U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
General Form for Registration of Securities
of Small Business Issuers
Under Section 12(b) or (g) of
the Securities Exchange Act of 1934
POWER EFFICIENCY CORPORATION
(Name of Small Business Issuer)
Delaware 22-3337365
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Number)
Organization)
4220 Varsity Drive, Suite E
Ann Arbor, MI 48108
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(Address of Principal Executive Offices including Zip Code)
734-975-9111
(Issuer's Telephone Number)
Securities to be Registered Under Section 12(b) of the Act: None
Securities to be Registered Under Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
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TABLE OF CONTENTS
Part I
Item 1. Description of Business
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Description of Property
Item 4. Security Ownership of Management
Item 5. Directors and Executive Officers
Item 6. Executive Compensation.
Item 7. Certain Relationships and Related Transactions
Item 8. Description of Securities
Part II
Item 1. Market for Common Equity and Related Stockholder Matters
Item 2. Legal Proceedings
Item 3. Changes in and Disagreements with Accountants
Item 4. Recent Sales of Unregistered Securities
Item 5. Indemnification of Directors and Officers
Part F/S
Item 1. Financial Statements
Part III
Item 1. Index to Exhibits
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FORWARD-LOOKING STATEMENTS
This Form 10-SB contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "PSLRA"), including, but
not limited to statements related to the Registrant's business objectives and
strategy. Such forward-looking statements are based on current expectations,
estimates and projections about the Registrant's industry, management beliefs,
and certain assumptions made by the Registrant's management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed, forecasted, or contemplated by any such forward- looking
statements. The PSLRA does not apply to initial public offerings.
Factors that could cause actual events or results to differ materially include,
among others, the following: continued market acceptance of Power Efficiency
Corporation's (the "Registrant") line of Power Commander(TM) products, the
Registrant's ability to expand and/or modify its line of Power Commander(TM)
products on an ongoing basis, intense competition from other developers,
manufacturers and/or marketers of energy reduction and/or power saving products,
the Registrant's negative net tangible book value, delays or errors in the
Registrant's ability to meet customer demand and deliver Power Commander(TM)
products on a timely basis, the Registrant's lack of working capital, the
Registrant's need to relocate and/or upgrade its facilities, and other risks
inherent in and associated with doing business an engineering intensive
industry. See, "Management's Discussion and Analysis or Plan of Operation --
Factors That May Affect Future Results and Market Price of Stock." Given these
uncertainties, investors are cautioned not to place undue reliance on any such
forward-looking statements.
Unless required by law, the Registrant undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. However, readers should carefully review the risk
factors set forth in other reports or documents the Registrant files from time
to time with the Securities and Exchange Commission (the "SEC"), particularly
the Annual Reports on Form 10-KSB, the Quarterly Reports on Form 10-QSB and any
Current Reports on Form 8-K.
The Registrant is voluntarily filing this Form 10-SB registration statement in
order to: (i) make information concerning its business plan, including
financials, as required by the SEC available to the public and its existing and
potential investors; and (ii) meet certain listing requirements for publicly
traded securities on the National Association of Securities Dealers' (NASD),
Over the Counter Electronic Bulletin Board. The Registrant intends to file the
interim and periodic reports required under the Exchange Act of 1934, as amended
("Exchange Act"), in order to stay in compliance with the Exchange Act. The
Registrant is currently quoted on the OTC Pink Sheets market under the ticker
symbol PREF.
In addition, the Registrant believes that by filing this Form 10-SB and being
obligated to file reports subject to Section 13 of the Exchange Act as well as
listing its common stock on the OTC Electronic Bulletin Board, the Registrant
can attract the financing necessary to implement its plan of business. The
Registrant anticipates filing an information statement
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with a sponsoring NASD Broker-Dealer for listing of the Registrant's common
stock on the OTC Electronic Bulletin Board upon completion of the comment period
for this Form 10-SB filing.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development
The Registrant was incorporated in Delaware on October 19, 1994. From inception
through 1997, the Registrant was a development stage entity that sought to
become engaged in the design, development, marketing and sale of proprietary
solid state electrical components designed to effectively reduce energy
consumption in alternating current induction motors. Alternating current
induction motors are commonly found in industrial and commercial facilities
throughout the world.
Commencing in 1997, the Registrant commenced the sale of Power Commander(TM),
its principal and proprietary product, which results in reduced energy
consumption in alternating current induction motors in industrial applications
of approximately 25 to 35 percent.(1) In addition, the Power Commander(TM)
extends motor life, minimizes maintenance, results in cooler running, reduced
stress and strain on the motor and reduces stress and strain on accompanying
electrical and mechanical systems(2). The Registrant's Power Commander(TM) was
the subject of a United States Patent granted in 1997. The Registrant offers the
Power Commander(TM) in two versions, each of which is a distinctly different
product, marketed and sold to different applications using different techniques.
These two products are the Three-Phase Power Commander(TM) used in industrial
and commercial applications and the Single-Phase Power Commander(TM) used in
consumer applications such as home appliances and the like.
On August 7, 2000, and pursuant to the terms and conditions of an Asset Purchase
Agreement (the "Asset Agreement") between the Registrant and Performance
Control, LLC, a Michigan limited liability company and largest distributor of
the Registrant's products ("Percon"). Pursuant to the Asset Agreement, the
Registrant acquired Percon's (i) contracts; (ii) current product and inventory;
(iii) state and municipal permits, certificates, registrations, licenses and
authorizations; (iv) Intellectual Property; (v) goodwill; (vi) accounts
receivable; (vii) prepaid expenses; (viii) furniture, fixtures and equipment;
(ix) Customer Lists; and (x) Internet web site located at
www.performancecontrol.com
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(1) Evaluation of Power Efficiency Corporation's Power Commanders(TM). June
10, 1999. J.D. Kueck and R.H. Staunton, Oak Ridge Laboratory, Oak Ridge,
Tennessee.
Motor Controllers Keep Escalating Costs in Check. Energy Users News, April
2000 Edition, page 25.
(2) Energy Savings on Escalators Attracts Utility-sponsored Rebates.
February 2000 Edition of Elevator World Magazine, page___.
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(collectively the "Assets") in consideration for an aggregate of 1,112,245
authorized but unissued shares of the Registrant's common stock, $.001 par value
per share. The Registrant also assumed $438,888.20 of Percon's liabilities. The
closing of the Registrant's purchase of the Assets was conditioned upon the sale
of a minimum of 12 units in the Registrant's May 16, 2000 private offering of a
minimum of 12 ($300,000) and a maximum of 40 ($1,000,000) units under and
pursuant to the provisions of Rule 506 of Regulation D under the Securities Act
of 1933, as amended. Each unit consisted of 25,000 shares of the Registrant's
Common Stock, $.001 par value per share, offered at $1.00 per share; and a five
year warrant to purchase 25,000 additional shares of the Registrant's Common
Stock at $3.00 per share during the first year, $4.00 per share during the
second year and $5.00 per share during the third year. As part of the
transaction with Percon, the Registrant, Nicholas Anderson and Anthony Caputo,
its two principal stockholders; and Percon, Philip Elkus and Stephen L. Shulman,
its two principal members entered into a Stockholders' Agreement dated August 7,
2000 (the "Stockholders' Agreement"). The Stockholders' Agreement provides for:
(i) the management of the Registrant; (ii) the regulation of the stockholder's
rights in connection with their interests in the Registrant; (iii) the
circumstances under which the sale, assignment, transfer, encumbrance or other
disposition of their respective issued and outstanding shares in the Registrant
shall be restricted; and (iv) the restriction on shares of the Registrant's
common stock that may be issued in the future; and (v) the restriction on shares
of the Registrant's common stock which may become issuable pursuant to the
exercise of options or warrants granted in the future. The Stockholders'
Agreement terminates on the date of the first to occur of the following events:
(i) the closing of the sale by one or more of the stockholders pursuant to one
or more offerings registered under the Securities Act to any person or group of
persons who are not, and who do not become, at the time of sale, parties to the
Stockholders' Agreement of a number of shares equal to at least 50% of the
maximum total number of shares beneficially owned by all of the stockholders at
any time; (ii) bankruptcy, receivership, or dissolution of the Registrant; (iii)
the voluntary agreement of all the parties who are then bound by the terms of
the Stockholders' Agreement; (iv) the acquisition of all the shares by one of
the stockholders; or (v) five years from the date of the Stockholders'
Agreement.
(b) Business of the Registrant
The Registrant's Principal Products
The Registrant's marketing efforts for the Power Commander(TM) have
been concentrated in several industries in which the Registrant's principal
stockholders have significant experience. These areas include the elevator and
escalator industry; national electrical supply houses; large real estate
property management companies; and to a lesser extent, public transportation
systems. As the Registrant's operations are scaled up and revenues from the sale
of the Power Commander(TM) grow, the Registrant intends to simultaneously (i)
market the Power Commander(TM), both directly and through distributors, to other
compatible industries such as conveyor and line production systems and (ii)
develop and market its Motor Starter product line. The Registrant's Motor
Starter product
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is designed to soft start a motor, save energy, protect and conserve the motor,
and has the capacity to act as a remote switching device. The Registrant also
expects to devote a small portion of its revenues to ongoing research and
development for new and improved products.
The Registrant offers the Power Commander(TM) in two versions, each of
which is a distinctly different product, marketed and sold to different
audiences using different techniques. These two products are the Three-Phase
Power Commander(TM) used in industrial and commercial applications and the
Single-Phase Power Commander(TM) used in consumer applications such as home
appliances and the like. The Registrant's marketing efforts have been initially
concentrated on the Three-Phase Power Commander(TM). Both versions of the Power
Commander(TM) reduce energy consumption on electrical equipment by
electronically sensing and controlling the amount of energy the motor consumes.
The motor only uses the energy it needs to perform its work task thereby
increasing its efficiency. The end result is a reduction of energy consumption
of approximately twenty-five (25%) to thirty-five (35%) percent in those
applications which do not always run at peak load levels.
The Registrant's management believes that the Power Commander(TM) line
offers a technologically superior energy reduction solution as compared to
competing products for the following reasons. The Power Commander(TM) is the
result of extensive field and laboratory engineering refinements undertaken
since 1994. These refinements enable the Power Commander(TM) to offer a superior
control system which rapidly and accurately measures and monitors key motor
operating conditions and rapidly and accurately adapts motor operating
parameters during rapid changes in motor load, all without excessive vibration,
synchronization problems or other material adverse effects to the motor or
surrounding electrical and mechanical systems.
Three-Phase Power Commander(TM). The initial market for the Three-Phase
Power Commander(TM) is the elevator and escalator industry although the
Registrant is also aggressively marketing this product to other industries such
as the plastics manufacturing, petroleum and automotive industries. Domestic
sales in the elevator and escalator market were $6.3 billion in 1999. Based upon
reliable trade journals there are approximately 672,000 elevators and 31,000
escalators, currently in operation in North America alone. Additionally,
approximately 21,684 new elevators and 1,281 new escalators, respectively, are
installed annually in the domestic market. Each existing installation is a
potential candidate for the retrofit of the Three-Phase Power Commander(TM) and
each new installation is a potential candidate for initial installation.
Various other markets such as conveyor systems, machine tools, mining
equipment, crude oil pumps, weaving machines etc., are believed to be viable
target markets for the Three- Phase Power Commander(TM) and the Registrant is
seeking to build a distributorship base to address these markets.
Single-Phase Power Commander(TM). Like the Registrant's Three-Phase
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Power Commander(TM) described above, the Registrant's Single-Phase Power
Commander(TM) reduces energy consumption in electrical equipment by sensing and
controlling the amount of energy the motor consumes. Most motors commonly used
in home appliances and other consumer goods are Single-Phase motors. There are
millions of Single-Phase motors utilized in consumer goods annually. Unlike the
industrial market, retrofitting in this context is not cost efficient.
Since the Single-Phase Power Commander(TM) is usable in a broad variety
of contexts, and can be installed with little effort or expense, it is a product
suitable for installation at the OEM level. Consequently, the Registrant's
marketing plan for the Single-Phase Power Commander(TM) is to identify the major
OEM (Original Equipment Manufacturers) that can best utilize the Single-Phase
Controller.
Research and Development
The Registrant intends to continue its research and development effort
to introduce new products based on the Power Commander(TM) solid state
technology. Towards this end, and during the two fiscal years ended December 31,
2000, the Registrant spent an aggregate of $44,806 ( Performance Control spent
$189,097 in 1999) on research and development activities, virtually none of
which was borne by customers. As of the date of this registration statement, the
Registrant has under development the Solid State Energy Saving Motor Starter
which is described under "Proposed Products." In addition, and for the
foreseeable future, the Registrant intends to limit its research and development
activities to secondary products for Three-Phase industrial and commercial AC
induction motors. Two of these products are (i) a soft starting motor starter
(without energy saving features) to compete with existing transformer and other
electro-mechanical type motor starters; and (ii) a series of electronic relay
systems to turn equipment on and off as required.
Marketing and Sales
The Registrant's marketing efforts for the Performance Controller(TM)
have been concentrated in several industries in which the Registrant's principal
stockholders have significant experience. These areas include the elevator and
escalator industry; the oil field supply industry, and large real estate
property management companies. As of December 31, 1999, approximately 3,500 of
the Registrant's Performance Controller(TM)/Power Commander/Energy
Master/Ecostart brand units have been installed at more than 120 facilities
throughout the United States.
As the Registrant's operations are scaled up and revenues from the sale
of the Performance Controller(TM) grow, the Registrant intends to simultaneously
(i) market the Performance Controller(TM) through Original Equipment
Manufacturers (OEM), to other compatible industries such as conveyor and line
production systems, machine tools and other industrial applications; and (ii)
develop and market its Motor Starter product line. The Registrant's Motor
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Starter product is designed to soft start a motor, which saves energy and
protects the motor, and has the capacity to act as a remote switching device.
In 2000, the Registrant entered into three material contracts for the
purchase of Performance Controller(TM) products. The first is an annual contract
with Montgomery KONE, the world leader in escalator sales. The second is a
five-year contract for Performance Controller(TM) products with the Defense
Logistics Agency of the Federal government of the United States and the third is
an annual contract with Otis Elevator.
Manufacturing
The Registrant's manufacturing facility is located in Ann Arbor,
Michigan, and its manufacturing activities consist of assembly, QA/QC, and
packaging. The Registrant is currently utilizing one of three subcontractors to
manufacture the Three-Phase Controllers(TM). The Registrant has negotiated
contract-manufacturing arrangements with Systems Control a leading manufacturer
in the electronics industry. Systems Control's capacity has been estimated to
allow for approximately 1000 units per month. It is anticipated that leasing new
or additional space to increase manufacturing capacity in the Detroit area can
be done cost-effectively, as production of the Registrant's product is not
capital equipment intensive. The Registrant is in the final pre-production
testing of electronic modules incorporating the latest gating switches. A key
cost component within the technology. Management believes, but there can be no
assurance, that this technology will produce a cost reduction of approximately
50% for the total product.
Product cost-reduction efforts are, and will remain, a focal point of
the Registrant. One key element of the program includes an aggressive
manufacturing engineering effort to reduce production cycle times as well as
material and processing costs. A second element of the program is to out source
production operations. The assembly of printed circuit boards by outside
suppliers, with automated assembly and test equipment, reduces cost and ensures
quality. Thirdly, as the volumes increase, the Registrant intends to recognize
favorable purchasing economies, increased labor efficiencies and improved
overhead absorption. Also, the Registrant is looking at off shore manufacturing
to help meet the anticipated demand for the product.
Source of Supply and Availability of Raw Materials
The Power Commander(TM) and the Motor Starter have both been designed
to use standard, off the shelf, easily acquired components. Such components are
tried and trusted and are basic items that are readily available worldwide at
very competitive prices. They come in standard and miniature versions and offer
the Registrant a large latitude in product design. Both the Power Commander(TM)
and Motor Starter use a combination of components. Although the Registrant
believes that most of the key components required for the production of its
products are currently available in sufficient production quantities from
multiple sources, there can be no assurance that they will remain so readily
available.
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Competition
The principal competitive factors in the Registrant's markets include
innovative product design, product quality, product performance, utility rebate
acceptance, established customer relationships, name recognition, distribution
and price.
The Registrant competes against a number of companies, many of which
have longer operating histories, established markets and far greater financial,
advertising, research and development, manufacturing, marketing, personnel and
other resources than the Registrant currently has or may reasonably be expected
to have in the foreseeable future. This competition may have an adverse effect
on the ability of the Registrant to commence and expand its operations or
operate profitability.
The Registrant believes that expected competition in the Motor Starter
market will be more intense than that for the Power Commander(TM) because the
potential market for the Motor Starter is much larger than that for the Power
Commander(TM), competitors in that field are more numerous and generally much
larger and financially able, and because the Motor Starter is such a staple
product type currently being sold by nearly all companies in the electrical
component business.
In addition, the Registrant assumes that there are other companies with
substantial financial, technical, manufacturing and marketing resources
currently engaged in the development and marketing of products similar to those
being developed by the Registrant. Accordingly, some of these companies could
launch products competitive with those under development or to be manufactured
by the Registrant.
Notwithstanding the foregoing, as of the date of this registration
statement, and insofar as energy saving, soft motor starting devices are
concerned, management believes that the three-phase Performance Controller(TM)
has no viable direct competition in the United States. However, the Registrant
has not conducted any formal market study, and management has based its
conclusion based solely upon its experience. There are other devices on the
market that provide a soft motor start, without any other energy savings
circuitry, and some that provide only energy saving. Management believes that
competition for the energy savings feature provided by the Performance
Controller(TM) is limited to: (i) controllers such as "MotorMizer" "Power Boss",
and the " Power Planner", which utilize a different electronic technology than
the NASA/Anderson based technology used by the Registrant; (ii) controllers that
utilize variable frequency drive technology; and (iii) companies seeking to
replace an older, less efficient motor with a new high efficiency motor.
Management believes that each of these competitive products are
technologically inferior to the Performance Controller(TM) in that they are
either: (i) more expensive and more complex to set up in an operating
environment; (ii) more restrictive because they by design slow down the speed
and performance of the motor; and (iii) of enormous size and produce extensive
harmonic distortion. Insofar as high efficiency motor replacement is concerned,
management believes that the energy savings gain attributable to high
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efficiency motors is materially lower than that of the Performance
Controller(TM). In addition, the in-rush amperage needed to start an energy
efficient motor is many times higher than that needed to start a conventional
motor. This factor is made worse because the purchase of a new motor does not
provide a soft starting capability without also the purchase of a separate soft
start device. The soft starting devices on the market are themselves, at least
as costly as a Performance Controller(TM).
Because of the enormous opportunity in the single-phase motor
applications, there have been several companies that have, with different
technologies, tried to exploit this market. The "Green Plug" (voltage clamping),
"Power Planner" (digital microchip) and "Econelectric" (power factor control)
are products that have created industry awareness. However, and to the best of
Management's belief, none of the products have achieved market acceptance.
Patents and Proprietary Rights
The Registrant currently relies on a combination of trade secret,
patents and non-disclosure agreements to establish and protect its proprietary
rights in its products. There can be no assurance that these mechanisms will
provide the Registrant with any competitive advantages. Furthermore, there can
be no assurance that others will not independently develop similar technologies,
or duplicate or "reverse engineer" the proprietary aspects of the Registrant's
technology. Apart from its rights under the NASA license against, which is
described below, the Registrant, does have an U.S. patent issued with respect to
its products. The "Balanced and Synchronized Phase Detector for an AC Induction
Motor Controller" was issued on October 13, 1998 with patent number 5,821,726.
The Registrant has additional proprietary technology being assessed for patent
filing.
The Registrant has obtained U.S. Trademark registration of the Power
Commander(TM) mark.
The Registrant is an exclusive licensee pursuant to a patent license
agreement of certain Power Factor Controller Technology owned by the United
States, as represented by NASA. This license agreement covers the USA and its
territories and possessions and does not require the Registrant to pay royalties
to NASA in connection with the Registrant's sale of products employing
technology utilizing the licensed patents. The Registrant's rights under the
agreement are non-transferable and may not be sublicensed without NASA's
consent. The agreement terminates upon the expiration of all of the licensed
patents, currently 2001, unless reissuance of the patents occurs.
The Registrant believes that its products and other proprietary rights
do not infringe any proprietary rights known to be possessed by third parties.
There can be no assurance, however, that third parties will not assert
infringement claims in the future, the defense costs of which could be
extensive.
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Employees
At the date of this Registration Statement, the Registrant employs
seven persons on a full time basis. Of this number, one person is engaged in
administration/international sales, one in sales and marketing, one in
engineering/administration, one in engineering/production, one in accounting and
finance, one in field installation/technical support and one in clerical,
stenographic and reception. At such time as business conditions dictate, the
Registrant expects to hire additional personnel for increased production,
marketing and sales. The Registrant has no collective bargaining agreements and
considers its relationship with its employees to be good. The Registrant
utilizes consultants in the areas of electrical and mechanical engineering,
manufacturing engineering and finance on an ongoing basis.
Customers
The Registrant currently does business with approximately 25 customers. Of this
number, four, including Otis Elevator (Division of United Technologies), KONE,
Inc., Millar Elevator Service Co. and the Defense Logistics Agency of the
General Service Administration, presently account for approximately 50% of the
Registrant's gross revenues. In light of the Registrant's intentions to focus
its business on original equipment manufacturers in the elevator, oil field pump
and manufacturing industries, the Registrant may be deemed to be and continue to
be dependent upon a small number of customers. Accordingly, the loss of one or
more of these customers is likely to have a material adverse effect upon the
Registrant's business.
Government Regulation
The Registrant is not required to be certified by any Government
Agency's. However, the Registrants products are manufactured to comply with
specific Underwriters codes that meet National Safety Standards. Presently, the
Registrants products comply with UL 508 standards and have also begun the
certification to meet CSA (Canadian electrical standards). The Department of
Commerce does not require the Registrants technology to be certified for export.
The Registrants Industrial code is 421610 and the SIC code is 5063.
Deregulation of Electrical Energy
Deregulation of the electrical energy markets is widely expected to
create increased competition and increased demand for all products, which reduce
energy consumption. Management believes that one important change resulting from
deregulation may be the basis on which electricity is measured and sold to
industrial customers. In Ohio, one of the first states to deregulate bulk sale
of electricity (known as wheeling), and in England, which has had wheeling for
several years, electricity is sold based on Kilovolt-Amps ("KVA"). In
comparison, electricity in the United States has traditionally been sold based
on kilowatt-hours ("KVH").
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Management believes that the net effect of charging based on KVA rather
than KVIH is to reward companies, which are efficient in their use of energy.
The Performance Controller(TM) saves substantially more energy as measured by
KVA than it does measured by KVH. As a result, management believes that the
advent of wide spread wheeling in the United States could have a materially
beneficial effect upon the Registrant's sales volume.
Effect on Environmental Regulations
To the extent that the Registrant's management can determine, there are no
federal, state, or local provisions regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment with
which compliance by the Registrant has had, or is expected to have, a material
effect upon the capital expenditures, earnings, or competitive position of the
Registrant.
Risk Factors
Limited Capitalization. As of the date hereof, the Registrant continues
to have limited working capital and will be dependent upon additional financing
to meet its capital needs. There can be no assurance that any additional
financing thereby necessitated will be available on acceptable terms, if at all.
Currently, the Registrant has no existing credit facilities or similar bank
borrowing arrangements but may seek to secure such arrangements following the
effectiveness of this Registration Statement. No assurances can be given that
any such arrangements will be secured.
Limited Operating History, Manufacturing and Distribution Arrangements.
To date, and principally attributable to a lack of working capital, the
Registrant's operations have been limited in scale. Although the Registrant has
a contract manufacturing arrangement with an automated production facility, has
established relationships with suppliers, and received contracts for its
products, the Registrant may experience difficulties in production scale-up,
inventory management, product distribution and working capital until such time
as the Registrant's operations have been scaled-up to normal commercial levels.
There can be no assurance that the Registrant will operate profitably.
Registrant's License From NASA Exclusive for the USA. The basic
technology upon which the Registrant's products are based is derived from a
patent license agreement by and between the Registrant and NASA. The
Registrant's license from NASA is exclusive for the USA, although the Registrant
is one of only two licensees of NASA's Power Factor Controller Technology
worldwide. The Registrant has also made certain improvements to the basic
technology covered by the NASA license, which may place the Registrant in a
competitively superior position to the other licensee. No assurance can be
given, however, that the other licensee will not seek to improve the basic
technology in a manner similar to that of the Registrant.
Supplier Dependence. Although the Registrant believes that most of the
key components required for the production of its products are currently
available in sufficient
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production quantities from multiple sources, there can be no assurance that they
will remain so readily available. It is possible that other components required
in the future may necessitate custom fabrication in accordance with
specifications developed or to be developed by the Registrant. Also, in the
event that the Registrant, or its contract manufacturer as applicable, is unable
to develop or acquire components in a timely fashion, the Registrant's ability
to achieve production yields, revenues and net income will be adversely
affected.
Sales and Marketing Risks. The Registrant's products are currently
distributed through the network of contacts established by the Registrant's
principal stockholders, which contacts were developed out of other business
enterprises conducted by them. The Registrant's future growth and profitability
will depend upon the successful development of a distribution network and upon
their ability to penetrate the market with the Registrant's products.
Competition; Rapid Technological Change. The Registrant competes
against a number of companies, many of which have longer operating histories,
established markets and far greater financial, advertising, research and
development, manufacturing, marketing, personnel and other resources than the
Registrant currently has or may reasonably be expected to have in the
foreseeable future. This competition may have an adverse effect on the ability
of the Registrant to expand its operations or operate profitability. The motor
control industry is highly competitive and characterized by rapid technological
change. The Registrant's future performance will depend in large part upon its
ability to become and remain competitive and to develop, manufacture and market
acceptable products in these markets. Competitive pressures may necessitate
price reductions, which can adversely affect revenues and profits. If the
Registrant is not competitive in its ongoing research and development efforts,
its products may become obsolete, or be priced above competitive levels.
Although management believes that, based upon their performance and price, the
Registrant's products are attractive to customers, there can be no assurance
that competitors will not introduce comparable or technologically superior
products, which are priced more favorably than the Registrant's products.
No Cash dividends on Common Stock. The Registrant has not paid or
declared any dividends on its common stock and does not anticipate paying or
declaring any cash dividends on its common stock in the foreseeable future.
Possible Resales Under Rule 144. All of the approximately 4,000,000
shares of the Registrant's common stock held by the Registrant's officers,
directors and principal (10%) stockholders and all shares of common stock
issuable upon exercise of outstanding stock options which have been and may be
granted under the Registrant's incentive stock option plan have not been
registered under the Act, but may, under certain circumstances, be available for
public sale by means of ordinary brokerage transactions in the open market
pursuant to Rule 144, promulgated under the Act, subject to certain limitations.
In general, under Rule 144, a person (or persons whose shares are aggregated)
who has
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<PAGE>
satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of securities which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of
securities, without any limitation, by a person who is not an affiliate of the
Registrant and who has satisfied a two-year holding period. Any substantial sale
of the Registrant's common stock pursuant to Rule 144 may have an adverse effect
on the market price of the Unit Shares.
Potential Effect of Penny Stock Rules on Liquidity of Shares. If the
Registrant's securities are not listed on NASDAQ or certain other national
securities exchanges and the price thereof falls below $5.00, then subsequent
purchases of such securities will be subject to the requirements of the penny
stock rules absent the availability of another exemption. The SEC has adopted
rules that regulate broker-dealer practices in connection with transactions in
"penny stocks." Penny stocks generally are equity securities with a price of
less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system). The penny stock rules require a
broker-dealer to deliver a standardized risk disclosure document required by the
SEC, to provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, monthly account statements showing the market value of each penny
stock held in the customer's account, to make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules. If the
Registrant's securities become subject to the penny stock rules, investors in
this Offering may find it more difficult to sell their securities. If the
Registrant's securities were subject to the existing or proposed regulations on
penny stocks, the market liquidity for the Registrant's securities could be
severely and adversely affected by limits on the ability of broker/dealers to
sell the Registrant's securities and the ability of purchasers in this Offering
to sell their securities in the secondary market.
Limitation on Directors' Liabilities under Delaware Law. Pursuant to
the Registrant's Certificate of Incorporation and under Delaware law, directors
of the Registrant are not liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
Authorization and Discretionary Issuance of Preferred Stock. The
Registrant's Certificate of Incorporation authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Registrant's Board of Directors is empowered, without stockholder approval, to
issue preferred stock with dividends, liquidation, conversion, voting
14
<PAGE>
or other rights which could adversely affect the relative voting power or other
rights of the holders of the Registrant's common stock. In the event of
issuance, the preferred stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Registrant, which could have the effect of discouraging bids for the Registrant
and thereby prevent stockholders from receiving the maximum value for their
shares. Although the Registrant has no present intention to issue any shares of
its preferred stock, there can be no assurance that the Registrant will not do
so in the future.
Product Liability Risk. The Registrant may be subject to potential
product liability claims that could, in the absence of sufficient insurance
coverage, have a material adverse impact on the Registrant. Presently, the
Registrant has general liability coverage that includes product liability up to
two million dollars. Any large product liability suits occurring early in the
Registrant's growth may significantly adversely affect the Registrant's ability
to expand the market for its Power Commander(TM) line of products.
No Key Man Insurance. The Registrant presently has no key man life
insurance policies. As soon as practicable following the commencement of
profitable operations (of which there can be no assurance), the Registrant
intends to purchase key man life insurance on the lives of its two principal
executive officers, Stephen L. Shulman and Nicholas Anderson. Upon purchase of
such insurance, the Registrant intends to pay the premiums and be the sole
beneficiary. The lack of such insurance may have a material adverse effect upon
the Registrant's business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF ARRANGEMENT
(a) Plan of Operation -N/A
(b) Management's Discussion and Analysis of Financial Condition and results of
Operations
Overview
The Registrant generates revenues from a single business segment, the
design, development, marketing and sale of proprietary solid state electrical
components designed to effectively reduce energy consumption in alternating
current induction motors. From inception (October 19, 1994) through 1997, the
Registrant was a development stage entity.
From February through August 2000, the Registrant was essentially inactive. On
August 7, 2000, the Registrant purchased the assets of Percon, the largest
distributor of the Registrant's products, and relocated its principal offices
and facilities to Percon's facilities in Ann Arbor, Michigan. The Registrant
began generating revenues from sale of its patented Power Commander(TM) line of
motor controllers in 1996. As of December 31, 1999, the Registrant had an
accumulated deficit of $143,524, primarily as a result of the Registrant's
investment in research, development and infrastructure.
15
<PAGE>
Comparison of Six Months Ended June 30, 1999 and 2000
Revenues. Revenues for the six months ended June 30, 2000 were $9600
compared to $40,589 for the six months ended June 30, 1999, an decrease of
$30,989, or322%. The decrease in revenue was principally attributable to
completion of product development.
Cost of revenues. Cost of revenues for the six months ended June 30, 2000
decreased to $38,738, or -403% of revenues, from $310,404 or -765% of revenues,
for the six months ended June 30, 1999. The decrease in cost of revenues as a
percentage of revenues was primarily due to limited sales and increased
development costs.
Research and development. Research and development expenses were $7,000, or
73% of revenues, for the six months ended June 30, 2000 as compared to $13,241,
or 33% of revenues, for the six months ended June 30, 1999 due to technical
developments that required re-evaluation.
Selling, general and administrative. Selling, general and administrative
expenses decreased to $19,540, or 203% of revenues, for the six months ended
June 30, 2000 from $195,096, or 480% of revenues, for the six months ended June
30, 1999. The decrease in expenses was primarily due to decreases in sales,
marketing and administrative personnel.
Liquidity and Capital Resources
Since inception, the Rregistrant has financed its operations primarily
through the sale of equity securities. The Registrant has received a total of
approximately $1,128,102 from public and private offerings of its equity
securities. As of December 31, 1999, the Registrant did not have any cash and
cash equivalents. As of June 30, 2000, the Registrant had cash and cash
equivalents of $661.
Cash used in operating activities was $666 for the six months ended June
30, 2000, $(182,499)in 1999, and $(96,656) in 1998. Cash used in operating
activities in the six months ended June 30, 2000 reflected a net loss of
$29,137. In 1999, cash used in operating activities reflected a net loss of
$418,171. In 1998, cash used in operating activities reflected a net loss of
339,687.
The Registrant expects to experience growth in its operating expenses,
particularly in research and development and selling, general and administrative
expenses, for the foreseeable future in order to execute its business strategy.
As a result, the Registrant anticipates that operating expenses, as well as
planned capital expenditures, will constitute a material use of any cash
resources.
Management believes that its existing cash and cash equivalents are
insufficient to meet the Registrant's anticipated cash needs for the next 6
months. Since capital resources are insufficient to satisfy the Registrant's
liquidity requirements, Management intends to seek to sell additional equity
securities or debt securities or obtain debt financing. The Registrant has not
made arrangements to obtain additional financing and there is no assurance that
financing, if required, will be available in amounts or on terms acceptable to
Management, if at all.
16
<PAGE>
Comparison of Fiscal Year Ended December 31, 1999 and 1998
Revenues.
Revenues for the fiscal year ended December 31, 1999 were $83,679 compared to
$72,949 for the fiscal year ended December 31, 1998, an increase of $10,730, or
approximately 15%. The decrease in revenue was principally attributable to hold
on product shipments.
Cost of revenues. Cost of revenues for the fiscal year ended December 31,
1999 increased to $186,831 or 224% of revenues, from $159,902 or 218% of
revenues, for the fiscal year ended December 31, 1998. The increase in cost of
revenues as a percentage of revenues was primarily due to material costs.
Research and development. Research and development expenses were $23,232,
or approximately 28% of revenues, for the fiscal year ended December 31, 1999 as
compared to $21,574, or approximately 29% of revenues, for the fiscal year ended
December 31, 1998 due to increased overhead.
Selling, general and administrative. Selling, general and administrative
expenses increased to $291,587, or 348% of revenues, for the fiscal year ended
December 31, 1999 from $232,416, or 319% of revenues, for the fiscal year ended
December 31, 1998. The increase in expenses was primarily due to increases in
sales, marketing and administrative personnel and travel.
Liquidity and Capital Resources
Since inception, the Registrant has financed its operations primarily
through the sale of equity securities. The Registrant has received a total of
approximately $1,128,102 from public and private offerings of its equity
securities. As of December 31, 1999, the Registrant did not have any cash and
cash equivalents. As of December 31, 1999, the Registrant had no cash and cash
equivalents.
Cash used in operating activities was $(351) for the fiscal year ended
December 31, 1999, and $1,816 in 1998. Cash used in operating activities in the
fiscal year ended December 31, 1999 reflected a net loss of $418,171. In 1998,
cash used in operating activities reflected a net loss of $339,687.
The Registrant expects to experience growth in its operating expenses,
particularly in research and development and selling, general and administrative
expenses, for the foreseeable future in order to execute its business strategy.
As a result, the Registrant anticipates that operating expenses, as well as
planned capital expenditures, will constitute a material use of any cash
resources.
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<PAGE>
Management believes that its existing cash and cash equivalents are
insufficient to meet the Registrant's anticipated cash needs for the next 6
months. Since capital resources are insufficient to satisfy the Registrant's
liquidity requirements, Management intends to seek to sell additional equity
securities or debt securities or obtain debt financing. The Registrant has not
made arrangements to obtain additional financing and there is no assurance that
financing, if required, will be available in amounts or on terms acceptable to
Management, if at all.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133,") as amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB No. 133" and SFAS No. 138 "Accounting for Certain
Derivative Instruments and Hedging Activities." SFAS 133 requires that all
derivative financial instruments be recorded on the balance sheet at their fair
market value. Changes in the fair market value of derivatives are recorded each
period in current earnings (loss) or comprehensive income (loss), depending on
whether a derivative is designed as part of a hedge transaction, and if so, the
type of hedge transaction. Virtually all of the Registrant's revenues and the
majority of its costs are denominated in U.S. dollars, and to date, the
Registrant has not entered into any derivative contracts. The effective date of
SFAS 133, as amended by SFAS 137 and SFAS 138, is for fiscal years beginning
after June 15, 2000.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Registrant has complied with
the provisions of SAB 101 for all periods presented.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
25" ("FIN 44"). This interpretation clarifies the definition of an employee for
purposes of applying Opinion 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of a previously fixed stock option plan or award; and
the accounting for an exchange of stock compensation awards in business
combinations. FIN 44 is effective July 1, 2000; however certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis
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<PAGE>
from July 1, 2000. The adoption of certain of the provisions of FIN 44 prior to
June 30, 2000 did not have a material effect on the financial statements. The
Registrant does not expect that the adoption of the remaining provisions will
have a material effect on the financial statements.
Cash Requirements and Need for Additional Funds
The Registrant anticipates a substantial need for cash to fund its
working capital requirements for the next twelve months. It is the opinion of
management that approximately $______would be required to fill existing orders
and to expand the Registrant's marketing, sales and operations during the next
twelve months. .
ITEM 3. DESCRIPTION OF PROPERTY
The Registrant maintains its principal executive offices at 4220
Varsity Drive, Suite E, Ann Arbor, Michigan where approximately 6,000 square
feet of space is leased from a non-affiliated landlord pursuant to a five year
lease which expires in February of 2001. The lease, which provides for base rent
of approximately $4,500 per month, requires the Registrant to pay taxes and
common area maintenance charges (aggregating approximately $ 550 per month), and
provides for an option to renew the same for a single additional term of three
(3) years. The Registrant's premises are adequate for its present needs and are
being utilized to approximately 100% of their capacity.
In light of the pending expiration of its lease, the Registrant intends
to enter into negotiations with its non-affiliated landlord with a view towards
executing either an extension of its existing lease or a new lease, both of
which will provide for upgraded electrical capacity. Alternatively, the
Registrant intends to explore the availability of other suitable space in the
same general geographic area as its existing executive offices.
There can be no assurance that the Company will execute a extended or
new lease with its existing landlord. However, and in the opinion of management,
the state of the Ann Arbor and surrounding area real estate market is such that
numerous alternate offices are available at comparable or similar terms; and
that such a course of action would not have a material adverse effect on the
Registrant's business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owner. The information is
furnished as of September 30, 2000, as to the number of shares of the
Registrant's Common Stock, $.001 par value per share owned beneficially or is
known by the Registrant to own beneficially more than 5% of any class of such
security:
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<PAGE>
Name and Address Amount and Nature
of Beneficial of Beneficial
Owner Ownership (1) Percentage of Class(1)
----- ------------- ----------------------
Anthony C. Caputo
1155 Colonial Way
Bridgewater, NJ 08807 1,340,000(2) 23%
Nicholas Anderson
1536 208th Street
Bayside, NY 11360 1,646,500(3)(4) 28%
Performance Control LLC
4220 Varsity Drive, Suite E
Ann Arbor, MI 48108 1,004,853(5) 17%
---------------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting or investment power with respect to the securities. Except
as indicated by footnote, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. The number of
shares of common stock outstanding used in calculating the percentage for each
above listed person assumes that none of the issued and outstanding options to
purchase an aggregate of 500,000 shares of the Registrant's common stock or
common stock purchase warrants to acquire an aggregate of 50,000 shares of the
Registrant's common stock have been exercised. Percentage of beneficial
ownership is based on 5,795,845 shares of common stock outstanding as of
September 30, 2000.
(2) Does not include an aggregate of: (i) 131, 820 shares that Mr. Caputo is
entitled to purchase at $2.00 per share pursuant to five year, Non-Qualified
Incentive Stock Options; or (ii) 18,180 shares that Mr. Caputo is entitled to
purchase at $5.50 per share pursuant to five year, Qualified Incentive Stock
Options. All options were granted on November 6, 1996 under the Registrant's
1994 Incentive Option Plan (the "Plan") and repriced on September 7, 2000.
(3) Does not include an aggregate of: (i) 131, 820 shares that Mr. Anderson is
entitled to purchase at $2.00 per share pursuant to five year, Non-Qualified
Incentive Stock Options; or (ii) 18,180 shares that Mr. Caputo is entitled to
purchase at $5.50 per share pursuant to five year, Qualified Incentive Stock
Options. All options were granted on November 6, 1996 under the Plan and
repriced on September 7, 2000.
(4) Includes an aggregate of 200,000 shares pledged as collateral security for a
$100,000 loan made to the Registrant pursuant to a written loan agreement dated
September 29, 1999 with a non-affiliated party.
(5) Represents shares issued pursuant to the Asset Agreement and subject to the
Stockholders' Agreement.
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<PAGE>
(b) Security Ownership of Management. The information is furnished as of
September 30, 2000, as to the number of shares of the Registrant's Common Stock,
$.001 par value per share owned beneficially by each executive officer and
director of the Registrant and by all executive officers and directors as a
group:
Name and Address Amount and Nature
of Beneficial of Beneficial
Owner Ownership (1) Percentage of Class(1)
----- ------------- ----------------------
Stephen L. Shulman,
President
4220 Varsity Drive, Suite E
Ann Arbor, MI 48108 64,843(2) -
Nicholas Anderson,
Chief Technology Officer
1536 208th Street
Bayside, NY 11360 1,646,500(3)(4) 28%
Arthur Smith,
Treasurer
4220 Varsity Drive, Suite E
Ann Arbor, MI 48108 - -
Gerard S. DiFiore,
Secretary
One Riverfront Plaza
Newark, NJ 07102-5400 - (5)
All Officers and
Directors as a Group
(4 persons) 2,715,196 (6)(7) 47%
-----------------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting or investment power with respect to the securities. Except
as indicated by footnote, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. The number of
shares of common stock outstanding used in calculating the percentage for each
above listed person assumes that none of the issued and outstanding options to
purchase an aggregate of 500,000 shares of the Registrant's common stock have
been exercised. Percentage of beneficial ownership is based on 5,795,845 shares
of common stock outstanding as of September 30, 2000.
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<PAGE>
(2) Does not include an aggregate of 1,004,853 shares owned of record by
Performance Control LLC, a Michigan limited liability Registrant and principal
stockholder of the Registrant, of which Stephen Shulman is a member and manager.
(3) Does not include an aggregate of: (i) 131, 820 shares that Mr. Anderson is
entitled to purchase at $2.00 per share pursuant to five year, Non-Qualified
Incentive Stock Options; or (ii) 18,180 shares that Mr. Anderson is entitled to
purchase at $5.50 per share pursuant to five year Qualified Incentive Stock
Options. All options were granted on November 6, 1996 under the Plan and
repriced on September 7, 2000.
(4) Includes: (i) an aggregate of 200,000 shares pledged as collateral security
for a $100,000 loan made to the Registrant pursuant to a written loan agreement
dated September 29, 1999 with a non-affiliated party; and (ii) 50,000 shares
pledged as collateral security for the Registrant's line of credit from Michigan
Heritage Bank.
(5) Does not include an aggregate of 30,00 shares that Mr. Gerard S. DiFiore is
entitled to purchase at $2.00 per share pursuant to five year, Non-Qualified
Incentive Stock Options granted on November 6, 1996 under the Plan and repriced
on September 7, 2000.
(6) Includes: (i) an aggregate of 64,843 shares owned of record by Stephen L.
Shulman, President of the Registrant; and (ii) an aggregate of 1,004,853 shares
owned of record by Performance Control LLC, a Michigan limited Liability Company
of which Stephen L. Shulman is a member and manager.
(7) Does not include an aggregate of 30,00 shares that Mr. Gerard S. DiFiore is
entitled to purchase at $2.00 per share pursuant to five year, Non-Qualified
Incentive Stock Options granted on November 6, 1996 under the Plan and repriced
on September 7, 2000.
(c) Changes in Control . As of the date of this Registration Statement,
the Registrant has not entered into any agreements, the operation of which may
at a subsequent date result in a change of control of the Registrant.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(a) Identify Directors and Executive Officers.
The following table sets forth: (1) names and ages of all persons who
presently are and who have been selected as directors of the Registrant; (2) all
positions and offices with the Registrant held by each such person; (3) the term
or office of each person named as a director; and (4) any period during which he
or she has served a such:
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<TABLE>
<CAPTION>
Duration and
Expiration Position & Age and
Date of Office with Director
Name Present Term Registrant Since
--------------------------------------------------------------------------------
<S> <C>
Anthony C. Caputo - Chairman 73 October 15, 1994(1)
Stephen L. Shulman Next Annual President, Chief 57 August 15, 2000(1)
Meeting of Executive Officer
Stockholders and Chairman
Nicholas Anderson Next Annual Chief Technology 65 October 15, 1994(1)
Meeting of Officer and
Stockholders Director
Scott Straka Next Annual Director 35 August 15, 2000(1)
Meeting of
Stockholders
Art Smith Next Annual Treasurer 75 August 15, 2000(1)
Meeting of
Stockholders
Gerard S. DiFiore Next Annual Secretary 42 August 15, 2000(1)
Meeting of
Stockholders
</TABLE>
------------------------
(1) Anthony C. Caputo resigned as Chairman of the Registrant's Board of
Directors on August 7, 2000. Nicholas Anderson resigned as President and Chief
Operating Officer of the Registrant on August 7, 2000 and Stephen L. Shulman was
elected in his place and stead to serve until the next annual meeting of the
Board of Directors of the Registrant. On the same day, Mr. Anderson was elected
as the Registrant's Chief Technology Officer. Gerard S. DiFiore resigned as a
Director of the Registrant on August 7, 2000 and Stephen L. Shulman was elected
in his place and stead to serve until the next annual meeting of the
stockholders of the Registrant. On August 7, 2000 Mr. Arthur Smith was elected
Treasurer of the Registrant. The change in the Registrant's management was
occasioned by the August 7, 2000 business combination with Percon represented by
the Asset Agreement and the Stockholders' Agreement.
Except for the August 7, 2000 Shareholders' Agreement that became an
integral part of the Registrant's the August 7, 2000 business combination with
Percon, the terms of which are enumerated in Item 1, there is no understanding
or arrangement between any directors or any other person or persons pursuant to
which such individual was or is to be selected as a director or nominee of the
Registrant. In addition, there are no agreements or understandings for an
officer or director to resign at the request of another person and the
above-named officers and directors are not acting on behalf of nor will act at
the direction of any other person.
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<PAGE>
(4) Business Experience
The following is a brief account of the experience, during the past
five years, of each director and executive officers of the Registrant:
Stephen L. Shulman has been the Registrant's President, Chief Executive
Officer and a Director since August, 2000. Prior thereto since 1992, Mr. Shulman
was a founder of Performance Control, LLC and served as a member and a manager
thereof since its inception. Prior thereto since 1986, Mr. Shulman was the
founder and Chairman of Fiberoptic Sensor Technology, Inc., a, manufacturer and
marketer of pressure sensors for medical and industrial applications in Ann
Arbor, Michigan, for which he served as its President from 1986 to 1992. Prior
thereto, Mr. Shulman was President of Medical Devices Inc. of Michigan, a
privately held manufacturer's representative company. Mr. Shulman has over 20
years of sales and marketing management experience with Medtronic, Inc. and
Pacesetter Medical Systems. Mr. Shulman attended Wayne State University.
Nicholas Anderson, a founder of the Registrant, served as the
Registrant's President, Chief Executive Officer and a Director from its
inception in 1994 until August 2000 when he became Chief Technology Officer. Mr.
Anderson has over 20 years experience in the sale, marketing and product
development of electrical and electronic products, primarily in the energy
saving market. From 1992 to the present, Mr. Anderson has been a Director of
Energy Services of Coyne Electrical Contracting, Inc., a major electrical
service organization based in New York City. From 1988 to 1992, Mr. Anderson was
the founder and Chief Executive Officer of Power Reducing Equipment, Inc., a
company formed to develop products to reduce energy consumption in AC motors.
During this period, Mr. Anderson obtained a patent, which was issued in April
1994. From 1980 to 1988, Mr. Anderson was President of Commander Control, Inc.,
a subsidiary of Endless Energy Corporation, a conglomerate involved in the
manufacture and sale of various energy saving products. In this capacity, Mr.
Anderson was responsible for designing a complete line of motor controllers and
for manufacturing various energy products including controllers in South Korea
and Hong Kong. Mr. Anderson was also responsible for creating a worldwide
distribution network for motor controllers including the United States, the
United Kingdom, Belgium, Greece, Japan, Hong Kong, South Korea, Mainland China,
Venezuela and the Dominican Republic. Mr. Anderson attended the City College
School of Engineering, and received a certification in Electronics Design from
Manhattan Technical Institute in 1957.
Scott Straka has been a director of the Registrant since August 2000.
Simultaneously therewith since 1996, Mr. Straka has been employed by the Power
and Industrial Division of Hitachi America, LTD, an international manufacturer
of engineered equipment serving the power generation market, as a Project and
Sales Manager for three different product types with $71 million in annual
sales. Prior thereto since 1990, Mr. Straka served as a Sales Engineer in the
Plainfield, NJ office of Sulzer Bingham Pumps, Inc., a Portland, OR,
manufacturer and distributor of centrifugal pumps for the power and refinery
industry. Prior thereto since 1986, Mr. Straka served as a Consulting Engineer
for Mult Tech
24
<PAGE>
Associates, Inc. an engineering consulting company in South Plainfield, NJ. Mr.
Straka received a bachelor of science degree in Mechanical Engineering from the
University of Dayton in 1986.
Arthur Smith has been the Registrant's Treasurer since August , 2000.
From August 1997 to present, Mr. Smith has been the Comptroller for Performance
Control LC. He was President and Chairman of Healthmaster, Inc. a software
development company from 1989 to Jan. 1997. Mr. Smith has been a Certified in
Public Accountant in the State of Michigan since 1952 and was in private
practice until 1988. Mr. Smith received a bachelor of arts degree in accounting
from Wayne State University in 1948.
(5) Directorships
Each Director of the Registrant has indicated to the Registrant that he is not a
director in any other registrant with a class of securities registered pursuant
to Section 12 of the Exchange Act or subject to the requirements of Section
13(d) or 15(d) of such act or any investment company registered under the
Investment Registrant Act of 1940.
(b) Identification of Certain Significant Employees
The Registrant does not presently employ any person as a significant
employee who is not an executive officer but who makes or is expected to make a
significant contribution to the business of the Registrant.
(c) Family Relationships
No family relationship exist between any director or executive officers
of the Registrant.
(d) Involvement in Certain Legal Proceedings
No event listed in Sub-paragraphs (1) through (4) of Subparagraph (d)
of Item 401 of Regulation S-B, as occurred with respect to any present executive
officer or director of the Registrant or any nominee for director during the
past five years and which is material to an evaluation of the ability or
integrity of such director or officer.
Investment Company Act of 1940
Although the Registrant will be subject to regulation under the
Securities Act, management believes the Registrant will not be subject to
regulation under the Investment Company Act of 1940 insofar as the Registrant
will not be engaged in the business of investing or trading in securities. In
the event the Registrant engages in a business combination, which result in the
Registrant holding passive investment interests in a number of entities the
Registrant could be subject to regulation under the Investment Company Act of
1940. In such event the Registrant would be required to register as an
25
<PAGE>
investment company and could be expected to incur significant registration and
compliance costs. The Registrant has obtained no formal determination from the
SEC as to the status of the Registrant under the Investment Company Act of 1940,
any violation of which would subject the Registrant to material adverse
consequences.
ITEM 6. EXECUTIVE COMPENSATION.
(a)(b) General and Summary Compensation Table
The following table sets forth the compensation paid by the Registrant during
the last three completed fiscal years to the Registrant's Chief Executive
Officer, the sole individual required to be disclosed who received compensation
from the Registrant:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards
Payouts
-----------------------------------------------------------------------------------------------------------------
Other Securities All
Annual Restricted Underlying Other
Bonus Compen- Stock Options/ LTIP Pay Compen-
Name and Principal Position Year Salary sation Awards SAR's Outs sation
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nicholas Anderson, 1997 60,000 - - - - -
President and CEO
-----------------------------------------------------------------------------------------------------------------
Nicholas Anderson, 1998 60,000 - - - - -
President and CEO
-----------------------------------------------------------------------------------------------------------------
Nicholas Anderson, 1999 60,000 - - - - -
President and CEO
-----------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Option/SAR Grant Table. During the two fiscal years ended December
31, 2000, no grants of stock options or freestanding SAR's were made by the
Registrant. Notwithstanding the foregoing, an aggregate of 500,000 shares of the
Registrant's Common Stock, $.001 par value per share are reserved for issuance
pursuant to the Registrant's long-term incentive plan adopted by the
Registrant's Board of Directors and stockholders in 1994. On November 1, 1996,
the Registrant issued five year, non-incentive options to purchase an aggregate
of 463,640 shares at $5.00 per share to the following individuals which were
repriced to $2.00 on September 7, 2000:
26
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------- --------------------- --------------------------------------------------
Name of Recipient No. of Shares Relationship to Registrant in 1996
-------------------------------------- --------------------- --------------------------------------------------
<S> <C>
Nicholas Anderson 131,820 Executive Officer and Director
-------------------------------------- --------------------- --------------------------------------------------
Anthony C. Caputo 131, 820 Executive Officer and Director
-------------------------------------- --------------------- --------------------------------------------------
R. Scott Caputo 150,000 None
-------------------------------------- --------------------- --------------------------------------------------
Gerard S. DiFiore 30,000 Executive Officer and Director
-------------------------------------- --------------------- --------------------------------------------------
Norbert Mayer 20,000 Employee
-------------------------------------- --------------------- --------------------------------------------------
</TABLE>
(d) Aggregate Option/SAR Exercises and Fiscal Year- End Option/SAR
Value Table. No stock options or freestanding SAR's were exercised during the
two fiscal years ended December 31, 2000.
(e) Long-Term Incentive Plan ("LTIP") Awards Table. During the two
fiscal years ended December 31, 2000, no LTIP awards were made by the
Registrant.
(f) Compensation of Directors. (1) and (2). During the two fiscal years
ended December 31, 2000, no director of the Registrant received any
compensation, whether pursuant to any standard or other arrangement or
otherwise.
(g) Employment Contracts and Termination of Employment, and Change-in
Control Arrangements. (1) and (2). No executive officer, director or employee of
the Registrant is serving pursuant to the terms of a written employment or other
compensation agreement, understanding or arrangement with the Registrant; and no
such agreement was entered into during the two fiscal years ended December 31,
2000.
(h) Report on Repricing of Options/SAR's. No stock options or
freestanding SAR's were repriced during the two fiscal years ended December 31,
2000. However, and as enumerated above, non incentive options to purchase an
aggregate of 463,640 shares granted on November 1, 1996 at $5.00 per share, were
repriced to $2.00 on September 7, 2000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a)(b) Transactions With Executive Officers, Directors and Principal
Stockholders, Etc.
On September 30, 2000, Nicholas Anderson, an executive officer,
director and principal stockholder of the Registrant, pledged an aggregate of
50,000 shares of the Registrant's common stock to the Michigan Heritage Bank as
collateral security for a $100,000 line of credit the Registrant is seeking to
secure from the bank. Except for the foregoing, and during the two fiscal years
ended December 31, 2000, and except as enumerated in Item 1a of this Report no
officer, director or relative or spouse of the foregoing persons or any relative
of such person who has the same home as such person, or is a director or other
officer of any parent or subsidiary of the Registrant or any shareholder known
by the Registrant to own of record or beneficially more than five (5%) percent
27
<PAGE>
of the Registrant's Common Stock, had a direct or indirect material interest in
any transaction or presently proposed transaction to which the Registrant or any
of its parents or subsidiaries was or is a party.
(c) Parents. Nicholas Anderson, a founder of the Registrant the record
and beneficial owner of an aggregate of 1,645,500 shares of the Registrant's
Common Stock, representing a 28% equity interest in the Registrant as of
September 30, 2000, may be deemed to be a parent of the Registrant. In addition,
Anthony C. Caputo, a founder of the Registrant the record and beneficial owner
of an aggregate of 1,340,000 shares of the Registrant's Common Stock,
representing a 23% equity interest in the Registrant as of September 30, 2000,
may also be deemed to be a parent of the Registrant.
(d) Transactions with Promoters. Inapplicable.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Registrant consists of 9,000,000
shares of Common Stock, par value $.001 per share, of which 5,795,845 shares are
issued and outstanding. The following statements relating to the capital stock
are summaries and do not purport to be complete. Reference is made to the more
detailed provisions of, and such statements are qualified in their entirety by
reference to, the Certificate of Incorporation and the By-laws, copies of which
are filed as exhibits to this Registration Statement.
(a) Description of Rights and Liabilities of Common Stockholders
------------------------------------------------------------
1. Dividend Rights - The holders of outstanding shares of common stock
are entitled to receive dividends out of assets legally available therefore at
such times and in such amounts as the Board of Directors of the Registrant may
from time to time determine. The board of directors of the Registrant will
review its dividend policy from time to time to determine the desirability and
feasibility of paying dividends after giving consideration the Registrant's
earnings, financial condition, capital requirements and such other factors as
the board may deem relevant.
2. Voting Rights - Each holder of the Registrant's common stock are
entitled to one vote for each share held of record on all matters submitted to
the vote of stockholders, including the election of directors. All voting is
noncumulative, which means that the holder of fifty percent (50%) of the shares
voting for the election of the directors can elect all the directors. The board
of directors may issue shares for consideration of previously authorized but
unissued common stock without future stockholder action.
3. Liquidation Rights - Upon liquidation, the holders of the common
stock are entitled to receive pro rata all of the assets of the Registrant
available for distribution to such holders.
28
<PAGE>
4. Preemptive Rights - Holders of common stock are not entitled to
preemptive rights.
5. Conversion Rights - Options to purchase an aggregate of 500,000
shares of the Registrant's common stock are presently issued and outstanding
under the Registrant's 1994 Stock Option Plan; and common stock purchase
warrants to acquire an aggregate of 50,000 shares of the Registrant's common
stock are presently issued and outstanding, none of which have been exercised.
6. Redemption rights - no redemption rights exist for shares of common
stock.
7. Sinking Fund Provisions - No sinking fund provisions exist.
8. Further Liability For Calls - No shares of common stock are subject
to further call or assessment by the issuer. The Registrant has not issued stock
options as of the date of this registration statement.
9. Potential Liabilities of Common Stockholders to State and Local
Authorities - No material potential liabilities are anticipated to be imposed on
stockholders under state statutes.
(b) Debt Securities
The Registrant is not registering any debt securities, nor are any outstanding.
(c) Other Securities To Be Registered
The Registrant is not registering any security other than its Common Stock.
Glossary
The Registrant Power Efficiency Corporation, the
company whose common stock is the subject of this
registration statement.
Exchange Act The Securities Exchange Act of 1934, as
amended.
"Penny Stock" Security As defined in Rule 3(a)(51) of the Exchange
Act a "penny stock" security is any equity
security other than a security (i) that is a
reported security (ii) that is issued by an
investment company (iii) that is a put or call
issued by the Options Clearing Corporation
29
<PAGE>
(iv) that has a price of $5.00 or more (except
for purposes of Rule 419 of the Securities
Act) (v) that is registered on a national
securities exchange (vi) that is authorized
for quotation on the Nasdaq Stock Market,
unless other provisions of Rule 3a5l-l are not
satisfied, or (vii) that is issued by an
issuer with (a) net tangible assets in excess
of $2,000,000, if in continuous operation for
more than three years or $5,000,000 if in
operation for less than three years or (b)
average revenue of at least $6,000,000 for the
last three years.
Securities Act The Securities Act of 1933, as amended.
Small Business Issuer As defined in Rule 12b-2 of the Exchange Act,
a "Small Business Issuer" is an entity (i)
which has revenues of less than $25,000,000
(ii) whose public float (the outstanding
securities not held by affiliates) has a value
of less than $25,000,000 (iii) which is a
United States or Canadian issuer (iv) which is
not an Investment Company and (v) if a
majority-owned subsidiary, whose parent
corporation is also a small business issuer.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS.
(a) Market Information.
The principal market for the Registrant's Common Stock, its only class
of publicly traded equity securities, is the over-the-counter market.
The following table indicates the quarterly high and low price ranges
of the Registrant's Common stock representing actual trades in the over-
the-counter market during the two fiscal years ended December 31, 1999 and for
the first three quarters of fiscal 2000 through September 12, 2000. From January
1, 1998 through March 21, 2000, the table indicates the quarterly high and low
bid and ask price ranges as reported by the Trading and Market Service of the
Nasdaq Stock Market, Inc. From March 22, 2000 through September 12, 2000, the
table indicates the quarterly high and low closing price ranges as reported by
the National Quotation Bureau, Inc.
30
<PAGE>
Fiscal 1998:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
Bid Ask Bid Ask
<S> <C> <C> <C> <C>
FIRST QUARTER
January 1st through
March 31, 1998 11.125 12.125 9.5 10.25
SECOND QUARTER
April 1st through
June 30, 1998 11.625 12.625 5 7.25
THIRD QUARTER
July 1st through
September 31, 1998 7.375 9.25 5 7
FOURTH QUARTER
October 1st through
December 31, 1998 6.125 8 5.25 6.125
Fiscal 1999:
FIRST QUARTER
January 1st through
March 31, 1999 9.125 9.75 6.125 7.125
SECOND QUARTER
April 1st through
June 30, 1999 9.125 8.8125 6 8
THIRD QUARTER
July 1st through
September 31, 1999 11.8125 12.1250 7.6875 8
FOURTH QUARTER
October 1st through
December 31, 1999 13.25 13.6875 6 6.25
Fiscal 2000:
FIRST QUARTER
January 1st through
March 21, 2000 9.25 9.75 5.50 6
</TABLE>
HIGH LOW
---- ---
FIRST QUARTER*
March 22nd through
March 31, 2000 5.125 3
SECOND QUARTER
April 1st through
June 30, 2000 3.50 1.95
THIRD QUARTER
July 1st through
September 12, 2000 4.125 2.75
-------------------------
* Commencing March 22, 2000, the Registrant's common stock has been traded in
the Pink Sheets.
31
<PAGE>
The SEC has adopted Rule 15g-9 which establishes the definition of a "penny
stock," for purposes relevant to the Registrant, as any equity security that has
a market price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require: (i) that a broker or
dealer approve a person's account for transactions in penny stocks and (ii) the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased. In order to approve a person's account for transactions in penny
stocks, the broker or dealer must (i) obtain financial information and
investment experience and objectives of the person; and (ii) make a reasonable
determination that the transactions in penny stocks are suitable for that person
and that person has sufficient knowledge and experience in financial matters to
be capable of evaluating the risks of transactions in penny stocks. The broker
or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the SEC relating to the penny stock market,
which, in highlight form, (i) sets forth the basis on which the broker or dealer
made the suitability determination and (ii) that the broker or dealer received a
signed, written agreement from the investor prior to the transaction. Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading, and about commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
In order to qualify for listing on the Nasdaq SmallCap Market, a company
must have at least (i) net tangible assets of $4,000,000 or market
capitalization of $50,000,000 or net income for two of the last three years of
$750,000; (ii) public float of 1,000,000 shares with a market value of
$5,000,000; (iii) a bid price of $4.00; (iv) three market makers; (v) 300
shareholders and (vi) an operating history of one year or, if less than one
year, $50,000,000 in market capitalization. For continued listing on the Nasdaq
SmallCap Market, a company must have at least (i) net tangible assets of
$2,000,000 or market capitalization of $35,000,000 or net income for two of the
last three years of $500,000; (ii) a public float of 500,000 shares with a
market value of $1,000,000; (iii) a bid price of $1.00; (iv) two market makers;
and (v) 300 shareholders.
If the Registrant does not meet the qualifications for listing on the Nasdaq
SmallCap Market, the Registrant's securities may be traded in the NASD's
over-the-counter ("OTC") market. The OTC market differs from national and
regional stock exchanges in that it (1) is not cited in a single location but
operates through communication of bids, offers and confirmations between
broker-dealers and (2) securities admitted to quotation are offered by one or
more broker-dealers rather than the "specialist" common to stock exchanges. The
32
<PAGE>
Registrant intends to apply for listing on the NASD OTC Bulletin Board following
the SEC's acceptance of this Form 10-SB. In the interim, the Registrant's common
stock continues to be traded in what are commonly referred to as the "pink
sheets" of the National Quotation Bureau, Inc under the symbol PREF. To qualify
for listing on the NASD OTC Bulletin Board, an equity security must have one
registered broker-dealer, known as the market maker, willing to list bid or sale
quotations and to sponsor the Registrant for listing on the Bulletin Board.
If the Registrant is unable initially to satisfy the requirements for
quotation on the Nasdaq SmallCap Market or becomes unable to satisfy the
requirements for continued quotation thereon, and trading, if any, continues to
be conducted in the OTC market, a shareholder may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Registrant's securities.
(b) Holders.
<PAGE>
As of September 15, 2000, the approximate number of holders of record of
shares of the Registrant's Common Stock,$.001 par value per share, the
Registrant's only class of trading securities, was believed by management to be
as follows:
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock, $.001 par 139
Management believes that there are in excess of 107 shareholders whose
securities are held in street name with various brokerage houses. The exact
number are unknown to Registrant. The issued and outstanding shares of the
Registrant's Common Stock were issued in accordance with the exemptions from
registration afforded by Sections 3(b) and 4(2) of the Securities Act and Rule
506 promulgated thereunder.
(c) Dividends.
The Registrant has paid no dividends during the fiscal years ended
December 31, 1999 and December 31, 2000. Other than the requirements of the
General Corporation Law of the State of Delaware that dividends be paid out of
capital surplus only and that the declaration and payment of a dividend not
render the Registrant insolvent, there are no restrictions on the Registrant's
present or future ability to pay dividends.
The payment by the Registrant of dividends, if any, in the future rests
within the discretion of its Board of Directors and will depend, among other
things, upon the Registrant's earnings, its capital requirements and its
financial conditions, as well as other relevant factors.
33
<PAGE>
(d) Reports to Stockholders.
The Registrant's bylaws do not require the delivery of an annual report to our
shareholders and the Registrant has no present plans to provide an annual report
to its stockholders. As stated at the beginning of this filing on page 2, the
Registrant is voluntarily filing this Form 10-SB in order to make its financial
information equally available to any interested parties or investors. The
Registrant will be subject to the disclosure rules of Regulation S-B for a small
business issuer under the Securities and the Exchange Act. The Registrant
anticipates it will become subject to disclosure filing requirements effective
sixty days after the date the SEC accepts this original Form 10-SB filing, and,
after that date, the Registrant will be required to file Form 10-KSB annually
and Form 10-QSB quarterly. In addition, the Registrant will be required to file
current reports and proxy and information statements from time to time as
required.
The public may read and copy any materials the Registrant files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N. W., Washington D. C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site (http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC.
ITEM 2. LEGAL PROCEEDINGS
There is no litigation pending or threatened by or against the
Registrant.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
(a) During the two fiscal years ended December 31,2000, the Registrant
did not experience a change of independent accountants.
(b) That with respect to the financial statements of the Registrant for
two fiscal years ended December 31,2000, there were no disagreements between the
Registrant and any accountant on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which
disagreements if not resolved to the satisfaction of the accountants involved
would have caused them to make reference in connection with their report to the
subject matter of the disagreement.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
During the three fiscal years ended December 31, 2000, no securities of
the Registrant were sold without registering the same under the Securities Act.
Notwithstanding the foregoing, on August 7, 2000, and as disclosed herein under
the caption "Business Development" in Item 1, the Registrant issued an aggregate
of 1, 112,245 shares of its common stock to Percon under the Asset Agreement. It
is claimed that the shares issued to Percon were exempt from registration under
Section 5 of the Securities Act by virtue of Section 4(2) thereof as a
transaction by an issuer not involving any public offering.
34
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation law (the "DGCL") makes
provision for the indemnification of officers and directors in terms
sufficiently broad to indemnify officers and directors under certain
circumstances from liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Section 145 of the DGCL empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise.
The certificate of incorporation of the Registrant provides for
indemnification of our directors against, and absolution of, liability to the
Registrant and its stockholders to the fullest extent permitted by the DGCL. The
Registrant intends to purchase directors' and officers' liability insurance
covering liabilities that may be incurred by our directors and officers in
connection with the performance of their duties.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS
CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, IT IS THE OPINION
OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS AGAINST
PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
35
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
POWER EFFICIENCY CORPORATION
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-1
Financial Statements:
Assets F-3
Stockholders' Equity F-4
Notes to Financial Statement F-6
36
<PAGE>
POWER EFFICIENCY CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
POWER EFFICIENCY CORPORATION
DECEMBER 31, 1999 AND 1998
CONTENTS
Page
Independent Auditors' Report............................................. 1
Financial Statements:
Balance Sheets....................................................... 2
Statements of Operations............................................. 3
Statements of Changes in Stockholders' (Deficit) Equity.............. 4
Statements of Cash Flows............................................. 5
Notes to Financial Statements........................................ 6-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Power Efficiency Corporation
Ann Arbor, Michigan
We have audited the accompanying balance sheets of Power Efficiency Corporation,
(a Delaware corporation) (the "Company") as of December 31, 1999 and 1998, and
the related statements of operations, changes in stockholders' (deficit) equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has a stockholder deficiency. These matters raise substantial doubt as to
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also discussed in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/Sobel & Co., LLC
Certified Public Accountants
September 27, 2000
Livingston, New Jersey
F-1
<PAGE>
POWER EFFICIENCY CORPORATION
BALANCE SHEETS
================================================================================
December 31,
1999 1998
------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 1,816
Accounts receivable, net of reserve of $5,000 20,250 132,282
Officer's loan receivable - 627
Inventory 95,133 95,741
Prepaid expenses - 4,309
Other current assets - 817
------------------------
Total Current Assets 115,383 235,592
------------------------
PROPERTY AND EQUIPMENT, Net 31,291 29,522
------------------------
OTHER ASSETS:
Customer list, net - 8,750
Deposits 4,000 4,000
Patent application costs, net 25,624 26,726
------------------------
Total Other Assets 29,624 39,476
------------------------
$ $ 304,590
176,298
========================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Cash overdraft $ $
350 -
Accounts payable and accrued expenses 182,791 197,334
Accrued salaries and payroll taxes 36,681 7,609
Stockholder's loan 100,000 -
------------------------
Total Current Liabilities 319,822 204,943
------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $.001 par value,
1,000,000 shares authorized, none outstanding - -
Common stock, $.001 par value, 9,000,000 shares
authorized, 4,383,600 and 4,208,600 issued and
outstanding in 1999 and 1998, respectively 4,384 4,209
Additional paid-in capital 1,123,718 948,893
Accumulated deficit (1,271,626) (853,455)
------------------------
Total Stockholders' (Deficit) Equity (143,524) 99,647
------------------------
$ $ 304,590
176,298
========================
F-2
<PAGE>
POWER EFFICIENCY CORPORATION
STATEMENTS OF OPERATIONS
================================================================================
Year Ended December 31,
1999 1998
----------------------------
REVENUES $ 83,679 $ 72,949
----------------------------
COSTS AND EXPENSES:
Cost of sales 186,831 159,902
Research and development 23,232 21,574
Selling, general and administrative 291,587 232,416
----------------------------
Total Costs and Expenses 501,650 413,892
----------------------------
LOSS FROM OPERATIONS (417,971) (340,943)
----------------------------
OTHER INCOME - 1,256
----------------------------
LOSS BEFORE PROVISION FOR INCOME TAXES (417,971) (339,687)
PROVISION FOR INCOME TAXES 200 -
----------------------------
NET LOSS $(418,171) $ (339,687)
============================
LOSS PER SHARE, BASIC CALCULATION $(.10) $(.08)
============================
WEIGHTED AVERAGE SHARES OUTSTANDING 4,369,017 4,184,217
============================
F-3
================================================================================
The accompanying notes are an integral part of these financial
statements.
<PAGE>
POWER EFFICIENCY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
YEAR ENDED DECEMBER 31, 1999 AND 1998
================================================================================
Total
Common Stock Additional Stockholders'
-------------------- Paid-in Accumulated (Deficit)
Shares Amount Capital Deficit Equity
-------------------------------------------------------
BALANCE,
January 1, 1998 4,183,600 $4,184 $ 923,918 $ (513,768) $ 414,334
Sale of Common Stock:
December 1998, cash,
third party, $1 per 25,000 25 24,975 - 25,000
share
Net loss, 1998 - - - (339,687) (339,687)
-------------------------------------------------------
BALANCE,
December 31, 1998 4,208,600 4,209 948,893 (853,455) 99,647
Sale of Common Stock:
February 1999, cash,
third party, $1 per 175,000 175 174,825 - 175,000
share
Net loss, 1999 - - - (418,171) (418,171)
-------------------------------------------------------
BALANCE,
December 31, 1999 4,383,600 $4,384 $1,123,718 $(1,271,626) $(143,524)
=======================================================
F-4
================================================================================
The accompanying notes are an integral part of these financial
statements.
<PAGE>
POWER EFFICIENCY CORPORATION
STATEMENTS OF CASH FLOWS
================================================================================
Year Ended December 31,
1999 1998
-------------------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
--------------------
Net loss $(418,171) $(339,687)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 17,662 18,076
Changes in certain assets and liabilities:
(Increase) decrease in:
Accounts receivable 112,033 140,604
Officer's loan receivable 627 -
Inventory 608 (50,135)
Prepaid expenses 4,309 9,308
Other current assets 817 (923)
Increase (decrease) in:
Accounts payable and accrued expenses (14,543) 118,492
Accrued salaries and payroll taxes 29,072 7,609
------------------------
Net Cash Used for Operating Activities (267,586) (96,656)
------------------------
INVESTING ACTIVITIES:
--------------------
Purchase of fixed assets (9,580) -
Patent application costs - (7,433)
------------------------
Net Cash Used for Investing Activities (9,580) (7,433)
------------------------
FINANCING ACTIVITIES:
--------------------
Proceeds from issuance of equity securities 175,000 25,000
Repayment of loan from officer - 25,000
Loan from stockholder 100,000 -
------------------------
Net Cash Provided by Financing Activities 275,000 50,000
------------------------
DECREASE IN CASH AND
CASH EQUIVALENTS (2,166) (54,089)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,816 55,905
------------------------
End of year (cash overdraft) $ $ 1,816
(350)
========================
F-5
================================================================================
The accompanying notes are an integral part of these financial
statements.
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS:
------------------------------------------------------------------------------
Power Efficiency Corporation (the "Company"), a Delaware corporation, designs,
develops, markets and sells, under the trade name Power Commander, solid state
electronic motor controllers which regulate and reduce the energy consumption of
alternating current induction motors. The Company currently has two products:
the Three Phase Power Commander, which is used in industrial applications, and
the Single Phase Power Commander, which is used in consumer applications. The
Company also engages in research and development of new, related energy saving
products.
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------------------------------------------
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be "Cash Equivalents".
Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or market.
Research and Development:
Research and development expenditures are charged to expense as incurred.
Property, Equipment and Depreciation:
Property and equipment are stated at cost. Maintenance and repairs are expensed
as incurred, while betterments are capitalized. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 5 to 10 years.
Customer List and Amortization:
Customer list is stated at cost. Amortization is computed based upon the
estimated useful life of the list, which is three years.
Patent Application Costs:
Patent application costs consist of costs incurred in applying for U.S. patents
based upon technology developed by the Company. These costs are capitalized
until the patent is awarded. At that time, the asset will be amortized over the
estimated useful life of the patent. If no patent is issued, these costs will be
expensed in the period when it is determined that no patent will be issued.
Revenue Recognition:
Revenue from product sales is recognized at the time of shipment. License
agreement revenue is recognized at the time that all significant services have
been provided.
================================================================================
F-6
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
------------------------------------------------------------------------------
Loss per Share:
Basic loss per share is determined by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted loss per share is computed as above while giving effect to all
dilutive potential common shares (but not giving effect to securities that would
have an antidilutive effect, as would occur in loss years) that were outstanding
during the period.
Long-Lived Assets:
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of its assets might not be
recoverable. There is no current indication that the Company's long-lived assets
might not be recoverable.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and temporary cash investments and
accounts receivable.
The Company places its cash and temporary cash investments with quality
financial institutions. From time to time the Company's balances with these
financial institutions may exceed the maximum insured amounts under the Federal
Deposit Insurance Corporation. The Company has not incurred losses related to
these financial instruments.
Sales and accounts receivable are from a relatively small number of distributors
of the Company's products. The Company closely monitors extensions of credit.
Income Taxes:
The Company has not provided for deferred taxes because the tax effect of
temporary differences between the tax basis of assets and liabilities and their
financial reporting amounts are not material.
Advertising:
Advertising costs are expensed as incurred.
================================================================================
F-7
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
NOTE 3 - GOING CONCERN:
------------------------------------------------------------------------------
The accompanying financial statements have been prepared assuming the Company is
a going concern which assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
suffered recurring losses from operations and has a stockholder deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amount of liabilities that might be necessary should the Company be unable
to continue in existence. Continuation of the Company as a going concern is
dependent on achieving profitable operations. Management's plans to achieve
profitability include developing new products, obtaining new customers and
merging its operations with its major customer. Management also plans to raise
additional capital through equity issuance or other types of financing. See also
Note 15 - Subsequent Events: Asset Purchase Agreement and Private Stock
Offering.
------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT:
------------------------------------------------------------------------------
At December 31, 1999 and 1998, property and equipment is comprised as follows:
1999 1998
------------------------
Machinery and equipment $43,965 $34,385
Office furniture and equipment 12,782 12,782
------------------------
56,747 47,167
Less: accumulated depreciation 25,456 17,645
------------------------
Property and Equipment, Net $31,291 $29,522
========================
------------------------------------------------------------------------------
NOTE 5 - CONCENTRATION OF RISKS:
------------------------------------------------------------------------------
The Company maintains cash balances at a financial institution located in New
Jersey. Amounts at this institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company may maintain balances in excess of the
insured limits.
Two customers accounted for approximately 78% of 1999 sales and 69% of accounts
receivable at December 31, 1999. One customer accounted for approximately 19% of
1998 sales and 81% of accounts receivable at December 31, 1998.
================================================================================
F-8
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
NOTE 6 - LICENSE AGREEMENT REVENUE:
------------------------------------------------------------------------------
In February 1996, the Company entered into a licensing agreement with its major
customer. The agreement relates to the single phase power control device. In
consideration of $100,000, the Company granted an exclusive license to such
major customer to use the Company's know-how, technology, specifications, data,
trade secrets and other information in existence or thereafter developed, to
manufacture, have manufactured, distribute, use and sell the licensed product
throughout the world. In the event the Company obtains title to a certain patent
related to the above technology, such patent will be included in the
transaction. The agreement also provides for a royalty of $1 for each licensed
product sold by the licensee having a sales price of $15 or less. In the event
that the sales price is greater than $15 per unit, the Company is entitled to a
royalty of $1 plus 10% of the sales price in excess of $15. No license agreement
revenue was accrued for the years ended December 31, 1999 and 1998.
------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES:
------------------------------------------------------------------------------
As of December 31, 1999 and 1998, the Company has available, on a federal tax
basis, net operating loss carryforwards of approximately $1,254,000 and
$836,000, respectively, which expire at varying amounts through 2014. The net
operating loss carryforwards result in deferred tax assets of approximately
$426,000 and $284,000 at December 31, 1999 and 1998; however, a valuation
reserve has been recorded for the full amount due to the uncertainty of
realization of the deferred tax assets.
------------------------------------------------------------------------------
NOTE 8 - WARRANTS AND STOCK OPTION PLAN:
------------------------------------------------------------------------------
Warrants:
In connection with a limited public offering of its common stock pursuant to a
Rule 504 offering memorandum dated July 15, 1996, the investment banker
received, for nominal consideration, five year warrants to purchase 36,720
shares of common stock. These warrants are exercisable at any time during the
four year period commencing October 17, 1997 for $5.50 per share of common
stock. In addition to permitting the payment of the exercise price in cash, the
holder of the warrant may surrender the warrant to the Company for cancellation
in lieu of cash for the exercise price. Under this alternative, the Company
would issue a lesser number of shares of common stock (determined in accordance
with a formula), retire the warrants, and receive no cash.
================================================================================
F-9
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
NOTE 8 - WARRANTS AND STOCK OPTION PLAN: (Continued)
------------------------------------------------------------------------------
On November 10, 1994, the Company issued five year warrants to purchase 5,000
shares of common stock. These warrants are exercisable at any time during the
five year period commencing on November 10, 1994 for $1.00 per share of common
stock. These warrants expired on November 10, 1999.
Stock Option Plan:
In 1994, the Company adopted a Stock Option Plan (the "Plan"). The Plan provides
for the granting of options to purchase up to 500,000 shares of common stock at
an exercise price equal to the fair market value of the common stock (110% of
fair market value for a holder of in excess of 10%) on the date of the grant. No
options have been exercised to date.
Plan activity during the year ended December 31, 1999 and 1998 follows:
Weighted Average
Shares Exercise Price
--------------------------------
Outstanding at January 1, 1998 500,000 $5.04
Granted during 1998 - -
Exercised during 1998 - -
Forfeited during 1998 - -
--------------------------------
Options outstanding and exercised at
December 31, 1998 500,000 5.04
Granted during 1999 - -
Exercised during 1999 - -
Forfeited during 1999 - -
--------------------------------
Options outstanding and exercisable
at December 31, 1999 500,000 $5.04
================================
Weighted average remaining contractual life at December 31, 1999
6.8
At December 31, 1999 and 1998, options for 463,640 shares at $5.00 and 36,360
shares at $5.50 were outstanding. These options were repriced by the Board of
Directors at the September 7, 2000 meeting to $2.00 per share. Additionally, at
the September 7, 2000 meeting, the Board of Directors authorized the issuance of
1,125,000 options at an exercise price of $2.00 per share.
------------------------------------------------------------------------------
NOTE 9 - ACCOUNTING FOR STOCK BASED COMPENSATION:
------------------------------------------------------------------------------
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123") for stock options issued. Accordingly, no compensation cost has been
recognized in the financial statements for the stock options issued to
employees.
During 1996, 180,000 stock options were granted to non-employees for services
rendered. The value of the options granted was $70,000 and was included in 1996
operations. The 180,000 stock options are included in the 500,000 options
reflected in Note 8 above.
================================================================================
F-10
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
NOTE 9 - ACCOUNTING FOR STOCK BASED COMPENSATION: (Continued)
------------------------------------------------------------------------------
The fair value of each option grant (aggregate of 320,000 stock options) was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants: expected volatility
of 51%; risk-free interest rate of 6.0%; and expected lives of 9.8 years.
Had compensation cost for the Company's stock option plan been recognized based
on the fair value at the grant date for awards consistent with the provisions of
SFAS 123, the Company's net loss and loss per share for the year ended December
31, 1996 would have been as indicated below:
As Originally As Adjusted
Reported for Repricing
----------------------------
Net loss - as reported $ (236,581) $ (94,632)
Net loss - pro forma $ (2,601,820) $(1,040,728)
Loss per share, basic calculation - as $(.06) $(.03)
reported
Loss per share, basic calculation - pro $(.64) $(.26)
forma
Management believes that the calculations under the Black-Scholes option-pricing
model do not fairly represent the fair value of the options granted because of
the short period of time (October 1996 through December 1996) that the common
stock has been traded (used for measurement purposes) and such trading has been
on a limited basis.
No new options were granted since 1996.
The stock options were repriced by the Board of Directors at the September 7,
2000 meeting to $2.00 per share. Additionally, at the September 7, 2000 meeting,
the Board of Directors authorized the issuance of 1,125,000 options at an
exercise price of $2.00 per share.
------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
------------------------------------------------------------------------------
The Company leases office, warehouse and research facilities under an operating
lease. The lease expired on June 1, 1999 and continued on a month-to-month
basis. Rent expense, including base rent and additional charges, for the year
ended December 31, 1999 and 1998 was $27,600, respectively.
In 1995, the Company entered into a nonexclusive patent license agreement
through 2001 with the National Aeronautics and Space Administration (NASA). This
agreement is currently being renegotiated to convert the remainder of said
license to a royalty free license. No royalty expense was accrued for the years
ended December 31, 1999 and 1998.
At December 31, 1999 and 1998, the Company was obligated, under a distribution
agreement, to sell power control boards (a component of the Three Phase Power
Commander) under a fixed price schedule based on cumulative units sold. This
agreement committed the purchaser to purchase $20,300,000 of product over the
ten year life of the agreement, of which $561,000 of revenues have been
recognized through 1998. Since the distributor has failed to meet minimum
purchases, the Company has the option to terminate the agreement.
================================================================================
F-11
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
NOTE 11 - RELATED PARTY TRANSACTIONS:
------------------------------------------------------------------------------
During 1999 and 1998, $72,000 and $60,000 was paid to an
officer/director/stockholder of the Company in the form of commissions. These
commissions are included in selling, general and administrative expenses for the
years ended December 31, 1999 and 1998.
During 1999 and 1998, the Company incurred legal fees of $36,656 and $39,025 to
a law firm. A partner in that firm is an officer/director/stockholder of the
Company.
In February 1998, an officer repaid the outstanding balance of a $25,000 loan
from the Company. This loan accrued interest of $106 during 1998 calculated at
5% interest per annum.
On October 1, 1996, the Company entered into a sales, engineering and consulting
agreement with Equipment Specialty Products ("ESP"), a corporation founded in
1980 by an officer/director/stockholder and owned by the son and spouse of such
officer/director/stockholder of the Company. Under the terms of this agreement,
the Company received a customer list (Note 1), and engineering and consulting
services related to the Company's current products and to future products.
The Company paid ESP $35,000 for the customer list and $355,000 related to
engineering and consulting services which were recognized as research and
development costs in previous years.
------------------------------------------------------------------------------
NOTE 12 - INSURANCE COVERAGE:
------------------------------------------------------------------------------
The Company's general liability and product liability insurance coverage lapsed
in mid-August 1999 for non-payment of premiums. The nature and extent of any
potential liability is uncertain. The Company believes that there is no material
risk of loss to the Company from possible product liability claims against the
Company.
------------------------------------------------------------------------------
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
------------------------------------------------------------------------------
Cash paid during the year ended December 31, for:
1999 1998
Income Taxes $200 $ -
====================
Interest $ - $ -
====================
================================================================================
F-12
<PAGE>
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
------------------------------------------------------------------------------
NOTE 14 - STOCKHOLDER'S LOAN:
------------------------------------------------------------------------------
On September 29, 1999, the Company borrowed $100,000 from a stockholder. The
loan is due and payable in a single payment of principal and interest on the
earlier of (i) the closing date of an equity financing by the Company; or (ii)
September 30, 2000, whichever occurs sooner. The loan bears interest at 10% per
annum payable on the due date.
The President and Chief Executive Officer of the Company granted the lender a
first lien and security interest in an aggregatge of 200,000 issued and
outstanding common shares of the Company owned by him as collateral. As
additional collateral security, the Company granted the lender the right and
option to purchase an aggregate 30,000 authorized but unissued shares of the
Company's common stock at a price equal to forty percent of the mean between the
closing bid and ask prices on the day the lender exercises the option.
The Board of Directors, on September 7, 2000, authorized renegotioting the loan
until the earlier of (i) January 31, 2001; or (ii) the closing date of the
Company's receipt of $625,000 in gross proceeds from an equity financing. As
additional consideration for the extension of the due date, the Company granted
an option to purchase an aggregate 50,000 authorized but unissued shares of the
Company's common stock at the set exercise price of $2.00 per share.
------------------------------------------------------------------------------
NOTE 15 - SUBSEQUENT EVENTS: ASSET PURCHASE AGREEMENT AND PRIVATE
------------------------------------------------------------------------------
STOCK OFFERING:
On August 7, 2000, the Company purchased certain assets and liabilities of
Performance Control, LLC, its major customer, for 1,112,245 authorized, but
unissued shares of the Company's common stock. In conjunction with this purchase
agreement, the Company also sold $300,000 of the Company's common stock through
a private placement. Such proceeds will be utilized for working capital purposes
of the combined entities.
These shares were sold in units of 25,000 authorized but unissued shares of the
Company's common stock at $1.00 per share, and a five year warrant to purchase
an additional 25,000 shares of the Company's common stock at $3.00 per warrant
share during the first year, $4.00 per share during the second year, and $5.00
per share during the third year. The unit and warrant shares are "restricted
securities" as that term is defined under Rule 144 under the Securities Act of
1933 and ineligible for public sale for a period of twelve months from the date
of issuance.
The Company's entire private placement offering consists of an aggregate of
1,000,000 unit shares and 1,000,000 warrant shares. The Company is currently
pursuing the sale of the remaining 700,000 shares and warrants.
The asset purchase agreement and the sale of 12 units of the Company's common
stock and warrants discussed above have not been reflected in the accompanying
financial statements.
================================================================================
F-13
<PAGE>
Power Efficiency Corporation
Balance Sheets
Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
Balance Postings 1/1 - 6/30/00 Balance Balance
!/1/00 Dr Cr 6/30/00 6/30/99
-----------------------------------------------------------------------------------------
Assets
Current Assets
<S> <C> <C> <C> <C> <C>
Cash and Equivilents 0.00 20,762.00 20,451.21 310.79 0.00
Accounts Receivable 25,250.00 9,600.00 23,500.00 11,350.00 89,669.00
Alllowance for Bad Debts (5,000.00) (5,000.00) (5,000.00)
Officer's Loan 0.00 627.00
Prepaid Expenses 0.00 862.00
Other Current Assets 0.00 817.00
Inventory 95,133.00 11,652.42 6,752.65 100,032.77 111,821.00
------------------ ---------------------- ---------------
Total Current Assets 115,383.00 106,693.56 198,796.00
------------------ ---------------------- ---------------
Property and Equipment (Net) 31,291.00 2,089.00 29,202.00 26,574.00
------------------ ---------------------- ---------------
Other Assets
Deposits 4,000.00 4,000.00 4,000.00
Customer List, Net 2,916.00
Patent Application Costs (Net) 25,624.00 275.00 25,349.00 26,175.00
------------------ ---------------------- ---------------
29,624.00 29,349.00 33,091.00
------------------ ---------------------- ---------------
Total Assets 176,298.00 165,244.56 258,461.00
================== ====================== ===============
Liabilities and Stockholders/ Equity
Currrent Liabilities
Cash Overdraft 350.00 350.00 0.00 5,683.00
Accounts Payable 168,291.00 22,093.97 41,028.27 187,225.30 190,063.00
Accrued Expenses 14,500.00 500.00 14,000.00
Accrued Salaries & Payroll Taxes 36,681.00 36,681.00 18,083.00
Stockholder's Loan 100,000.00 100,000.00
------------------ ---------------------- ---------------
319,822.00 337,906.30 213,829.00
------------------ ---------------------- ---------------
Stockholders' (Deficit) Equity
Preferred Stock, $.001 par Value,
1000,000 shares authorized,
none outstanding.
Common Stock, $.001 par value
9,000,000 shares authorized
4,383,600 issues and outstanding 4,384.00 4,384.00 4,384.00
Additional paid-in capital 1,123,718.00 1,123,718.00 1,123,718.00
Accumulated deficit (1,271,626.00) 1,271,626.00 (1,300,764.00) (1,083,470.00)
------------------ ---------------
Total Stockholders' Equity (143,524.00) (172,662.00) 44,632.00
------------------ ---------------------- ---------------
Total Liabilities and Stockholders' Equity 176,298.00 165,244.30 258,461.00
================== ===================== ==============
Power Efficiency Corporation
Statement of Operations
Six Months Ended June 30, 1999 and
June 30, 2000
Revenues 9,600.00 40,589.00
--------------------
Costs and Expenses
Cost of Sales 12,198.10 102,067.00
Research and Development 7,000.00 13,241.00
Selling, general and admininstative 19,539.64 155,096.00
-------------- --------------------
Total Costs and Expenses 38,737.74 270,404.00
--------------------
Loss from Operations (29,137.74) (229,815.00)
Loss Before Provision For Income Taxes (29,137.74) (229,815.00)
Provision for Income Taxes 0.00 200.00
Net Loss (29,137.74) (230,015.00)
Loss Per Share, Basic Calculation (0.01) (0.05)
Weighted Average Shares Outstanding 103,696.13 4,354,433.00 4,354,433.00
</TABLE>
<PAGE>
Power Efficiency Corporation
Schedule of Accounts Payable/
Accounts Receevable
As of June 30, 2000
<TABLE>
<CAPTION>
Payments/ Purchases/
Balance Receipts Sales Balance
Accounts Receibable 1/1/00 1/1-6/30/00 1/1-6/30/00 6/30/00
-------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Accu-Glo 10,500.00 8,750.00 1,750.00
CCS 2,900.00 2,900.00 0.00
Edison Power 7,000.00 7,000.00 0.00
Haned 2,112.00 2,112.00 0.00
Percon 2,738.00 2,738.00 Trans A/P 0.00
------------------------------------ -----------------
25,250.00 23,500.00 1,750.00
------------------------------------
Edison Power Technologies 9,600.00 9,600.00
-----------------
-----------------
Balance Accounts Receivable 6/30/00 11,350.00
=================
Accounts Payable
Adirondack Energy 10,000.00 7,000.00 17,000.00
Apparatus Electric 3,048.00 3,048.00
Airborne Express 1,076.00 40.85 233.05 1,268.20
AT&T 640.00 500.00 431.47 571.47
Badger Technologies 4,807.00 4,807.00
Birch Stewart 8,137.00 550.00 8,687.00
Bell Atlantic 349.00 116.93 465.93
Camtronics 1,888.00 1,888.00
Creatone 18,898.00 18,898.00
CSC 223.00 223.00
CST 696.00 285.42 981.42
Crown Peters 678.00 678.00
Crystal Propertues 13,800.00 2,300.00 11,500.00
Depository Trust 1,700.00 1,700.00
Dranetz-BMI 9,580.00 9,580.00 0.00
Federal Express 1,781.00 1,781.00
Kent Components 5,288.00 392.77 5,680.77
Mullaney 557.00 557.00 0.00
New Englland Business 344.00 0.00 321.50 665.50
Percon 53,853.00 2,738.00 4,864.65 55,979.65
PSG&G 1,865.00 866.08 998.92
Reed Smith Shaw 17,106.00 17,837.48 34,943.48
Semikron 1,407.00 1,407.00
Sobel & Company 10,000.00 5,000.00 5,000.00
Sprint 1,173.00 1,173.00
United Parcel Service 1,628.00 1,628.00
Weeks Holderbaum & DeGraw 4,161.00 4,161.00
Accrued Expenses
Accrued Commissions 12,000.00 12,000.00
Accrued Interest 2,500.00 2,500.00
Nick Anderson 500.00 500.00 0.00
-----------------------------------------------------------------------------------------
182,988.00 22,081.93 38,728.27 199,634.34
=========================================================================================
</TABLE>
<PAGE>
Power Efficiency Corporation
Balance Sheets
Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
June 30 June 30
2000 1999
-------------------- -----------------
Assets
Current Assets
<S> <C> <C>
Cash and Equivilents 311 -
Accounts Receivable Net of Reserve of $5,000 6,350 84,669
Officer's Loan 627
Prepaid Expenses 862
Other Current Assets 817
Inventory 100,032 111,821
-------------------- -----------------
Total Current Assets 106,693 198,796
-------------------- -----------------
Property and Equipment (Net) 29,202 26,574
-------------------- -----------------
Other Assets
Deposits 4,000 4,000
Customer List, Net 2,916
Patent Application Costs (Net) 25,349 26,175
-------------------- -----------------
Total Other Assets 29,349 33,091
-------------------- -----------------
Total Assets 165,244 258,461
==================== =================
Liabilities and Stockholders/ Equity
Currrent Liabilities
Cash Overdraft 5,683
Accounts Payable and Accrued Expenses 201,225 190,063
Accrued Salaries & Payroll Taxes 36,681 18,083
Stockholder's Loan 100,000 -
-------------------- -----------------
Total Current Liabilities 337,906 213,829
-------------------- -----------------
Stockholders' (Deficit) Equity
Preferred Stock, $.001 par Value,
1000,000 shares authorized,
none outstanding.
Common Stock, $.001 par value
9,000,000 shares authorized
4,383,600 issues and outstanding 4,384 4,384
Additional paid-in capital 1,123,718 1,123,718
Accumulated deficit (1,300,764) (1,083,470)
-------------------- -----------------
Total Stockholders' Equity (172,662) 44,632
-------------------- -----------------
Total Liabilities and Stockholders' Equity 165,244 258,461
==================== =================
</TABLE>
<PAGE>
Power Efficiency Corporation
Statements of Operations
Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
June 30 June 30
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues 9,600 40,589
--------------- ---------------
Costs and Expenses
Cost of Sales 12,198 102,067
Research and Development 7,000 13,241
Selling, General and Administrative 19,540 195,096
--------------- ---------------
Total Costs and Expenses 38,738 310,404
--------------- ---------------
Loss from Operations (29,137) (229,815)
---------------
Loss Before Provision for Income Taxes (29,137) (229,815)
Provision for Income Taxes - 200
--------------- ---------------
Net Loss (29,137) (230,015)
=============== ===============
Loss Per Share Basic Calculation $(.01) $(.08)
=============== ===============
Weighted Average Shares Outstanding 4,383,600 4,383,600
=============== ===============
</TABLE>
<PAGE>
Power Efficiency Corporation
Statements of Changes in Stockholders' (Deficit) Equity
Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Paid-in Accumulated (Deficit)
Common Stock Capital Deficit Equity
----------------------------------------------- -------------------
Shares Amount
<S> <C> <C> <C> <C> <C>
Balance
January 1, 1999 4,208,600 4,209 948,893 (853,455) 99,647
Sale of Common:
February, 1999, cash,
third party, $1 per share 175,000 175 174,825 175,000
Net Loss, Six Month ended
June 30, 1999 (230,015) (230,015)
-----------------------------------------------------------------------------------
Balance
June 30, 1999 4,383,600 4,384 1,123,718 (1,083,470) 44,632
===================================================================================
Balance
January 1, 2000 4,383,600 4,384 1,123,718 (1,271,627) (143,525)
Net Loss, Six Months ended
June 30, 2000 (29,137) (29,137)
-----------------------------------------------------------------------------------
Balance
June 30, 2000 4,383,600 4,384 1,123,718 (1,300,764) (172,662)
===================================================================================
</TABLE>
<PAGE>
Power Efficiency Corporation
Statements of Cash Flows
Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
Junr 30 June 30
2000 1999
--------------- --------------
<S> <C> <C>
Cash Flows Provided By (Used For)
Operating Activities:
Net Loss (29,137) (230,015)
Adustments to reconcile net loss to net
cash used for operating activities:
Depreciation and Amortization 2,364 9,338
Changes in certain assets and liabillities:
(Increase) decrease in:
Accounts Receivable 13,900 47,608
Officer's Loan Receivable
Inventory (4,899) (16,080)
Prepaid Expenses 3,447
Other Current Assets
Increase (decrease) in:
Accounts Payable and Accrued Expenses 18,433 (7,271)
Accrued Salaries and Payroll Taxes 10,474
--------------- --------------
--------------- --------------
Net Cash used for Operating Activities 661 (182,499)
--------------- --------------
Investing Activities:
Purchase of Fixed Assets -
Patent Application Costs -
--------------
--------------
Net Cash used for Investing Activities -
--------------
Financing Activities:
Proceeds from issuance of equity securities 175,000
Repayment of Loan from Officer
Loan from Stockholder
--------------
Net cash provided by Financing Activities 175,000
--------------
(Decrease) Increase in Cash and Cash Equivilants 661 (7,499)
Cash and Cash Equivilants:
Beginning of Year (350) 1,816
--------------- --------------
End of Year (Cash Overdraft) 311 (5,683)
=============== ==============
</TABLE>
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits and Index Required.
(1) EXHIBIT INDEX
Description of Document Location
(1) Underwriting Agreement N/A
(2) Plan of Acquisition, Reorganization,
Arrangement, Liquidation, or Succession N/A
(3)(i) Certificate of Incorporation Filed Herewith
(3)(ii) By-Laws Filed Herewith
(4) Instruments defining the rights of
security holders, including indentures
(a) Common Stock Filed Herewith
(5) Opinion re: legality *
(10) Material Contracts:
10 (a) August 7, 2000 Asset Purchase Agreement Filed herewith
10 (b) August 7, 2000 Stockholders' Agreement Filed herewith
10 (c) Lease Agreement dated February 16, 1996 Filed herewith
10 (d) Purchase Agreement with Millar Elevator Filed herewith
10 (e) Agreement with Kone dated December 1, 1998 Filed herewith
10 (f) Certificate of Liability Insurance Filed herewith
10 (g) United States Patent #5,821,726 Filed herewith
10 (h) Defense Supply Center contract Filed herewith
10 (i) 1994 Stock Option Plan Filed herewith
10 (j) May 16, 2000 Private Placement Memorandum Filed herewith
10 (k) Escrow Agreement dated August 4, 2000 Filed herewith
(11) Statement re: computation of
per share earnings N/A
(12) No exhibit required
(13) Annual or quarterly reports,
Form 10-Q and Form 10-QSB N/A
(14) Material foreign patents N/A
(15) Letter on unaudited interim
financial information N/A
(16) Letter on change in certifying
accountants N/A
(17) Letter on director resignation N/A
(18) Letter re changes in
accounting principles N/A
(19) Reports furnished to
security holders N/A
(20) Other documents or statements
to security holders N/A
(21) Subsidiaries of the Registrant None
(22) Published report regarding N/A
matters submitted to vote
(23) Consents to experts and counsel N/A
(24) Power of Attorney N/A
(25) Statement of eligibility of trustee N/A
(26) Invitations for competitive bids N/A
(27) Financial data schedules N/A
(28) Information from reports furnished
to State insurance regulatory authorities N/A
(99) Additional exhibits N/A
----------------------------------------
* To be filed by amendment
(b) Reports on Form 8-K. N/A
ITEM 2. DESCRIPTION OF EXHIBITS N/A
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, as
amended, the Registrant caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized.
POWER EFFICIENCY CORPORATION
By:
----------------------------------------
Stephen Shulman, President
October , 2000
