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In addition, as a result of market conditions in California during fiscal 2001, the credit worthiness of several participants in the marketplace with whom we conduct business has deteriorated significantly. For example, PG&E, which declared bankruptcy, has withheld payments of approximately $1.1 million from their remittances to us. Although we have filed a Proof of Claim in PG&E’s bankruptcy proceedings to recover these amounts, we have established an allowance for doubtful accounts in the amount of these withholdings. If other utilities declare bankruptcy, additional allowances may be required.
	•	Unbilled receivables — Our customers are billed monthly at various dates throughout the month. Unbilled receivables represent the amount of electric power delivered to customers at the end of a period, but not yet billed. Unbilled receivables from sales in California are estimated by the Company as the number of kilowatt-hours delivered times 95% of the individual Utility Purchased Energy cost as published by each individual utility for residential customers. Unbilled receivables from sales in Pennsylvania are estimated in the same manner, except using the average current customer sales price per kilowatt-hour.

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	•	Legal claims — From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. 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 Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” To date, we have not been affected by any litigation or other contingencies that have had, or are currently anticipated to have, a material impact on the Company’s results of operations or financial position. 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 its contingencies. Such additional expense could potentially have a material impact on our results of operations and financial position.

      We make our estimates and judgments based on, among other things, knowledge of operations, markets, historical trends and likely future changes, and when appropriate, the opinions of advisors with knowledge and experience in certain fields. However, due to the nature of certain assets and liabilities, there are risks and uncertainties associated with some of the estimates and judgments which are required to be made. Actual results could differ from these estimates under different assumptions or conditions.

Results of Operations

Year ended July 31, 2002 compared to year ended July 31, 2001

Retail energy sales

      Electricity sales to retail and commercial end-users decreased by $3.0 million, or 3.0%, to $97.0 million for fiscal 2002 from $100 million for fiscal 2001. The decrease resulted primarily from a decrease in California electricity retail sales, partially offset by an increase in Pennsylvania electricity retail sales. The decrease in California electricity retail sales was due primarily to a drop in retail energy prices. The average retail price per kWh in California during fiscal 2002 was $.085, as compared to $.145 during fiscal 2001. Total kilowatt-hours of electricity billed in California during fiscal 2002 was 775.6 million compared to 563.4 million billed in the prior year. The year-to-year increase in kilowatt-hours billed in California was due to an increase in commercial end-users that the Company began servicing in October 2001. The average retail price per kWh in Pennsylvania during fiscal 2002 was $.058 compared to $.05 during fiscal 2001. Total kilowatt-hours of electricity billed in Pennsylvania during fiscal 2002 was 468.9 million compared to 378.6 million billed in the prior year. The year-to-year increase in kilowatt-hours billed in Pennsylvania was due to an increase in commercial end-users that the Company began servicing in June 2002.

      On September 20, 2001, the CPUC issued a ruling suspending “direct access” pursuant to legislation by the California state legislature requiring the CPUC to suspend “direct access” in California. The suspension of “direct access” means that retail electricity suppliers, such as the Company, will not be allowed to actively seek customers. This ruling permits the Company to keep its current customer base, but prohibits the Company from signing up new non direct access customers for an undetermined period of time. During June through September 2001, we entered into new long-term electric service agreements with several large commercial and industrial customers in California. The contracts were all completed prior to the September 20, 2001 CPUC ruling to suspend “direct access.” Based on the historical consumption data of these commercial and industrial customers, we expect these new contracts to add approximately 600 million kWhs annually at sales contract rates in the aggregate of $.089 per kWh. Delivery to these customers began in October 2001 and all the new customer meters were on-line by January 2002. Revenues related to these contracts was $14.9 million for fiscal 2002.

      At July 31, 2002, we have approximately 89,000 customers compared to approximately 88,000 customers at July 31, 2001.

Wholesale energy sales

      Wholesale electricity sales decreased by $60.6 million, or 76.3%, to $18.8 million during fiscal 2002 from $79.3 million during fiscal 2001. The decrease was primarily due to a decrease in California wholesale energy

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Green power credit

      Green power credit revenue decreased by $1.9 million, or 48.5%, to $2.1 million during fiscal 2002 from $4.0 million during fiscal 2001. The green power credit decrease is due to the expiration of the green power credit program in December 2001. The California legislature has approved the continuation of the program beginning January 1, 2003.

Direct energy costs

      Direct energy costs increased to $86.2 million for fiscal 2002, an increase of $9.6 million, or 12.5%, from $76.6 million for fiscal 2001. This increase is a result of increased direct energy costs in Pennsylvania during fiscal 2002, partially offset by decreased direct energy costs in California. The increase in direct energy costs in Pennsylvania was due to an increase in total kilowatt-hours purchased resulting from the need to service new retail customers. Total kilowatt-hours purchased in Pennsylvania during fiscal 2002 was 992.9 million, at an average price of $.04 per kWh, compared to purchases made during fiscal 2001 of 662.5 million at an average price of $.04 per kWh. The decrease in direct energy costs in California resulted from a decrease in the price per kWh in California, partially offset by an increase in the number of kWh purchased. Total kilowatt-hours purchased in California during fiscal 2002 was 1.2 billion at an average price of $.03 per kWh compared to purchases during fiscal 2001 of 980.1 million kilowatt-hours at an average price of $.04 per kWh. A decrease in scheduling costs to deliver energy to our customers also contributed to the decrease in direct energy costs for California. California scheduling costs decreased to $.1 million for fiscal 2002 from $4.6 million for fiscal 2001. California’s reduced scheduling costs were a result of credits for direct energy costs.

Selling and marketing expenses

      Selling and marketing expenses decreased $0.1 million, or 2.4%, to $3.5 million for fiscal 2002 from $3.6 million for fiscal 2001. The decrease is due primarily to a decrease in payroll of $0.2 million offset by an increase in consulting expenses of $0.1 million. The decrease in payroll expenses was the result of call center attrition. The increase in consulting expenses was the result of market research for our expansion into other states.

General and administrative expenses

      General and administrative expenses decreased $0.9 million, or 4.2%, to $20.3 million for fiscal 2002 from $21.2 million for fiscal 2001. The decrease is due to decreases in legal expenses, consulting expenses and bad debt expenses, partially offset by increases in payroll expenses, management fees for Summit Energy Ventures LLC (“Summit”), Pennsylvania gross receipts tax and depreciation expenses. The decrease in legal expenses is due to the higher expenses in fiscal 2001 related to the settlement with our founder which are not present in fiscal 2002. The increase in payroll expenses is due to the hiring of software development employees who were formerly consultants to the Company and bonuses paid in excess of the bonus accrual. Summit management

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Stock-based compensation charges

      Stock-based compensation charges decreased by $1.8 million, or 94.4%, to $(0.7) million for fiscal 2002 from $1.1 million for fiscal 2001. The decrease is due to the reversal of stock-based compensation related to unvested variable stock options due to the decrease in value of our Common Stock in fiscal 2002.

Interest income, net

      Interest income decreased by $0.7 million, or 42.5%, to $0.9 million for fiscal 2002 from $1.6 million for fiscal 2001. The decrease is attributable to the decrease in cash flow available for investments provided from operations, partially offset by the reduction in interest expense due to the termination of our line of credit during fiscal 2002. The average interest rate during fiscal 2002 was 2.02% compared to 4.62% during fiscal 2001. The average balance earning interest during fiscal 2002 was $47.1 million compared to $48.9 million during fiscal 2001.

Provision for income taxes

      The provision for income taxes decreased by $17.7 million, or 81.1%, to $4.1 million for fiscal 2002 from $21.9 million during fiscal 2001. The decrease is due primarily to the lower net taxable income in fiscal 2002 compared to fiscal 2001.

Net income

      Net income decreased by $55.4 million, or 91.5%, to $5.2 million for fiscal 2002 from $60.5 million for fiscal 2001. This decrease in net income is primarily attributable to a decrease in gross margin, partially offset by the decrease in provision for income taxes and stock-based compensation charges. The principal reason for the decrease in gross margin was the significant decrease in California electricity wholesale and retail prices. The average wholesale electricity price in California during fiscal 2002 was $.02 per kWh compared to $.17 per kWh during fiscal 2001. The average California retail electricity price was $.085 per kWh compared to $.145 per kWh during fiscal 2001. Fiscal 2002 prices are in alignment with historical prices. Fiscal 2001 prices were abnormally high as a result of the energy crisis during that period.

Year ended July 31, 2001 compared to year ended July 31, 2000

Retail energy sales

      Electricity sales to retail and commercial end-users increased by $12.7 million, or 14.5%, to $100.0 million for fiscal 2001 from $87.3 million for fiscal 2000. The increase resulted primarily from an increase in Pennsylvania electricity retail sales, partially offset by a decrease in California electricity retail sales. The increased Pennsylvania retail sales were attributable to having a full year of electricity sales in fiscal 2001 compared to seven months of sales in the comparable period of 2000. The average retail price per kWh in Pennsylvania during fiscal 2001 was $.052 compared to $.0475 during fiscal 2000. Total kilowatt-hours of electricity billed in Pennsylvania during 2001 was 378.6 million compared to 3.2 million in the prior year. The decreased California retail sales were attributable to a reduction in kilowatt-hours billed in California resulting from the commercial and industrial customers that were returned to their incumbent utilities during June and July 2000 because their energy consumption requirements would have created significant credit exposure for us. Many of the customers that we returned to their incumbent utility used the majority of their energy during peak hours which required us to purchase electricity in the spot market during the portions of the day when it was most expensive, often at a price in excess of our selling price. The return of these customers to their incumbent utilities enabled us to bring our electricity supply requirements in California at or below the quantity of electricity that we had secured under our long-term purchase contract and reduced the average amount we paid for electricity by approximately $.01 per kWh for fiscal 2001 as compared to fiscal 2000. Total

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Wholesale energy sales

      Wholesale electricity sales commenced in fiscal 2001. The $79.3 million wholesale sales revenue consisted of California sales of $70.7 million and Pennsylvania sales of $8.6 million. Our major California wholesale customer during 2001 was the State of California Department of Water Resources and Power. Our other significant wholesale customers included Sempra Energy and San Diego Gas and Electric. The California supply and demand conditions that drove up the wholesale electricity prices during fiscal 2001 began moving toward equilibrium in the fourth quarter as wholesale prices began to decline.

Green power credit

      Green power credit revenue decreased by $8.3 million, or 67.7%, to $4.0 million for fiscal 2001 from $12.3 million for fiscal 2000. The green power credits decreased due to a rate reduction from $.015 to $.01 per kWh beginning in June 2000 and reduced sales of electricity subject to the credit caused by the reduction in the number of customers eligible to obtain the credit beginning in June 2000.

Direct energy costs

      Direct energy costs decreased by $10.1 million, or 11.7%, to $76.6 million for fiscal 2001 from $86.7 million for fiscal 2000. This decrease was a result of lower costs in California, partially offset by increased costs in Pennsylvania. Decreased costs in California during fiscal 2001, as compared to fiscal 2000, were due to reduced requirements for the purchase of electricity created by the return of certain commercial and industrial customers to their incumbent utilities in June and July 2000, partially offset by an increase in wholesale electricity costs in the spot market. Increased costs in Pennsylvania are due to having only seven months of costs for fiscal 2000 compared to a full year of costs for fiscal 2001. In Pennsylvania, for the seven months in fiscal 2000 that we operated there, our average monthly purchase of electricity was 8.8 million kWh increasing to 55.3 million kWh monthly for fiscal 2001, as we established our customer base. Direct energy costs, as a percent of net revenues, decreased from 87.1% fiscal 2000 to 41.8% for fiscal 2001.

Selling and marketing expenses

      Selling and marketing expenses decreased $2.6 million, or 42.1%, to $3.6 million for fiscal 2001 from $6.2 million for fiscal 2000. This decrease was primarily a result of a decrease in promotional activities as we reduced our activities in connection with the solicitation of new customers. Advertising costs decreased $1.9 million and telemarketing payroll decreased $0.4 million due to the reduction of personnel in that department.

General and administrative expenses

      General and administrative expenses increased $5.8 million, or 37.7%, to $21.2 million for fiscal 2001 from $15.4 million for fiscal 2000. This is primarily the result of increased legal expenses of $5.3 million and bad debt expenses of $1.3 million compared to fiscal 2000. The increase in legal expenses is primarily related to the settlement with our founder of $4.8 million and the increase in bad debt expense is related to our providing for amounts due from PG&E and California Power Exchange, both of which have declared bankruptcy. These increases were partially offset by a decrease in customer termination cost of $0.7 million incurred in fiscal 2000. There were no additional customer termination costs in fiscal 2001.

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Stock-based compensation charges

      Stock-based compensation charges increased from $0.4 million for fiscal 2000 to $1.1 million for fiscal 2001. The stock-based compensation charges for fiscal 2001 resulted from performance-based stock options granted to our Chairman and Chief Executive Officer.

Interest income, net

      Interest income grew to $1.6 million for fiscal 2001, an increase of $1.1 million or 220%, from $0.5 million for fiscal 2000. The increase was attributable to the increase in cash flow available for investments provided from operations, offset in part by a $0.6 million increase in interest expense due to borrowings which were outstanding on our line of credit during fiscal 2001.

Provision for income taxes

      The provision for income taxes increased to $21.9 million during fiscal 2001 compared to no provision for income taxes for fiscal 2000 for which we reported a loss before income taxes. The income tax rate for fiscal 2001 was 26.6% which was below the expected income tax rate primarily due to a reversal of the valuation allowance on our deferred tax asset in the amount of $13.6 million.

Net income

      Net income increased to $60.5 million for fiscal 2001, an increase of $69.2 million, or 800.1%, from the $8.6 million loss for fiscal 2000. This increase in net income was primarily due to a $93.8 million increase in gross margin, offset in part by the provision for income taxes of $21.9 million. The principal reason for the $93.8 million increase in gross margin was the significant increase in California electricity prices. California revenues rose substantially while the average cost per kWh of the electricity that we sold was lower than in the prior year. Because we were able to acquire electricity in California during fiscal 2001 under a fixed price electricity procurement contract which extended through June 2002, the higher prices at which we were able to recall the electricity significantly increased our gross margin.

Liquidity and Capital Resources

      As of July 31, 2002, cash and cash equivalents were $43.0 million compared to $41.1 million as of July 31, 2001. Our principal source of liquidity to fund ongoing operations for the year ended July 31, 2002 was cash provided by operations.

      Cash flow from operations for fiscal 2002 was $3.5 million, a decrease of $58.3 million compared with cash flow from operations in fiscal 2001 of $61.8 million. The primary reason for the decrease in cash flow from operations was a decrease of $55.4 million in net income to $5.2 million for fiscal 2002 from $60.5 million for fiscal 2001.

      Cash flow used in investing activities for fiscal 2002 was $9.2 million, an increase of $8.1 million, compared with cash used in investing activities in fiscal 2001 of $1.1 million. The primary reason for the increase was $7.4 million used for Summit Energy investments in Envenergy Inc., Turbocor, LLC, and Power Efficiency Corporation. Purchase of property, equipment and intangibles consumed $1.8 million.

      Cash flow provided by financing activities for fiscal 2002 was $7.7 million, an increase of $31.5 million, compared with cash used in financing activities of $23.8 million in fiscal 2001. Restricted cash decreased by $14.0 million as a result of our use of $8.2 million to fund investments and management fees for Summit Energy Ventures LLC (“Summit”), release of the $5.7 million letter of credit related to our energy supply contract with Calpine Power Service Company and the $1.7 million letter of credit related to our energy supply contract with Connectiv Energy Supply, Inc. that were transferred to short-term investments, offset by the $1.5 million letter of credit established pursuant to the Reliant Energy Services contract and interest earned of $0.3 million of which $0.2 million was transferred to short-term investments. Borrowings under the Coast Business Credit Agreement decreased $3.9 million as a result of the termination of the line of credit at

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      Cash flow from operations for fiscal 2001 was $61.8 million, an increase of $76.9 million, compared with cash used in operations in fiscal 2000 of $15.0 million. The primary reason for this increase was that net profit for fiscal 2001 was $60.5 million, compared to a net loss of $8.6 million for fiscal 2000. California’s higher retail and wholesale prices were the key factors relating to our profitability. Investing activities for fiscal 2001 consisted of purchases of property and equipment in the amount of $1.1 million, a decrease of $0.6 million compared to fiscal 2000.

      Cash used in financing activities for fiscal 2001 was $23.8 million, compared to cash provided by financing activities of $14.7 million for fiscal 2000. The change of $38.4 million was attributable to (a) our $15.0 million investment in Summit which is classified as restricted cash; (b) the absence of sales of our common stock during fiscal 2001, which provided $12.1 million in net proceeds during fiscal 2000; (c) an increase in restricted cash of $4.8 million used to establish letters of credit required by energy suppliers to support increased purchases of electricity in fiscal 2001; and (d) the use of $5.3 million in fiscal 2000 from borrowings under our credit facility.

      The most significant trend that has adversely effected our liquidity and capital resources during fiscal 2002 was the return to historical energy prices in the retail and wholesale markets in California. We believe that consumer energy prices have leveled off and will remain at their current level for the foreseeable future and that the wholesale energy market has stabilized after significant fluctuations during fiscal 2000 and 2001. Based on these factors, we believe that our liquidity and capital resources will not be adversely affected in fiscal 2003.

      As a result of market conditions in California during fiscal 2002, the credit worthiness of several participants in the marketplace with whom we conduct business deteriorated significantly. PG&E has withheld payments of approximately $1.1 million from their remittances to us. Although we have filed a proof of claim in PG&E’s bankruptcy proceedings to recover these amounts, there is no assurance that we will recover any of the payments withheld. Accordingly, we have established an allowance for doubtful accounts in the amount of these withholdings.

      As of January 31, 2002, $15 million in cash was invested in Summit. Under certain circumstances, we may, at our discretion, invest an additional $10 million in Summit. If this additional cash were invested with Summit, it would reduce the amount of cash that would otherwise be used for our growth initiatives. We are not obligated to make any further investment in Summit. In the event that the investment manager desires to cause Summit to issue membership interests to any other party, we shall have the right of first refusal to make the additional capital contribution on terms not less favorable as those proposed to such other party.

      On January 4, 2002, the Board of Directors of the Company approved a $10 million stock repurchase program. Under this program, the Company may purchase up to $10 million of its common stock, options and warrants, from time to time over an 18 month period, in open market or privately negotiated, subject to market conditions and other factors. As of October 28, 2002, no purchases of common stock, options or warrants have been made pursuant to this authority.

      We have entered into two new electricity supply contracts to replace a substantial portion of the electricity which we purchased in California under the Calpine Power Services Company contract which expired on June 30, 2002. The contracts are aligned to meet our projected load service requirements. Pursuant to the terms of these new agreements, we are obligated to minimum electric purchases of $20 million during the year ending July 31, 2003.

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      The following table shows our contractual cash obligations and commercial commitments as of July 31, 2002:

      Based upon our current plans, level of operations and business conditions, we believe that our cash and cash equivalents together with cash generated from operations will be sufficient to meet our capital requirements and working capital needs for at least the next 12 months. However, there can be no assurance that we will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to us.

Factors That May Affect Future Results

If competitive restructuring of the electric markets is delayed or does not result in viable competitive market rules, our business will be adversely affected.

      The Federal Energy Regulatory Commission (“FERC”) has maintained a strong commitment over the past six years to the deregulation of electricity markets. This movement would seem to indicate the continuation and growth of a competitive electric retail industry. As of October 2002, 24 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 incumbent utilities and customer switching rates have been low. Only recently have a small number of markets opened to competition under rules that we believe may offer attractive competitive opportunities. 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 that 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, incumbent utilities, consumer advocacy groups and potential 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 assure shareholders 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, significant or rapid price increases. The legislative and regulatory processes in some states take prolonged periods. In a number of jurisdictions, it may be many years from the date legislation is enacted until restructuring is completed.

      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 shareholders that federal legislation will not be passed in the future that could materially adversely affect our business.

We may incur substantial operating losses and we cannot assure shareholders that we will continue to be profitable.

      We have recognized significant revenue and our ability to generate such revenue is subject to uncertainty. In addition, we intend to increase our operating expenses to develop our business, including brand development, marketing and other promotional activities and the continued development of our billing,

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	•	Our ability to attract and to retain a critical mass of customers at a reasonable cost;
	•	Our ability to develop internal corporate organization and systems;
	•	The continued competitive restructuring of retail energy markets with viable competitive market rules; and
	•	Our ability to manage effectively our energy requirements and to sell our energy at a sufficient margin.

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 company for the supply of a commodity as critical to their well-being as electric power. 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 will be materially adversely affected.

If the Company can not obtain sufficient amounts of credit, our future growth and profitability could be adversely impacted.

      The Company must obtain credit from a combination of sources to support future growth and profitability. This includes financial institutions, trade credit, strategic alliances, and others.

We depend upon internally 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. Problems that arise with the performance of our 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. Also, any interruption of these services could be disruptive to our business.

Substantial fluctuations in electricity prices or the cost of transmitting and distributing electricity could have a material adverse affect on us.

      To provide electricity to our customers, we must, from time to time, purchase electricity in the short-term or “spot” wholesale energy markets, which are often highly volatile. In particular, the wholesale electric power market often experiences enormous price fluctuations during peak load periods. Furthermore, to the extent that we enter into contracts with customers that require us to provide energy at a fixed price over an extended period of time, we may incur losses caused by rising wholesale electricity prices. Periods of rising electricity prices may reduce our ability to compete with incumbent utilities because their regulated rates may not immediately increase to reflect these increased costs. The Energy Service Provider takes on the risk of purchasing power for an uncertain load and if the load does not materialize it leaves the ESP in a “long” position. Or, if unanticipated load appears, requiring the ESP to meet its energy requirements by purchasing additional energy leaving the ESP in a short position, the Company could be exposed to the price volatility of the wholesale spot markets. Historically, electricity has been the most volatile commodity in the world. Any of these contingencies could substantially increase our costs of operation if we are forced to purchase electricity at very high prices. Such factors could have a material adverse effect on our financial condition.

      We also are required to arrange for the scheduling and transmission of wholesale electricity to the local utilities for distribution over their distribution networks. In some circumstances we may be unable to deliver the energy to the local distribution point in a particular market at the appropriate time. If we are unable to meet our delivery requirements to the local utilities, we may be subject to fines and penalties.

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Suppliers of electricity have been experiencing deteriorating credit quality.

      We continue to actively manage our counterparty credit portfolio to attempt to reduce the impact of a potential counterparty default. As of July 31, 2002, the majority of our courterparties are rated investment grade or above by the major rating agencies. These ratings are subject to change at any time and with no advance warning. This situation could have an adverse impact on the source of our electricity purchases.

If the wholesale price of electricity decreases, we may be required to post letters of credit to secure our obligations under our long term energy contracts.

      Since the price of the electricity we purchase under long-term contracts is fixed over the term of the contracts, if the market price of wholesale electricity decreases below the contract price, the power generator may require us to post security in the form of a letter of credit to hedge against our defaulting on the contract and purchasing lower cost energy on the market. If we are required to post such security a portion of our cash would become restricted, which could adversely affect our liquidity.

We will be required to rely on utilities with whom we will be competing to perform some functions for our customers.

      Under the regulatory structures adopted in most jurisdictions, we will be required to enter into agreements with local incumbent 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 agreements could delay or negatively impact our ability to serve customers in those jurisdictions, which could have a material negative impact on our business, results of operations and financial condition.

      We will also be dependent on local utilities for maintenance of the infrastructure through which electricity 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 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. In those states, we will be required to rely on the local utility to provide us with our customers’ information regarding energy usage 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 to confirm the accuracy of the information provided by the local utility and we may not be able to control when we receive payment from the local utility. We also may be limited in our ability to create a supplier relationship with our customers. If we do not receive payments from the local utility on a timely basis, our working capital may be impaired.

In some markets, we will be 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 many of 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 for the cost of the electricity and to the local utilities for services related to the transmission and distribution of electricity 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.

We may face strong competition from incumbent utilities and other competitors.

      In most markets, our principal competitor may be the local incumbent utility company or its unregulated affiliates. The incumbent utilities have the advantage of long-standing relationships with their customers and they may have longer operating histories, greater financial and other resources and greater name recognition in

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      Some of our competitors, including incumbent utilities, have formed alliances and joint ventures in order to compete in the restructured retail electricity industry. Many customers of these incumbent utilities may decide to stay with their long-time energy provider if they have been satisfied with its service in the past. Therefore, it may be difficult for us to compete against incumbent utilities and their affiliates for customers who are satisfied with their historical utility provider.

      In addition to competition from the incumbent utilities and their affiliates, we may face competition from a number of other energy service providers, and other energy industry participants who may develop businesses that will compete with us in both local and national markets. 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 us.

Our revenues and results of operations are subject to market risks that are beyond our control.

      We sell electricity that we purchase from third-party power generation companies into competitive wholesale power markets or on a contractual basis. We are not guaranteed any rate of return through mandated rates, and our revenues and results of operations are likely to depend, in large part, upon prevailing market prices for electricity in our regional markets and other competitive 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 results from multiple factors, including:

	•	weather conditions,
	•	seasonality,
	•	usage,
	•	illiquid markets,
	•	transmission or transportation constraints or inefficiencies,
	•	availability of competitively priced alternative energy sources,
	•	demand for energy commodities,
	•	natural gas, crude oil and refined products, and coal production levels,
	•	natural disasters, wars, embargoes and other catastrophic events, and
	•	federal, state and foreign energy and environmental regulation and legislation.

Our results are subject to quarterly and seasonal fluctuations.

      Our quarterly operating results have fluctuated in the past and will continue to do so in the future as a result of a number of factors, including variations in levels of demand due to weather and seasonality and volatility of market prices.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      We do not have or use any derivative instruments to hedge the financial risks of our investments, nor do we have any plans to enter into such instruments. We generally invest cash equivalents in high-quality, short-term credit instruments consisting primarily of high yielding money market funds, bankers acceptance notes

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      Since we do not generate any of the electricity that we sell, our business has exposure to market volatility in prices of electricity. To mitigate risks relative to the movements in electricity prices, we have entered into primarily fixed-priced contracts for the purchase of electricity through the wholesale electricity market. Nevertheless, to the extent demand from our customers exceeds the supply we have obtained through fixed-price contracts, we are subject to risks relative to the movements in electricity prices.

      An electricity price change of per $.01 kWh, has an estimated annual impact on our net revenue of:

Item 8. Financial Statements and Supplementary Data

      The financial statement information, including the report of independent accountants, required by this Item 8 is set forth on pages F-1 to F-26 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-25 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

      Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information About Our Directors

      The following table sets forth information regarding our directors, including their age as of October 18, 2002 and business experience during the past five years. Each of our directors has served continuously as a director of the Company since the date indicated in his or her biography below, and each is currently serving a one year term expiring at the Company’s next annual meeting or until his or her respective successor is elected and qualified.

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Information with Respect to the Company’s Executive Officers

      The following table sets forth certain information regarding our executive officers, including their respective ages and their business experience during the last five years, as of October 18, 2002. Executive officers are elected by, and serve at the pleasure of, the Board of Directors.

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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 greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

      With the exception of Joseph P. Saline, Jr., one of the Company’s directors, who, to our knowledge has yet to file a Form 3 indicating his initial ownership of shares of our Common Stock, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required during the fiscal year, our officers, directors and greater than 10% beneficial owners complied with all Section 16(a) filing requirements.

Item 11. Executive Compensation

Compensation of the Company’s Directors

      Directors who also are our employees are not paid any fees or remuneration, as such, for their service on the Board of Directors or on any Board committee.

      Cash Compensation. Each non-employee (outside) director is paid a quarterly retainer in the amount of $6,250 and a fee of $500 for each Board Meeting which the Board member attends. Directors who serve on Board Committees (other than the chairman of such committee) are paid $300 for each committee meeting the Board member attends. Committee Chairpersons are paid $500 for each such committee meeting the Chairperson attends.

      Stock Options. In connection with their election to our Board, Mr. Perkins, Ms. Jonas and Mr. Goodman each are entitled to receive an annual grant of options to purchase up to 50,000 shares of our common stock at an exercise price set by the Company from time to time.

Compensation of the Company’s Executive Officers

      The Company is required by the SEC to disclose compensation paid by the Company during the last three fiscal years to (a) the Company’s Chief Executive Officer; (b) the Company’s four most highly compensated executive officers, other than the Chief Executive Officer, who were serving as executive officers at the end of fiscal 2002; and (c) up to two additional individuals for whom such disclosure would have been provided under clause (a) and (b) above but for the fact that the individual was not serving as an executive officer of the Company at the end of fiscal 2002; provided, however, that no disclosure need be provided for any executive officer, other than the Chief Executive Officer, whose total annual salary and bonus does not exceed $100,000.

      Accordingly, the following sections disclose information regarding compensation paid by the Company during the last three fiscal years to (a) Mr. Carter, the Company’s Chief Executive Officer; and (b) Richard Paulsen, James L. Oliver, John A. Barthrop, and Scott A. Petterson, the four most highly-compensated executive officers, other than the Chief Executive Officer, who were serving as executive officers at the end of fiscal 2002 and whose salary and bonus exceeded $100,000. All of these officers are referred to in this Proxy

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Summary Compensation Table

      The following table sets forth for each of the past three fiscal years, all compensation received for services rendered in all capacities by the Named Executive Officers.

(1)	Bonus compensation is determined pursuant to employment contracts and/or by the Compensation Committee and is generally based upon performance measured on a calendar year basis.
(2)	For Mr. Carter, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $15,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $46,953. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $15,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $20,641. The amount attributable to perquisites in Fiscal 2000 consists of an automobile allowance of $7,800, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $2,367.
(3)	For Mr. Paulsen, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $9,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $12,446. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $2,865, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $2,792.
(4)	For Mr. Barthrop, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $7,200, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $9,003. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $4,800, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $5,606. The amount attributable to perquisites in Fiscal 2000 consists of reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $877.
(5)	For Mr. Oliver, the amount attributable to perquisites in Fiscal 2002 consists of an automobile allowance of $8,600, and reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $11,396. The amount attributable to perquisites in Fiscal 2001 consists of an automobile allowance of $4,800, and reimbursement for medical expenses (including gross up payments

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	to pay income taxes on reimbursements) of $7,366. The amount attributable to perquisites in Fiscal 2000 consists of an automobile allowance of $2,800.
(6)	For Mr. Petterson, the amount attributable to perquisites in Fiscal 2002 consists of reimbursement for medical expenses (including gross up payments to pay income taxes on reimbursements) of $9,619. The amount attributable to perquisites in Fiscal 2001 consists of reimbursement for medical expenses (including gross up payments to

Stock Option Grants.

      The following table shows stock option grants to the Named Executive Officers during fiscal 2002.

Option/SAR Grants in Last Fiscal Year

(1)	The Company is required by the SEC to use 5% and 10% assumed rate of appreciation over the ten year option term. This does not represent the Company’s estimate or projection of the future Common Stock price. If the Common Stock does not appreciate, the Named Executive Officers will receive no benefit from the options.
(2)	These options were granted pursuant to the terms of Mr. Carter’s employment agreement, which provides for the granting of options to purchase up to 300,000 shares of the Company’s Common Stock each January from 2001 through 2004 upon meeting or exceeding the Company’s financial performance objectives as set forth in its business plan. The Company exceeded the applicable performance goals by at least 10% in 2001, entitling Mr. Carter to an option to purchase 300,000 shares of the Company’s Common Stock. These options were fully vested on the date of grant.

Option Exercises/ Fiscal Year End Value.

      The following table shows stock option exercises and the value of unexercised stock options held by the Named Executive Officers during fiscal 2002.

Aggregated Option/ SAR Exercises in Last Fiscal Year

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(1)	Represents the positive difference between the Company valuation of $1.86 per share of Common Stock as of July 31, 2002 and the exercise price of the options. There is no market value for the Common Stock. This valuation was made by the Company for accounting and financial reporting purposes and does not reflect actual transactions.

Employment Contracts and Change of Control Agreements

      Ian B. Carter. Mr. Carter serves as Chairman and Chief Executive Officer of the Company pursuant to an employment agreement originally entered into on January 1, 2000, as amended and restated on November 1, 2000. The agreement provides for Mr. Carter’s employment through January 31, 2005.

      Mr. Carter is entitled to a minimum base salary of $275,000 for the first year of his employment, with annual increases of $50,000 per year for each of the first four years, followed by a $75,000 increase for the fifth year of the contract. In addition, Mr. Carter is entitled to receive a bonus of $100,000 and any additional discretionary cash bonus based on the Company’s results of operation. In addition, Mr. Carter’s base salary may be increased from time-to-time by the Board of Directors. Under his employment agreement, Mr. Carter is eligible to earn options to purchase, in the aggregate, up to 3,600,000 shares of the Company’s common stock on the terms and subject to the conditions described under the heading “Stock Options Granted to Company’s Chairman and Chief Executive Office and Related Stock-based Compensation” in Note 9 to the Consolidated Financial Statements, which is incorporated herein by reference.

      If during the term of the agreement, Mr. Carter is terminated, leaves, or is replaced as a result of: (a) all or substantially all of the assets of the Company or more than fifty percent (50%) of the issued and outstanding voting shares of the Company being acquired by any one person or entity not then affiliated with the Company; (b) control of the Company being taken over by a group of shareholders when no significant change of ownership has taken place; or (c) a merger, acquisition, strategic alliance or any other event that could bring substantial capital into the Company, the Company will pay Mr. Carter an amount equal to eight times the annual base salary due him plus the amount of taxes payable by Mr. Carter. In such events, Mr. Carter has the right to require the Company to repurchase all of his stock and all stock options referenced in his agreement, whether earned or unearned, at a value two times the then aggregate price value of the Company’s stock.

      The Company may terminate Mr. Carter’s employment upon Mr. Carter’s death, total disability, or for cause. Upon a termination for death or total disability, the Company will continue to pay Mr. Carter for a period of one year thereafter or until expiration of the term of the agreement, whichever occurs first, his then current base salary and bonus. “For cause” is limited to a conviction, entry of plea of guilty or nolo contendere for any felony that would materially and adversely interfere with his ability to perform his services of his employment. In the event of a termination for cause, Mr. Carter is entitled to receive all compensation and benefits payable to him through the date of termination.

      Mr. Carter may terminate his employment only upon (a) the sale of all or substantially all of the Company’s assets to a person unaffiliated with the Company or the occurrence of a change of control without Mr. Carter’s consent or (b) the Company’s material breach of the agreement. In the case of a termination resulting from a sale of assets or change of control, Mr. Carter is entitled to receive a payment equal to eight times his then current base salary. In the case of termination due to the Company’s material breach of contract, Mr. Carter is entitled to receive a payment equal to the monetary value of all of the compensation and benefits payable to him for the remainder of the term.

      If at the expiration of the term, the Company has met or exceeded the projections set forth in the business plan, and the Company does not offer to extend Mr. Carter’s employment on terms no less favorable than those stated in the agreement, the Company will pay Mr. Carter a sum of $100,000 for a period of ten years. Mr. Carter will consult to the Company during that period and be Vice-Chairman of the Board.

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      Richard L. Paulsen. Mr. Paulsen serves as Chief Operating Officer of the Company pursuant to an employment agreement entered into on November 1, 2000. The agreement provides for Mr. Paulsen’s employment through December 31, 2004.

      Mr. Paulsen will receive a base salary according to the following schedule, subject to increases which the Chief Executive Officer and the Compensation Committee may grant from time to time: $275,000 for the first twelve months of his employment, $325,000 for the second twelve months, $375,000 for the third twelve months and $425,000 per annum thereafter. Mr. Paulsen will be entitled to an annual cash bonus of $75,000 for calendar years 2001 and 2002, and $100,000 thereafter based upon the number of meters then under contract.

      If during the term of the agreement there is a change in control, then the Company will pay Mr. Paulsen a cash bonus equal to the sum of eight times his then annual base salary plus the amount of certain applicable taxes payable by him. Mr. Paulsen has the right to require the Company to repurchase all of his stock and all stock options referenced in his agreement, whether earned or unearned, at a value two times the then aggregate price value of the Company’s stock, not to exceed $10.00 per share.

      The agreement will terminate upon the occurrence of any of the following: Mr. Paulsen’s death, total disability, material breach of the agreement or fiduciary duty by Mr. Paulsen or written notice of Mr. Paulsen’s decision to terminate his employment. If Mr. Paulsen’s employment is terminated in any of the reasons described above, he will be entitled to receive the base salary and benefits earned through the date of termination. If Mr. Paulsen’s employment is terminated for any other reason, then he will be entitled to receive (a) his base salary and benefits earned through the date of termination and (b) an amount equal to one and one-half times his then current annual base salary.

      James L. Oliver. Mr. Oliver serves as Chief Financial Officer of the Company pursuant to an employment agreement entered into on November 1, 2000. The agreement provides for Mr. Oliver’s employment through December 31, 2004.

      Mr. Oliver will receive a base salary according to the following schedule, subject to increases which the Chief Executive Officer and the Compensation Committee may grant from time to time: $150,000 for the first twelve months of his employment, $180,000 for the second twelve months, $210,000 for the third twelve months and $240,000 per annum thereafter. Mr. Oliver will be paid an annual cash bonus of 30% of his then current annual salary provided that the Company has met or exceeded the projections in its annual business plan or as the board of directors deems appropriate.

      If during the term of the agreement there is a change in control, as defined in the agreement, then the Company will pay Mr. Oliver a cash bonus equal to the sum of four times Mr. Oliver’s then current annual base salary plus the amount of certain taxes payable by Mr. Oliver. In the event of a sale of assets or any change of control as defined therein, Mr. Oliver shall have the right to require the Company to repurchase all of his stock and stock options, then earned or to be earned, at two times the then aggregate price value of the Company’s stock not to exceed $10.00 per share.

      The agreement will terminate upon the occurrence of any of the following: Mr. Oliver’s death, total disability, material breach of the agreement or fiduciary duty by Mr. Oliver or written notice of Mr. Oliver’s decision to terminate his employment. If Mr. Oliver’s employment is terminated in any of the manners described above, he will be entitled to receive the base salary and benefits earned through the date of termination. If Mr. Oliver’s employment is terminated for any other reason, then he will be entitled to receive (a) his base salary and benefits earned through the date of termination and (b) an amount equal to one and one-half times his then current annual base salary.

      John A. Barthrop. Mr. Barthrop serves as Chief Legal Officer of the Company pursuant to an employment agreement dated on November 1, 2000. The agreement provides for Mr. Barthrop’s employment through December 31, 2004.

      Mr. Barthrop will receive a base salary according to the following schedule, subject to possible increases which the Chief Executive Officer and the Compensation Committee may grant from time to time: $160,000

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      If during the term of the agreement there is a change in control, as defined in the agreement, then the Company will pay Mr. Barthrop a cash bonus equal to the sum of four times Mr. Barthrop’s then current annual base salary plus the amount of certain taxes payable by Mr. Barthrop.

      The agreement will terminate upon the occurrence of any of the following: Mr. Barthrop’s death, total disability, material breach of the agreement or fiduciary duty by Mr. Barthrop or written notice of Mr. Barthrop’s decision to terminate his employment. If Mr. Barthrop’s employment is terminated in any of the manners described above, he will be entitled to receive his base salary and benefits earned through the date of termination. If Mr. Barthrop’s employment is terminated for any other reason, then he will be entitled to receive (a) the base salary and benefits earned through the date of termination and (b) an amount equal to one and one-half times his then current annual base salary.

      Pursuant to the employment agreements dated November 1, 2000, Messrs. Paulsen, Barthrop and Oliver, have been or granted option to purchase an aggregate of 900,000, 500,000 and 500,000 shares, respectively, of the Company’s Common Stock. The options will have a three-year vesting period and an exercise price of $2.75 a share. All of the options will expire on November 1, 2007.

      Scott A. Petterson. We have entered into a Change of Control Agreement dated November 1, 2000 with Scott A. Petterson, our Vice President and Corporate Controller. If during the term of the agreement there is a change in control, as defined in the agreement, then the Company will pay Mr. Petterson a cash bonus equal to Mr. Petterson’s then current annual base salary. In the event of a sale of assets of any change of control as defined therein, Mr. Petterson shall have the right to require the Company to repurchase all of his stock and stock options, then earned or to be earned, at two times the then aggregate price of the Company’s stock.

Compensation Committee Interlocks and Insider Participation

      Executive compensation is determined by a Compensation Committee elected by our Board of Directors. The Compensation Committee is currently comprised of: Robert Perkins, Craig Goodman and Junona Jonas. The Compensation Committee was formed by the Board in September 1999, and both Mr. Perkins and Mr. Carter were appointed to the Compensation Committee in December 1999. Mr. Goodman and Ms. Jonas were appointed in January 2002 and replaced Mr. Gates (a former board member), and Mr. Carter on the Compensation Committee. The Compensation Committee meets periodically or on an as needed basis and decides compensation structure and amounts on the basis of comparable executive compensation structures and amounts as established by a peer group of companies, our performance and other factors as may be determined to be useful in making such determination by the Compensation Committee. None of the current Compensation Committee members are or has been an officer or employee of Commonwealth Energy Corporation. Prior to his replacement on the compensation committee, Mr. Carter recused himself on compensation issues relating to himself. No member of the Compensation Committee is or has been a director or member of the compensation committee of another entity, one of whose executive officers serves or has served on our Compensation Committee. In addition, no member of the Compensation Committee is or has been the member of a compensation committee of another entity, one of whose executive officers is or has been a member of our Board of Directors.

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      The following table contains certain information as of the Record Date regarding all persons who were the beneficial owners of more than 5% of the outstanding shares of Common Stock, each of the directors of the Company, each nominee for election to become a director, each of the executive officers named in the Summary Compensation Table set forth below under the caption “Compensation of Executive Officers” (we refer to all these officers as the “Named Executive Officers”) and all directors and executive officers as a group. The persons named hold sole voting and investment power with respect to the shares shown opposite their respective names, unless otherwise indicated. The information with respect to each person specified is as supplied or confirmed by such person, based upon statements filed with the Securities and Exchange Commission, or based upon the actual knowledge of the Company.