SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 18, 2002
POWER EFFICIENCY CORPORATION
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-31805 22-3337365
-------- --------- ----------
(State or other Commission File Number (IRS Employer
jurisdiction of incorporation) Identification No.)
4220 Varsity Drive, Suite E, Ann Arbor, Michigan 48108
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 975-9111
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events.
Series A Convertible Preferred Stock Financing
On June 14, 2002, Power Efficiency Corporation, a Delaware corporation (the
"Company"), closed on a $2.5 million round of equity financing (the "Financing")
from Summit Energy Ventures, LLC ("Summit"), a leading private equity firm
specializing in energy related technologies. Summit is an affiliate of
Commonwealth Energy Corporation, a diversified energy provider and service
company based in Tustin, California. Transaction documents executed in the
Financing are attached as Exhibits.
Preferred Stock and Stock Purchase Warrant. Pursuant to the terms of the stock
purchase agreement entered into between the Company and Summit (the "Stock
Purchase Agreement"), the Company issued 2,346,233 shares of Series A-1
Convertible Preferred Stock, $.001 par value per share, of the Company ("Series
A-1") for a purchase price of $2,500,000, which will result in Summit owning a
28% fully diluted equity stake in the Company. Summit also received a stock
purchase warrant (the "Warrant"), which is exercisable after January 1, 2004, to
purchase such number of additional shares of Series A-2 Convertible Preferred
Stock, $.001 par value per share, of the Company ("Series A-2") (collectively
Series A-1 and Series A-2 shall be referred to herein as the "Series A Preferred
Stock") or common stock, $.001 par value per share, of the Company (the "Common
Stock") enabling Summit to purchase up to 51% of the Company.
Liquidation Preference/Dividends. The Series A Preferred Stock contains certain
liquidation rights upon the liquidation or winding up of the Company (the
"Liquidating Event"). Upon the occurrence of a Liquidating Event, the holder of
Series A Preferred Stock shall be entitled to a per share disbursement equal to
two (2) times the per share purchase price (the "Purchase Price") the holder
paid for such shares. The holders of Series A Preferred Stock are not entitled
to any fixed dividends but, the Company is prohibited from declaring and issuing
dividends to any securities ranking junior to the Series A Preferred Stock
unless dividends are also declared and paid concurrently on the Series A
Preferred Stock.
Conversion Provisions. The Series A Preferred Stock, at the election of the
holder, shall be convertible into such number of fully paid and non-assessable
shares of Common Stock as is determined by dividing the Purchase Price by the
conversion price (the "Conversion Price") in effect at the time of conversion.
The Series A Preferred Stock shall initially be convertible into shares of
Common Stock at the rate of two shares of Common Stock for each share of the
Series A Preferred Stock. In addition, the Series A Preferred Stock is subject
to anti-dilution protection. In the event the Company issues shares of either
common or preferred stock at a per share price less than the Conversion Price,
then the Conversion Price shall be reduced to reflect the lower per share price.
Voting Rights. The shares of Series A Preferred Stock vote together with the
Common Stock as a single class. Each share of Series A Preferred Stock shall
have a number of votes equal to the number of shares of Common Stock then
issuable upon the conversion of the Series A Preferred Stock, provided that,
until December 14, 2003, at any time there is a vote of the stockholders of the
Company, Summit shall only be entitled to vote such number of shares of Series A
Preferred Stock as shall be equal to 28% of the outstanding shares of Common
Stock entitled to vote on the date of such stockholder vote.
Protective Provisions. Certain actions by the Company will require the prior
affirmative vote of a majority of the then outstanding shares of Series A
Preferred Stock. These actions include, but are not limited to, (i) redeeming,
repurchasing, or acquiring, directly or indirectly, any shares of the Company's
stock, (ii) declaring, or taking any action resulting in payment of dividends or
distributions with respect to any capital stock, (iii) selling or issuing any
equity or debt securities of the Company or rights to acquire equity or debt
securities of the Company, except for (a) the issuance of options to purchase up
to 4,500,000 shares of Common Stock, and the issuance of the Common Stock upon
exercise of such options, pursuant to existing stock option plans of the Company
and (b) the issuance and exercise of warrants to purchase approximately
1,000,000 shares of Common Stock; (iv) increasing or decreasing the authorized
number of shares of any class or series of preferred stock of the Company; (v)
entering into, permitting or agreeing to any transaction or series of
transactions which would involve a Liquidation Event or the sale of a
significant portion of the assets of the Company outside of sales in the
ordinary course of business (for purposes of this section a "significant
portion" of the assets of the Company shall mean assets constituting all or
substantially all of an operating or business unit or division of the Company,
or other assets having a purchase price in excess of 20% of the Company's total
assets at the time of the proposed transaction; and (vi) incurring debt in
excess of $2,000,000, by the Company, its parent or subsidiary or incurrence of
liens and/or encumbrances on the assets of the Company (other than liens filed
by any financial lending institutions) which relate to borrowings in an amount
greater than 50% of the book value of the Company's assets.
Warrant. As part of the terms of the Financing, Summit was issued the Warrant
which upon full exercise would enable Summit to purchase such number of
additional shares of either Series A-2 or Common Stock, at the election of
Summit, which would give Summit a 51% interest in the Company. The Warrant,
exercisable in whole or in part, is exercisable commencing on January 1, 2004
and expires on June 14, 2012, at a per share price which values the Company on a
fully diluted basis at three (3) times the Company's trailing four (4) quarters
EBITDA as calculated upon the date Summit exercises any part of the Warrant.
Upon Summit exercising the Warrant in full, Summit shall be entitled to appoint
a majority of the members of the Board.
Amended Stockholders' Agreement
Also as part of the Financing, Summit became a party to the existing
stockholders agreement by and between the Company and certain stockholders
groups (the "Amended Stockholders' Agreement"). The governance provisions of the
Amended Stockholders' Agreement requires that the Company's Board of Directors
(the "Board") to be expanded from five (5) members to eight (8) members; five
(5) who will be nominated by existing stockholder groups and three (3) who will
be nominated by Summit. In addition, Raymond J. Skiptunis will soon become the
Company's Chief Financial Officer and will take the Board seat previously held
by Lee W. Greenberg and Summit will fill the three (3) remaining Board seats. It
is expected these appointments will be effective in mid July, 2002. The
Company's by-laws were amended to accurately reflect the governance provisions
of the Amended Stockholders' Agreement.
Pursuant to the Amended Stockholders' Agreement, each of the stockholder parties
(the "Stockholders") agreed to cause the Board to appoint the following persons
as officers of the Company:
Office Name
------ ----
Stephen Shulman President
Stephen Shulman Chief Executive Officer
Nicholas Anderson Chief Technology Officer
Raymond J. Skiptunis Chief Financial Officer
Arthur N. Smith Treasurer/Controller/Secretary
In addition, the Amended Stockholders' Agreement contains certain provisions
that affect the ability of the Stockholders to transfer their shares.
Right of First Refusal. If at any time a Stockholder desires to sell their
shares (the "Offered Shares") (other than (i) a resale under rule 144 of the
Securities Act of 1933, as amended (the "Securities Act") or (ii) pursuant to a
registered public offering under the Securities Act or (iii) a transfer to
permitted affiliates or family members, as set forth in the Amended
Stockholders' Agreement), the selling Stockholder must first offer to the other
Stockholders the right to purchase the Offered Shares upon terms and conditions
similar to the ones the selling Stockholder was initially proposing to sell the
Offered Shares to the third party purchaser. In the event the Stockholders fail
to exercise this right, then the selling Stockholder can sell the Offered Shares
subject to the "Co-Sale" Rights and "Tag-Along" Rights set forth below.
"Co-Sale" Rights. If any of the Stockholders (other than Summit) intends to sell
or transfer their shares and the other Stockholders have not fully exercised
their Right of First Refusal, set forth above, then Summit shall have the right
to participate in such sale and sell a pro rata share of their stock to the
third party purchaser.
"Tag Along" Rights. If Summit intends to sell or otherwise transfer such number
of shares that will result in the party receiving such shares beneficially
owning on a fully diluted basis a greater number of shares of stock than any
other Stockholder group to the Amended Stockholders' Agreement, then the other
Stockholder groups shall have the right to participate in such sale and sell a
pro rata share of their stock to the purchasing party.
Preemptive Rights. The Amended Stockholders' Agreement also provides the
Stockholders with certain preemptive rights entitling the Stockholders the
option to purchase a pro rata share of the securities to be issued by the
Company in certain private financings.
The Amended Stockholders' Agreement shall terminate upon (i) the Company closing
a firmly underwritten public offering by the Company pursuant to a registration
statement filed and declared effective under the Securities Act covering the
offer and sale of Common Stock for the account of the Company yielding net
proceeds of at least $15,000,000 to the Company at a price per share of Common
Stock that yields a total enterprise value of the Company of not less than
$50,000,000; (ii) bankruptcy receivership or dissolution of the Company; (iii)
the voluntary agreement of all parties bound by the terms of the Agreement; (iv)
the acquisition of all the shares of stock by one party; (v) the full and
complete exercise of all the rights under the Warrant by Summit (or its
assignee) pursuant to its terms; or (vi) on June 14, 2007.
Ancillary Matters
The Company and Summit also entered into a Registration Rights Agreement
entitling Summit, subject to the terms and conditions of the Registration Rights
Agreement, to demand that the Company file a registration statement covering all
of the Company securities owned by Summit.
In addition, the Company requested that Michigan Heritage Bank grant the Company
a new line of credit in the amount of $1,000,000. The Company also received a
waiver letter from Bank One, Michigan waiving the Company's non-compliance with
certain covenants set forth in the loan agreement by and between the Company and
Bank One, Michigan. The Company intends to use a portion of the proceeds from
the Financing to pay down the outstanding amount of the loan with Bank One,
Michigan. As a condition of the Financing, Stephen Shulman and Nicholas Anderson
restructured the Company's repayment obligations for certain loans made by
Messrs. Shulman and Anderson to the Company.
As consideration for their assistance in closing the Financing, the Company
issued a five (5) year stock purchase warrant to Lee Greenberg and Raymond J.
Skiptunis for the purchase of 75,000 and 100,000, respectively, shares of Common
Stock at a per share exercise price of $1.76.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Item 7(a) Financial Statements:
Not applicable.
Item 7(b) Pro Forma Financial Information:
Not applicable.
Item 7(c) Exhibits:
Exhibit 3.1 Amendment to the Articles of Incorporation dated June 5, 2002
Exhibit 3.2 Amended by-laws dated June 11, 2002
Exhibit 4.1 Stock Purchase Agreement dated June 14, 2002
Exhibit 4.2 Stock Purchase Warrant dated June 14, 2002
Exhibit 4.3 Amended and Restated Stockholders' Agreement dated June 14,
2002
Exhibit 4.4 Registration Rights Agreement dated June 14, 2002
Exhibit 4.5 Certificate of Designation dated June 13, 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
POWER EFFICIENCY CORPORATION
(Registrant)
Date: June 19, 2002 By: /s/ Stephen Shulman
----------------------------------
Stephen Shulman, President