PRIVATE PLACEMENT MEMORANDUM No._____
POWER EFFICIENCY CORPORATION
40 Units at $25,000 per Unit
Each Unit Comprised of 25,00 Shares of Common Stock at $1.00 per Share and
a Warrant to Purchase an Additional 25,000 Shares of Common Stock
Minimum Purchase One Unit
All 2,000,000 shares of common stock, par value $.001 per share, contained in
the Units (the "Shares") offered hereby, are being issued and sold by Power
Efficiency Corporation., a Delaware corporation (the "Company"). Prior to this
offering (the "Offering'), there has been a limited public market for the
Company's common stock. The Offering price has been arbitrarily determined by
the Company. The Offering will begin on the date of this Memorandum and continue
for 60 days, subject to a the sale of a minimum of 12 Units. See "Summary of the
Offering".
The Units offered hereby involve a high degree of
risk and immediate substantial dilution - See
the Risk Factors on Page 13.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE MERITS OF, OR GIVE ITS APPROVAL TO, THIS
OFFERING. NOR HAS THE SEC NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR COMPLETENESS OF THIS MEMORANDUM OR OTHER SELLING LITERATURE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Public Selling Proceeds to
Commissions/1 Company/2
Per Unit $25,000 $2,500 $22,500
Minimum $300,000 $30,000 $270,000
Maximum $1,000,000 $100,000 $900,000
1. The Offering is being made directly by the Company on a "12 Unit
$300,000-or-none-best efforts" basis through its directors, officers and
employees who shall serve without compensation. However, the Company reserves
the right to engage registered broker/dealers in the sale of the Units to assist
in this Offering for which the Company will pay brokerage commissions not to
exceed 10% on such sales. All proceeds will be held in escrow until the sale of
12 Units. See "Summary of the Offering".
2. After deducting commissions but before deducting the expenses of the
offering, which are estimated to be $10,000.
Any representation or warranty that may be made by anyone regarding the Company
other than as contained herein is unauthorized and invalid. The Units are being
offered under and pursuant to Rule 506 of Regulation D solely to "Accredited
Investors" as that term is defined in Rule 501(a) of Regulation D under the
Securities Act of 1933, as amended (the "Act").
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POWER EFFICIENCY CORPORATION
4220 Varsity Drive, Suite E
Ann Arbor, MI 48108
201-488-4040
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The date of this Memorandum is May 16, 2000
POWER EFFICIENCY CORPORATION
LIMITED OFFERING SOLELY TO ACCREDITED INVESTORS
THE INFORMATION CONTAINED HEREIN IS DEEMED CONFIDENTIAL BY POWER EFFICIENCY
CORPORATION, (HEREINAFTER THE "COMPANY"), HAS NOT NECESSARILY BEEN RELEASED
PUBLICLY, AND IS DISCLOSED FOR THE SOLE PURPOSE OF EVALUATION BY A POTENTIAL
PURCHASER OF THE UNITS BEING OFFERED HEREBY. SO LONG AS THIS INFORMATION IS NOT
PUBLICLY AVAILABLE AND BEARS ON THE VALUE OF AN INVESTMENT IN THE COMPANY'S
SECURITIES, NO PERSON TO WHOM IT HAS BEEN MADE AVAILABLE MAY PARTICIPATE IN ANY
PUBLIC TRADING INVOLVING SECURITIES OF THE COMPANY BASED UPON THE INFORMATION
CONTAINED IN THIS PRIVATE PLACEMENT MEMORANDUM. ANY SUCH TRADING BY A RECIPIENT
OF THIS MEMORANDUM, OR BY A PERSON WHO IS INFORMED BY THE RECIPIENT OF THE
CONTENTS OF THIS MEMORANDUM, COULD RESULT IN CIVIL OR CRIMINAL LIABILITY TO SUCH
RECIPIENT FOR VIOLATION OF FEDERAL OR STATE SECURITIES LAWS.
THE UNITS REFERRED TO HEREIN ARE NOT BEING REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION FOR
TRANSACTIONS BY AN ISSUER NOT INVOLVING ANY PUBLIC OFFERING. THESE UNITS ARE
BEING OFFERED ONLY TO INVESTORS WHOM THE COMPANY BELIEVES ARE "ACCREDITED
INVESTORS" AS THAT TERM IS DEFINED IN RULE 501(A) OF REGULATION D OF THE
SECURITIES ACT OF 1933, AS AMENDED.
THE UNITS OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AS AMENDED OR UNDER APPLICABLE STATE SECURITIES LAWS NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS MEMORANDUM OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY STATE OR ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH STATE OR JURISDICTION. NEITHER THE DELIVERY OF THIS
MEMORANDUM NOR ANY SALE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE FACTS HEREIN SET FORTH SINCE
THE DATE HEREOF.
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE AS BEING LEGAL ADVICE THE CONTENTS OF
THIS MEMORANDUM OR ANY OTHER COMMUNICATIONS FROM THE COMPANY OR ANY OF ITS
RESPECTIVE AFFILIATES, RELATED PARTIES, OFFICERS, OR EMPLOYEES. EACH RESPECTIVE
INVESTOR SHOULD CONSULT HIS OWN COUNSEL, ACCOUNTANT, OR BUSINESS ADVISOR
CONCERNING INVESTMENT IN THE UNITS OFFERED HEREBY.
PRIOR TO THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREIN, THE COMPANY
WILL MAKE AVAILABLE TO PROSPECTIVE INVESTORS AND/OR THEIR REPRESENTATIVES AND
ADVISORS, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM, THE
COMPANY OR FROM ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS OFFERING AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE
EXTENT THAT THE COMPANY POSSESSES SUCH INFORMATION OR CAN OBTAIN IT WITHOUT
UNREASONABLE EFFORT OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE
INFORMATION CONTAINED IN THIS MEMORANDUM. NO PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS CONCERNING THIS TRANSACTION WHICH ARE
NOT CONTAINED
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IN THIS MEMORANDUM, AND ANY SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
ANY REPRODUCTION OR DISTRIBUTION OF THIS MEMORANDUM IN WHOLE OR IN PART, OR THE
DIVULGENCE OF ANY OF ITS CONTENTS, TO ANY PERSON OTHER THAN THE PERSON TO WHOM
THIS MEMORANDUM IS DELIVERED, IS PROHIBITED WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMPANY. BY ACCEPTING THIS MEMORANDUM, THE RECIPIENT AGREES TO RETURN IT TO
THE COMPANY IF HE/SHE DOES NOT PURCHASE ANY OF THE UNITS OFFERED HEREBY.
EACH INVESTOR MUST CONFIRM AND REPRESENT THAT THE UNITS ARE BEING ACQUIRED FOR
LONG TERM INVESTMENT WITHOUT ANY PRESENT OR FORESEEABLE NEED TO CONSIDER
DISPOSITION OF THE UNITS.
EACH INVESTOR WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS TO THE COMPANY,
INCLUDING (BUT NOT LIMITED TO) REPRESENTATIONS AS TO INVESTMENT INTENT, DEGREE
OF SOPHISTICATION, ACCESS TO INFORMATION CONCERNING THE COMPANY AND ABILITY TO
BEAR THE ECONOMIC RISK OF THE INVESTMENT.
INVESTMENT ADVISORS AND OTHER MANAGERS OF INVESTMENT ACCOUNTS SHOULD NOT
CONSIDER THIS INVESTMENT FOR ANY INVESTOR WHO DOES NOT POSSESS THESE
QUALIFICATIONS AND SHOULD NOT TRANSMIT THIS MEMORANDUM TO ANY SUCH INVESTOR.
THE UNITS OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY FEDERAL OR
STATE GOVERNMENTAL AUTHORITY NOR HAS ANY SUCH AUTHORITY PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
NO OFFERING LITERATURE OR ADVERTISING IN WHATEVER FORM SHALL BE EMPLOYED IN THIS
OFFERING EXCEPT FOR THIS MEMORANDUM, STATEMENTS CONTAINED HEREIN AND THE
EXHIBITS ATTACHED HERETO. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY
REPRESENTATIONS OR GIVE ANY INFORMATION WITH RESPECT TO THIS OFFERING OTHER THAN
THE INFORMATION CONTAINED HEREIN, AND IF GIVEN OR MADE, ANY SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY.
THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM PROVIDES A DESCRIPTION OF THE
UNITS OFFERED HEREBY AS WELL AS A SUMMARY OF THE DOCUMENTS PURPORTED TO BE
SUMMARIZED HEREIN. HOWEVER, THIS MEMORANDUM IS A SUMMARY ONLY AND DOES NOT
PURPORT TO BE COMPLETE. ACCORDINGLY, REFERENCE IS MADE TO THE OPERATIVE
AGREEMENTS AND OTHER DOCUMENT, COPIES OF WHICH ARE ATTACHED AS EXHIBITS HERETO
OR WILL BE SUPPLIED UPON REQUEST, FOR THE EXACT TERMS OF SUCH AGREEMENTS AND
DOCUMENTS TO WHICH REFERENCE IS MADE HEREIN.
THE COMPANY HAS THE RIGHT IN ITS SOLE DISCRETION TO REJECT ANY SUBSCRIPTION FOR
ANY REASON WHATSOEVER. THE COMPANY IS NOT OBLIGATED TO NOTIFY THE RECIPIENTS OF
THIS MEMORANDUM THAT ALL OF THE UNITS OFFERED HEREBY HAVE BEEN SOLD. ASSUMING
THAT ALL OF THE SUBSCRIPTION DOCUMENTS ARE IN ORDER AND THAT A SUBSCRIBER MEETS
THE SUITABILITY STANDARDS AND SUCH OTHER STANDARDS AS THE COMPANY SHALL, IN ITS
DISCRETION, FROM TIME TO TIME ESTABLISH FOR THE PURCHASE OF THE UNITS, SUCH
SUBSCRIBERS WILL BE ACCEPTED ON A FIRST- COME BASIS AND SUBJECT TO PRIOR
SUBSCRIPTIONS AND THE RIGHT OF THE COMPANY TO ACCEPT OR REJECT ANY
SUBSCRIPTIONS.
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THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISK OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM PROVIDES A DESCRIPTION OF THE
UNITS OFFERED HEREBY AS WELL AS A SUMMARY OF THE DOCUMENTS PURPORTED TO BE
SUMMARIZED HEREIN. HOWEVER, THIS MEMORANDUM IS A SUMMARY ONLY AND DOES NOT
PURPORT TO BE COMPLETE. ACCORDINGLY, REFERENCE IS MADE TO THE OPERATIVE
AGREEMENTS AND OTHER DOCUMENTS, COPIES OF WHICH ARE ATTACHED AS EXHIBITS HERETO
OR WILL BE SUPPLIED UPON REQUEST, FOR THE EXACT TERMS OF SUCH AGREEMENTS AND
DOCUMENTS TO WHICH REFERENCE IS MADE HEREIN.
SEE THE SECTION ENTITLED "STATE LAW LEGENDS" ANNEXED HERETO AS EXHIBIT "J" AND
HEREBY INCORPORATED HEREIN BY REFERENCE, FOR CERTAIN INFORMATION RELATING TO THE
VARIOUS BLUE SKY LAW REQUIREMENTS APPLICABLE TO RESIDENTS OF CERTAIN STATES
WHERE THE OFFER MAY BE MADE.
Forward Looking Statements
When used in this Memorandum, the words "may," "will,"expect," "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are intended
to identify forward- looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, operating results and financial
position. Shareholders and prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors are described herein under the heading "Risk Factors."
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TABLE OF CONTENTS
Summary of the Offering................................................... 6
Accredited Investor Subscription Agreement................................ 11
EXHIBITS
EXHIBIT A: Form of Escrow Agreement
EXHIBIT B: Form of Common Stock Purchase Warrant
EXHIBIT C: Definition of Accredited Investor
EXHIBIT D: Form of Investment Letter
EXHIBIT E: May 8, 2000 Term Sheet with Performance Control LLC
EXHIBIT F: Agreement with R.Scott Caputo dated September 29, 1999
EXHIBIT G: Reprint of Article From the April 2000 Edition of Energy User News
EXHIBIT H: Unaudited Financial Statements of the Company for the Fiscal year
Ended December 31, 1998
EXHIBIT I: United States Patent No. 5821726 and NASA License
EXHIBIT J: State Notice Requirements
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SUMMARY OF THE OFFERING
The following summary of the Offering memorialized in this private placement
memorandum (the "Memorandum") describes the numerous aspects of the Offering
believed by the Company to be material to investors. This summary, together with
the unaudited management financial statements referred to herein should be read
in their entirety by prospective investors. The following summary is, therefore,
qualified in its entirety by reference to full text of the accredited investor
subscription agreement following this summary (the "Subscription Agreement") and
to the exhibits attached hereto.
The Company ........The Company was organized under the laws of the state of
Delaware in October 1994. The Company's temporary executive
offices are located at 4220 Varsity Drive, Suite E, Ann
Arbor, MI 48108. The telephone number of the Company is
(201) 488-4040
Until 1997, the Company 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 industrial and
commercial facilities throughout the world.
Commencing in 1997, the Company 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. 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. The Company's Power Commander(TM) was the subject
of a United States Patent granted in 1997. A copy of the
patent is annexed hereto as Exhibit "I" and incorporated
herein by reference. The Company 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.
Term Sheet .........On May 8, 2000, the Company entered into a written term
sheet (the "Term Sheet") with Performance Control, LLC, an
affiliated privately owned Michigan limited liability
company ("Control"). The Term Sheet was executed by the
Company, Control, the officers, directors and principle
stockholders of the Company, and the
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principle members and manager of Control. The Term Sheet set
forth the agreement and understanding of the Company and
Control as to the parameters of a business combination
between the Company and Control and a reorganization of the
Company. The Company intends to utilize a portion of the
proceeds from the Offering to implement the transaction
memorialized by the Term Sheet and consisting of the
following: (i) a change of the Company's Board of Directors
and management including the execution of employment
agreements; (ii) the acquisition of the assets of Control in
consideration of an aggregate of 1,112,245 authorized but
unissued shares of the Company's common stock (the
"Acquisition Shares"); (iii) the repayment or restructuring
of a $100,000 working capital loan made on September 29,
1999; (iv) the filing of a Form 10SB with the SEC; (v) the
issuance of 50,000 common stock purchase warrants to a non-
affiliated consultant; and (vi) the extension of outstanding
underwriter's warrants to purchase an aggregate of 36,720
shares of the Company's common stock at $5.50 per share. The
foregoing are collectively referred to as the "Transaction".
Additional information concerning the Transaction is set
forth in the enclosed Subscription Agreement.
The Company's
Obligations ........In order for the business combination with Control to close,
and in addition to other conditions contained in the Term
Sheet, the Company will be required to sell a minimum of 12
Units offered hereby within 60 days from May 8, 2000. The
sale of units in the Company's May 12, 2000 bridge loan
offering comprised of $50,000 principal amount of 12%
convertible promissory notes convertible into Units shall
qualify towards the sale of the minimum number of Units.
The Units .........Each Unit is comprised of 25,000 authorized but unissued
shares of the Company's Common Stock, $.001 par value per
share, offered at $1.00 per Share (the "Unit Shares"), and a
five year warrant to purchase 25,000 additional shares of
the Company's Common Stock, $.001 par value per share (the
"Warrant Shares") at $3.00 per Warrant Share during the
first year of the term of this Warrant expiring on the first
anniversary of the date hereof, $4.00 per Warrant Share
during the second year expiring on the second anniversary of
the date hereof, and $5.00 per Warrant Share during the
third year expiring on the third anniversary of the date
hereof (the "Warrant"). A form of Warrant is annexed hereto
as Exhibit "B" and hereby incorporated herein by reference.
The Unit Shares and the Warrant Shares will be "restricted
securities" as that term is defined under Rule 144 under the
Act and ineligible for public sale for a period of 12 months
from the date of issuance.
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The Offering
Number of Offered Units
Minimum 12
Maximum 40
Price per Unit $25,000
Type of Offering $300,000-or-none
Shares authorized
Common Stock, $.001 par 9,000,000
Preferred Stock, $.001 par 1,000,000
Shares outstanding prior to Offering 4,383,600 (1)(2)
Shares outstanding after Offering
Minimum 4,683,600
Maximum 5,383,600 (1)(2)
Equity ownership by Subscribers before
the Acquisition of the assets of Control
Minimum 6.4
Maximum 18.6% (1)(2)
Equity ownership by Subscribers after
the acquisition of the assets of Control
Mimimum 5.2
Maximum 15.3% (1)(2)
Equity ownership by existing stockholders
of the Company before the acquisition of
the assets of Control
Minimum 93.6%
Maximum 81.4% (1)(2)
Equity ownership by existing stockholders
of the Company after the acquisition of
the assets of Control
Minimum 75.6% (1)(2)
Maximum 67.4% (1)(2)
---------------
(1) Prior to the issuance of a minimum of 300,000 and a maximum of
1,000,000 Warrant Shares upon exercise of the Warrants.
(2) Prior to the exercise of five year options to purchase an
aggregate of 500,000 shares of the Company's common stock at
$5.00 per share (463,640 shares) and $5.50 (36,360 shares)
granted on November 6, 1996 under the Company's 1994 Incentive
Option Plan.
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Use of Proceeds The Company intends to utilize the proceeds from the sale of
the Units to implement the Transaction and for working
capital purposes.
Control ............Control is engaged in the assembly and distribution of motor
controller products and energy management related electrical
components since 1996. The principals of Control have been
involved in the energy management business for approximately
ten years and have developed several significant strategic
relationships, in a number of industries including
manufacturing, refrigeration, petroleum, lumber and
automotive. Since 1996, and pursuant to the terms and
conditions of a Product Assembly and Distributorship
Agreement and a License Agreement with the Company, Control
has been principally engaged in the assembly and
distribution of the Company's Three Phase Power
Commander(TM) and the Company's Single Phase Power
Commander(TM).
Risk Factors........The Units are speculative securities and involve a high
degree of risk and immediate dilution, and should be
purchased only by persons who can afford the loss of their
entire investment.
Method of
Distribution .......The Units are being offered by the Company on a
best-efforts-12 Unit ($300,000)-or-none basis. In the event
that a minimum of 12 Units are not sold and paid for within
60 days from the date of this Memorandum, all funds received
from subscribers will be returned without interest thereon
or deduction therefrom. Pending the sale of a minimum of 12
Units, all checks representing an investment in the Units
will be deposited in an attorneys escrow account maintained
by Lester Yudenfriend, Esq., securities counsel to the
Company at the European American Bank (the "Escrow
Account"). In the event that a minimum of $3000,000 has not
been deposited into the Escrow Account within 60 days from
May 8, 2000 (the "Termination Date"), all proceeds received
from subscribers will be promptly returned to them without
interest thereon or deduction therefrom. In the event a
minimum of $300,000 has been deposited into the Escrow
Account by the Termination Date, the Company may continue to
sell the remaining Units until the expiration of 120 days
from May 8, 2000, the date of the Term Sheet.
The Units are being offered by the officers and directors of
the Company without compensation. The Units may also be
offered on a best-efforts basis by registered broker dealers
that are members of the National Association of Securities
Dealers, Inc. ("Selling Agents"). In the event that the
services of Selling Agents are used, the Company may pay a
10% commission on all such sales.
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Method of
Subscriptions ......In order to subscribe for the Units being offered hereby,
each investor must complete and execute: (i) the
subscription agreement, a form of which follows this
Summary. (the "Subscription Agreement"); (ii) the escrow
agreement, a form of which is annexed hereto as Exhibit "A"
and hereby incorporated herein by reference (the "Escrow
Agreement"); and (iii) the investment letter, a form of
which is annexed hereto as Exhibit "D" and hereby
incorporated herein by reference(the "Investment Letter").
The Company has reserved the discretionary right to reject
all or any portion of any subscription and to abandon the
Offering at any time prior to a closing on the minimum
amount of Units.
Investors purchasing Units will make payment in full at the
time of subscription.
Executed Subscription Agreements, Escrow Agreements and
Investment Letters shall be delivered to the Company, along
with the investor's check or money order payable to "Lester
Yudenfriend, Esq. as Escrowee" The Company shall give each
investor notice of the acceptance or rejection of his or her
subscription.
Terms of
Offering ...........The Company is offering the Units pursuant to Rule 506 of
Regulation D under the Act. The Units are being offered only
to Accredited Investors as that term is defined in Rule 501
of Regulation D under the Act and as defined in Exhibit "C"
annexed hereto.
Absence of
Current
Audited
Financial
Statements........ The only financial information being supplied to Subscribers
is the Company's unaudited financial statements for the fiscal year ended
December 31, 1998 (the "98 Financials"). A copy of the 98 Financials are annexed
hereto as Exhibit "I" and hereby incorporated herein by reference. The Company
has yet to complete the audit of the 1998 Financials much less the financial
statements for the fiscal year ended December 31, 1999 (the "99 Financials") or
the three months ended March 31, 2000. There can be no assurance that the 98
Financials will not be materially adjusted if and when the same are audited.
Similarly, there can be no assurance that the Company's 99 Financials will be
audited. A failure to audit the 98 and/or the 99 Financials will materially
adversely effect the Company's ability to file the Form 10 and to complete the
Transaction.
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POWER EFFICIENCY CORPORATION
ACCREDITED INVESTOR SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (the "Agreement") Between Power Efficiency
Corporation, a publicly owned Delaware corporation with temporary offices c/o
4220 Varsity Drive, Suite E, Ann Arbor, MI 48108 (the "Company") and the
individual, firm or entity executing this Agreement on the last page hereof (the
"Subscriber"). The Offering (as that term is hereinafter defined) shall be
offered only to and consummated strictly with "Accredited Investors" as that
term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933,
as amended (the "Act")and set forth on Exhibit "C" and hereby incorporated
herein by reference. This Agreement sets forth the terms under which the
Subscriber will invest in the Company.
1. Description of the Offering. This Agreement sets forth the terms
under which the Subscriber will invest in the Company. This subscription is for
a minimum of 12 and a maximum of 40 units at a purchase price of $25,000 per
unit (the "Units"). Each Unit is comprised of 25,000 authorized but unissued
shares of the Company's Common Stock, $.001 par value per share, offered at
$1.00 per Share (the "Unit Shares"), and a three year warrant to purchase 25,000
additional shares of the Company's Common Stock, $.001 par value per share (the
"Warrant Shares") at $3.00 per Warrant Share during the first year of the term
of this Warrant expiring on the first anniversary of the date hereof, $4.00 per
Warrant Share during the second year expiring on the second anniversary of the
date hereof, and $5.00 per Warrant Share during the third year expiring on the
third anniversary of the date hereof (the "Warrant"). The Unit Shares and
Warrant Shares will be "restricted securities" as that term is defined under
Rule 144 under the Act and ineligible for public sale for a period of 12 months
from the date of issuance. As a condition precedent to the issuance of the Unit
Shares, the Subscriber shall be required to sign the investment letter annexed
hereto as Exhibit "D" and hereby incorporated herein by reference. The Units are
being offered under and pursuant to Rule 506 of Regulation D (the "Rule") under
the Act for a period of 60 days. This offering (the "Offering") is being
conducted solely to "Accredited Investors" as that term is defined in Rule
501(a) of Regulation D under the Act The Offering is being conducted for the
purpose of providing the working capital necessary to put the Company in the
position to implement the Company's proposed business combination and
reorganization of the Company with Performance Control, LLC, an affiliated
Michigan limited liability company ("Control") pursuant to a written term sheet
dated May 8, 2000 executed by the Company, Control, the officers, directors and
principle stockholders of the Company, and the principle members and manager of
Control, a true copy of which is annexed hereto as Exhibit "E" and hereby
incorporated herein by reference. (the "Term Sheet"). The entire Offering
consists of an aggregate of 1,000,000 Unit Shares and 1,000,000 Warrant Shares.
The business combination and reorganization of the Company shall
consist of and the Company shall utilize a portion of the proceeds derived from
the Offering to implement the following: (i) a change of the Company's Board of
Directors and management including the execution of two employment agreements;
(ii) the acquisition of the assets of Control in consideration of an aggregate
of 1,112,245 authorized but unissued shares of the
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Company's common stock (the "Acquisition Shares"); (iii) the repayment or
restructuring of a $100,000 working capital loan made on September 29, 1999;
(iv) the filing of a Form 10SB with the SEC; (v) the issuance of 50,000 common
stock purchase warrants to a non- affiliated consultant; and (vi) the extension
of outstanding underwriter's warrants to purchase an aggregate of 36,720 shares
of the Company's common stock at $5.50 per share (collectively referred to as
the "Transaction"). The parameters of the Transaction are enumerated in the Term
Sheet, a copy of which is annexed hereto as Exhibit "E".
The following is a brief description of the constituent elements of the
Transaction as set forth in the Term Sheet:
The Change of Management. As soon as practicable, Anthony C. Caputo
shall resign as a director of the Company for personal reasons. The vacancy
created by Mr. Caputo's resignation shall be filled by Steven Shulman.
Thereafter, Gerard S. DiFiore shall resign as a director of the Company for
personal reasons. The vacancy created by Mr. DiFiore's resignation shall be
filled by a duly qualified representative of the group of private investors in
the Financing (the "Nominee"). The new Board of Directors shall elect new
interim executive officers of the Company to serve at the discretion of the
group of private investors financing the transaction (the "Investors") and/or
the investment bank, joint venture or industry partner intended to be recruited
by the Investors to finance the subsequent round of capital raising as follows:
President and Chief Sales Officer - Stephen Shulman
Chief Operating Officer - Nicholas Anderson
Chief Financial Officer - the Nominee
An integral part of the change of management shall be the Company's preparation
and execution of five year employment agreements with Nicholas Anderson and
Steven Shulman as executive officers. These agreements shall provide for first
year base salaries of $120,000. The salaries for the second through fifth years
shall be $120,000 plus annual increases or bonuses tied to both the level of the
Company's gross revenues and amount of net after tax profits. In addition to
offering comprehensive health benefits and the inclusion of customary vacation,
expense reimbursement, confidentiality, non-compete, and disability provisions,
the agreements shall offer Shulman incentive stock options to purchase such
number of shares of the Company's common stock as shall be mutually agreed upon
between the individuals and the Company's investment banker up to a maximum of
500,000 shares.
The Business Combination. As soon as practicable but in no event later
than 60 days from May 8, 2000, the Company shall enter into a written asset
purchase agreement with Control (the "Acquisition Agreement"). Pursuant to the
Acquisition Agreement, the Company shall acquire all of the assets of Control
solely in exchange for an aggregate of 1,112,245 Acquisition Shares valued, for
the purposes of the Acquisition Agreement, at $.50 per Acquisition Share(the
"Acquisition"). The Acquisition Agreement shall provide that Control shall
utilize an aggregate of 28,500
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Acquisition Shares to satisfy $114,000 in notes payable to members and an
aggregate of 73,745 Acquisition Shares to satisfy $294,978 in accrued salaries
payable to members and employees of Control. In addition, the Acquisition
Agreement shall provide that the Company will assume the approximately $450,000
of accrued labilities of Control. The Acquisition Shares will represent an
approximate 20.4% equity interest in the Company as of the date of the Term
Sheet prior to: (i) the original issuance of the Unit Shares; (ii) the exercise
of the Warrants or the original issuance of the Warrant Shares; or (iii) the
exercise of five year options to purchase an aggregate of 500,000 shares of the
Company's common stock at $5.00 per share (463,640 shares) and $5.50 (36,360
shares) granted on November 6, 1996 under the Company's 1994 Incentive Option
Plan (the "Options"). The Acquisition Shares will be "restricted securities" as
that term is defined in Rule 144(a)(3) under the Act. The officers, directors
and principal stockholders of the Company and Control shall agree that if
required by the Company's investment/merchant banker in the next round of
financing, if any, they will enter into identical voluntary lock up agreements
with the Company with respect to the Acquisition Shares. The Acquisition
Agreement shall provide for the mutual release of liability arising under the
disputed December 31, 1998 Asset Purchase Agreement between the Company and
Control. The Company and Control shall negotiate in good faith and use their
best efforts to arrive at a mutually acceptable Acquisition Agreement for
approval, execution and delivery at the earliest reasonably practical date, but
in no event later than 60 days from May 8, 2000. The Company and Control will
thereupon use their best efforts to effect a closing and to proceed with the
transactions contemplated by the Acquisition Agreement as promptly as is
reasonably practicable. In the event a minimum of $300,000 has not been sold by
the Company within the aforesaid 60 days, Control has retained the right, on ten
days prior written notice to the Company, to terminate the Acquisition Agreement
with the Company.
The Debt Restructuring. As soon as practicable, the Company and R.
Scott Caputo ("RSC") shall amend their written loan agreement dated September
29, 1999, a true copy of which is annexed hereto as Exhibit "F" and hereby
incorporated herein by reference, wherein RSC lent the sum of $100,000 to the
Company (the "RSC Agreement"). The amendment to the RSC Agreement shall provide
that in the event the Company is successful in the sale of all 40 Units, the
Company will repay its $100,000 obligation to RSC together with all accrued
interest (the "RSC Loan"). In the event the Company sells less than 40 Units,
the Company and RSC shall renegotiate the terms and conditions of the RSC Loan.
In either event the RSC Agreement shall be modified to release the lien on the
200,000 shares of the Company's common stock being held as collateral security
for the RSC Loan and owned of record by Nicholas Anderson, an executive officer
and director of the Company.
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The Form 10-SB. As soon as practicable following: (i) the closing of
the Financing; (ii) the change in management; (iii) the closing of the
acquisition of the assets of Control; and (iv) the restructuring of the RSC
Loan; the Company shall file with the Securities and Exchange Commission (the
"SEC") a registration statement on Form 10-SB (the "Form 10"). The Form 10 shall
be accompanied by audited financial statements for the two fiscal years ended
December 31, 1999 and unaudited financial statements as required by Rule 3-12 of
Regulation S-X.
The Warrant Issuance. As soon as practicable after May 8, 2000, the
Company shall issue to a non-affiliated third party consultant a five year
warrant to purchase 50,000 restricted shares of the Company's common stock at an
exercise price equal to the fair market value thereof in the over the counter
market on the date the warrant is issued.
Warrant Extension. As soon as practicable after May 8, 2000, the
Company shall extend the exercise date of the warrant issued to a registered
broker dealer on July 15, 1996 to purchase an aggregate of 36,720 shares of the
Company's common stock at $5.50 per share. The term of this warrant shall be
extended until the close of business on October 15, 2002.
2. Terms of the Offering. The Company is offering the Units on 12 Unit
($300,000) minimum, best efforts basis for a period of 60 days by its officers
and directors who will serve in this capacity without compensation. However, the
Company reserves the right to utilize the services of participating NASD member
broker-dealers or registered representatives (the "Selling Agents"). In the
event Selling Agents are utilized, the Company will pay sales commissions to the
Selling Agents up to a maximum of 10% of the gross Offering proceeds sold by
such Selling Agents. As provided in the escrow agreement annexed to this
Agreement as Exhibit "A" and hereby incorporated herein by reference (the
"Escrow Agreement"), shares of the Company's common stock comprising the Units
will be deposited in an attorney's escrow account maintained by Lester
Yudenfriend, Esq., securities counsel to the Company (the "Escrow Account"). In
the event that a minimum of $3000,000 has not been deposited into the Escrow
Account within 60 days from May 8, 2000 (the "Termination Date"), all proceeds
received from subscribers will be promptly returned to them without interest
thereon or deduction therefrom. In the event a minimum of $300,000 has been
deposited into the Escrow Account by the Termination Date, the Company may
continue to sell the remaining Units until the expiration of 120 days from the
date of the Term Sheet. The Unit Shares and the Warrant Shares will be
unregistered securities as that term is defined under the Act and will be
ineligible for public sale for a period of 12 months from the date of issuance
or the exercise of the Warrants. Accordingly, all certificates representing the
Unit Shares and the Warrant Shares will bear a restrictive legend on their face
and will be subject to a stop transfer order on the books and records of the
Company and/or the Company's transfer agent.
Certificates representing the Unit Shares and the Warrant Shares shall
be registered in the name(s) of the beneficial owner(s) as they appear on the
last page of this Agreement and thereafter mailed to the address appearing
therein as soon as possible
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following the date the Subscriber's funds clear collection. The execution of
this Agreement is a condition precedent to a valid subscription to the Units.
Execution of this Agreement shall constitute an offer by the Subscriber to
subscribe to the Units in the amount and on the terms specified herein. The
Company reserves the right, in its sole discretion, to reject in whole or in
part, any subscription offer. If the Subscriber's offer is accepted, the Company
will execute a copy of this Agreement and return it to Subscriber. Upon
execution of this Agreement, the Company will deliver to the Subscriber a
certificate representing the number of Unit Shares purchased and a Warrant duly
executed by the President and Secretary of the Company.
3. Subscription Payment. Subscription to the Units requires a cash
investment of $25,000 per Unit. The subscription price will be payable in cash
in full on subscription.
4. Brief Description of the Company. A brief description of the
Company's business is set forth below. The Subscriber hereby represents that the
Subscriber has read the same prior to the signing of this Agreement. In
addition, and simultaneously with the delivery of this Agreement, the Company
has afforded the Subscriber the opportunity to ask questions of and receive
answers from management of the Company concerning the information disclosed
below.
Until 1997, the Company 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 industrial and commercial facilities throughout the world.
Commencing in 1997, the Company 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. 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. The Company's Power Commander(TM) was the subject of a
United States Patent granted in 1997. A copy of this patent is annexed hereto as
Exhibit "I" and incorporated herein by reference. The Company 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.
The Company intends to utilize the proceeds from this Offering to consummate the
Transaction and thereafter to penetrate the new and retrofit alternating current
induction motor market. Management estimates that there are over one billion
alternating current induction motors currently in operation and almost three
hundred million new motors are purchased each year as replacements or new
applications. Many of these motors are candidates to be retrofitted with the
Power Commander(TM), especially in the four industries in which the Company has
concentrated its initial efforts: the elevator and escalator
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industry; plastics granulators; machine tools; and pump jacks for the petroleum
industry.
As of the date of this Memorandum, more than 2,500 units of the Company's motor
controller products have been installed at facilities throughout the United
States. In most cases, these units have demonstrated the ability to reduce
energy consumption of alternating current induction motors by an average of
approximately 25%. The Company's management believes that these tests and
additional successful testing results from nationally accredited laboratories
and Fortune 500 companies will maximize product acceptance in the various
compatible industries.
In 1997, the Company was granted a United States Patent covering various motor
controller aspects of its Power Commander(TM). In addition, the Company is an
exclusive licensee pursuant to a patent license agreement of certain Power
Factor Controller Technology owned by the United States, as represented by the
National Aeronautics and Space Administration ("NASA"). This license agreement,
which expires on July 31, 2001, covers the USA and its territories and
possessions and requires the Company to pay certain royalties to NASA in
connection with the Company's sale of products employing technology utilizing
the licensed group of patents. The government's patents covers various systems
employed by motor controllers. The Company's rights under the agreement are non
transferable and may not be sublicensed without NASA's consent. The agreement
terminates on July 31, 2001 upon the expiration of all of the licensed patents,
unless reissuance of the patents occur. The agreement is terminable by NASA for
various reasons including, among other things, the Company's default in the
payment of royalties, default in making of required reports, the failure to
market products employing the invention, or under other circumstances.
5. Risk Factors Associated With an Investment in the Units.
An investment in the Units involves a high degree of risk and should be
considered only by Subscribers who can sustain the loss of their entire
investment. Accordingly, the Subscriber hereby represents that the Subscriber
has read the following risk factors prior to the signing of this Agreement. In
addition, the Subscriber acknowledges that simultaneously with the delivery of
this Agreement, the Company has afforded the Subscriber the opportunity to ask
questions of and receive answers from management of the Company concerning the
risk factors disclosed below.
No Assurance of Return to the Bulletin Board; Volatility of
Price.Commencing on May 24, 2000, the shares of the Company's common stock will
be delisted from the OTC Bulletin Board and will only be traded in the pink
sheets published by the National Quotation Bureau, Inc. (the "Pink Sheets").
Until and unless the Company is successful in finalizing the acquisition of the
assets of Control and filing and causing the Form 10 to become effective under
the Securities Exchange Act of 1934, of which there can be no assurance, the
Company's common stock will continue to trade in the Pink Sheets. Following the
closing of this Offering, the Company intends to renew or seek a new listing in
Standard & Poor's Corporation Records. There can be no assurance that the
Company will be successful in its efforts and, even if the Company is
successful, there can be no assurance that a regular trading market for the
Company's common stock will
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develop, continue or be sustained. The Pink Sheets offer significantly less
trading liquidity than the OTC Bulletin Board. Price quotations for securities
traded in the Pink Sheets are not available in newspapers. Therefore, this lack
of readily available price information may impair the ability of purchasers of
the Units to sell them at or near their original offering price or at any price.
Furthermore, it is unlikely that a lending institution will accept the Company's
securities as pledged collateral for loans even if a regular trading market
develops or continues. In addition, the trading price of the Company's common
stock could be subject to wide fluctuations in response to quarterly variations
in the Company's operating results, announcements by the Company or others,
developments affecting the Company, and other factors or events. In addition,
the stock market has experienced extreme price and volume fluctuations in recent
months. These fluctuations have had a substantial effect on the market price for
many companies, often unrelated to operating performance, and these factors may
adversely affect the market price of the Company's common stock.
Control's Right of Termination. The Term Sheet contains a
provision whereby in the event a minimum of $300,000 has not been sold by the
Company in the Private Offering within the aforesaid 60 days, Control has
retained the right, on ten days prior written notice to the Company, to
terminate the Acquisition Agreement with the Company. In the event of the
termination by Control as a result of the failure of the Company to meet its
minimum obligations under the Private Offering, the Subscribers to the Units
will in all likelihood lose their entire investment.
Financial Statement Risk. The only financial information being
supplied to Subscribers is the Company's unaudited financial statements for the
fiscal year ended December 31, 1998 (the "98 Financials"). A copy of the 98
Financials are annexed hereto as Exhibit "H" and hereby incorporated herein by
reference. The Company has yet to complete the audit of the 1998 Financials much
less the financial statements for the fiscal year ended December 31, 1999 (the
"99 Financials") or the three months ended March 31, 2000. There can be no
assurance that the 98 Financials will not be materially adjusted if and when the
same are audited. There can be no assurance that the Company's 99 Financials
will be audited. A failure to audit the 99 Financials will materially adversely
effect the Company's ability to file the Form 10 or to complete the Transaction.
Limited Capitalization. Prior to the date of this Offering,
the Company had limited working capital and will be dependent upon the net
proceeds from this Offering for the consummation of the Transaction. In
addition, and even if this Offering is successfully completed with the sale of
all offered Units, the Company may be required to seek additional financing if
anticipated levels of revenue are not realized, if higher than anticipated costs
are incurred in the manufacture and marketing of the Company's products, or if
product demand exceeds expected levels. There can be no assurance that any
additional financing thereby necessitated will be available on acceptable terms,
if at all. Currently, the Company has no existing credit facilities or similar
bank borrowing arrangements but may seek to secure such arrangements following
consummation of this Offering. No assurances can be given that any such
arrangements will be secured.
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Limited Operating History, Manufacturing and Distribution Arrangements.
To date, and principally attributable to a lack of working capital and longer
than anticipated research and development time and expense, the Company's
operations have been limited in scale. Although the Company has a contract
manufacturing arrangement with an automated production facility, has established
relationships with suppliers, and received contracts for its products, the
Company may experience difficulties in production scale-up, inventory
management, product distribution and working capital until such time as the
Company's operations have been scaled-up to normal commercial levels.
Company's License From NASA Not Exclusive. The basic
technology upon which the Company's products are based is derived from a patent
license agreement by and between the Company and NASA. The Company's license
from NASA is not exclusive, although the Company is one of only two licensees of
NASA's Power Factor Controller Technology. The Company has also made certain
improvements to the basic technology covered by the NASA license, which may
place the Company 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 the way that the Company has.
Supplier Dependence. Although the Company 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. 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 Company.
Also, in the event that the Company, or its contract manufacturer as applicable,
is unable to develop or acquire components in a timely fashion, the Company's
ability to achieve production yields, revenues and net income will be adversely
affected.
Sales and Marketing Risks. The Company's products are
currently distributed through the network of contacts established by the
Company's principal stockholders, which contacts were developed out of other
business enterprises conducted by them. The Company'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 Company's
products.
Competition; Rapid Technological Change. The Company 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
Company 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
Company to expand its operations or operate profitability. The motor control
industry is highly competitive and characterized by rapid technological change.
The Company'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 Company is
not competitive in its ongoing research and development efforts, its products
may become
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obsolete, or be priced above competitive levels. Although management believes
that, based upon their performance and price, the Company'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 Company's products.
No Cash dividends on Common Stock. The Company 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
3,000,000 shares of the Company's common stock held by the Company's officers,
directors and principal (10%) stockholders and all shares of common stock
issuable upon exercise of outstanding stock options which have been and mat be
granted under the Company'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
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
Company and who has satisfied a two-year holding period. Any substantial sale of
the Company'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 Company'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
Company's securities become subject to the penny stock rules, investors in this
Offering may find it more difficult to sell their securities. If the Company's
securities were subject to the existing or proposed regulations on penny stocks,
the market liquidity for the Company's securities could be severely and
adversely affected by limits on the ability of
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broker/dealers to sell the Company'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 Company's Certificate of Incorporation and under Delaware law,
directors of the Company are not liable to the Company 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 Company'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 Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividends, liquidation, conversion, voting or other rights which
could adversely affect the relative voting power or other rights of the holders
of the Company'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 Company, which could have the
effect of discouraging bids for the Company and thereby prevent stockholders
from receiving the maximum value for their shares. Although the Company has no
present intention to issue any shares of its preferred stock, there can be no
assurance that the Company will not do so in the future.
6. The Company's Representations and Warranties. The Company hereby
represents and warrants to the Subscriber as follows:
(a) The Company is a corporation duly formed, validly existing
and in good standing under the laws of the State of Delaware with full power and
authority to conduct its business;
(b) The Company has the corporate power to execute, deliver
and perform this Agreement in the time and manner contemplated, and has taken
all requisite corporate action to issue and deliver the Unit Shares and the
Warrant to the Subscriber and to execute and perform the Escrow Agreement; and
(c) The Unit Shares and the Warrant Shares will be, upon
issuance and delivery to the Subscriber, duly and validly issued, fully paid and
non-assessable with no personal liability attaching to the ownership thereof.
7. Subscriber's Representations, Warranties and Covenants. The
Subscriber hereby represents and warrants to and covenants with the Company as
follows:
(a) The Subscriber: (i) is over the age of 21; (ii) has
adequate means of providing for the Subscriber's current needs and possible
contingencies, and the Subscriber has no need for liquidity of the Subscriber's
investment in the Company; (iii) can bear the economic risk of losing the
Subscriber's entire investment in the Units; (iv)
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has such knowledge and experience in business and financial matters that the
Subscriber is capable of evaluating the relative risks and merits of the
Subscriber's investment in the Units; (v) has reviewed the definition of
"Accredited Investor" under the Act as set forth on Exhibit "C" annexed hereto
and incorporated herein by reference and affirms that the Subscriber is an
"Accredited Investor"; (vi) has not relied upon any oral statements or
representations by the Company or its principals; and (vii) understands the
undercapitalized and speculative nature of the Company's business as well as the
uncertainty attendant upon the Company's ability to reach profitability within
the foreseeable future;
(b) The Subscriber has had an opportunity to ask questions of
and receive answers from the Company or a person or persons acting on its
behalf, concerning the terms and conditions of this investment and the content
of the exhibits annexed hereto;
(c) The Subscriber's compliance with the terms and conditions
of this Agreement will not conflict with any instrument or agreement pertaining
to the Units or the transactions contemplated herein; and will not conflict in,
result in a breach of, or constitute a default under any instrument to which the
Subscriber is a party or the Units are the subject;
(d) The Subscriber will seek the Subscriber's own legal, tax
and investment advice concerning tax implications attendant upon the purchase of
the Units and understands and accepts that the Company is relying upon this
representation insofar as disclosure of legal, tax and investment matters is
concerned;
(e) The Subscriber acknowledges, accepts and understands that:
(i) the Unit Shares and the Warrant Shares will be 'restricted securities' as
that term is defined under the Act; (ii) the Subscriber will be acquiring the
Units (as well as the Unit Shares and the Warrant Shares) solely for the
Subscriber's own account, for investment purposes and without a view towards the
resale or distribution thereof; (iii) the Subscriber will hold the Unit Shares
and the Warrant Shares for the applicable one year holding period proscribed by
Rule 144 under the Act; and (iv) any sale of the Unit Shares and/or the Warrant
Shares will be accomplished only in accordance with the Act or the rules and
regulations of the SEC adopted thereunder. In addition, the Subscriber hereby
consents to the imprinting of a standard form of restrictive legend on all
certificates representing the Unit Shares and the Warrant Shares as well as the
imposition of a standard form of stop transfer order against the Unit Shares and
the Warrant Shares on the books and records of the Company's transfer agent;
(f) The Subscriber understands that the Company is under no
obligation to register the Unit Shares or the Warrant Shares under the Act or to
comply with the requirements for any exemption which might otherwise be
available, or to supply the Subscriber with any information necessary to enable
the Subscriber to make routine sales of the Unit Shares and/or the Warrant
Shares under Rule 144 or any other rule of the Rules and Regulations of the SEC
adopted under the Act; and
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(g) If the Subscriber is a corporation, partnership, trust or
any unincorporatedassociation: (i) the person executing this Agreement does so
with full right, power and authority to make this investment; (ii) that such
entity was not formed for the specific purpose of making an investment in the
Company; and (iii) that all further representations and warranties made herein
are true and correct with respect to such corporation, partnership, trust and
unincorporated association.
The foregoing representations and warranties are true and accurate as
of the date hereof and shall be true and accurate as of the date of delivery of
the subscription to the Company and shall survive such delivery. If, in any
respect, such representations and warranties shall not be true and accurate, the
Subscriber shall give written notice of such fact to the Company, specifying
which representations and warranties are not true and accurate and the reasons
therefor.
8. Responsibility. The Company or its officers and directors shall not
be liable, responsible or accountable in damages or otherwise to Subscriber for
any act or omission performed or omitted by them in good faith and in a manner
reasonably believed by them to be within the scope of the authority granted to
them by this Agreement and in the best interests of the Company provided they
were not guilty of gross negligence, willful or wanton misconduct, fraud, bad
faith or any other breach of fiduciary duty with respect to such acts or
omissions.
9. Registration of the Warrant Shares. The Company has undertaken to
utilize its best efforts to include the Warrant Shares in the first registration
statement filed by the Company with the SEC under the Act. The terms and
conditions of the Company's undertaking are set forth in the Warrant.
10. Miscellaneous.
(a) This Agreement shall be deemed to have been made in and shall be
governed by and interpreted under and construed in all respects in accordance
with the laws of the State of New Jersey, irrespective of the place of domicile
or residence of any Subscriber. In the event of a controversy arising out of the
interpretation, construction, performance or breach of this Agreement, the
Company and the Subscriber hereby agree and consent to the jurisdiction and
venue of the United States District Court for the Northern District of New
Jersey; and further agree and consent that personal service or process in any
such action or proceeding outside of the State of New Jersey and Essex County
shall be tantamount to service in person within Essex County, New Jersey, and
will confer personal jurisdiction and venue on the aforesaid Court;
(b) The Company and the Subscriber hereby covenant that this
Agreement is intended to and does contain and embody herein all of the
understandings and Agreements, both written or oral, of the Company and the
Subscriber with respect to the subject matter of this Agreement, and that there
exists no oral agreement or understanding, express or implied liability, whereby
the absolute, final and unconditional character and nature of this Agreement
shall be in any way invalidated, empowered or affected. There are no
representations or warranties other than those set forth herein;
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(c) The headings of this Agreement are for convenient
reference only and they shall not limit or otherwise affect the interpretation
or effect of any terms or provisions hereof;
(d) This Agreement shall not be changed or terminated orally
except as set forth herein. All of the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by and
against the successors and assigns of the Company and the heirs, executors,
administrators and assigns of the Subscriber; and
(e) A modification or waiver of any of the provisions of this
Agreement shall be effective only if made in writing and executed with the same
formality as this Agreement. The failure of either the Company or the Subscriber
to insist upon strict performance of any of the provisions of this Agreement
shall not be construed as a waiver of any subsequent default of the same or
similar nature, or of any other nature or kind.
[the rest of this page has intentionally been left blank]
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12. Subscription Application. The Subscriber hereby offers to purchase and
subscribe to______ Units; and encloses payment of $25,000 for each Unit
subscribed for herein.
SIGNATURE PAGE
For Individuals
----------------------------------
Signature of Individual Subscriber
----------------------------------
Name of Subscriber (please print)
----------------------------------
Street Address - Residence (please print)
----------------------------------
City, State and Zip Code (please print)
Social Security Number
-----------------------------------
AGREED TO AND ACCEPTED:
Power Efficiency Corporation
BY:
-----------------------------------
Nicholas Anderson, President
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12. Application for Partnership Subscribers. The Subscriber hereby offers to
purchase and subscribe to______ Units; and encloses payment of $25,000 for each
Unit subscribed for herein.
SIGNATURE PAGE
For Partnership
----------------------------------
Name of Partnership (please print)
BY:_______________________________
Signature of General Partner
--------------------------------
Name and Title of Authorized
Signatory (please print)
---------------------------------
Business Address (please print)
----------------------------------
City, State and Zip Code (please print)
Tax Identification Number
-----------------------------------
AGREED TO AND ACCEPTED:
Power Efficiency Corporation
BY:
-----------------------------------
Nicholas Anderson, President
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12. Application for Corporate Subscribers. The Subscriber hereby offers
to purchase and subscribe to______ Units; and encloses payment of $25,000 for
each Unit subscribed for herein.
SIGNATURE PAGE
For Corporation
----------------------------------
Name of Corporation
BY:_______________________________
Signature of Executive Officer
--------------------------------
Name and Title of Authorized
Signatory (please print)
---------------------------------
Business Address (please print)
----------------------------------
City, State and Zip Code (please print)
Tax Identification Number
-----------------------------------
AGREED TO AND ACCEPTED:
Power Efficiency Corporation
BY:
-----------------------------------
Nicholas Anderson, President
26
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EXHIBIT "A"
ESCROW AGREEMENT
27
<PAGE>
ESCROW AGREEMENT made this ___ day of May 2000 between Power Efficiency
Corporation., a publicly owned Delaware corporation with temporary principal
offices c/o 4220 Varsity Drive, Suite E, Ann Arbor, MI 48108 (the "Company"),
the individual, firm or entity indicated on the last page of this Agreement (the
"Investor") and Lester Yudenfriend, Esq., with office at 1133 Broadway, Suite
321, New York, New York 10010 (the "Escrowee"). The Company, the Investor and
the Escrowee are sometimes collectively referred to as the "Parties".
W I T N E S S E T H :
WHEREAS, the Company intends to conduct a private offering consisting
of a minimum of 12 and a maximum of 40 units at a purchase price of $25,000 per
unit (the "Units"). Each Unit to be comprised of 25,000 authorized but unissued
shares of the Company'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 Company's Common Stock, $.001 par value per share at $3.00 per Warrant Share
during the first year of the term of this Warrant expiring on the first
anniversary of the date hereof, $4.00 per Warrant Share during the second year
expiring on the second anniversary of the date hereof, and $5.00 per Warrant
Share during the third year expiring on the third anniversary of the date hereof
during the first year, $4.00 per Warrant Share during the second year and $5.00
per Warrant Share during the third year (the "Warrant"); and
WHEREAS, the sale of the Units shall be offered buy the Company only to
and consummated strictly with "Accredited Investors" as that term is defined in
Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the
"Offering"); and
WHEREAS, the Company is conducting the Offering on a best efforts
basis, with a minimum $300,000 and a maximum of $1,000,000 to be invested in the
Units; and
WHEREAS, in accordance with the terms and conditions enumerated in the
Company's Private Placement Memorandum dated May 16, 2000 to which this
agreement (the "Escrow Agreement") is attached as an exhibit (the "Memorandum"),
the Company proposes to establish an escrow arrangement with the Escrowee; and
WHEREAS, the Escrowee has agreed to act as escrow agent in connection
with the deposit by the Company with the Escrowee of the funds received from
subscribers to the Offering (the "Funds") on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, it is agreed as follows:
1. Establishment of Escrow. By virtue of their respective execution of
this Escrow Agreement, the Company's causing the delivery of the Funds to the
Escrowee, and the Escrowee's acceptance of the Funds, the Parties hereby create
the escrow made the subject of this Escrow Agreement and the Company hereby
authorizes the Escrowee to utilize, transfer and disburse the Funds as
hereinafter provided.
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2. Terms of the Escrow. Commencing with the execution of this Escrow
Agreement and until the sale of a minimum of 12 Units or 60 days from May 8,
2000 (unless extended by mutual consent of the Company and Control) whichever
sooner occurs (the "Termination Date"), the Escrowee shall act as escrow agent.
The Escrowee agrees to receive and disburse the Documents (hereinafter defined)
and the proceeds from the sale of the Units in accordance with the following
conditions:
A. All monies received in connection with the sale of Units
shall be deposited in an attorney's escrow account to be established for this
purpose by the Escrowee at the European American Bank, 1107 Broadway, New York,
New York 10010 in accordance with applicable New York law (the "Escrow
Account"). Prior to the making of each deposit, the Company shall have caused
each subscriber (whether an individual, a firm or an entity) to the Units (the
"Subscribers") to deliver to the Escrowee: (i) a copy of the signature page of
the Company's subscription agreement duly executed by the Subscriber and the
Company; and (ii) a copy of the signature page of the Escrow Agreement duly
executed by the Subscriber and the Company (hereinafter collectively referred to
as the "Documentation"). Thereafter, and upon the deposit of Funds in the
minimum sum of $300,000, the Escrowee shall deliver to the Company a list
containing the name, address and amount received from each Subscriber to the
Units and number of Units or part thereof to which said individual, firm or
entity has subscribed. The Company shall then, as soon as practicable, return to
the Escrowee: (i) a stock certificate duly signed by the President and Secretary
of the Company; and (ii) a Warrant duly signed by the President of the Company
(hereinafter collectively referred to as the "Final Documentation"). Promptly
upon receipt of the Final Documentation, the Escrowee shall cause the Final
Documentation to be duly delivered to the Subscribers via certified mail, return
receipt requested or overnight package deliver service.
b. In the event that a minimum of $300,000, representing an
aggregate of 12 Units shall have been sold and the monies corresponding to such
sales shall have been deposited in the Escrow Account, together with the Final
Documentation on or before the Termination Date, then the initial terms of the
escrow created hereby shall be deemed to have been satisfied. Thereafter, the
Escrowee shall be authorized and directed to disburse the Funds and the Units as
hereinafter enumerated.
c. At such time as minimum of $300,000 shall be deposited in
the Escrow Account, the Escrowee shall: (i) pay to the Escrowee the sum of
$1,500 together with such disbursements as shall have been incurred by the
Escrowee (the "Escrow Costs"); and (ii) cause the due issuance and delivery to
each Subscriber of his, her or its Unit(s) . After disbursing the Escrow Costs
and issuing the Units to the Subscribers, the Escrowee shall pay the remainder
of the Funds to the Company via a check drawn on the Escrow Account. The
foregoing is hereinafter referred to as the (the "Initial Closing"). Thereafter,
upon receipt of additional Funds totaling $700,000 or at least every two weeks,
the Escrowee shall issue Units to new Subscribers and disburse Funds to the
Company ("Subsequent Closings").
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<PAGE>
d. In the event that a minimum of $300,000, representing an
aggregate of 12 Units, shall not have been sold and the monies corresponding to
such sales shall not have been deposited in the Escrow Account, together with
the Final Documentation on or before the Termination Date, then the Escrowee is
hereby authorized promptly, after the Termination Date, to return to the
Subscribers the amounts theretofore paid by them to the Escrowee and deposited
in the Escrow Account. Such return is to be made without interest thereon or
deduction therefrom.
e. Upon the happening of either of the events as specified
above, (a) namely, that a minimum of $300,000, representing an aggregate of 12
Units shall have been sold, the monies corresponding to such sales shall have
been deposited in the Escrow Account together with the Final Documentation on or
before the Termination Date, the holding of the Initial Closing and Subsequent
Closings and the disbursement of the Funds and the issuance and delivery of the
Units as hereinabove set forth in Sections 2b and 2c, or, in the alterative, (b)
that a minimum of $300,000, representing an aggregate of 12 Units shall not have
been sold before the Termination Date, the repayment to the Subscribers of the
amounts theretofore paid by them to the Escrowee (as provided in paragraph 2d),
then the Escrowee shall be relieved of all liabilities in connection with the
Funds; the Escrowee shall be automatically discharged without notice to the
Company, and this Escrow Agreement shall forthwith terminate and become null and
void.
3. Indemnification. The Company and the Subscriber(s) hereby jointly
and severally agree to indemnify and hold harmless the Escrowee from and against
any and all liability, cost, expense, damage, action or other charges which may
be imposed upon or incurred by Escrowee in connection with the performance of
its duties hereunder (which performance shall be at no expense to the Escrowee),
except with respect to any liability, costs, expenses, damages, actions or other
charges incurred as a result of the Escrowee's bad faith, gross negligence or
willful disregard of the provisions of this Escrow Agreement. Before being
required to take any action, which in its reasonable opinion might subject it to
liability or expense, the Escrowee may require that it be furnished with
indemnity reasonably satisfactory to it and that the amount of any such
reasonable expenses be advanced to it by the Company.
4. Reliance Upon Documentation. The Escrowee shall incur no liability
for any action taken or suffered in good faith. The Escrowee may conclusively
rely upon and shall be protected in acting upon the Documentation, and/or the
Final Documentation including any notice, request, consent, instruction or other
instrument believed by the Escrowee in good faith to be genuine or to be signed
by or presented by the proper person, or duly authorized or properly made. The
Escrowee shall not be responsible for any of the representations or agreements
contained in either the subscription agreement between the Company and the
Subscriber (the "Subscription Agreement"), the Note, the Warrant or for the
performance of any other similar agreement(s), except the performance of
Escrowee's express duties as set forth herein; and the Escrowee shall not be
required to take any action other than in accordance with the terms hereof. No
amendment or modification of the Subscription Agreement, the Note or the Warrant
[or any collateral
30
<PAGE>
documents] shall affect the rights and duties of the Escrowee without its prior
written consent.
5. Engagement of Counsel. If the Escrowee is in doubt as to any action
which it should take under the terms hereof, it may employ legal counsel to
render an opinion on any or all questions it may have and may take action on
such opinion without being liable for damages to the Company and/or the
Subscribers, or their legal representatives, successors and assigns. The
reasonable cost of employment of counsel by the Escrow Agent for such opinion
shall be borne jointly and severally by the Company and the Subscriber(s). The
Escrowee, being a law firm, shall have the right to advise and represent itself
and, in such event, the value of its services, calculated in accordance with its
then current hourly billing rates, shall be paid by the Company and the
Subscriber(s). The obligation of the Company and the Subscriber(s) for payment
of such fees and disbursements shall be joint and several. The Escrowee shall
also, in such instances, be entitled to refrain from taking any action other
than to keep safely the Funds until the Escrowee shall be instructed otherwise
by both the Company and the Subscriber(s), or by final judgment of a court of
competent jurisdiction.
6. Resignation. The Escrowee serving under this Escrow Agreement shall
have the right to resign as Escrowee at any time by notifying the Company and
any Subscriber(s) with respect to which the Escrowee is still holding Funds, in
writing. Such resignation shall become effective upon the first to occur of (i)
thirty (30) days after the date of such written resignation, or (ii) the
designation of a qualified replacement Escrowee and its acceptance of the terms
and conditions of this Escrow Agreement. A duly licensed member of the bar of
the State of New York shall be deemed a qualified replacement.
7. Discharge. Upon dispensing of the escrowed Funds in accordance with
the provisions of this Escrow Agreement, the Escrowee shall automatically be
relieved and discharged of all claims and liabilities relating to said escrowed
Subscriptions and shall not be subject to claims or surcharges made by or on
behalf of either the Company or the Subscriber(s).
8. Representations and Warranties. In order to implement the operation
of this Escrow Agreement, the Parties hereby jointly and severally represent as
follows:
a. The execution, delivery and performance of this Escrow
Agreement, in the time and manner herein specified, will not conflict with,
result in a breach of, or constitute a default under any existing agreement,
indenture, or other instrument to which either the Company or the Escrowee is a
party or by which any such entity may be bound or affected;
b. Both the Company or the Escrowee have full legal authority
to enter into this Escrow Agreement and to perform the same in the time and
manner contemplated;
c. This Escrow Agreement has been submitted to, ratified and
approved
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<PAGE>
by the Board of Directors of the Company: and
d. The Company will cause all checks received from subscribers
to the Offering and representing the Funds to be deposited with the Escrowee in
the Escrow Account.
9. Amendment. This Escrow Agreement may not be amended except by an
instrument in writing signed on behalf of each of the Parties hereto.
10. Waiver. At any time prior to the Termination Date, the Parties
hereto, may: (i) extend the time for the performance of any Party; (ii) waive
any inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto; and (iii) waive compliance with any of
the agreements or conditions contained herein. The failure of any Party to
insist upon strict performance of any of the provisions of this Escrow Agreement
shall not be construed as a waiver of any subsequent default of the same or
similar nature or of any of provision, term, condition, warranty, representation
or guaranty contained herein.
11. Binding Effect. All of the terms and provisions of the Escrow
Agreement shall be binding upon and inure to the benefit of and be enforceable
by and against the Parties hereto and their respective successors. This Escrow
Agreement shall not be assignable under any circumstances.
12. Entire Agreement. Each of the Parties hereto, covenants that this
Escrow Agreement is intended to and does contain and embody herein all of the
understandings and agreements, both written and oral, of the Parties hereby with
respect to the subject matter of this Escrow Agreement and that there exists no
oral agreement or understanding express or implied, whereby the absolute, final
and unconditional character and nature of this Escrow Agreement shall be in any
way invalidated, impaired or affected.
13. Governing Law. This Escrow Agreement shall be governed by and
interpreted under and construed in all respects in accordance with the laws of
the State of New York, irrespective of the place of domicile or residence of any
Party.
14. Arbitration. The parties agree that in the event of a controversy
arising out of the interpretation, construction, performance or breach of the
Escrow Agreement, any and all claims arising out of or relating to this Escrow
Agreement shall be settled by arbitration according to the Commercial
Arbitration Rules of the American Arbitration Association located in New York
City before a single arbitrator, except as provided below. The decision of the
arbitrator(s) will be enforceable in any court of competent jurisdiction. The
Parties hereby agree and consent that service of process in any such arbitration
proceeding outside the City of New York shall be tantamount to service in person
within New York, New York and shall confer personal jurisdiction on the American
Arbitration Association. In any dispute where a Party seeks Fifty Thousand
Dollars ($50,000.00) or more in damages, three (3) arbitrators will be employed.
In resolving all disputes between
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the Parties, the arbitrators will apply the law of the State of New York, except
as may be modified by this Escrow Agreement. The arbitrators are, by this Escrow
Agreement, directed to conduct the arbitration hearing no later than three (3)
months from the service of the statement of claim and demand for arbitration
unless good cause is shown establishing that the hearing cannot fairly and
practically be so convened. The arbitrators will resolve any discovery disputes
by such prehearing conferences as may be needed. The Parties agree that the
arbitrators and any counsel of record to the proceeding will have the power of
subpoena process as provided by law. Notwithstanding the foregoing, if a dispute
arises out of or related to this Escrow Agreement, or the breach thereof, before
resorting to arbitration the Parties agree first to try in good faith to settle
the dispute by mediation under the Commercial Mediation Rules of the American
Arbitration Association. The costs and fees of arbitration levied by the
American Arbitration Association shall be assessed as directed by the
arbitrator(s).
15. Originals. This Escrow Agreement may be executed in counterparts
each of which so executed shall be deemed an original and constitute one and the
same agreement.
16. Addresses of the Parties. Each Party shall at all times keep the
other Party informed of its principal place of business if different from that
stated herein, and promptly notify the other of any change of address.
17. Notices. Any notice required or contemplated by this Escrow
Agreement shall be deemed sufficiently given when delivered in person,
transmitted by facsimile (if followed by a copy by mail within three (3)
business days) or sent by registered or certified mail or priority overnight
package delivery service to the address of the Party entitled to notice as
appearing on the first page of this Escrow Agreement or at such other address as
the same may designate in a notice for that purpose. All notices shall be deemed
to have been made upon receipt, in the case of mail, personal delivery or
facsimile, or on the next business day, in the case of priority overnight
package delivery service.
IN WITNESS WHEREOF, the Parties have executed this Escrow
Agreement as of the day and year first above written.
Power Efficiency Corporation
By:
-------------------------------------------
Nicholas Anderson, President
-------------------------------------------
Lester Yudenfriend, Esq., as Escrowee Only
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<PAGE>
ESCROW AGREEMENT SIGNATURE PAGE:
FOR INDIVIDUAL INVESTORS:
-------------------------------------------
Signature
-------------------------------------------
Print name
-------------------------------------------
Print Street Address
-------------------------------------------
Print City, State and Zip Code
FOR CORPORATE INVESTORS:
Name of Corporation
BY:
-------------------------------------------
Signature of Executive Officer or Manager
-------------------------------------------
Print Name and Title of Authorized Signatory
-------------------------------------------
Print Business Address
-------------------------------------------
Print City, State and Zip Code
34
<PAGE>
EXHIBIT B
COMMON STOCK PURCHASE WARRANT
35
<PAGE>
THE WARRANT EVIDENCED BY THIS CERTIFICATE AND THE COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS. THE WARRANT OR SHARES
OF SUCH COMMON STOCK MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR OTHERWISE
DISPOSED OF UNLESS A REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS WITH RESPECT TO SUCH DISPOSITION IS THEN IN EFFECT OR
UNLESS THE PERSON PROPOSING TO MAKE THE DISPOSITION SHALL FURNISH, WITH RESPECT
TO SUCH DISPOSITION, AN OPINION OF COUNSEL SATISFACTORY TO POWER EFFICIENCY
CORPORATION TO THE EFFECT THAT SUCH SALE, TRANSFER, ASSIGNMENT OR OTHER
DISPOSITION WILL NOT INVOLVE ANY VIOLATION OF THE REGISTRATION PROVISIONS OF THE
ACT (OR ANY SUPERSEDING STATUTE) OR ANY APPLICABLE STATE SECURITIES LAWS.
POWER EFFICIENCY CORPORATION
STOCK PURCHASE WARRANT
COMMON STOCK
Warrant No. PEC-1 No. of Shares - Up to 25,000
This certifies that, for value received,
------------------------------
Name of Warrant holder
or his, her or its assigns (the "Holder"), is entitled, subject to the terms and
conditions hereinafter set forth at any time after the date of the Exercise
Event Notice (as that term is hereinafter defined in Section 1 hereof) but
before 5:00 o'clock p.m., New York time, on the third anniversary of the date of
this warrant (the "Warrant") but not thereafter (the "Expiration Date"), to
purchase up to 25,000 shares of common stock, $.001 par value per share("Warrant
Shares"), of Power Efficiency Corporation, a Delaware corporation with temporary
offices c/o 4220 Varsity Drive, Suite E, Ann Arbor, Michigan 48108 (the
"Company"), such number of Warrant Shares being subject to adjustment upon the
occurrence of the contingencies set forth in this Warrant. This Warrant shall be
exercisable at a price of $3.00 per Warrant Share during the first year of the
term of this Warrant expiring on the first anniversary of the date hereof, $4.00
per Warrant Share during the second year expiring on the second anniversary of
the date hereof, and $5.00 per Warrant Share during the third year expiring on
the third anniversary of the date hereof (the "Exercise Price").
Upon delivery of this Warrant duly executed, together with payment of
the Exercise Price for the Warrant Shares thereby at 4220 Varsity Drive, Suite
E, Ann Arbor, Michigan 48108, or at such other address as the Company may
designate by notice in writing to the Holder of the Warrant Shares so purchased.
All Warrant Shares which may be issued upon the exercise of this Warrant will,
upon issuance, be fully paid and non-assessable and free from any taxes, liens,
and charges with respect thereto.
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This Warrant is subject to the following terms and conditions:
1. Exercise of The Warrant. This Warrant may be exercised by the Holder
furnishing the Company with written notice of the Holder's intent to exercise at
any time after issuance and delivery hereof and prior to 5:00 o'clock p.m., New
York time, on the Expiration Date but not thereafter, as to all or any part of
the number of whole Warrant Shares then subject hereto (the "Exercise Notice").
In case of any partial exercise of this Warrant, the Company shall execute and
deliver a new Warrant of like tenor and date for the balance of the Warrant
Shares purchasable hereunder. The Exercise Notice shall set a closing date not
more than ten days thereafter but not later than the Expiration Date, where the
Holder's purchase of the of the Warrant Shares shall take place (the "Closing
Date"). On the Closing Date, the purchase of the Warrant Shares shall take place
at the offices of the Holder's attorneys, Lester Yudenfriend, 1133 Broadway,
Suite 321, New York, NY 10010. The Exercise Price shall be paid in lawful funds
of the United States of America payable in cash or by certified or official bank
check, said amount being subject to adjustments upon the occurrence of the
contingencies set forth in this Warrant. In the event the Holder fails to
exercise the Warrant and set a Closing Date before the Expiration Date, the
Warrant shall expire, become non-exercisable and be of no further validity.
2. Adjustment of Exercise Price and the Number of Shares Purchasable
Hereunder. The Exercise Price and the number of Warrant Shares purchasable
hereunder shall, upon the prior occurrence of an event enumerated in (a) and (b)
of this Section 2 or an event numerated in Section 3 below (an "Exercise
Event"), be subject to adjustment from time to time in accordance with the
following provisions:
(a) In the event of any payment of any cash dividend or
distribution of property by the Company otherwise than out of earned surplus,
either tangible or intangible (other than distributions of the Warrant Shares),
to the holders of the Company's common stock, the Exercise Price for the Warrant
Shares then subject to this Warrant shall be reduced by the per share amount of
such dividend or distribution when the Exercise Price is equal to the then par
value of the common stock. If and when the Exercise Price is equal to the then
par value of the common stock, the Holder shall be entitled to receive,
concurrently with the holder of the common stock then outstanding, the per share
amount of any such dividend or distribution with respect to the number of
Warrant Shares then receivable upon exercise of this Warrant in the same manner
and to the same extent as if the Holder were then the registered owner of the
Warrant Shares then subject hereto. For purposes of this paragraph, the per
share amount of any distribution of property shall be the fair market value
thereof as determined by the Company's Board of Directors in good faith in the
resolutions authorizing any such distribution.
(b) In the event the Company shall at any time issue any
shares of its common stock as a stock dividend, the Exercise Price in effect
immediately prior to such subdivision shall be proportionately decreased, and in
the case the Company shall at any time combine the outstanding shares of its
common stock, the Exercise Price in effect immediately prior to such combination
shall be proportionately increased, effective from and after the record date of
such subdivision or combination, as the case may be.
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(c) No adjustment of the Exercise Price shall be made upon the
subsequent issuance of any additional shares of the Company's common stock
pursuant to the exercise of any such warrants, options or other subscription or
purchase rights or pursuant to the exercise of any conversion or exchange rights
in any convertible securities.
3. Reorganization, Reclassification, Consolidation or Merger. If at any
time while this Warrant is outstanding there shall be any reorganization or
reclassification of the common stock of the Company (other than a subdivision or
combination of shares provided for in paragraph 2 above) or any consolidation or
merger of the Company with another corporation, or the sale, lease or conveyance
of the property of the Company as an entirely or substantially as an entirety,
the holder of this Warrant shall thereafter be entitled to receive, during the
term hereof and upon payment of the Exercise Price, the number of shares of
stock or other securities or property of the Company or of the successor
corporation resulting from such consolidation or merger, as the case may be, to
which a holder of the common stock of the Company, deliverable upon the exercise
of this Warrant, would have been entitled upon such reorganization,
reclassification, consolidation, merger, sale, lease or conveyance; and in any
such case, appropriate adjustment (as determined by agreement of the Board of
Directors of the Company) shall be made in the application of the provisions
herein set forth with respect to the rights and interest thereafter of the
holder of this Warrant to the end that the provisions set forth herein
(including the adjustment of the Exercise Price) shall thereafter be applicable,
as property thereafter deliverable upon the exercise hereof.
4. Notice of Adjustments. Upon any adjustment of the Exercise Price
upon the exercise of this Warrant, then, and in each such case, the Company,
within thirty days, may give written notice thereof to the Holder at the address
of such holder as shown on the books of the Company, which notice shall state
the Exercise Price as adjusted upon the exercise of this Warrant, setting forth
in reasonable detail the facts and method of calculation of each.
5. Charges, Taxes and Expenses. The issuance of certificates for
Warrant Shares upon any exercise of this Warrant shall be made with charges to
the holder hereof for any tax or other expense in respect to the issuance of
such certificates, all of which taxes and expenses shall be paid by the Warrant
holder, and such certificates shall be issued in the name of, or in such name or
names as may be directed by , the holder of this Warrant; provided, however,
that in the event that certificate for Warrant Shares are to be issued in a name
other than the name of the holder of this Warrant, this Warrant when surrendered
for exercise shall be duly executed by the holder hereof in person or by an
attorney duly authorized in writing.
6. Certain Obligations of the Company. The Company agrees that it will
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully-paid and
non-assessable Warrant Shares at the Exercise Price as so adjusted.
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7. Restrictions on Transfer. The Warrant Shares issuable upon any exercise
of this Warrant shall be restricted securities as that term is defined under the
Act. In this regard, the Holder represents to the Company that upon the Holder's
exercise of the Warrant the Holder: (i) will be acquiring the Warrant Shares for
the Holder's own account for the purpose of investment and not with a view to or
for resale in connection with any distribution thereof; (ii) will not offer to
sell or otherwise transfer any of the Warrant Shares in violation of the Act;
and (iii) agrees that the certificates representing the Warrant Shares shall be
the subject of a stop transfer order on the books and records of the Company or
its transfer agent and shall bear a standard form of restrictive legend.
8. Notice to Warrant Holder. So long as this Warrant is outstanding:
(i) if the Company shall pay any dividend or make any distribution upon the
Company's common stock; or (ii) if the Company shall offer to the holders of its
common stock for subscription or purchase by them any share of stock of any
class or any other rights; or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into any corporation, sale, lease or transfer of
all or substantially all of the property and assets of the Company to another
corporation or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then, in any such case, the Company may cause
to be mailed by certified mail to the Holder, at least 15 days prior to the date
specified in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such dividend, distribution or rights, or (y)
such reorganization, reclassification, consolidation, merger, sale, lease,
transfer, dissolution, liquidation or winding up to take place and the date, if
any is to be fixed, as of which the holders of common stock of record shall be
entitled to exchange their Warrant Shares for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, lease, transfer, dissolution, liquidation or winding up.
9. Miscellaneous. (a) The Company covenants that it will at all times
reserve and keep available, solely for the purpose of issue upon the exercise
hereof, a sufficient number of shares of its common stock to permit the exercise
of the Warrant in full.
(b) The terms of this Warrant shall be binding upon and shall
inure to the benefit of any successors or assigns of the Company and the Holder.
(c) Prior to the due exercise of this Warrant, the Holder
shall not be entitled to vote or receive dividends (except as provided in
paragraph 2(a) hereof) or be deemed to be a shareholder of the Company for any
purpose.
(d) This Warrant may be divided into separate Warrants
covering a minimum of 10,000 shares of the common stock or any whole multiple
thereof, for the total number of Warrant Shares then subject to this Warrant at
any time, or from time to time, upon the request of the Holder and the surrender
of the same to the Company for such purpose. Such subdivided Warrants shall be
issued promptly by the Company following any such request and shall be of the
same form and tenor as this Warrant, except for any requested change in the name
of the Holder.
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(e) Except as otherwise provided herein, this Warrant and all
rights hereunder are transferrable by the Holder in person or by duly authorized
attorneys on the books of the Company upon surrender of this Warrant, properly
endorsed, to the Company. The Company may deem and treat the Holder at any time
as the absolute owner hereof for all purposes and shall not be affected by any
notice to the contrary.
(f) Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers and its corporate seal to be affixed hereof.
May , 2000
Power Efficiency Corporation
By:
--------------------------------------------
Nicholas Anderson, Chief Operating Officer
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FORM OF AS SIGNMENT
(Subject to the restrictions set forth in the Warrant.)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto __________________________ the right represented by this Warrant to
purchase __________ Shares of the Common Stock, $.001 par value per share of
Power Efficiency Corporation to which this Warrant relates, and appoints
_______________, attorney to transfer said right on the books of said
Corporation, with full power of substitution in the premises.
Dated:________________________ _____________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
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FORM OF SUBSCRIPTION
(To be signed only upon exercise of the Warrant.)
To: Power Efficiency Corporation
The undersigned, the holder of this Warrant, hereby irrevocably elects
to exercise the purchase rights represented by this Warrant for, and to purchase
thereunder, pursuant to and in accordance with the terms of this Warrant,
___________ shares of common stock, $.001 par value per share of Power
Efficiency Corporation, and herewith makes payment of $_______ therefor, and
requests that the certificates for such Shares be issued in the name of and be
delivered to ________________, whose address is ______________________________,
and if such Shares shall not be all of the shares purchasable thereunder, that a
new Warrant or like tenor for the balance of the shares purchasable hereunder be
delivered to the undersigned.
Dated:________________________ _____________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant)
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EXHIBIT C
DEFINITION OF ACCREDITED INVESTOR
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Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the
"Act") defines an "Accredited Investor" as any person who comes within any of
the following categories, or who the issuer reasonably believes comes within any
of the fol owing categories, at the time of the sale of the securities to that
person:
(i) Any bank or savings and loan association as defined in Sections
3(a)(2) and 3(a)(5)(A), respectively, of the Act acting either in its
individual or fiduciary capacity;
(ii) Any broker dealer registered pursuant to Section 15 of the Securities
Exchange Act ;
(iii) Any insurance company as defined in Section 2(13) of the Act;
(iv) Any investment company registered under the Investment Company Act of
1940 or a business development company as defined in Section 2(a)(48)
of that Act;
(v) Any Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958;
(vi) Any employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974 and):
(a) The investment decision is made by a plan fiduciary, as defined
in Section 3(21) of such Act, which is either a bank, savings and
loan association, insurance company, or registered investment
adviser; or
(b) The employee benefit plan has total assets in excess of
$5,000,000; or
(c) The plan is a self-directed plan with investment decisions made
solely by persons who are "Accredited Investors" as defined under
the 1933 Act.
(vii)Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(viii) Any entity that has total assets in excess of $5,000,000, was not
formed for the specific purpose of acquiring shares of the Company and
is one or more of the following:
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(a) an organization described in Section 501(c)(3) of the Internal
Revenue Code; or
(b) a corporation; or
(c) a Massachusetts or similar business trust; or
(d) a partnership.
(ix) Any trust with total assets exceeding $5,000,000, which was not formed
for the specific purpose of acquiring shares of the Company and whose
purchase is directed by a person who has such knowledge and experience
in financial and business matters that he is capable of evaluating the
merits and risks of the investment in the shares;
(x) Any natural person who, together with the person's spouse, have a net
worth of at least $1,000,000 or the person, individually, has had net
income of not less than $200,000 during the last two years, and
reasonably anticipates that the person will have an income of at least
$200,000 during the present year and the next year.
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EXHIBIT D
INVESTMENT LETTER
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Board of Directors
Power Efficiency Corporation
4220 Varsity Drive, Suite E
Ann Arbor, MI 48108
Gentlemen:
In connection with the purchase by the undersigned as of May , 2000 for
one or more of the units being offered by Power Efficiency Corporation, a
Delaware corporation (the "Company") and delivery to the undersigned (the
"Units") and comprised of 25,000 authorized but unissued shares of the Company's
Common Stock, $.001 par value per share ("Unit Shares"), and a five year warrant
to purchase 25,000 additional shares of the Company's common stock, $.001 par
value per share (the "Warrant Shares"), the undersigned for himself/itself, and
his/its heirs, representatives, executors, administrators, successors and
assigns, represents, warrants and agrees with the Company as follows with
respect to the Units:
1. The undersigned will be acquiring the Unit Shares and the Warrant
Shares comprising the Units for investment and not with a view to the
distribution thereof and is familiar with the meaning of such representation and
covenants and understands the restrictions which are imposed thereby. More
specifically, but without limitation, the undersigned understands that in the
view of the Securities and Exchange Commission, one who acquires securities for
investment is not exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Act"), if he merely acquires such securities for
resale upon the occurrence or non-occurrence of some predetermined event or for
holding for a fixed or determinable period in the future.
2. The undersigned will be acquiring the Unit Shares and the Warrant
Shares comprising the Units solely for the undersigned's own account and no
other person or entity has any direct or indirect beneficial ownership or
interest therein.
3. The Undersigned hereby represents and warrants that he has a net
worth substantially in excess of the cost of the Units to the undersigned and in
the event the undersigned shall incur a loss in the Units, it would not
materially affect the undersigned's financial condition.
4. The undersigned has been advised that in reliance on the
representations, warranties and agreements herein made by the undersigned, the
issuance, and delivery of the Unit Shares and the Warrant Shares comprising the
Units to the undersigned will not be registered under the Act on the ground that
the issuance thereof is exempt from registration by virtue of Sections 4(2)
and/or 3(b) thereof.
5. The undersigned represents to the Company that the undersigned has
such knowledge and experience in financial and business matters that the
undersigned is
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capable of evaluating and understanding the merits and risks attendant upon the
investment in the Company represented by the acquisition of the Units.
6. The undersigned represents and warrants to the Company that the
investment in the Company represented by the purchase of the Units came about as
a result of direct communications between the Company and the undersigned, and
did not result from any form of general advertising or general solicitation
including but not limited to, advertisements or other communications in
newspapers, magazines, or other media; broadcasts on radio or television,
seminars or promotional meetings or any letter, circular or other written
communication.
7. The undersigned will hold the Unit Shares and the Warrant Shares
comprising the Units for 12 months before any sale thereof under Rule 144.
Very truly yours,
-------------------------------------
Signature of Subscriber
-------------------------------------
(Print) Name of Subscriber
-------------------------------------
(Print) Title of Authorized Signatory
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