<PAGE>
2,250,000 UNITS
[LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE COMMON STOCK PURCHASE WARRANT
PCT HOLDINGS, INC., a Nevada corporation (the "Company"), is hereby offering
2,250,000 units (the "Units"), each Unit consisting of one share (the "Shares")
of the Company's common stock, $.001 par value (the "Common Stock"), and one
warrant to purchase one share of Common Stock (the "Warrants"), for the initial
offering price of $3.125 per Unit (the "Unit Offering Price"). The Units will
separate immediately upon issuance, and the Common Stock and Warrants that make
up the Units will trade only as separate securities. Each Warrant initially
entitles the holder thereof to purchase one share of Common Stock at an exercise
price of $4.6875 per share (150% of the Unit Offering Price), subject to certain
adjustments including, if the Company's audited fiscal 1997 net income (adjusted
to exclude any expense relating to the vesting of any employee options or
warrants) does not exceed $1.5 million, a one-time downward adjustment of the
exercise price to (a) $3.90625 per share (125% of the Unit Offering Price) if
such net income is $800,000 to $1.5 million, (b) $3.125 per share (100% of the
Unit Offering Price) if such net income is $500,000 to $799,999, and (c)
$2.34375 per share (75% of the Unit Offering Price) if such net income is less
than $500,000. The Warrants are exercisable at any time, unless previously
redeemed, until the fifth anniversary of the date of this Prospectus, subject to
certain conditions. The Company may redeem the outstanding Warrants, in whole or
in part, at any time upon at least 30 days prior written notice to the
registered holders thereof, at a price of $.25 per Warrant, provided that the
closing bid price of the Common Stock has been at least 200% of the then-current
exercise price of the Warrants for each of the 20 consecutive trading days
immediately preceding the date of the notice of redemption.
The Common Stock is included in the Nasdaq Small Cap Market System ("Nasdaq
- -- Small Cap") under the symbol "PCTH." On July 10, 1996, the last reported sale
price of the Common Stock on Nasdaq -- Small Cap was $3.50 per share. Before
this Offering, there has been only a limited market for the Common Stock and no
market for the Warrants, and there is no assurance that an active public market
will develop or that, if it does develop, it will be sustained. The Common Stock
and the Warrants have been approved for listing on the Nasdaq National Market
System under the symbols "PCTH" and "PCTHW," respectively, upon the
effectiveness of this Offering.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING AT PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit........................ $3.125 $.28125 $2.84375
Total(3)........................ $7,031,250 $632,813 $6,398,437
</TABLE>
(SEE ACCOMPANYING FOOTNOTES ON NEXT PAGE.)
The Units are offered by the several Underwriters, subject to prior sale,
when, as, and if delivered to and accepted by the Underwriters, and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the Units will be made in New York, New York, on or about July 19, 1996.
------------------------
PAULSON INVESTMENT COMPANY, INC. COHIG & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS JULY 15, 1996
<PAGE>
- ------------------------
(1) Excludes a nonaccountable expense allowance payable by the Company to
Paulson Investment Company, Inc. and Cohig & Associates, Inc. (the
"Underwriters"), equal to 3% of the aggregate Unit Offering Price. The
Company has also agreed (i) to issue to the Underwriters warrants (the
"Underwriters' Warrants") to purchase an aggregate of up to 225,000 Units,
exercisable at $3.75 per Unit (120% of the Unit Offering Price), and (ii) to
grant certain registration rights with respect to the securities underlying
the Underwriters' Warrants. The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of this Offering payable by the Company estimated
at $854,437, including the Underwriters' nonaccountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option (the
"Overallotment Option") to purchase up to 337,500 additional Units on the
same terms and conditions as set forth above, solely for the purpose of
covering overallotments, if any. If the Overallotment Option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $8,085,938, $727,734 and $7,358,204, respectively. See
"Underwriting."
Kryoflex-Registered Trademark- is a registered trademark and Partners with
Tomorrow-TM- and Northridge Valve-TM- are trademarks of the Company.
------------------------
The Company is subject to the reporting and other requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company intends to furnish its shareholders with annual reports containing
audited financial statements and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
------------------------
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference) and the address
(including title and department) and telephone number to which such request is
to be directed.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMPANY'S
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PICTURE SUMMARIES
1. [Picture of various EMI filters surrounding a dime to indicate relative
size]
Miniature solder-in EMI filters for feedthru applications
2. [Picture of several discoidal capacitors next to a nickel to indicate
relative size]
Multi-layer ceramic discoidal capacitors for EMI filter applications
3. [Picture of many EMI filters]
High reliability screw-in low pass EMI filters
4. [Picture of a worker pouring molten metal into a mold]
Pouring of a sandcasting mold
5. [Picture of aluminum castings]
High volume precision aluminum castings
6. [Picture showing equipment in Cashmere machine shop]
Precision machine shop
7. [Picture of emergency exit window frame for passenger aircraft]
Emergency exit window frame for passenger aircraft
8. [Picture of the reset mechanism used in the Seismic valve]
Seismic's valve includes a patented mechanism for resetting the valve
without special tools
9. [Picture of the Seismic natural gas shut-off valve]
Seismic's natural gas shut-off valve is manufactured by Cashmere
10. [Picture of the Seismic residential natural gas shut-off valve and its
packaging]
Seismic markets its residential valve under the brand name "Northridge
Valve-TM-"
11. [Picture of electronic components welded onto an aluminum housing]
Lightweight components laser welded into an aluminum housing for aircraft
applications
12. [Picture of five electrical connectors made for the International Space
Station]
Connectors for International Space Station
13. [Picture of two aluminum Aamram missile modules]
Aluminum Aamram missile modules with laser welded hermetic connectors
14. [Reproduction of the Company's logo including the words "Partners With
Tomorrow-TM-"]
Partners With Tomorrow
15. [Picture of the Company's facility in Wenatchee, Washington]
A substantial percentage of the Company's customers consists of large
manufacturing companies in the aerospace, defense, energy, medical and
general electronics industries. The Company also markets and sells its
products to a variety of smaller specialized electronics companies and has
recently entered the consumer home improvement market with its natural gas
shut-off valves.
16. [Picture of four hermetic electronic packages]
Laser welded hermetic electronic packages are used in sophisticated
communications and radar equipment
17. [Picture of various electrical connectors]
Space-age connectors involve many complex machined shapes and sizes
18. [Picture of several formulations of Kryoflex-Registered Trademark-
materials]
Proprietary Kryoflex-Registered Trademark- materials are produced in many
different formulations
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
OVERALLOTMENT OPTION, THE WARRANTS OR THE UNDERWRITERS' WARRANTS. SEE
"DESCRIPTION OF SECURITIES" AND "UNDERWRITING." UNLESS THE CONTEXT INDICATES
OTHERWISE, REFERENCES HEREIN TO THE "COMPANY" ARE TO PCT HOLDINGS, INC. AND ITS
CONSOLIDATED SUBSIDIARIES.
THE COMPANY
PCT Holdings, Inc. (the "Company") develops, manufactures, markets and sells
a broad range of precision electronic components designed to operate with a high
degree of reliability in harsh environments such as the ocean, space and the
human body. These environments experience extremes in temperature, pressure and
corrosiveness that can make product repair or replacement difficult or
impossible. The Company uses its patented technologies to produce electronic
components for a wide variety of applications in the aerospace, defense, energy,
medical and general electronics industries.
The Company operates through five wholly owned subsidiaries. Two of these
businesses are engaged in the production of electronic devices, with one
producing a variety of electronics packages and connectors shielded from their
environment by the Company's proprietary ceramic seals, and the other producing
devices designed to filter out electromagnetic interference detrimental to other
electronic devices. The Company has recently acquired a business that designs,
manufactures and sells automatic natural gas shut-off valves for use in
earthquake sensitive areas. The Company also has two businesses that manufacture
machined or cast metal products for many applications, including products that
are incorporated into or complementary with the products of its other
subsidiaries.
A substantial percentage of the Company's customers for its electronic
products consists of large manufacturing companies in the aerospace, defense,
energy, medical and general electronics industries. These include Hughes
Aircraft Company, Honeywell Inc.'s Military Avionics Division, Lockheed Martin
Corporation, Northrop Grumman Corporation, Space Systems/Loral, Inc.,
Westinghouse Electric Corporation and TRW, Inc. The Company's metal products
customers include The Boeing Company, Kawasaki Heavy Industries, Ltd., Deere &
Company, Northrop Grumman Corporation and PACCAR Inc. The Company also markets
and sells its products to a variety of smaller, specialized electronics
companies. The Company, with its natural gas shut-off valves, has recently
entered the consumer home improvement market and has received initial orders for
its valves from home improvement centers such as Eagle Hardware & Garden Inc.,
Ernst Home Center, Inc., HomeBase Inc., Home Depot U.S.A., Inc. and Ace Hardware
Corp.
The Company's strategy is to expand the range of products it offers within
its core areas of competence, and to produce a larger portion of the customer's
total product requirement, through internal growth and the acquisition or
development of new technologies. The Company has recently experienced
significant growth in revenues, as a result of both the acquisition of
complementary businesses and internal growth within each of its operating
subsidiaries. The Company hopes to continue to experience growth and to exploit
both technological and marketing synergies resulting from the integration of the
businesses it has acquired and other businesses or technologies that it may
acquire in the future.
The Company is incorporated under the laws of the State of Nevada. Its
corporate offices are located at 434 Olds Station Road, Wenatchee, Washington,
and its telephone number is (509) 664-8000.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................ 2,250,000 Units, each Unit consisting of one share of
Common Stock and one Warrant to acquire one share of
Common Stock. The Common Stock and Warrants will be
separately transferrable immediately upon commencement
of trading.
Common Stock to be outstanding
after the Offering.............. 9,728,309 shares.(1)
Use of proceeds................... To repay indebtedness, acquire equipment, expand facili-
ties, fund potential acquisitions, and provide working
capital. See "Use of Proceeds."
Risk factors...................... Investment in the Units involves a high degree of risk.
See "Risk Factors."
Nasdaq National Market System
symbols......................... Common Stock ...................................... PCTH
Warrants ......................................... PCTHW
</TABLE>
- ------------------------
(1) Excludes 642,783 shares of Common Stock issuable upon exercise of stock
options and warrants at a weighted average exercise price of $4.174 per
share outstanding at May 31, 1996. Also excludes 845,000 shares of Common
Stock issuable upon the exercise of a stock option that the Company has
agreed to grant to Donald A. Wright on the date of this Prospectus at
$4.6875 per share. An additional 9,717 shares of Common Stock are reserved
for issuance under the Company's 1995 Stock Incentive Plan and an additional
91,000 shares of Common Stock are reserved for issuance under the Company's
Independent Director Stock Plan. See "Capitalization," "Management --
Benefit Plans" and "Description of Securities -- Stock Options."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Net sales.................................................................... $ 2,940 $ 11,035 $ 20,725
Gross profit................................................................. 80 1,943 4,286
Loss from operations......................................................... (884) (846) (479)
Net loss..................................................................... (1,098) (1,411) (999)
Loss per share of Common Stock............................................... (.60) (.41) (.16)
Shares used in computation of loss per share................................. 1,826 3,469 6,209
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................................... $ 952 $ 6,496
Total assets......................................................................... 27,649 31,003
Short-term debt...................................................................... 8,005 5,815
Long-term debt....................................................................... 1,961 1,961
Stockholders' equity................................................................. 12,539 18,083
</TABLE>
- ------------------------
(1) The increases in net sales are attributable to acquisitions by the Company
and internal growth. See "Acquisition History" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(2) Adjusted to reflect the sale of the Units offered hereby, assuming the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
Does not include proceeds that would be received upon exercise of stock
options and warrants outstanding at May 31, 1996, to acquire an aggregate of
642,783 shares of Common Stock, or the proceeds that would be received upon
the exercise of a stock option that the Company has agreed to grant to
Donald A. Wright on the date of this Prospectus to purchase 845,000 shares
of Common Stock. See "Capitalization," "Management -- Benefit Plans" and
"Description of Securities -- Stock Options."
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH
BELOW AND INFORMATION ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS:
HISTORY OF NET LOSSES. The Company reported net losses of $1,098,000 in
fiscal 1994, $1,411,000 in fiscal 1995, and $999,000 in fiscal 1996. The Company
has not demonstrated an ability to achieve substantial profitable operations.
There is no assurance that profitable operations will be achieved in fiscal 1997
or at any time thereafter or that any profitable operations will be sustained.
The Company's ability to achieve a profitable level of operations in the future
will depend on many factors, including the Company's ability to assimilate its
recent and potential future acquisitions and to finance its subsidiaries'
production, the degree of market penetration of its products, its ability to
develop new products, the degree of market acceptance of new products, and the
level of competition in those markets in which the Company operates. The Company
is currently experiencing growth in orders and backlog, which will require
additional expenditures to support a higher level of inventory and operations.
These requirements will affect cash flow and results of operations over the
short term and may result in significant future losses if anticipated growth is
not sustained.
NEED FOR IMMEDIATE ADDITIONAL CAPITAL. The Company is experiencing an
immediate need for additional capital to fund its current operations and to
repay matured and maturing debt. The Company also needs to refinance certain of
its existing indebtedness. The Company's primary line of credit expired on July
1, 1996, at which time the Company was in default under one of its covenants.
The Company owed $1,224,000 under that line of credit as of the expiration date,
and is currently negotiating to obtain renewal of that line of credit with
revised covenants. The Company has recently incurred $1,350,000 in short-term
debt maturing in September 1996 which the Company plans to repay using a portion
of the proceeds of this Offering. See "Use of Proceeds." The Company has also
extended the repayment time on a number of its accounts payable. The Company has
obtained a waiver, until September 1, 1996, of defaults under certain financial
and funding covenants relating to an industrial revenue bond of the Morel
subsidiary with an outstanding balance of $1,357,000 as of June 30, 1996. The
Company has obtained a repayment extension for a $313,000 short-term debt
obligation of the Morel subsidiary, in anticipation of the closing of this
Offering. Although the Company believes it will be able to obtain satisfactory
lending arrangements from bank or other institutional lenders, there is no
assurance that its primary line of credit will be renewed, that alternative
financing will be available, or that any available financing will be on
favorable terms. The Company believes that the proceeds of this Offering will
allow it to repay necessary debt obligations and accounts payable, and to fund
its ongoing operations for at least the next 12 months. However, the Company may
need to raise additional capital in the future. See "Risk Factors -- Need for
Additional Long-Term Capital," "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
INTEGRATION OF ACQUISITIONS; MANAGEMENT OF GROWTH. As part of its business
strategy, the Company has recently experienced rapid growth as a result of
several acquisitions that have placed, and will continue to place, a significant
strain on its management, financial and other resources. The Company intends to
continue to evaluate opportunities for growth through expansion of current
operations and the acquisition of other entities, products or technology,
although no material acquisitions are currently planned. There is no assurance
that the Company will be able to implement its growth strategy or that such
strategy ultimately will prove successful. Recent and any future acquisitions
may subject the Company to many risks, including risks relating to integrating
and managing the operations and personnel of acquired companies, maintaining
uniform standards, controls, procedures and policies, potential disruption of
the Company's ongoing business, and possible impairment of relationships with
employees and customers as a result of the integration of any new management or
other personnel. Any future acquisitions could adversely affect the Company's
results of operations
6
<PAGE>
due to the risks of assessing the value, strengths, and weaknesses of
acquisition candidates or new products, diversion of management attention from
the Company's existing businesses, reduction of the Company's cash, disruption
of product development cycles, dilution of earnings per share or other factors.
The Company's ability to manage its current and future growth will require it to
implement and improve its operational, financial, budgeting, management
information and internal control systems. The success of the Company will depend
on the ability of management to implement effectively these changes and to
manage the Company's operations over the long term. The Company's historical
acquisitions have been made, and any future acquisitions will be made, on the
assumption that certain synergies and other operating efficiencies can be
achieved in the combined operation. While the Company believes that it has
experienced some of the anticipated benefits from its acquisitions, there is no
assurance that all of the expected benefits will be achieved or that any
benefits will be sustained. A failure to achieve or sustain the anticipated
benefits of any acquisition could result in that acquisition having a
detrimental effect on the Company's results of operations, cash flow and
financial condition. See "Acquisition History" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SIGNIFICANT CUSTOMERS. The Cashmere subsidiary of the Company
historically has been almost entirely dependent upon The Boeing Company
("Boeing"), although the percentage of its Boeing sales decreased to
approximately 75% of Cashmere's total net sales in fiscal 1996. Sales by
Cashmere and other Company subsidiaries to Boeing constituted approximately 28%
of the Company's consolidated net sales for fiscal 1996. As a result, general
economic conditions and events affecting Boeing, all of which are outside the
control of the Company, may have a significant impact on Cashmere's sales and
consequently on the overall results of operations of the Company. For example, a
change in inventory practices at Boeing and a general downturn in the aerospace
market led to an almost 50% drop in Cashmere's sales in calendar year 1993. A
machinist's union strike at Boeing during the winter of 1995-1996 adversely
affected Cashmere sales to Boeing, although such sales have recently begun to
increase. Cashmere has entered into contracts with Boeing which extend beyond
one year to supply parts at fixed prices, and, accordingly, aluminum or other
metal price increases or other cost increases can adversely affect Cashmere's
margins on the sale of those parts. The Morel subsidiary, which was acquired by
the Company in December 1995, is dependent on PACCAR Inc., including its
Kenworth and Peterbilt divisions (collectively, "PACCAR"). Net sales to PACCAR
constituted 75% of Morel's net sales in fiscal 1995. Net sales to PACCAR in the
last six months of fiscal 1996 constituted 23% of the Company's consolidated net
sales for that period. PACCAR has reported that its first quarter 1996 net sales
declined 9% from first quarter 1995 net sales, due to an industry-wide decrease
in demand for trucks from the record sales levels of 1995. PACCAR has no
contractual obligation to continue to place orders for products of Morel, and
Boeing has considerable flexibility under its contracts with Cashmere to reduce
its level of orders or to cease ordering products from Cashmere. Both Cashmere
and Morel have developed and are implementing strategies intended to decrease
their reliance on sales to these primary customers. However, there is no
assurance that either Cashmere or Morel can successfully reduce its reliance on
Boeing and PACCAR, respectively, to a degree that will protect the Company in
the event of unexpected decreases in sales to these primary customers. See
"Business."
NEED FOR ADDITIONAL LONG-TERM CAPITAL. The Company anticipates that, if its
primary line of credit is renewed or replaced on satisfactory terms, the
Company's existing capital resources and expected revenue from operations,
together with the net proceeds of this Offering, will be adequate to satisfy its
capital requirements for at least the next 12 months. The Company's actual
capital needs, however, will depend upon numerous factors, including the amount
of revenue generated from operations, the cost of increasing the Company's sales
and marketing activities, the ability of third-party suppliers to meet product
commitments, the willingness of the Company's primary lender to renew its line
of credit, and any future acquisitions, none of which can be predicted with
certainty. There is no assurance that the Company's primary line of credit will
be renewed or that the Company will not require additional capital sooner than
currently anticipated. The Company may receive additional funds upon exercise of
the Warrants and other outstanding warrants and stock options, but
7
<PAGE>
there is no assurance that any such warrants or stock options will be exercised.
As a result of these and other factors, the Company is unable to predict
accurately the amount or timing of future capital that it will require. There is
no assurance that any additional financing will be available to the Company on
acceptable terms, or at all, when required by the Company. The inability to
obtain necessary financing could materially and adversely affect the Company's
business and results of operations. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
COMPETITION. The Company operates in highly competitive markets. Most of
its competitors have greater financial resources, broader experience, better
name recognition and more substantial marketing operations than does the
Company, and represent substantial long-term competition. The industries in
which the Company competes are characterized by ongoing product development
efforts and evolving technology, and success depends in part upon the ability to
gain a competitive advantage through proprietary technology. Although the
Company believes that its proprietary technology may give it a competitive
advantage with respect to its technology-based products, new developments by
competitors are expected to continue. The Company's competitors may develop
products that are viewed by customers as more effective or more economic than
the Company's product lines. There is no assurance that the Company will be able
to compete successfully against current and future competitors or that the
competitive pressures faced by the Company will not materially or adversely
affect the Company's business and results of operations. See "Business --
Competition."
RECENT INTRODUCTION OF NEW PRODUCT INTO NEW MARKET. Unlike the other
businesses acquired by the Company, there had been no sales of the Seismic
subsidiary's natural gas shut-off valve before the Company acquired the
technology for that product in November 1995. In addition, the natural gas
shut-off valve is intended for consumer use and is being marketed to retail
distributors of home improvement products and to natural gas utilities for sale
to consumers. This represents a different type of product than the Company has
previously manufactured, and a different kind of market than the markets in
which the Company's other subsidiaries operate. The Company began marketing the
natural gas shut-off valve in December 1995, and received initial orders for the
product beginning in March 1996. There is no assurance that this product will
achieve market acceptance, or that the Company will be able to market the
product successfully or to compete in this new market. Failure of the natural
gas shut-off valve to achieve market acceptance and to compete successfully
could have a material adverse effect on the Company's business and results of
operation. See "Business -- Seismic Safety Products, Inc."
TECHNOLOGICAL CHANGE; DEVELOPMENT OF NEW PRODUCTS. The market for the
Company's products is characterized by steadily evolving technology and industry
standards, changes in customer needs and new product introductions. The
Company's success will depend on its ability to enhance its current products,
develop new products that meet changing customer needs, advertise and market its
products, and respond to evolving industry standards and other technological
changes on a timely and cost-effective basis. There is no assurance that the
Company will be successful in developing new products or enhancing its existing
products on a timely basis, or that such new products or enhancements will
achieve market acceptance. Furthermore, from time to time the Company and others
may announce new products, enhancements or technologies that have the potential
to replace or render obsolete the Company's existing products. Any failure by
the Company to anticipate or respond adequately to changes in technology and
customer preferences, the introduction of new products or enhancements by others
or any significant delays in the development or introduction of new products by
the Company could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent on the Company's Chief Executive Officer and President, Donald A. Wright,
and a small number of other senior management and operational personnel. The
loss of the services of any of these employees could have a material adverse
effect on the ability of the Company to achieve its business objectives. The
Company has key man life insurance policies on the life of Mr. Wright in the
aggregate amount of
8
<PAGE>
$3 million. The Company's growth and future success will depend in large part
upon its ability to attract and retain additional senior management and highly
skilled personnel to provide management and technological depth and support, to
enhance and market its existing products and to develop new products.
Competition for skilled management, technical, marketing and sales personnel is
intense. There is no assurance that the Company will be successful in attracting
and retaining the key management, technical, marketing and sales personnel
necessary to support the Company's business and its recent and future
acquisitions, and its failure to do so would materially and adversely affect the
Company's business and results of operations. See "Management."
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. The Company regards elements
of its technology as proprietary and relies primarily on a combination of
patent, trade secret, copyright and trademark laws, confidentiality procedures,
and other intellectual property protection methods to protect its proprietary
technology. The Company has 32 United States patents, three United States patent
applications pending and three international patent applications pending
relating to certain of its technology and products. There is no assurance that
the Company's patent applications will result in issued patents, that the
Company's existing patents or any future patents will provide the Company with
any competitive advantages for its products or technology, or that, if
challenged, the Company's patents will be held valid and enforceable. Despite
the precautions taken by the Company, unauthorized parties may attempt to copy
aspects of the Company's products or obtain and use information that the Company
regards as proprietary, and existing intellectual property laws afford only
limited protection. Policing violations of such laws is difficult. The laws of
certain countries in which the Company's products are or may be distributed do
not protect the Company's products and intellectual property rights to the same
extent as do the laws of the United States. There is no assurance that these
protections will be adequate or that the Company's competitors will not
independently develop similar technology, gain access to the Company's trade
secrets or other proprietary information, or design around the Company's
patents. The Company may be required to enter into costly litigation to enforce
its intellectual property rights or to defend infringement claims by others.
Such infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all. The Company has recently settled
patent infringement litigation instituted by a competitor by purchasing two
patents and granting the competitor a license to use these and certain other
related patents of the Company. The Company's issued patents expire at various
times over the next 16 years beginning in September 1997. Although the Company
believes that the manufacturing processes of much of its technology that is
currently protected by patents, particularly that of its Pacific Coast
subsidiary, are sufficiently complex that competing products made with the same
technology are unlikely, there is no assurance that the Company's competitors
will not design competing products using the same or similar technology once
these patents have expired. See "Business -- Proprietary Rights."
ENVIRONMENTAL MATTERS. The Company is subject to federal, state and local
laws, regulations and ordinances concerning solid waste disposal, hazardous
materials storage, use and disposal, air emissions, waste water and storm water
disposal, employee health and other environmental matters (together,
"Environmental Laws"). Proper waste disposal and environmental regulation are
major considerations for the Company because certain metals and chemicals used
in its manufacturing processes are classified as hazardous substances. Since the
Company's acquisition of the Morel subsidiary in December 1995, the Company has
initiated an environmental compliance program for the Morel facility, which
includes obtaining all permits necessary for that facility to operate in
compliance with applicable Environmental Laws. As part of this program, Morel in
January 1996 obtained a permit to discharge air emissions. Morel is operating
without a permit required under Environmental Laws to discharge waste water and
storm water. In May 1996, Morel submitted an application to the State of
Washington for this permit. A failure by Morel to obtain the required permit
could result in regulatory authorities imposing fines on Morel or ordering Morel
to cease operations or both. The Company is obtaining the necessary
environmental data to support the permit application and expects to submit such
data by August 1996. Although the Company believes that the necessary permit
will be issued in the first or second quarter of fiscal 1997, there is no
assurance that such
9
<PAGE>
permit will be issued, and the failure to obtain such permit would have a
material adverse effect on the Company. From time to time, the Company's
operations may result in other noncompliance with Environmental Laws. If any
violations of Environmental Laws occur, the Company could be liable for damages
and for the costs of remedial actions and could also be subject to revocation of
permits necessary to conduct its business. Any such revocation could require the
Company to cease or limit production at one or more of its facilities, which
could have a material adverse effect on the Company. As a generator of hazardous
materials, the Company is subject to financial exposure even if it fully
complies with these laws. Environmental Laws could become more stringent over
time, imposing greater compliance costs and increasing risks and penalties
associated with any violations. There is no assurance that any present or future
noncompliance with Environmental Laws will not have a material adverse effect on
the Company's results of operations or financial condition. See "Business --
Environmental Matters."
GOVERNMENT REGULATION. Certain of the Company's products are manufactured
and sold under United States government contracts or subcontracts. As with all
companies that provide products or services to the federal government, the
Company is directly and indirectly subject to various federal rules, regulations
and orders applicable to government contractors. Certain of these government
regulations relate specifically to the vendor-vendee relationship with the
government, such as the bidding and pricing rules. Under regulations of this
type, the Company must observe certain pricing restrictions, produce and
maintain detailed accounting data, and meet various other requirements. The
Company is also subject to a number of regulations affecting the conduct of its
business generally. For example, the Company must adhere to federal acquisition
requirements and to standards established by the Occupational Safety and Health
Act relating to labor practices and occupational safety standards. Violation of
applicable government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds. See
"Business -- Government Regulation."
AVAILABILITY AND COST OF MATERIALS. The Company does not have fixed price
contracts or arrangements for all of the raw materials and other supplies it
purchases. The Company generally has readily available sources of raw materials
and other supplies required for the manufacture of its products and, where
possible, the Company maintains alternate sources of supply. However, shortages
of, and price increases for, certain raw materials and supplies used by the
Company have occurred in the past and may occur in the future. Future shortages
or price fluctuations could have a material adverse effect on the Company's
ability to manufacture and sell its products in a timely and cost effective
manner. See "Business -- Supplies and Production."
PRODUCT LIABILITY. The Company is subject to the risk of product liability
claims and lawsuits for harm caused by products of the Company. The Company
maintains product liability insurance with a maximum coverage of $2 million.
However, there is no assurance that the Company's insurance will be sufficient
to cover any claims that may arise. A successful product liability claim in
excess of the Company's insurance coverage could have a material adverse effect
on the Company.
NO LIQUID MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION. Prior to
this Offering, there has been a limited public market for the Common Stock and
no public market for the Warrants. There is no assurance that an active trading
market for the Common Stock or the Warrants will develop or be sustained after
this Offering. The Unit Offering Price for the Units being sold by the Company
in this Offering has been determined by negotiations between the Company and the
Underwriters. See "Underwriting." The trading price of the Common Stock and
Warrants could be subject to significant fluctuations in response to factors
such as, among others, variations in the Company's anticipated or actual results
of operations, announcements of new products or technological innovations by the
Company or its competitors, and changes in earnings estimates by analysts. In
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies in general, and small capitalization,
emerging growth companies in particular, and are often unrelated to their
operating performance. These broad market fluctuations may adversely affect the
market prices
10
<PAGE>
of the Common Stock or the Warrants. Purchasers of the Units will incur an
immediate book value dilution, and certain events, such as the issuance of
Common Stock pursuant to the exercise of outstanding warrants and stock options,
could result in additional dilution. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Sale of substantial amounts of the
Company's Common Stock in the public market or the prospect of such sales could
materially and adversely affect the market price of the Common Stock and the
Warrants. Upon completion of this Offering, the Company will have outstanding
9,728,309 shares of Common Stock. The 2,250,000 shares of Common Stock contained
in the Units offered hereby, and the 125,000 shares sold in the Company's first
public offering, will be immediately eligible for sale in the public market
without restriction on the date of this Prospectus. The 2,408,170 shares that
were issued by the Company in connection with two offerings under Regulation S
("Regulation S") of the Securities Act, in July 1995 and November 1995, to the
extent not previously resold into the United States, are available for resale
into the United States without restriction at such time as an exemption from
registration under the Securities Act is or becomes available. The 490,000
shares that were issued by the Company in connection with a third Regulation S
offering in May 1996 will become available for resale into the United States
without restriction at such time as an exemption from registration under the
Securities Act is or becomes available, but not sooner than December 16, 1996,
under the terms of a lock-up agreement. An additional 4,446,058 shares are
restricted shares ("Restricted Shares") subject to the restrictions upon resale
under Rule 144 of the Securities Act. Of the Restricted Shares, the 62,500
shares issued to the Company's original shareholders are eligible for immediate
resale in the public market pursuant to Rule 144(k). An aggregate of 3,176,175
shares issued in connection with the Verazzana merger (see "Acquisition History
- -- Acquisition of Cashmere") will become eligible for resale on February 17,
1997; 295,300 shares issued in connection with the Company's first Regulation S
offering will be available for resale in July 1997 (see "Certain Transactions");
and 325,000 shares issued in connection with the Morel acquisition which are not
subject to registration rights will become eligible for resale on December 1,
1997. Another 587,083 shares of the Restricted Shares and a warrant to purchase
37,500 shares are subject to registration rights, which have been waived for
this Offering but which if exercised subsequently would become eligible for
resale upon the effectiveness of a future registration statement covering such
shares. The 300,000 shares of Common Stock issuable to UTCO Associates, Ltd.
under a currently exercisable warrant to purchase such shares are being
registered by the Registration Statement of which this Prospectus is a part.
However, those shares are subject to a lock-up agreement and, once issued, will
first become eligible for sale in the public market 180 days after the date of
this Prospectus. See "Selling Shareholder." Shortly after this Offering, the
Company intends to file a registration statement under the Securities Act to
register approximately 1,260,000 shares reserved for issuance under the
Company's outstanding stock options and warrants, stock option plans, and stock
option commitments, of which 172,723 shares will be exercisable and eligible for
sale upon the expiration of lock-up agreements six months after the date of this
Prospectus, and of which 845,000 shares will be exercisable and eligible for
sale upon the expiration of a contractual restriction on sale expiring one year
from the date of this Prospectus. See "Description of Securities -- Stock
Options" and "Management -- Benefit Plans." Sales in the public market of
substantial amounts of Common Stock or the perception that such sales could
occur could depress prevailing market prices for the Common Stock and Warrants.
See "Description of Securities" and "Shares Eligible for Future Sale."
11
<PAGE>
ACQUISITION HISTORY
The Company is the result of an initial acquisition in 1990, four additional
acquisitions that have occurred since May 1994, and a merger with a
non-operating public company in February 1995.
ACQUISITION OF PACIFIC COAST. Donald A. Wright purchased Pacific Coast
Technologies, Inc. ("Pacific Coast") in April 1990. Pacific Coast designs,
manufactures and markets hermetically sealed electrical connectors, electronic
sealants and instrument packages, using patented and proprietary technology. Mr.
Wright acquired Pacific Coast in exchange for cash and a promissory note to the
sellers. In May 1994, PCT Holdings, Inc., a Washington corporation ("Original
PCTH"), was formed to hold the stock of Pacific Coast and to acquire Cashmere
Manufacturing Co., Inc. ("Cashmere"). See "Acquisition of Cashmere," below. The
formation of Original PCTH was treated as if a pooling of interests for
accounting purposes. In 1994, Mr. Wright initiated a series of strategic
acquisitions of companies whose operations and products the Company believes are
complementary to the products designed, manufactured and marketed by Pacific
Coast.
ACQUISITION OF CASHMERE. The first such company acquired was Cashmere in
May 1994. Cashmere operates a precision machine shop that produces diversified
components and assemblies for the aerospace, defense, electronics and
transportation industries, including products and services provided to the
Company's other subsidiaries. Cashmere was acquired in May 1994 by Original PCTH
in exchange for common stock of Original PCTH. The transaction was treated as a
purchase for accounting purposes. In February 1995, Original PCTH was merged
into a wholly owned subsidiary of Verazzana Ventures, Ltd., an inactive public
company (the "Verazzana merger"). In that merger, the Original PCTH stock paid
as consideration for the Cashmere acquisition was converted into 791,666 shares
of the Company's Common Stock. The successor to Original PCTH was dissolved in
May 1996, leaving Pacific Coast and Cashmere as subsidiaries of the Company.
ACQUISITION OF CERAMIC DEVICES. The Company acquired Ceramic Devices, Inc.
("Ceramic Devices") in April 1995 (effective for accounting purposes as of
February 28, 1995). Ceramic Devices designs and manufactures a line of
specialized filtering devices for use with electronic circuits operating in
hostile environments and has a customer base similar to that of Pacific Coast.
The purchase price for the Ceramic Devices acquisition was the issuance by the
Company to the sellers of two promissory notes totaling $600,000 in principal
amount and 133,333 shares of the Company's Common Stock. The transaction was
treated as a purchase for accounting purposes.
ACQUISITION OF SEISMIC. In November 1995, the Company formed Seismic Safety
Products, Inc. ("Seismic"), which acquired substantially all of the assets of a
Florida corporation of the same name and certain patents from affiliates of the
Florida corporation. Seismic develops and markets automatic natural gas shut-off
valves activated by earthquakes and plans to market other earthquake safety
products. Cashmere manufactures the natural gas shut-off valve for Seismic. The
purchase price for the Seismic asset and patent acquisition was cash, certain
deferred payment obligations and 128,750 shares of the Company's Common Stock.
The transaction was treated as a purchase for accounting purposes.
ACQUISITION OF MOREL. Most recently, the Company acquired Morel Industries,
Inc. ("Morel") in December 1995 (effective for accounting purposes as of
November 30, 1995). Morel manufactures precision cast aluminum parts used
principally in the transportation, heavy trucking and aerospace industries. The
purchase price for the Morel acquisition was the issuance of 650,000 shares of
the Company's Common Stock, after certain post-closing adjustments. The
transaction was treated as a purchase for accounting purposes.
The Company intends to continue to evaluate opportunities for growth through
expansion of current operations, or through the acquisition of other entities or
lines of business, or both, although no material expansions or acquisitions are
currently planned.
12
<PAGE>
USE OF PROCEEDS
The net proceeds of this Offering are estimated to be approximately
$5,544,000 (approximately $6,472,000 if the Overallotment Option is exercised in
full) after deducting the underwriting discount and estimated offering expenses.
The Company intends to use a portion of the net proceeds to repay
approximately $2,189,500 of indebtedness. Of that amount, approximately $839,500
represents the following indebtedness that was incurred or acquired in
connection with acquisitions by the Company: approximately $312,500 under a
promissory note to certain individual lenders to Morel, due on September 1, 1996
and bearing interest at the rate of 15% per annum; approximately $177,000 under
a promissory note held by a title company in connection with Morel's facility
due on February 14, 1997 and bearing interest at the rate of 12% per annum;
approximately $150,000 under a promissory note held by the individuals who sold
Ceramic Devices to the Company, due on August 31, 1996 and bearing interest at
the rate of 10% per annum; and obligations of approximately $200,000 of the
purchase price for the Seismic patent acquisition, due on November 30, 1996,
which do not bear interest. The remaining approximately $1,350,000 in
indebtedness to be repaid from net proceeds of this Offering represents
short-term debt recently incurred by the Company, including $150,000 owed to
Robert L. Smith, a director of the Company, due on September 27, 1996, and
bearing interest at the rate of 18% per annum, and $1,200,000 owed to UTCO
Associates, Ltd., due on the earlier of the closing of this Offering or
September 1, 1996, and bearing interest at the rate of 18% per annum. The
Company may also elect to use a portion of the net proceeds to repay
approximately $1,357,000 under an industrial revenue bond of Morel. See "Risk
Factors -- Need for Immediate Additional Capital," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments," "Selling Shareholder" and "Certain Transactions."
The Company intends to use the balance of the net proceeds of this Offering
primarily to acquire additional processing and manufacturing equipment, to fund
certain facilities expansion, to fund potential acquisitions, and to increase
working capital. If the net proceeds are insufficient to accomplish all of the
purposes set forth above, the proceeds will be applied first to repay the
foregoing indebtedness, and then in an order of priority determined by the
Company. Pending the foregoing uses, the Company may invest the net proceeds in
short-term, interest-bearing obligations.
The Company expects that, if its primary line of credit is renewed or
replaced on satisfactory terms, the net proceeds from this Offering will allow
the Company to fund operations for at least the next 12 months. The Company
expects that additional capital will be required to fund longer-term operations
and acquisitions. There is no assurance that the Company will be able to obtain
such financing or that such financing will be available on favorable terms. See
"Risk Factors -- Need for Immediate Additional Capital," "Risk Factors -- Need
for Additional Long-Term Capital" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
13
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Until March 13, 1995, there was no public market for the Common Stock. From
that date through September 14, 1995, the Common Stock was listed on the Nasdaq
Electronic Bulletin Board. Since September 15, 1995, the Common Stock has been
traded on Nasdaq -- Small Cap under the symbol "PCTH."
The Units will separate immediately upon issuance, and the Common Stock and
Warrants that make up the Units will trade only as separate securities. The
Common Stock and the Warrants have been approved for listing on the Nasdaq
National Market System on the effectiveness of this Offering under the symbols
"PCTH" for the Common Stock and "PCTHW" for the Warrants.
The following table shows the range of high and low sales prices reported by
Nasdaq for the Common Stock for each period in the calendar years shown below.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ----------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1995
First Quarter (from March 13, 1995)................................................ $ 6.00 $ 5.00
Second Quarter..................................................................... 8.00 5.00
Third Quarter...................................................................... 8.00 5.00
Fourth Quarter..................................................................... 6.00 4.00
1996
First Quarter...................................................................... 4.375 3.75
Second Quarter..................................................................... 5.00 2.75
Third Quarter (through July 10, 1996).............................................. 4.3125 3.50
</TABLE>
As of July 10, 1996, the closing sales price on Nasdaq - Small Cap for the
Common Stock was $3.50 per share.
As of July 10, 1996, there were 856 holders of record of 7,478,309 shares of
Common Stock.
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends on
the Common Stock in the foreseeable future. The Company's agreement with its
principal lender restricts the Company's ability to pay dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1996, and as adjusted to give effect to the issuance of the 2,250,000 Units
being offered by the Company hereby, and receipt of the net proceeds therefrom,
after deducting the underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
MAY 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt................................................................ $ 8,005 $ 5,815
Long-term debt................................................................. 1,961 1,961
Stockholders' equity
Common Stock, par value $.001, 100,000,000 shares authorized, 7,478,309
shares issued(1)............................................................ 19,102 24,646
Accumulated deficit.......................................................... (6,563) (6,563)
Total stockholders' equity..................................................... 12,539 18,083
Total capitalization........................................................... 22,505 25,859
</TABLE>
- ------------------------
(1) Does not include 642,783 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at May 31, 1996. Also excludes an
option to purchase 845,000 shares of Common Stock that the Company has
agreed to grant to Donald A. Wright on the date of this Prospectus. See
"Description of Securities -- Stock Options" and "Management -- Benefit
Plans."
15
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of May 31, 1996
was approximately $8,686,000, or approximately $1.16 per share. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities divided by the 7,478,309 shares of Common Stock
outstanding as of May 31, 1996.
Net tangible book value dilution per share represents the difference between
the amount per share paid by new investors who purchase Units in this Offering
and the net tangible book value per share of Common Stock immediately after
completion of this Offering. After giving effect to the sale by the Company of
2,250,000 Units in this Offering and the receipt of the estimated proceeds
therefrom (after deduction of the underwriting discount and estimated offering
expenses and attributing no portion of the value of a Unit to a Warrant), the
net tangible book value of the Company as of May 31, 1996 would have been
approximately $14,230,000 or $1.46 per share. This represents an immediate
increase in net book value of $.30 per share to existing shareholders and an
immediate dilution in net tangible book value of $1.67 per share to new
investors purchasing Units in this Offering, as illustrated in the following
table:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $ 3.125
Net tangible book value per share at May 31, 1996................. $ 1.16
Increase per share attributable to new investors.................. .30
---------
Pro forma net tangible book value per share after this Offering..... 1.46
---------
Net tangible book value dilution per share to new investors......... $ 1.67
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of May 31, 1996 to
reflect the same adjustments described above, the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by (i) the existing holders of Common Stock and (ii) the
new investors in this Offering, assuming the sale of 2,250,000 Units by the
Company hereby at a Unit Offering Price of $3.125 per Unit. The calculations are
based upon total consideration given by new and existing shareholders (after
deduction of the underwriting discount and estimated offering expenses and
attributing no portion of the value of a Unit to a Warrant).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ---------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 7,478,309 77% $ 19,102,000 78% $ 2.55
New investors........................... 2,250,000 23% 5,544,000 22% $ 2.46
----------- --- -------------- ---
TOTAL............................... 9,728,309 100% $ 24,646,000 100%
----------- --- -------------- ---
----------- --- -------------- ---
</TABLE>
The above computations assume no exercise of the following warrants and
stock options: (i) warrants held by Donald A. Wright, Nick A. Gerde and an
employee of Pacific Coast to purchase 160,000 shares of Common Stock at an
exercise price of $2.00 per share, (ii) outstanding options to purchase 145,283
shares of Common Stock at a weighted average exercise price of $5.09 per share,
(iii) an option to purchase 845,000 shares of Common Stock at $4.6875 per share
that the Company has agreed to grant to Mr. Wright on the date of this
Prospectus; and (iv) warrants held by the Selling Shareholder and Robert L.
Smith, a director of the Company, to purchase an aggregate of 337,500 shares of
Common Stock at an exercise price of $4.80 per share. To the extent that such
warrants and options are exercised, there may be further dilution to investors
in this Offering. See "Description of Securities," "Management -- Benefit Plans"
and "Certain Transactions."
16
<PAGE>
SELECTED FINANCIAL INFORMATION
(in thousands, except per share data)
The following table presents selected historical information of the Company.
The selected financial information as of and for the years ended May 31, 1995
and 1996 is derived from and should be read in conjunction with the information
set forth in the audited financial statements and related notes of the Company
included in this Prospectus. The selected financial information as of and for
the year ended May 31, 1994 has been derived from audited financial statements
of the Company not presented herein. This information should be read in
conjunction with the financial statements and other financial information
included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................................................... $ 2,940 $ 11,035 $ 20,725
Gross profit................................................................... 80 1,943 4,286
Loss from operations........................................................... (884) (846) (479)
Net loss....................................................................... (1,098) (1,411) (999)
Loss per share of Common Stock................................................. (.60) (.41) (.16)
Shares used in computation of loss per share................................... 1,826 3,469 6,209
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................... $ (1,237) $ 1,375 $ 952
Total assets................................................................... 7,894 11,630 27,649
Short-term debt................................................................ 4,403 3,159 8,005
Long-term debt................................................................. 649 743 1,961
Stockholders' equity........................................................... 1,226 5,454 12,539
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below and in "Use of Proceeds"
and "Business" includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, and is
subject to the safe harbor created by those sections. Factors that realistically
could cause results to differ materially from those projected in the
forward-looking statements are set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below and in "Risk
Factors."
OVERVIEW
The Company's financial condition and results of operations have been
substantially affected by a corporate acquisition at the end of fiscal 1994,
another acquisition in fiscal 1995 and two additional acquisitions in fiscal
1996. These acquisitions, as well as internal growth in the Company's existing
business and the acquired businesses, have resulted in substantial increases in
net sales from $3,456,000 in the first quarter of fiscal 1996 to $7,238,000 in
the fourth quarter of fiscal 1996. Approximately $2,891,000 of this growth in
net sales resulted from the acquisitions and approximately $891,000 resulted
from internal growth.
Operating expenses and margins have also been substantially affected by
acquisitions. Expenses directly associated with acquisitions, including
transaction-related legal, accounting and other expenses and merger and equity
capital costs, amounted to approximately $538,000 in fiscal 1995 and
approximately $104,000 in fiscal 1996. The Company has also experienced
substantial increases in all other expense categories as a result of the
increase in operations. A portion of these expenses can be attributed to the
assimilation of acquired operations into the existing business.
The Company's electronic products business is characterized by relatively
low volumes and high margins, as compared with its metal products business where
volumes have historically been higher and margins lower than in the electronic
products business. The Company believes that margins will remain higher for
electronic products than for metal products, although products incorporating
both electronic and metal parts are expected to generate margins closer to
electronic product margins. As a result of margin differences, changes in
product mix between electronic and metal products can be expected to affect
overall margins for the Company. Due to the lack of sales history for its
natural gas shut-off valves, the Company is unable to assess accurately the
effect that product line may have on margins.
As a result of the foregoing factors, the Company's historical results of
operations are not necessarily indicative of future operating performance.
The Company's net sales for the six months ended May 31, 1996 were
approximately $13,594,000. Of that amount, Pacific Coast's net sales were
$3,874,000, or 29%; Ceramic Devices' net sales were $1,029,000, or 8%; Seismic's
net sales were $190,000, or 1%; Cashmere's net sales were $3,213,000, or 23%;
and Morel's net sales were $5,288,000, or 39%. The Company expects that the most
substantial rates of growth in revenue, if any, in the future will come
principally from the Pacific Coast and Seismic operations.
The Company and certain of its subsidiaries have relied on commercial
borrowing arrangements, as well as equity infusions, to supply significant
portions of their required working capital. The Company's working capital
requirements have been substantially increased by the growth in its operations
and by the significant transaction-related expenses associated with
acquisitions. The Company's principal operating line of credit expired on July
1, 1996, and the Company is in default on one of its covenants to that lender.
In March and May 1996, the Company received aggregate net proceeds of
approximately $1,270,000 from the issuance of additional short-term debt. The
proceeds were used principally to repay indebtedness to an existing lender and
for operating capital. In
18
<PAGE>
May 1996, the Company also closed a Regulation S offering pursuant to which the
Company raised proceeds, net of commissions, of approximately $1,340,000. The
proceeds of that offering were used primarily for working capital and to retire
short-term debt. The Company believes that the net proceeds from this Offering,
together with credit facilities that it expects will be available to it upon
receipt of such proceeds, will be sufficient to meet its budgeted working
capital requirements for at least the next 12 months. However, there is no
assurance that commercial credit will be available to the Company following this
Offering or that the Company's working capital requirements will not exceed
those currently budgeted.
The Company has not experienced any material seasonality in its operations.
The Company has evaluated the effect of the recent accounting pronouncements,
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company will implement SFAS No. 121 in fiscal
1997. Implementation is not expected to have a material impact on the Company's
financial statements. The Company intends to continue to apply APB Opinion No.
25 in accounting for stock-based compensation for purposes of determining net
income and to adopt the pro forma disclosure requirements of SFAS No. 123 in
fiscal 1997.
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $8,829,000, the benefits of which expire beginning in
fiscal 2001 through fiscal 2011. The net operating losses created by the
subsidiaries prior to their acquisition are limited to use by the subsidiary
which originally generated the net operating loss, and may be further limited as
to the amount which may be used in any one year. The following approximate net
operating losses are available on an individual company basis, without taking
into account these expirations or limitations: PCT Holdings, Inc. $126,000,
Pacific Coast $5,584,000, Ceramic Devices $342,000, Cashmere $691,000, Morel
$1,979,000, and Seismic $107,000. If the subsidiaries achieve profitable
operations, the net operating loss carryforwards available should reduce the
federal income taxes due in future years.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MAY 31, 1996 AND 1995
The Company acquired Ceramic Devices in fiscal 1995 and acquired Seismic and
Morel in fiscal 1996. Accordingly, the Company's results of operations for
fiscal 1995 included a full year of operations at Pacific Coast and Cashmere and
three months at Ceramic Devices. Fiscal 1996 operations included a full year of
operations at Pacific Coast, Cashmere and Ceramic Devices and six months at
Seismic and Morel.
The Company's net sales increased a total of $9,690,000 in fiscal 1996 from
fiscal 1995. Of that increase, $2,509,000 resulted from increased revenue of
Pacific Coast; $147,000 resulted from increased revenue of Cashmere; $1,555,000
was from a full year of operations of Ceramic Devices; $190,000 was from the
addition of Seismic; and $5,289,000 was from the addition of Morel.
Net sales of Pacific Coast in fiscal 1996 were 64.7% higher than net sales
of that subsidiary in the prior year. The Company believes that this increase is
a result of a variety of factors, including larger order sizes, broader market
acceptance of the Company's proprietary technologies, increased sales of higher
priced products, the addition of new customers, and improved engineering, design
and manufacturing capabilities. Cashmere's net sales in fiscal 1996 increased by
2.6% over net sales in 1995. Net sales of Ceramic Devices in fiscal 1996 were
$1,954,000, compared with net sales of $399,000 for the three months during
which the Company owned Ceramic Devices in fiscal 1995. The Company believes
that the increase in net sales of Ceramic Devices is due primarily to increasing
order sizes from existing customers.
Intercompany sales, which were eliminated in consolidation and not included
in the above analysis, totaled $723,000 for fiscal 1996. Intercompany sales in
fiscal 1996 were made by Cashmere to Pacific Coast ($375,000), Seismic
($124,000) and Morel ($224,000). In comparison, intercompany sales for fiscal
1995 totaled $287,000, which represented sales by Cashmere to Pacific Coast.
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Gross profit of the Company increased from $1,943,000 in fiscal 1995 to
$4,286,000 in fiscal 1996. This represents an increase from 17.6% of net sales
in fiscal 1995 to 20.7% of net sales in fiscal 1996. The increase in gross
profit margin is primarily attributable to increased margins at Pacific Coast,
which the Company believes resulted principally from larger order quantities and
improved manufacturing efficiencies at Pacific Coast.
Interest income decreased to $37,000 in fiscal 1996 from $74,000 in fiscal
1995, primarily as the result of a reduction in a note receivable of Cashmere
related to Cashmere's reacquisition of a portion of the Cashmere manufacturing
facility in May 1995. Interest income in fiscal 1996 resulted primarily from
earnings on a $1,000,000 certificate of deposit held as collateral for Pacific
Coast's Community Development Block Grant loan from Washington State and Chelan
County. Interest expense increased in fiscal 1996 to $535,000 from $356,000 in
fiscal 1995, primarily as a result of debt acquired upon the acquisition of
Morel. Interest expense attributable to Morel in fiscal 1996, from December 1,
1995, when the Company acquired Morel, totaled $205,000. Merger and equity
capital costs of $104,000 in fiscal 1996 represent expenses related to the
acquisitions of Morel and Seismic. Merger and equity capital costs of $538,000
in fiscal 1995 represent the cost of converting options and warrants of Original
PCTH to common stock immediately prior to the Verazzana merger, the acquisition
costs associated with that merger, and the Ceramic Devices acquisition in April
1995. See "Acquisition History."
The federal income tax benefits of $67,000 for fiscal 1996 and $241,000 for
fiscal 1995 resulted from recording deferred tax assets for net operating losses
generated during those periods.
The Company has determined that it operates in two business segments within
the guidelines of SFAS No. 14. These business segments are "Electronic and
Safety Products" (Pacific Coast, Ceramic Devices and Seismic) and "Machined and
Cast Metal Products" (Cashmere and Morel). Accordingly, the Company has included
the appropriate disclosure in Note 17, Business Segment Information, in its
audited financial statements. See "Index to Financial Statements -- PCT
Holdings, Inc. and Subsidiaries Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1996, the Company had $13,009,000 in total current assets and
$12,057,000 in total current liabilities, resulting in net working capital of
$952,000 and a current ratio of 1.08 to 1.00. At May 31, 1995, the Company had
$6,614,000 in current assets and $5,239,000 in current liabilities, resulting in
net working capital of $1,375,000 and a current ratio of 1.26 to 1.00. The
Company has renegotiated and refinanced certain loans that were due during
fiscal 1996 so that $1,663,000 in principal amount plus accrued interest will be
due on August 31, 1996 and September 1, 1996 to certain lenders to Ceramic
Devices and Morel. The Company intends to use a portion of the net proceeds from
this Offering to pay those obligations. See "Use of Proceeds." The Company is
experiencing an immediate need for additional capital to fund its current
operations. The Company's primary line of credit expired on July 1, 1996, at
which time the Company was in default under one of its covenants. The Company
owed $1,224,000 under that line of credit as of the expiration date, and is
currently negotiating renewal of that line of credit with revised covenants. The
Company has obtained a waiver, until September 1, 1996, of defaults under
certain financial and funding covenants with Morel's bank lender. The Company
has also extended the repayment time on a number of its accounts payable.
Although the Company believes it will be able to obtain satisfactory lending
arrangements from bank or other institutional lenders, there is no assurance
that its primary line of credit will be renewed, that alternative financing will
be available, or that any available financing will be on favorable terms.
Inability to renew or replace the Company's line of credit on satisfactory terms
and failure to obtain the additional capital it needs to pay its obligations and
fund the growth of its operations could have a material adverse effect on the
Company's business and results of operations. See "Risk Factors -- Need for
Immediate Additional Capital" and "Risk Factors -- Need for Additional Long-Term
Capital."
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The Company currently has no material purchase commitments for capital
equipment. Additions and replacements of plant and equipment are generally
funded through working capital, trade-in credits for the replaced equipment, or
capital leases or long-term notes secured by the equipment purchased. The
Company may use a portion of the net proceeds of this Offering to acquire
additional processing and manufacturing equipment and to fund certain facilities
expansion. See "Use of Proceeds."
RECENT DEVELOPMENTS
In the fourth quarter of fiscal 1996, the Company obtained an aggregate of
$2,690,000 in additional debt and equity financing. In March 1996, the Company
borrowed $150,000 from Robert L. Smith, a director of the Company, pursuant to a
promissory note that accrues interest at 18% per annum and is due in full on
September 27, 1996. The Company issued Mr. Smith a warrant to purchase 37,500
shares of Common Stock at an exercise price of $4.80 per share, expiring on May
22, 2001, as additional consideration for this loan. See "Certain Transactions."
In May 1996, the Company borrowed $1,200,000 from the Selling Shareholder
pursuant to a promissory note that accrues interest at 18% per annum, and is due
in full on the earlier of the closing of this Offering or September 1, 1996,
with monthly extensions to December 1, 1996 available for additional fees. The
Company issued the Selling Shareholder a warrant to purchase 300,000 shares of
Common Stock at an exercise price of $4.80 per share, expiring on May 22, 2001,
as additional consideration for this loan. See "Selling Shareholder." The
proceeds from these loans were used to pay off a line of credit from a bank
lender to Morel and to provide working capital. These loans are expected to be
repaid using a portion of the proceeds of this Offering. See "Use of Proceeds."
In May 1996, the Company sold 490,000 shares of Common Stock in a Regulation S
offering to Swiss investors at prices of $2.54 and $3.00 per share, raising
proceeds, net of commissions, of approximately $1,340,000. The proceeds of this
Regulation S offering were used to pay approximately $500,000 in principal and
accrued interest on two promissory notes incurred in connection with the
acquisition of Ceramic Devices, to pay $250,000 in principal and accrued
interest on a $500,000 promissory note acquired upon the acquisition of Morel,
and to provide working capital.
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BUSINESS
The Company develops, manufactures, markets and sells a broad range of
precision electronic components designed to operate with a high degree of
reliability in harsh environments such as the ocean, space and the human body.
These environments experience extremes in temperature, pressure and
corrosiveness that can make product repair or replacement difficult or
impossible. The Company uses its patented technologies to produce electronic
components for a wide variety of applications in the aerospace, defense, energy,
medical and general electronics industries.
The Company operates through five wholly owned subsidiaries. Two of these
businesses are engaged in the production of electronic devices, with one
producing a variety of electronics packages and connectors shielded from their
environment by the Company's proprietary ceramic seals, and the other producing
devices designed to filter out electromagnetic interference detrimental to other
electronic devices. The Company has recently acquired a business that designs,
manufactures and sells automatic natural gas shut-off valves for use in
earthquake sensitive areas. The Company also has two businesses that manufacture
machined or cast metal products for many applications, including products that
are incorporated into or complementary with the products of its other
subsidiaries.
A substantial percentage of the Company's customers for its electronic
products consists of large manufacturing companies in the aerospace, defense,
energy, medical and general electronics industries. These include Hughes
Aircraft Company ("Hughes Aircraft"), Honeywell Inc.'s Military Avionics
Division, Lockheed Martin Corporation ("Lockheed Martin"), Northrop Grumman
Corporation ("Northrop Grumman"), Space Systems/Loral, Inc., Westinghouse
Electric Corporation and TRW, Inc. The Company's metal products customers
include Boeing, Kawasaki Heavy Industries, Ltd., Deere & Company, Northrop
Grumman and PACCAR. The Company also markets and sells its products to a variety
of smaller, specialized electronics companies. The Company, with its natural gas
shut-off valves, has recently entered the consumer home improvement market and
has received initial orders for its valves from home improvement centers such as
Eagle Hardware & Garden Inc., Ernst Home Center, Inc., HomeBase Inc., Home Depot
U.S.A., Inc. and Ace Hardware Corp.
The Company's strategy is to expand the range of products it offers within
its core areas of competence, and to produce a larger portion of the customer's
total product requirement, through internal growth and the acquisition or
development of new technologies. The Company has recently experienced
significant growth in revenues, as a result of both the acquisition of
complementary businesses and internal growth within each of its operating
subsidiaries. The Company hopes to continue to experience growth and to exploit
both technological and marketing synergies resulting from the integration of the
businesses it has acquired and other businesses or technologies that it may
acquire in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of the Company's business
segments.
PACIFIC COAST TECHNOLOGIES, INC.
PRODUCTS. Pacific Coast designs, manufactures and markets hermetically
sealed electrical connectors, electronic sealants and instrument packages, using
patented and proprietary technology. Pacific Coast was founded in 1976, and was
acquired by Mr. Wright in 1990. See "Acquisition History." Pacific Coast's
products are specifically designed for use in applications that operate in harsh
environments, such as the ocean, space and the human body, which experience
extremes in temperature, pressure or corrosiveness. Pacific Coast distributes
its products primarily to the defense, aerospace, and communications industry,
the energy industry, and the medical industry. In the aerospace, defense and
communications industry, Pacific Coast's largest customer group, its products
are used in radar, avionics, and telecommunications applications. Pacific Coast
participated in the production of the world's first hermetically sealed fiber
optic connector for use on the international space station Alpha. In the energy
industry, Pacific Coast's products are used in tools for drilling oil wells. In
the medical industry, Pacific Coast's products can be found in pacemakers, bone
growth stimulators and other implantable electronic devices such as audio
implants for the hearing impaired. Pacific Coast's products generally range in
price from approximately $50 to $1,000.
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Pacific Coast uses its proprietary hermetic sealant, Kryoflex, in many of
its products to provide a high level of hermetic seal protection in harsh
environments. Kryoflex is a multiple-phase derivative of ceramic oxide
crystalline silicate. A Kryoflex seal is mechanically stronger, and withstands
and dissipates more heat, than the glass or brazed ceramic seals used by many of
Pacific Coast's competitors. Unlike many of its competitors, a Kryoflex seal can
bond to a number of different metals and can bond dissimilar metals. The
composition and method of making Kryoflex is a proprietary trade secret of
Pacific Coast.
Pacific Coast has patented its technology in the field of explosively bonded
metals. This technology allows dissimilar metals to be welded together to make
electronic connectors and packages. The resulting devices are lighter than those
made entirely of stainless steel but have equivalent hermetic seal protection.
This technology makes Pacific Coast products competitive where light weight is a
requirement, such as in space applications.
Pacific Coast has recently patented several metal matrix composite
technologies. Metal matrix composites allow Pacific Coast to make lighter, more
durable electronic packages. In March 1996, Hughes Aircraft, an existing
customer of Pacific Coast, placed the first order for products utilizing the
Company's metal matrix composite technology. Pacific Coast intends to make this
technology available to Morel for use in casting sealed electronic packaging for
customers of Pacific Coast.
Pacific Coast generally develops new products from its existing technologies
in response to specific customer needs, with such development almost exclusively
funded by its customers. Pacific Coast plans to continue developing new
technologies to meet the changing requirements of its customers and, where
appropriate, to file additional patent applications for those new technologies.
Pacific Coast may also purchase additional strategic proprietary technology from
third-party developers. Pacific Coast does not expect to devote substantial
resources to research and development that is not funded by customers.
CUSTOMERS. Pacific Coast's customer base includes Fortune 1000 companies as
well as smaller, specialized firms. For fiscal 1996, Pacific Coast's major
customers in the defense, aerospace and communications market included ST
Olektron Corp., Honeywell Inc.'s Military Avionics Division, Amphenol
Corporation, AlliedSignal Inc.'s Aerospace Equipment Systems division, Space
Systems/ Loral, Inc., Hughes Aircraft, Westinghouse Electric Corporation, TRW
Space and Electronics Group, and Lockheed Martin. Pacific Coast's major
customers in the energy market during that period included Schlumberger
Industries, Inc. and its French parent company (collectively, "Schlumberger"),
Baker Hughes and Western Atlas International, Inc. Pacific Coast's major
customers in the medical market during that year were Advanced Bionics
Corporation and Electro-Biology, Inc. Pacific Coast has a varied customer base,
and no single customer accounted for more than 10% of its net sales for fiscal
1996, except for ST Olektron Corp. (13.7%) and Schlumberger (10.8%).
STRATEGY. Pacific Coast's strategy is to increase its sales and market
share by developing increasingly sophisticated electronic packages, modules and
subsystems that integrate its proprietary technology and products made by the
Company's other subsidiaries. Pacific Coast also plans to expand its
cross-marketing with the Company's other subsidiaries. As sales volumes
increase, Pacific Coast intends to increase its automation in order to obtain
additional efficiencies. In addition, Pacific Coast is developing a number of
standard products that it believes can be produced and sold more cost
effectively than custom products. In the aerospace and defense industries, the
Company believes that there is a significant potential for increased use of its
products in satellite and ground-based radar applications. In the communications
industry, Pacific Coast believes that there is similar potential for use of its
products in radio frequency applications. In the energy market, Pacific Coast
plans to continue to develop new devices to be incorporated on oil drilling
tools in order to take advantage of the emerging development of oil fields in
Russia, China, and other areas. In the medical devices market, Pacific Coast
expects to develop standard and custom devices to support more sophisticated
audio implants, bone growth stimulators, pacemakers and other implantable
electronic devices.
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CERAMIC DEVICES, INC.
PRODUCTS. Ceramic Devices designs and manufactures a line of specialized
filtering devices for use with electronic circuits operating in hostile
environments. Ceramic Devices was founded in 1982, and the Company purchased it
in February 1995 to obtain a source of ceramic filters for Pacific Coast's
connectors and electronic products. Ceramic Devices' products filter out
electromagnetic interference and other electrical signals that pose significant
problems for the manufacturers and users of high-performance, high-reliability
electronic systems. Ceramic Devices is an approved supplier of ceramic filtering
devices to military contractors. Ceramic Devices fabricates all components of
its multilayer capacitors and filters to military requirements and
individualized customer specifications. Ceramic Devices' product development is
generally funded by its customers. Ceramic Devices' products generally range in
price from approximately $5 to $100.
CUSTOMERS. Ceramic Devices' customer base is generally the same as the
customer base of Pacific Coast, including large defense, aerospace and
communications companies. Such customers purchase Ceramic Devices products for
incorporation into sophisticated electronic systems. Ceramic Devices' major
customers include Hughes Electro-Optical Operations, Inc., Hughes Aircraft,
Lockheed Martin, AlliedSignal Inc.'s Aerospace Equipment Systems division, and
EMS Technologies, Inc. No one customer accounted for more than 10% of Ceramic
Devices' net sales for fiscal 1996, except for Lockheed Martin (13.9%) and
Hughes Aircraft (12%). Because the customer base of Pacific Coast represents
potential customers for Ceramic Devices, the companies use the same direct sales
force and manufacturers' representative group.
STRATEGY. The Ceramic Devices growth strategy includes increasing its
marketing efforts to existing and potential customers in the defense, aerospace
and communications industries, and targeting customers of Pacific Coast in the
medical industry. In May 1996, Ceramic Devices completed its move from San
Diego, California to the Pacific Coast facility in Wenatchee, Washington. The
Ceramic Devices strategy also includes increasing the efficiency of its
production process through interaction with Pacific Coast, combining its filters
with Pacific Coast products, and marketing Ceramic Devices products together
with products of Pacific Coast.
SEISMIC SAFETY PRODUCTS, INC.
PRODUCTS. Seismic develops and markets natural gas shut-off valves that are
automatically activated by earthquakes, and plans to market other earthquake
safety products for use in residential applications. Cashmere manufactures the
natural gas shut-off valve for Seismic, using patented technology that Seismic
purchased in November 1995 from the inventors after six years of development.
The technology for a commercial version of this valve is currently being
completed by Seismic. Seismic's valves are designed to be installed in new and
existing natural gas lines and to automatically shut off the supply of gas in an
earthquake. The valve may also be used as a manual natural gas shut-off valve to
avert fires in other emergency situations. Significant patented features of the
valve include a mechanism for manual reset of the shut-off valve without special
tools and a seamless design to prevent potential leakage. Seismic's natural gas
shut-off valve is certified by the American Gas Association and the State of
California. The price for Seismic's residential natural gas shut-off valve
generally ranges from approximately $100 wholesale to $200 retail.
CUSTOMERS. Seismic began marketing its residential valve in December 1995
under the brand name "Northridge Valve." Beginning in March 1996, Seismic
received initial orders from several large home improvement centers, including
Eagle Hardware & Garden Inc., HomeBase Inc., Ernst Home Center, Inc., Home Depot
U.S.A., Inc. and Ace Hardware Corp. Prospective purchasers of Seismic's valve
include builders, plumbers, security companies and utility companies.
STRATEGY. Seismic's strategy is to sell its gas shut-off valve to large
home improvement centers and other consumer outlets, and to utility companies
for distribution to their customers, in earthquake-prone areas. The City of Los
Angeles requires that new construction have an automatic natural gas shut-off
valve installed. The Company believes that similar regulations may appear
elsewhere on
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the West Coast due to its relatively high potential for seismic activity. The
Seismic patents and patent applications extend beyond the current product to
cover other possible products, such as a commercial version of the natural gas
shut-off valve and an electrical shut-off product currently under development.
Future production plans may include the use of aluminum cast components made by
Morel, which the Company believes may reduce production costs, in addition to
the precision machined parts currently made by Cashmere which are included in
the shut-off valve.
CASHMERE MANUFACTURING CO., INC.
PRODUCTS. Cashmere operates a precision machine shop that produces
diversified components and assemblies for the aerospace, defense, electronics
and transportation industries. Cashmere was founded in 1969, and the Company
purchased it in 1994 to provide precision machined products initially for
Pacific Coast. Cashmere now provides products for other subsidiaries of the
Company as well. Cashmere produces principally aluminum products, ranging from
small connectors to very complex assemblies. Cashmere builds to order only, in
conformance with the machining specifications of its customers. Cashmere is ISO
9000 approved, which qualifies it to perform work for most aerospace and general
electronic companies. Cashmere's products generally range in price from
approximately $10 to $200.
CUSTOMERS. Prior to fiscal 1995, Cashmere's sales were almost exclusively
to Boeing. Through a diversification program, the percentage of Cashmere's sales
to Boeing was approximately 75% for fiscal 1996. Sales to Boeing by Cashmere and
other Company subsidiaries constituted approximately 28% of the Company's
consolidated net sales for that year. See "Risk Factors -- Dependence on
Significant Customers." At May 31, 1996, Cashmere's major customers were Boeing,
Pacific Coast, Nissho Iwai American Corporation, Kawasaki Heavy Industries, Ltd.
and Northrop Grumman. Pacific Coast, Morel, and Seismic together accounted for
9.4% of Cashmere's sales for fiscal 1996. Cashmere manufactures a variety of
aluminum and stainless steel connector shells and electronic packages for
Pacific Coast, machines cast parts for Morel, and is the sole manufacturer of
the natural gas shut-off valve marketed by Seismic.
STRATEGY. Through access to the customer base of Pacific Coast, Cashmere is
pursuing strategies intended to continue reducing its dependency on Boeing.
Cashmere plans to expand its direct sales effort, concentrate on customer
service, and offer additional value-added services. Most Pacific Coast products
require machining which is increasingly being provided by Cashmere, allowing
Cashmere to benefit from the sales and marketing efforts of Pacific Coast. Morel
is also currently a customer of Cashmere. Cashmere, together with Morel, has
recently implemented direct sales coverage in the Pacific Northwest and Southern
California in an effort to expand the market for products of both companies.
MOREL INDUSTRIES, INC.
PRODUCTS. Morel manufactures precision cast aluminum parts used principally
in the transportation, heavy trucking and aerospace industries. Morel was
founded in 1909, and the Company purchased Morel in 1995 to provide cast parts
for its other subsidiaries and to expand its presence in the transportation
industry. Morel uses sand castings, lost foam and permanent molds to contain and
shape molten aluminum. These components are often further shaped or patterned on
Morel's milling equipment to meet a customer's specific needs. Morel also
provides additional services such as painting, machining and general assembly
work. Morel is currently operating at less than full capacity and believes that
it could use its remaining capacity without significant additional capital
expenditures. Morel's products generally range in price from approximately $5 to
$100.
CUSTOMERS. Morel is dependent on sales to PACCAR, which constituted 75% of
Morel's net sales in fiscal year 1995. Net sales to PACCAR in the last six
months of fiscal 1996 constituted 23% of the Company's consolidated net sales
for that period. See "Risk Factors -- Dependence on Significant Customers."
Morel's other major customers include Deere & Company, Accra Manufacturing, Inc.
and Boeing.
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STRATEGY. Morel's customers are increasingly requesting products that are
cast and machined by a single provider. The Company believes that Morel's
ability to machine its aluminum parts, combined with additional capacity at
Cashmere, will increase its ability to compete for finished cast aluminum
business. The Company plans to diversify Morel's customer base by taking
advantage of its access to the customers and marketing of the Company's other
subsidiaries. The Company also has plans to provide Morel access to proprietary
technology, such as the metal matrix composite technology recently patented by
Pacific Coast, in order to enhance Morel's competitive advantages in its
industry. The Company believes the recent addition of direct sale
representatives in the Pacific Northwest and Southern California for Morel and
Cashmere will allow Morel to diversify its customer base and reduce its
dependence on PACCAR.
MARKETING
PACIFIC COAST AND CERAMIC DEVICES. Pacific Coast and Ceramic Devices market
their products in the United States, Europe and Japan through a network of 22
manufacturer representatives and resellers as of May 31, 1996, generally
established on a geographic basis. These representatives and resellers are
subject to agreements that prevent them from selling the products of competitors
of Pacific Coast and Ceramic Devices. In addition, Pacific Coast and Ceramic
Devices maintain a joint internal sales and customer service staff and
engineering capability to meet customer requirements for technical support.
SEISMIC. The Company currently markets Seismic's natural gas shut-off valve
in California, Oregon, Utah and Washington. In addition, the Company believes
that there is a significant market for Seismic's valves in other
earthquake-prone areas, such as Japan. Seismic's strategy is to increase its
marketing efforts in two domestic distribution channels: large regional natural
gas utilities for direct sales to their customers and large home improvement
centers for sales to consumers. Seismic also intends to implement a direct mail
program as part of its marketing campaign. In the future, Seismic may enter into
a strategic arrangement with a Japanese firm to market Seismic's natural gas
shut-off valve in Japan.
CASHMERE AND MOREL. Cashmere and Morel have a similar existing and
potential customer base and use the same direct sales approach and personnel.
They currently have direct regional sales personnel covering the West Coast. The
Company expects to engage additional salespeople for other geographic regions as
business warrants.
COMPETITION
PACIFIC COAST AND CERAMIC DEVICES. The market for Pacific Coast and Ceramic
Devices products is highly competitive and is composed of numerous competitors,
none of which dominates the market. Competition is based primarily on product
quality, price, custom product development capability, and technical support.
Pacific Coast's principal competitors include Balo Precision Parts, Inc.
("Balo"), Amphenol Corporation, Hermetic Seal Corporation, Kemlon Products and
Development Co., ITT Cannon Inc. and Alberox Corporation. Pacific Coast recently
purchased two patents from Balo and licensed certain rights under these and
certain other related patents of the Company to Balo under the terms of a
settlement agreement between Pacific Coast and Balo. See "Business --
Proprietary Rights." Pacific Coast is not aware of any competitor that competes
with all of its product lines, although competitors do exist in each market.
Ceramic Devices' principal competitors in all of its markets include AVX
Corporation, Spectrum Control, Inc. and Maxwell Laboratories, Inc.'s Sierra
Capacitor/Filter Division. Many of these companies have greater financial and
technical resources than the Company. The Company believes that Pacific Coast
and Ceramic Devices products are positioned to be competitive in these markets
due to the quality of the products, the proprietary and patented technology, and
their custom product development capability.
SEISMIC. The market for Seismic's natural gas shut-off valve includes
several principal competitors, such as Safe T Quake Corporation, Engdahl
Enterprises and Pacific Seismic Valves, Inc. The Company believes that its
valve's rugged construction, ease of installation, easy reset feature, and
pricing should allow it to be competitive in this market.
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CASHMERE AND MOREL. The market for Cashmere and Morel products is very
competitive on a regional basis. The Company expects that access to Pacific
Coast's proprietary technology and customer base will provide Cashmere and Morel
with a competitive advantage in their industries. In addition, the Company
believes that modernization accomplished when Morel purchased its current
facilities in March 1994 enables Morel to produce its products more efficiently.
The Company believes that the ability to offer combined and complementary
products and value-added services with the Company's other subsidiaries will
enhance the ability of Cashmere and Morel to compete in this market. See "Risk
Factors -- Competition."
SUPPLIERS AND PRODUCTION
PACIFIC COAST AND CERAMIC DEVICES. Pacific Coast and Ceramic Devices have
multiple competitive sources generally available to supply all of their needs
for raw, processed and machined materials. However, Pacific Coast and Ceramic
Devices occasionally experience delivery and quality difficulties with their
vendors, and maintain secondary sources of supply for outside purchases. Pacific
Coast and Ceramic Devices also maintain a quality control program to monitor
supplier compliance with their supply requirements.
CASHMERE, MOREL AND SEISMIC. Cashmere has a readily available source of
supply for the raw materials it requires through numerous product distributors.
Morel has several suppliers of aluminum for its casting process, including
Aluminum Company of America, Inc. (ALCOA), Morel's largest supplier, which has a
supply facility located within approximately 35 miles of Morel's facility.
However, delivery and quality of supplies may vary or change from time to time.
In addition, the price of aluminum fluctuates with the market, which is
generally absorbed by Cashmere but which Morel can generally pass through to its
customers. All of Seismic's products are supplied by Cashmere. See "Risk Factors
- -- Availability and Cost of Materials."
PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent, trade secret,
copyright and trademark laws, confidentiality procedures, and other intellectual
property protection methods to protect its proprietary technology. The Company
currently holds 32 United States patents and has three United States patent
applications pending and three international patent applications pending. Of
these, Pacific Coast owns 29 United States patents and has two United States
patent applications pending and two international patent applications pending,
and Seismic owns three United States patents, has one United States patent
application pending and has one international patent application pending that
designates Japan and Europe as jurisdictions in which patent protection is
sought.
The Company's issued patents will expire at various times over the next 16
years, beginning in September 1997. Although the Company believes that the
manufacturing processes of its technology that is currently protected by
patents, particularly that of Pacific Coast, are sufficiently complex that
competing products made with the same technology are unlikely, there is no
assurance that the Company's competitors will not design competing products
using the same or similar technology once these patents have expired.
There is no assurance that the patent applications by Pacific Coast and
Seismic will result in issued patents, that the existing patents or any future
patents issued to the Company or its subsidiaries will provide any competitive
advantages for their products or technology, or that, if challenged, the patents
issued to the Company or its subsidiaries will be held valid and enforceable.
Despite the precautions taken by the Company, unauthorized parties may attempt
to copy aspects of the Company's products or obtain and use information that the
Company regards as proprietary, and existing intellectual property laws afford
only limited protection. Policing violations of such laws is difficult. The laws
of certain countries in which the Company's products are or may be distributed
do not protect the Company's products and intellectual property rights to the
same extent as do the laws of the United States. There is no assurance that
these protections will be adequate or that the Company's competitors will not
independently develop similar technology, gain access to the Company's trade
secrets or other proprietary information, or design around the Company's
patents.
27
<PAGE>
The Company may be required to enter into costly litigation to enforce its
intellectual property rights or to defend infringement claims by others. Such
infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all. The Company recently settled
litigation with Balo, a competitor of Pacific Coast, involving patent
infringement claims by and against Balo. As a result of the settlement, Pacific
Coast acquired two patents from Balo in the field of explosively bonded hermetic
connectors and packages, which was the subject of the litigation, and granted
Balo a license to use these and certain other related patents of the Company.
See "Risk Factors -- Limited Protection of Proprietary Technology."
GOVERNMENT REGULATION
Certain of the Company's products are manufactured and sold under United
States government contracts or subcontracts. As with all companies that provide
products or services to the federal government, the Company is directly and
indirectly subject to various federal rules, regulations and orders applicable
to government contractors. Certain of these government regulations relate
specifically to the vendor-vendee relationship with the government, such as the
bidding and pricing rules. Under regulations of this type, the Company must
observe certain pricing restrictions, produce and maintain detailed accounting
data, and meet various other requirements. The Company is also subject to a
number of regulations affecting the conduct of its business generally. For
example, the Company must adhere to federal acquisition requirements and to
standards established by the Occupational Safety and Health Act relating to
labor practices and occupational safety standards. Violation of applicable
government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds. See
"Risk Factors -- Governmental Regulation."
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances concerning solid waste disposal, hazardous materials storage, use and
disposal, air emissions, waste water and storm water disposal, employee health
and other environmental matters (together, "Environmental Laws"). Proper waste
disposal and environmental regulation are major considerations for the Company
because certain metals and chemicals used in its manufacturing processes are
classified as hazardous substances.
Since the Company's acquisition of Morel in December 1995, the Company has
initiated an environmental compliance program for the Morel facility, which
includes obtaining all permits necessary for that facility to operate in
compliance with applicable Environmental Laws. As part of this program, Morel in
January 1996 obtained a permit to discharge air emissions. Morel is operating
without a permit required by Environmental Laws to discharge waste water and
storm water. In May 1996, Morel submitted an application to the State of
Washington for this permit. A failure by Morel to obtain the required permit
could result in regulatory authorities imposing fines on Morel or ordering Morel
to cease operations or both. The Company is obtaining the necessary
environmental data to support the permit application and expects to submit such
data by August 1996. Although the Company believes that the necessary permit
will be issued in the first or second quarter of fiscal 1997, there is no
assurance that such permit will be issued, and the failure to obtain such permit
would have a material adverse effect on the Company.
From time to time, the Company's operations may result in other
noncompliance with Environmental Laws. If any violations of Environmental Laws
occur, the Company could be liable for damages and for the costs of remedial
actions and could also be subject to revocation of permits necessary to conduct
its business. Any such revocation could require the Company to cease or limit
production at one or more of its facilities, which could have a material adverse
effect on the Company. As a generator of hazardous materials, the Company is
subject to financial exposure even if it fully complies with these laws.
Environmental Laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violations. There is no assurance that any
28
<PAGE>
present or future noncompliance with Environmental Laws will not have a material
adverse effect on the Company's results of operations or financial condition.
See "Risk Factors -- Environmental Matters."
FACILITIES
All of the Company's subsidiaries are now located in the greater Wenatchee,
Washington area. All of the operating subsidiaries except Morel operate from
adjacent buildings in Wenatchee, and Morel is located 15 miles away in Entiat.
The close proximity of the operating subsidiaries is part of the Company's
strategy to enhance the efficiencies between these companies.
Pacific Coast operates from facilities in Wenatchee, Washington of
approximately 31,000 square feet, which it has leased from the Port of Chelan
County since September 1994. An additional 7,500 square feet were added to the
lease in January 1996 to house Ceramic Devices' operations. Ceramic Devices
completed its move to Wenatchee from San Diego, California in May 1996. Cashmere
and Seismic operate from an adjacent facility of approximately 42,000 square
feet which Cashmere has leased from the Port of Chelan County since October
1995. This facility was built to suit Cashmere by the Port of Chelan. The leases
for these facilities expire in the year 2005 and both contain options to renew
for two additional five-year terms. Total lease costs for these facilities are
$342,000 per year.
Morel operates from facilities in Entiat, Washington of approximately 84,000
square feet. Morel purchased these facilities and relocated from Seattle in
August 1994, at which time the facilities were renovated into a modern foundry
operation.
Cashmere owns a portion of its previous facility of approximately 46,000
square feet located in nearby Cashmere, Washington. Although the Company held
this property for sale during a portion of fiscal 1996, it is currently using
the property for staging and storage. The Company is assessing its long-term
plans for the property, including retaining the property as an operating asset.
Ceramic Devices is subject to two leases for its previous facilities in San
Diego, California. Those facilities total approximately 9,900 square feet of
office and manufacturing space in two buildings. Both leases expire on April 30,
1997, and the total rent is $6,775 per month. Ceramic Devices is seeking to
sublease this space through the end of the lease term.
EMPLOYEES
As of June 1, 1996, the Company and its subsidiaries had a total of 352
full-time employees, of which 298 were in manufacturing and quality assurance,
14 were in customer service, marketing and sales, 12 were in engineering, 25
were in administration, and 3 were in customer-sponsored product development.
None of the Company's employees is covered by an ongoing collective bargaining
agreement, the Company has experienced no work stoppages, and the Company
believes that its relationship with its employees is good.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Donald A. Wright(1) 44 Chairman of the Board, Chief Executive Officer and President
Herman L. "Jack" Jones 65 Executive Vice President, Chief Operating Officer and Director
Nick A. Gerde 51 Vice President Finance and Chief Financial Officer
Roger P. Vallo(1)(2)(3)(4) 61 Secretary and Director
Robert L. Smith(1)(4) 81 Director
Donald B. Cotton(2)(4) 58 Director
Allen W. Dahl, M.D.(1)(2)(3) 68 Director
Paul Schmidhauser(3) 47 Director
</TABLE>
- ------------------------
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Option Committee
(4) Member of the Finance and Audit Committee
Donald A. Wright has been the Chairman of the Board, Chief Executive Officer
and President of the Company since February 1995, and held those same positions
with Original PCTH and its successor from May 1994 until the successor was
dissolved in May 1996. Mr. Wright has been an officer and director of Pacific
Coast and its predecessor, Kyle Technology Corporation, since 1990. Mr. Wright
also has been an officer and director of each of the Company's other operating
subsidiaries since their respective acquisitions by the Company.
Herman L. "Jack" Jones has been Executive Vice President, Chief Operating
Officer and a director of the Company since February 1995, and held those same
positions with Original PCTH and its successor from May 1994 until the successor
was dissolved. Mr. Jones also has served as a director of Pacific Coast since
April 1994, a director of Morel since December 1995 and a director of Seismic
since October 1995. Mr. Jones founded Cashmere and has served as President and a
director of Cashmere since 1969.
Nick A. Gerde has been the Vice President Finance and Chief Financial
Officer of the Company since February 1995. Mr. Gerde is also an officer and
director of each of the Company's operating subsidiaries. Mr. Gerde served as
Controller/CFO of Hydraulic Repair & Design, Inc., a regional hydraulic
component repair and wholesale distribution company, from March 1990 through
April 1993; Business Development Specialist with the Economic Development
Council of North Central Washington from July 1993 to June 1994; and vice
president of Televar Northwest, Inc., a closely held telecommunications company,
from July 1994 to February 1995. Mr. Gerde is a certified public accountant.
Roger P. Vallo has been a director and the Secretary of the Company since
February 1995, and held those same positions with Original PCTH and its
successor from May 1994 until the successor was dissolved. Mr. Vallo served as a
director of Pacific Coast from February 1991 to November 1995 and as Secretary
from July 1993 to October 1994. From 1990, he served as a director of the
predecessor of Pacific Coast and subsequently as a director of Pacific Coast.
Mr. Vallo also is the President and Chief Executive Officer of Prudential
Preferred Properties in Everett, Washington.
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<PAGE>
Robert L. Smith has been a director of the Company since February 1995 and
was the Treasurer of the Company from that date until July 9, 1996. Mr. Smith
held those same positions with Original PCTH and its successor from May 1994
until the successor was dissolved. Prior to May 1994, he served as a director
and officer of Pacific Coast. Mr. Smith is engaged in the commercial real estate
business for Prudential Preferred Properties in Everett, Washington.
Donald B. Cotton has been a director of the Company since February 1995, and
was a director of Original PCTH and its successor from May 1994 until the
successor was dissolved. He was a director of Pacific Coast from October 1993 to
October 1994. Mr. Cotton retired from GTE in 1993, where he served most recently
as a vice president. He is currently self-employed as a software consultant.
Allen W. Dahl, M.D. has been a director of the Company since February 1995,
and was a director of Original PCTH and its successor from October 1994 until
the successor was dissolved. Dr. Dahl is a semi-retired physician, practicing in
the Puget Sound region of Washington.
Paul Schmidhauser has been a director of the Company since November 1995.
Mr. Schmidhauser currently manages SIR Schmidhauser Industrial Representations
AG, a Swiss company. From January 1994 to January 1995, Mr. Schmidhauser was a
private investor. Prior to January 1994, Mr. Schmidhauser was a Vice President
of ABB W&E Umwelttechnik AG, a Swiss company.
Directors of the Company hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and duly
qualified. Under the terms of an agreement between Lysys Ltd. ("Lysys") and the
Company, dated January 3, 1995, Lysys has the right to nominate one of the
Company's Board members, until July 1998. Mr. Schmidhauser is the current
designee of Lysys to the Board of Directors. See "Certain Transactions."
Executive officers are elected by the Board of Directors of the Company at the
first Board meeting after each annual meeting of shareholders and hold office
until their successors are elected and duly qualified.
SIGNIFICANT EMPLOYEES
John M. Eder, 52, has been President and a director of Seismic since October
1995. He also has served as Executive Vice President of Cashmere since September
1990, and as a director of Cashmere since October 1994.
Stephen L. Morel, 43, has been President of Morel since February 1989, and a
director of Morel since May 1976. Stephen Morel and Mark Morel, below, are
brothers.
Mark Morel, 44, has been Vice President of Sales of Morel since July 1989,
and a director of Morel since December 1988.
Ivan G. Sarda, 63, has been President and a director of Ceramic Devices
since April 1995. Before the Company's acquisition of Ceramic Devices, Mr. Sarda
was a founder and served as President and a director of Ceramic Devices'
predecessor.
Lewis L. Wear, 55, has been President of Pacific Coast since February 1996,
and a director of Pacific Coast since November 1995. He also has been a director
of Ceramic Devices since November 1995. Prior to November 1995, Mr. Wear was
Vice President of Sales for Vacuum Atmospheres, a division of WEMS, Inc.
DIRECTOR COMPENSATION
The Independent Director Stock Plan, approved by the shareholders of the
Company in November 1995, provides for an initial award of 500 shares of Common
Stock and an annual award of $5,000 worth of Common Stock to each non-employee
director. Each non-employee director who serves on a committee of the Board of
Directors is entitled to receive a fee of $1,000 per year for each committee on
which that director serves, and the chairperson of each committee is entitled to
receive an additional $500 fee per year. In addition, each non-employee director
of a subsidiary of the Company, who is not a director of the Company, will
receive a fee of up to $1,000 per year. At the Board's option, persons who serve
as directors of a subsidiary of the Company may be eligible for additional fees.
Each of the cash
31
<PAGE>
fees may be paid, at the Board's option, in shares of Common Stock. Non-employee
directors receive no salary for their services and receive no fee from the
Company for their participation in meetings, although all directors are
reimbursed for reasonable travel and other out-of-pocket expenses incurred in
attending meetings of the Board. As of May 31, 1996, 9,000 shares have been
issued to Directors under the Independent Director Plan, with 6,000 shares
subject to forfeiture if certain conditions are not met. See "Management --
Benefit Plans."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth the annual and
long-term compensation of Donald A. Wright ("Named Executive") for services in
all capacities to the Company for the last three fiscal years. No other officer
of the Company received annual salary and bonuses exceeding $100,000 in the
fiscal year ended May 31, 1996. This table and the following tables do not
include a stock option that the Company has agreed to grant to Mr. Wright in
fiscal 1997 on the date of this Prospectus for 845,000 shares of Common Stock at
$4.6875 per share.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
AWARDS
ANNUAL COMPENSATION ------------------------------
--------------------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/
NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS SARS
PRINCIPAL POSITION YEAR(1) ($) ($) ($) ($) (#)
- ------------------------------- ----------- --------- ------ ------------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald A. Wright(2)(3) 1996 110,577 0 0 0 112,560
CEO and President 1995 83,654 0 0 0 100,000(4)
1994 75,000 0 0 0 0
<CAPTION>
PAYOUTS
-------------
LTIP ALL OTHER
NAME AND PAYOUTS COMPENSATION
PRINCIPAL POSITION ($) ($)
- ------------------------------- ------------- ----------------
<S> <C> <C>
Donald A. Wright(2)(3) 0 400(5)
CEO and President 0 0
0 0
</TABLE>
- ------------------------
(1) Information is shown for the May 31 fiscal years of the Company and, prior
to February 1995, Original PCTH, which employed Mr. Wright during the
relevant periods.
(2) Mr. Wright became the Chief Executive Officer of the Company in February
1995, upon effectiveness of the merger of Original PCTH into a wholly owned
subsidiary of the Company. See "Acquisition History."
(3) The compensation shown for Mr. Wright for the fiscal year ended May 31,
1994 was paid by Original PCTH.
(4) Represents unexercised, but exercisable, warrants to purchase 100,000
shares of Common Stock. See "Aggregated Option/SAR Exercises and Fiscal
Year-End Option/SAR Values," below.
(5) Represents estimated value of the personal use of a company car.
OPTION GRANTS. The following table sets forth information on grants of
stock options or other similar rights by the Company during the last fiscal year
to the Named Executive.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL MARKET PRICE
SECURITIES OPTIONS/SARS EXERCISE OR ON DATE OF
UNDERLYING OPTIONS/ GRANTED TO EMPLOYEES BASE PRICE GRANT EXPIRATION
NAME SARS GRANTED (#) IN FISCAL YEAR ($/SHARE) ($/SHARE) DATE
- ---------------------------- ------------------- ------------------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Donald A. Wright 97,560 67% 5.125 5.125 10/30/2005
15,000 10% 4.875 4.875 11/28/2005
</TABLE>
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES. The
following table sets forth information concerning exercise of stock options and
warrants during the last fiscal year by the Named Executive and the fiscal year
end value of unexercised options:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
OPTIONS/SARS AT FY-END (#) SARS AT FY-END ($)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- --------------------- ------------- ------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Donald A. Wright 0 0 134,512(1) 78,048 209,000 N/A
</TABLE>
- ------------------------
(1) Includes warrants that were granted by Original PCTH on December 24, 1994,
and converted by the Company, as of February 17, 1995, into warrants to
purchase 100,000 shares of Common Stock at $2.00 per share, which are
currently exercisable in full.
EMPLOYMENT AGREEMENTS
Mr. Wright has been employed by the Company pursuant to an Employment
Agreement dated January 1, 1995, as amended on March 1, 1996 (the "Recent
Employment Agreement"). The Recent Employment Agreement was superseded by an
Employment Agreement dated as of June 1, 1996 (the "New Employment Agreement").
The New Employment Agreement has a term of two years, ending on May 31, 1998,
unless terminated earlier for "cause" (as defined in the New Employment
Agreement). Both employment agreements prohibit Mr. Wright from competing with
the Company for two years following termination. Under the Recent Employment
Agreement, Mr. Wright received an annual base salary of $100,000 for calendar
year 1995, and salary at an annual rate of $125,000 for the first five months of
calendar year 1996. Under the New Employment Agreement, Mr. Wright receives an
annual base salary of $160,000 and $175,000 for fiscal years 1997 and 1998,
respectively, subject to any increase that may be determined to be appropriate
by the Board of Directors. Based on Mr. Wright's performance as judged by the
Board of Directors, Mr. Wright also may be entitled to receive stock options to
purchase 15,000 shares of Common Stock per year at an exercise price equal to
the fair market value of the Common Stock on the date of grant for each of the
fiscal years 1996, 1997 and 1998. The Board of Directors awarded Mr. Wright
options to purchase up to 15,000 shares of Common Stock at $4.875 per share for
his performance during fiscal year 1995. In addition, under the New Employment
Agreement, if a "change of control" of the Company occurs and within six months
thereafter Mr. Wright is terminated without "cause" or terminates his employment
for "good reason" (as such terms are defined in the New Employment Agreement),
Mr. Wright would be entitled to receive a severance payment equal to twice his
annual base salary then in effect, subject to certain exceptions provided in the
New Employment Agreement. The term "change of control" includes the following
events: (i) a change in composition of the Board of Directors over any two-year
period such that the directors at the beginning of the period, together with
directors subsequently approved by the continuing directors, no longer
constituted a majority of the Board, or (ii) any person becoming the beneficial
owner of securities having 30% or more of the voting power of the Company's
outstanding voting securities, subject to certain exceptions in the New
Employment Agreement. Any such severance payment under the New Employment
Agreement would be reduced to the extent necessary to avoid subjecting the
payment to penalty taxes on parachute payments. In addition to such severance
payment, Mr. Wright and his family would be entitled to continue to participate
for one year after such termination in employee health and medical benefits
plans and programs in which they were participants when employment terminated,
to the extent permitted by such plans and programs.
BENEFIT PLANS
1995 STOCK INCENTIVE PLAN
The Company's 1995 Stock Incentive Plan (the "Plan") provides for the award
of incentive stock options ("ISOs") to key employees and the award of
non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"), bonus
rights, and other incentive grants to employees and certain non-employees (other
than non-employee directors) who have important relationships with the Company
or its subsidiaries.
33
<PAGE>
ADMINISTRATION. The Plan may be administered by the Board of Directors or
by a committee of directors or officers of the Company. The Board of Directors
has designated an Option Committee to administer the Plan. The Option Committee
determines and designates the individuals to whom awards under the Plan should
be made and the amount and terms and conditions of the awards, except that if
officers of the Company serve on the Option Committee it may not grant options
to such officers. The Option Committee may adopt and amend rules relating to the
administration of the Plan, but only the Board of Directors may amend or
terminate the Plan. The Plan is administered in accordance with Rule 16b-3
adopted under the Exchange Act.
ELIGIBILITY. Awards under the Plan may be made to employees, including
employee directors, of the Company and its subsidiaries, and to nonemployee
agents, consultants, advisors, and other persons (but not including nonemployee
directors) that the Option Committee believes have made or will make an
important contribution to the Company or any subsidiary thereof.
SHARES AVAILABLE. Subject to adjustment as provided in the Plan, a maximum
of 1,000,000 shares of Common Stock are reserved for issuance thereunder. If an
option, SAR or performance unit granted under the Plan expires or is terminated
or canceled, the unissued shares subject to such option, SAR or performance unit
are again available under the Plan. In addition, if shares sold or awarded as a
bonus under the Plan are forfeited to the Company or repurchased thereby, the
number of shares forfeited or repurchased are again available under the Plan.
TERM. Unless earlier terminated by the Board, the Plan will continue in
effect until the earlier of: (i) ten years from the date on which the Plan is
adopted by the Board, and (ii) the date on which all shares available for
issuance under the Plan have been issued and all restrictions on such shares
have lapsed. The Board may suspend or terminate the Plan at any time except with
respect to options, performance units, and shares subject to restrictions then
outstanding under the Plan.
STOCK OPTION GRANTS. The Option Committee may grant ISOs and NSOs under the
Plan. With respect to each option grant, the Option Committee determines the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised (including
whether the option will be subject to any vesting requirements and whether there
will be any conditions precedent to exercise of the option), and the other terms
and conditions of the option.
ISOs are subject to special terms and conditions. The aggregate fair market
value, on the date of the grant, of the Common Stock for which an ISO is
exercisable for the first time by the optionee during any calendar year, may not
exceed $100,000. An ISO may not be granted to an employee who possesses more
than 10% of the total voting power of the Company's stock unless the option
price is at least 110% of the fair market value of the Common Stock subject to
the option on the date it is granted and the option is not exercisable five
years after the date of grant. No ISO may be exercisable after ten years from
the date of grant. The option price may not be less than 100% of the fair market
value of the Common Stock covered by the option at the date of grant.
In general, no vested option may be exercised unless at the time of such
exercise the optionee is employed by or in the service of the Company or any
subsidiary thereof, within 12 months following termination of employment by
reason of death or disability, or within three months following termination for
any other reason except for cause. Options are nonassignable and nontransferable
by the optionee except by will or by the laws of descent and distribution at the
time of the optionee's death. No shares may be issued pursuant to the exercise
of an option until full payment therefor has been made. Upon the exercise of an
option, the number of shares reserved for issuance under the Plan will be
reduced by the number of shares issued upon exercise of the option. Options to
purchase an aggregate of 145,283 shares of Common Stock have been granted under
the Plan, and the Company has agreed to issue Mr. Wright an option under the
Plan to purchase 845,000 shares upon the date of this Prospectus. See
"Description of Securities -- Stock Options."
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<PAGE>
STOCK APPRECIATION RIGHTS. The Option Committee may grant SARs under the
Plan. Each SAR entitles the holder, upon exercise, to receive from the Company
an amount equal to the excess of the fair market value on the date of exercise
of one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a SAR granted in connection with an option,
the excess of the fair market value of one share of Common Stock of the Company
over the option price per share under the option to which the SAR relates),
multiplied by the number of shares covered by the SAR or the option. Payment by
the Company upon exercise of a SAR may be made in Common Stock, in cash, or by a
combination of Common Stock and cash.
If a SAR is granted in connection with an option, the following rules shall
apply: (i) the SAR shall be exercisable only to the extent and on the same
conditions that the related option could be exercised; (ii) the SAR shall be
exercisable only when the fair market value of the stock exceeds the option
price of the related option; (iii) the SAR shall be for no more than 100% of the
excess of the fair market value of the stock at the time of exercise over the
option price; (iv) upon exercise of the SAR, the option or portion thereof to
which the SAR relates terminates; and (v) upon exercise of the option, the
related SAR or portion thereof terminates.
Each SAR is nonassignable and nontransferable by the holder except by will
or by the laws of descent and distribution at the time of the holder's death.
Upon the exercise of a SAR for shares, the number of shares reserved for
issuance under the Plan will be reduced by the number of shares issued. Cash
payments of SARs will not reduce the number of shares of Common Stock reserved
for issuance under the Plan. No SARs have been granted under the Plan.
RESTRICTED STOCK. The Option Committee may issue shares of Common Stock
under the Plan subject to the terms, conditions, and restrictions determined
thereby. Upon the issuance of restricted stock, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued. No
restricted shares have been granted under the Plan.
STOCK BONUS AWARDS. The Option Committee may award shares of Common Stock
as a stock bonus under the Plan. The Option Committee may determine the
recipients of the awards, the number of shares to be awarded, and the time of
the award. Stock received as a stock bonus is subject to the terms, conditions,
and restrictions determined by the Option Committee at the time the stock is
awarded. No stock bonus awards have been granted under the Plan.
CASH BONUS RIGHTS. The Option Committee may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii) SARs
granted or previously granted, (iii) stock bonuses awarded or previously
awarded, and (iv) shares issued under the Plan. Bonus rights granted in
connection with options entitle the optionee to a cash bonus if and when the
related option is exercised. The amount of the bonus is determined by
multiplying the excess of the total fair market value of the shares acquired
upon the exercise over the total option price for the shares by the applicable
bonus percentage. The bonus rights granted in connection with a SAR entitle the
holder to a cash bonus when the SAR is exercised. The amount of the bonus is
determined by multiplying the total fair market value of the shares or cash
received pursuant to the exercise of the SAR by the applicable percentage. The
bonus percentage applicable to any bonus right is determined by the Option
Committee but may in no event exceed 75%. Bonus rights granted in connection
with stock bonuses entitle the recipient to a cash bonus, in an amount
determined by the Option Committee, when the stock is awarded or purchased or
any restrictions to which the stock is subject lapse. No bonus rights have been
granted under the Plan.
PERFORMANCE UNITS. The Option Committee may grant performance units
consisting of monetary units which may be earned if the Company achieves certain
goals established by the Committee over a designated period of time. The goals
established by the Option Committee may include earnings per share, return on
shareholders' equity, return on invested capital, and similar benchmarks.
Payment of an award earned may be in cash or in Common Stock or partly in both,
and may be made when earned, or vested and deferred, as the Option Committee
determines. Each performance unit will be
35
<PAGE>
nonassignable and nontransferable by the holder except by will or by the laws of
descent and distribution at the time of the holder's death. The number of shares
reserved for issuance under the Plan shall be reduced by the number of shares
issued upon payment of an award. No performance units have been granted under
the Plan.
CHANGES IN CAPITAL STRUCTURE. The Plan provides that if the outstanding
Common Stock of the Company is increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any recapitalization, stock split
or certain other transactions, appropriate adjustment will be made by the Option
Committee in the number and kind of shares available for grants under the Plan.
In addition, the Option Committee will make appropriate adjustments in the
number and kind of shares as to which outstanding options will be exercisable.
In the event of a merger, consolidation or other fundamental corporate
transformation, the Board may, in its sole discretion, permit outstanding
options to remain in effect in accordance with their terms; to be converted into
options to purchase stock in the surviving or acquiring corporation in the
transaction; or to be exercised, to the extent then exercisable, during a 30-day
period prior to the consummation of the transaction.
INDEPENDENT DIRECTOR STOCK PLAN
The Company's Independent Director Stock Plan (the "Director Plan") provides
for the award of shares of Common Stock to non-employee directors of the Company
to attract, reward, and retain qualified individuals to serve as directors and
to provide added incentive to such persons by increasing their ownership
interest in the Company.
ADMINISTRATION. The Director Plan may be administered by the Board of
Directors or by a committee of directors and officers of the Company. The Board
has delegated to the Compensation Committee the responsibility of administering
the Director Plan. Subject to the requirements of the Director Plan, the
Compensation Committee has the authority to, among other things, determine the
fair market value of the Common Stock, interpret the Director Plan and
prescribe, amend, and rescind rules and regulations relating thereto, and make
all determinations deemed necessary or advisable to administer the Director
Plan, except that only the Board of Directors may suspend, amend or terminate
the Director Plan. No director may vote on any action by the Board of Directors
with respect to any matter relating to an award held by such director. The
Director Plan is administered in accordance with Rule 16b-3 adopted under the
Exchange Act.
ELIGIBILITY. Shares may be awarded under the Director Plan only to
Independent Directors. The term "Independent Director" means a director who is
not an employee of the Company or any of its subsidiaries.
SHARES AVAILABLE. The total number of shares of Common Stock that may be
awarded as bonuses under the Director Plan may not exceed 100,000 shares. If any
share awarded under the Director Plan is forfeited, such share will again be
available for purposes of the Director Plan.
TERM. Unless earlier suspended or terminated by the Board, the Director
Plan will continue in effect until the earlier of: (i) ten years from the date
on which it is adopted by the Board, and (ii) the date on which all shares
available for issuance under the Director Plan have been issued.
INITIAL AWARD. The Independent Directors who were elected at the 1995
annual shareholders meeting each received 500 shares of Common Stock (the
"Initial Award") for a total of 3,000 shares. In the future, each new
Independent Director will receive an Initial Award upon such Independent
Director's first election or appointment to the Board.
ANNUAL AWARD. Each Independent Director also will be awarded additional
shares (the "Annual Award") in an amount determined in accordance with the
formula set forth below, on an annual basis, each time he or she is elected to
the Board (or, if directors are elected to serve terms longer than one year, as
of the date of each annual shareholders' meeting during that term). The number
of shares awarded in the Annual Award will be equivalent to the result of $5,000
divided by the fair market
36
<PAGE>
value of a share on the date of the award, rounded to the nearest 100 shares (or
a fraction thereof if the Independent Director is elected or appointed to the
Board at any time other than at the annual meeting of shareholders). Each of the
Independent Directors elected at the 1995 annual shareholders meeting received
an Annual Award of 1,000 shares of Common Stock for a total of 6,000 shares.
VESTING AND FORFEITURE. Shares issued pursuant to an Initial Award are
fully vested upon the date of the award. Shares issued pursuant to an Annual
Award vest in full on the first anniversary following the date of the Annual
Award if the Independent Director has attended at least 75% of the regularly
scheduled meetings of the Board during that year (the "Vesting Period"). If an
Independent Director does not attend at least 75% of the regularly scheduled
meetings of the Board during the Vesting Period, the shares issued pursuant to
that Annual Award will expire and be forfeited without having vested. If a
Director ceases to be an Independent Director for any reason other than death or
disability before his or her last Annual Award vests, the shares issued pursuant
to that Annual Award will be forfeited. If an Independent Director is unable to
continue his or her service as a director as a result of his or her disability
or death, unvested shares of such Independent Director will immediately become
vested as of the date of disability or death. In the event of a merger,
consolidation or plan of exchange to which the Company is a party and in which
the Company is not the survivor, or a sale of all or substantially all of the
Company's assets, any unvested shares will vest automatically upon the closing
of such transaction.
STATUS BEFORE VESTING. Each Independent Director will be a shareholder of
record with respect to all shares awarded under the Director Plan, whether or
not vested. No Independent Director may transfer any interest in unvested shares
to any person other than to the Company.
CERTAIN TAX CONSIDERATIONS RELATED TO EXECUTIVE COMPENSATION
As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, in the event that compensation paid by the Company to a "covered
employee" (the chief executive officer and the next four highest paid employees)
in a year were to exceed an aggregate of $1,000,000, the Company's deduction for
such compensation could be limited to $1,000,000.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table shows, to the best of the Company's knowledge based on
the records of the Company's transfer agent and the Company's records on
issuances of shares, as adjusted to reflect changes in ownership documented in
filings with the Securities and Exchange Commission made by certain shareholders
and provided to the Company pursuant to Section 16 of the Exchange Act and
statements provided to the Company by certain shareholders, Common Stock
ownership on May 31, 1996, by (i) each person known by the Company to own
beneficially more than 5% of the Company's outstanding Common Stock ("Principal
Shareholder"), (ii) each of the Company's directors, (iii) the Named Executive
in the Summary Compensation Table, and (iv) all executive officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK (2)
AMOUNT AND NATURE OF --------------------------
BENEFICIAL BEFORE AFTER
NAMES AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) OFFERING OFFERING
- --------------------------------------------------------------------- ---------------------- ------------ ------------
<S> <C> <C> <C>
Donald A. Wright (3)
c/o PCT Holdings, Inc.
434 Olds Station Road
Wenatchee, WA 98801................................................. 1,245,850 14.7% 11.6%
Herman L. "Jack" Jones
c/o PCT Holdings, Inc.
432 Olds Station Road
Wenatchee, WA 98801................................................. 701,437 9.4% 7.2%
Pensionfund of the Siemens
Companies in Switzerland
CH 8047
Zurich, Switzerland................................................. 650,000 8.7% 6.7%
Stephen Morel
224 Stoneybrook Lane
Wenatchee, WA 98801................................................. 398,433 5.3% 4.1%
Melvin B. Hoelzle (4)
8105 South Broadway
Everett, WA 98203................................................... 380,500 5.1% 3.9%
Roger Vallo (5)
2707 Colby Avenue
Suite 1101
Everett, WA 98201................................................... 219,026 2.9% 2.3%
Robert L. Smith (6)
20008 Grand Avenue, Apt. 201
Everett, WA 98201................................................... 161,887 2.2% 1.7%
Donald B. Cotton (7)
538 Timber Ridge Drive
Trophy Club, TX 76262............................................... 103,609 1.4% 1.1%
Allen W. Dahl
7300 Madrona Drive N.E.
Bainbridge Island, WA 98110......................................... 29,276 * *
Paul Schmidhauser
Rebbergstrasse 28
CH-8112 Otelfingen, Switzerland..................................... 1,500 * *
All Executive Officers and Directors
as a group (eight persons)(8)....................................... 2,503,946 29.3% 23.2%
</TABLE>
- ------------------------
* Less than 1%.
38
<PAGE>
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days are treated as outstanding
for determining the amount and percentage of Common Stock owned by such
individual. Shares for which beneficial ownership is disclaimed by an
individual also are included for purposes of determining the amount and
percentage of Common Stock owned by such individual. To the Company's
knowledge, each person has sole voting and sole investment power with
respect to the shares shown except as noted, subject to community property
laws, where applicable.
(2) Rounded to the nearest 1/10th of one percent, based on 7,478,309 shares of
Common Stock outstanding before this Offering and 9,728,309 shares of Common
Stock outstanding after this Offering.
(3) Includes 34,666 shares held by Ragen MacKenzie, Incorporated, custodian for
Donald A. Wright, in two IRA accounts. Also includes currently exercisable
warrants to purchase 100,000 shares of Common Stock, and currently
exercisable options to purchase 34,512 shares of Common Stock. Also includes
an option to purchase 845,000 shares of Common Stock that the Company has
agreed to grant to Mr. Wright on the date of this Prospectus.
(4) Includes 85,416 shares held by Dain Bosworth, Incorporated, custodian for
Melvin B. Hoelzle IRA.
(5) Includes 216,666 shares held by or on behalf of Seattle-First National
Bank, custodian for Roger P. Vallo IRA.
(6) Includes a currently exercisable warrant to purchase 37,500 shares of
Common Stock.
(7) Includes 69,443 shares held by Lincoln Trust Company, custodian for Donald
B. Cotton IRA.
(8) Includes currently exercisable warrants to purchase up to 162,500 shares of
Common Stock, and currently exercisable options to purchase up to 47,723
shares of Common Stock. Also includes an option to purchase 845,000 shares
of Common Stock that the Company has agreed to grant to Mr. Wright on the
date of this Prospectus.
39
<PAGE>
SELLING SHAREHOLDER
The table below sets forth certain information as of May 31, 1996 with
respect to the beneficial ownership of Common Stock by UTCO Associates, Ltd., a
Utah limited partnership (the "Selling Shareholder"). Other than providing
short-term financing to the Company in May 1996, the Selling Shareholder has not
had any position, office or other material relationship with the Company within
the past three years.
The shares of Common Stock offered by the Selling Shareholder may be offered
for sale, beginning 180 days after the date of this Prospectus, from time to
time at market prices prevailing at the time of sale or at negotiated prices,
and without payment of any underwriting discounts or commissions except for
usual and customary selling commissions paid to brokers or dealers. The Company
will not receive any proceeds from the sale of the Common Stock by the Selling
Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES OFFERED OWNED AFTER OFFERING
------------------------------ BY SELLING --------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER(1) PERCENTAGE(2) SHAREHOLDER(1) NUMBER(3) PERCENTAGE(3)
- ----------------------------------------- ----------- ----------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
UTCO Associates, Ltd. ................... 300,000 3.9% 300,000 0 0%
230 West 200 South, Suite 2601
Salt Lake City, Utah 84101
</TABLE>
- ------------------------
(1) Represents shares issuable upon exercise of a warrant held by the Selling
Shareholder issued in connection with the short-term financing referenced
above. The warrant is exercisable at $4.80 per share and is immediately
exercisable in full. The warrant and a promissory note were issued by the
Company to the Selling Shareholder in May 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments." See "Use of Proceeds" as to the repayment of the promissory
note.
(2) Excludes any shares of Common Stock issuable upon exercise of any
outstanding stock options and warrants of the Company, other than the
warrant held by the Selling Shareholder, and excludes 845,000 shares of
Common Stock issuable upon the exercise of an option that the Company has
agreed to grant to Donald A. Wright on the date of this Prospectus. See
"Description of Securities -- Stock Options."
(3) Assumes the exercise of the Selling Shareholder's warrant to purchase
300,000 shares of Common Stock at an exercise price of $4.80 per share and
the sale by the Selling Shareholder of all shares of Common Stock issued
pursuant to such exercise.
40
<PAGE>
CERTAIN TRANSACTIONS
On May 18, 1994, Pacific Coast received a $2,000,000 loan from the County of
Chelan, Washington, secured by a standby letter of credit from the Frontier Bank
of Everett, Washington. To secure the Company's obligations under the letter of
credit, Melvin B. Hoelzle, a Principal Shareholder, and Robert L. Smith, a
director of the Company, each provided a certificate of deposit and executed a
guaranty. The Company retired the letter of credit and the obligations of
Messrs. Hoelzle and Smith on September 21, 1995.
On May 31, 1994, Original PCTH acquired all of the outstanding shares of
Cashmere from the shareholders of Cashmere, in exchange for common stock of
Original PCTH. Herman L. "Jack" Jones, a Principal Shareholder, executive
officer, and director of the Company received shares of Original PCTH in that
transaction, which were later exchanged for 791,666 shares of the Company. In
connection with the acquisition, Cashmere sold the land and buildings, located
in Cashmere, Washington, where its manufacturing facilities were then located,
to Mr. Jones and John M. Eder, a former director of the Company and presently an
Executive Vice President of Cashmere and President of Seismic, for $975,207.
Cashmere received a note from Mr. Jones for the sales price, payable in monthly
installments of $7,600 through May 2014, including interest at 7% per annum. The
note was collateralized by the land and the buildings that then housed
Cashmere's operations. No significant gain or loss to the Company resulted from
this transaction. Cashmere leased these premises from Mr. Jones for a term of
three years with monthly lease payments of $9,000. In May 1995, the Company and
Messrs. Jones and Eder reached an agreement for Cashmere to reacquire a portion
of the land and buildings. Under that agreement, Cashmere canceled $673,990 of
the outstanding note from Mr. Jones, Mr. Jones agreed to assume the payment
obligation of Cashmere under certain bank debt related to the property, although
Cashmere remains an obligor under that bank debt, and Cashmere renewed the
$278,795 balance of the note from Mr. Jones under the same terms as the bank
debt. Mr. Jones is negotiating to refinance the bank debt in his name and remove
Cashmere as an obligor. There is no assurance that Cashmere will be removed as
an obligor on the bank debt. The Company paid Mr. Jones $108,000 in May 1995 for
the cancellation of the lease, which was terminated upon completion of
Cashmere's new facility in Wenatchee, Washington.
On January 3, 1995, Original PCTH entered into a funding agreement (the
"Funding Agreement") with Lysys Ltd. ("Lysys"). Under the Funding Agreement,
Lysys agreed to use its best efforts to find suitable and qualified investors to
purchase the Company's Common Stock. Subsequent to the Verazzana merger, Lysys
facilitated the sale by the Company of 800,000 shares of Common Stock pursuant
to the Funding Agreement in an offering exempt from registration under
Regulation S of the Securities Act, which raised approximately $4.6 million. As
compensation for its services, Lysys was paid a commission of $478,400 in cash
and 739,700 shares of the Company's Common Stock were issued to designees of
Lysys. Pensionfund of the Siemens Companies in Switzerland ("Siemens"), a
Principal Shareholder, purchased 150,000 shares in the offering.
Under the Funding Agreement, Lysys has the right to nominate one of the
Company's Board members until July 1998. Paul Schmidhauser, who was elected as a
director of the Company at the 1995 annual shareholders meeting, was nominated
as a director by Lysys. Mr. Schmidhauser has no ownership or other pecuniary
interest in or association with Lysys. See "Management -- Directors and
Executive Officers."
Roger D. Dudley, one of the Company's directors from February 1995 to
November 1995, is associated with Lysys although he is not a director, executive
officer or equity owner of Lysys. Mr. Dudley provided certain services to Lysys
in connection with its performance under the Funding Agreement. As compensation
for such services, 295,300 of the shares of Common Stock issuable to Lysys
pursuant to the Funding Agreement were issued to SMD Ltd., LLC, a limited
liability company, one-third of which is owned by another limited liability
company owned by Mr. Dudley's family. Mr. Dudley claims beneficial ownership of
88,433 of such shares, and disclaims beneficial ownership of the remaining
shares.
41
<PAGE>
Mr. Dudley is also an executive officer of C.I. International Limited, which
is the manager of Capital International Fund Limited, a foreign investment fund.
While Mr. Dudley was a director of the Company, Capital International Fund
Limited purchased 86,000 shares of Common Stock on February 15, 1995 and 64,000
shares on July 12, 1995. Mr. Dudley has no ownership interest in these shares
and, except in his capacity as an executive officer of C.I. International
Limited, exercises no control over C.I. International Limited or Capital
International Fund Limited.
In February 1995, Arthur S. Robinson, a director of the Company from
February 1995 to April 1996 and of Original PCTH and its successor from May 1994
to April 1996, exchanged his rights in a consulting contract with Original PCTH
for shares of common stock of Original PCTH, which were subsequently converted
to 17,361 shares of the Company's Common Stock.
The Company entered into another agreement with Lysys on November 3, 1995,
as amended on January 19, 1996 (the "Placement Agreement"), pursuant to which
Lysys facilitated the sale by the Company of 838,470 shares of Common Stock in
an offering exempt from registration under Regulation S of the Securities Act.
The Company raised approximately $3.4 million from the offering, from which
Lysys was paid a commission of $234,772. Pursuant to the Placement Agreement,
the Company issued 30,000 shares of Common Stock to a designee of Lysys as
additional compensation in connection with the offering. Siemens, a Principal
Shareholder, purchased 500,000 shares of Common Stock in the offering.
On October 9, 1995, Allen W. Dahl, a director of the Company, loaned Morel
$100,000 pursuant to the terms of a promissory note, for working capital until
consummation of the Morel merger, as defined in the following paragraph. All
amounts due under this note were paid in full by Morel in December 1995.
On December 1, 1995 (effective for accounting purposes on November 30,
1995), the Company effected a merger between a subsidiary of the Company that
was formed for such purpose and Morel (the "Morel merger"). See "Acquisition
History." As consideration for the Morel merger, the Company, after certain
post-closing adjustments, issued 650,000 shares of Common Stock to Stephen L.
Morel and Mark Morel (the "Morel Shareholders"). As a result, the Morel
Shareholders own an aggregate of approximately 9% of the outstanding Common
Stock prior to this Offering. Also in connection with the Morel merger, the
Company entered into a registration rights agreement with the Morel
Shareholders, pursuant to which the Morel Shareholders were granted the right,
under certain circumstances, to have up to 50% of their shares registered, at
the Company's expense, on an equal basis with other shareholders of the Company
within two years after the date of closing. These registration rights have been
waived as to this Offering. See "Description of Securities -- Registration
Rights." Prior to the Morel merger, no material relationship existed between
Morel and the Company or any of its affiliates, directors, officers, or their
associates, except that Morel and certain subsidiaries of the Company transacted
business from time to time in the ordinary course of business.
On March 28, 1996, Robert L. Smith, a director of the Company, loaned the
Company $150,000 pursuant to a promissory note from the Company to Mr. Smith
that accrues interest at 18% per annum and is due in full on September 27, 1996.
The Company expects to use a portion of the net proceeds of this Offering to
repay that note. See "Use of Proceeds." The Company also issued Mr. Smith a
warrant to purchase 37,500 shares of Common Stock at $4.80 per share that is
immediately exercisable, but those shares cannot be sold until the expiration of
a lock-up period of 180 days from the date of this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Developments." In addition, the warrant grants Mr. Smith certain rights
to register the shares issuable upon exercise of the warrant. Mr. Smith has
waived his rights to register those shares in this Offering. See "Description of
Securities -- Registration Rights."
42
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
The Common Stock and the Warrants offered hereby will be sold only in Units.
Each Unit consists of one share of Common Stock and one Warrant. The Units will
separate immediately upon issuance, and the Common Stock and Warrants that make
up the Units will trade only as separate securities.
COMMON STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, $.001 par value per share. As of July 10, 1996, there were
7,478,309 shares of Common Stock, fully paid and nonassessable, outstanding.
Each share of outstanding Common Stock is entitled to participate equally in
dividends as and when declared by the Board of Directors of the Company, out of
funds legally available therefor, and is entitled to participate equally in any
distribution of net assets made to the Company's shareholders in liquidation of
the Company after payment to all creditors thereof. There are no preemptive
rights or rights to convert Common Stock into any other securities. The holders
of the Common Stock are entitled to one vote for each share held of record on
all matters voted upon by the Company's shareholders and may not cumulate votes
for the election of directors. Thus, the owners of a majority of the shares of
the Common Stock outstanding may elect all of the directors of the Company and
the owners of the balance of the shares of the Common Stock would not be able to
elect any directors of the Company.
WARRANTS
UNDERWRITERS' WARRANTS. In connection with this Offering, the Company has
authorized the issuance of the Underwriters' Warrants and has reserved 450,000
shares of Common Stock for issuance upon exercise of such warrants (including
the Warrants issuable upon exercise of the Underwriters' Warrants). The
Underwriters' Warrants will entitle the holders to acquire 225,000 Units at an
exercise price of $3.75 per Unit (120% of the Unit Offering Price). The
Underwriters' Warrants will be exercisable at any time from the first
anniversary of the date of this Prospectus until the fifth anniversary of the
date of this Prospectus.
THE WARRANTS. Each Warrant will entitle the holder to purchase one share of
Common Stock at a price of $4.6875 per share (150% of the Unit Offering Price),
subject to certain adjustments including, if the Company's audited fiscal 1997
net income does not exceed $1.5 million, a one-time downward adjustment of the
exercise price to (a) $3.90625 per share (125% of the Unit Offering Price) if
such net income is $800,000 to $1.5 million, (b) $3.125 per share (100% of the
Unit Offering Price) if such net income is $500,000 to $799,000, and (c)
$2.34375 per share (75% of the Unit Offering Price) if such net income is less
than $500,000. The vesting of one outstanding warrant is dependent upon Pacific
Coast being issued a patent, which occurred in fiscal 1996, and meeting or
exceeding certain gross sales benchmarks for calendar years 1996 and 1997. See
"Other Warrants" below. The Company may grant additional performance-based
options or warrants to its employees. The vesting of performance-based options
or warrants may result in certain expenses that would reduce net income for
financial accounting purposes. Solely for the purpose of determining whether a
downward adjustment to the exercise price of the Warrants will be made based on
fiscal 1997 net income, any expense relating to the vesting of any
performance-based options or warrants held by employees (including any
amortization of capitalized patent costs relating to such warrants or options)
will be excluded in determining fiscal 1997 net income. The Warrants will,
subject to certain conditions, be exercisable at any time until the fifth
anniversary of the date of this Prospectus, unless earlier redeemed. Outstanding
Warrants are redeemable by the Company, at $.25 per Warrant, upon at least 30
days prior written notice to the registered holders, if the closing bid price
(as defined in the Warrant Agreement described below) per share of Common Stock
for the 20 consecutive trading days immediately preceding the date notice of
redemption is given equals or exceeds 200% of the then-current exercise price of
the Warrants. If the Company gives notice of its intention to redeem, a holder
would be forced either to exercise his or her Warrant before the date specified
in the redemption notice or accept the redemption price.
43
<PAGE>
The Warrants will be issued in registered form under a Warrant Agreement
(the "Warrant Agreement") between the Company and Interwest Transfer Co., Inc.,
as warrant agent (the "Warrant Agent"). The shares of Common Stock underlying
the Warrants, when issued upon exercise of a Warrant, will be fully paid and
nonassessable, and the Company will pay any transfer tax incurred as a result of
the issuance of Common Stock to the holder upon its exercise.
The Warrants and the Underwriters' Warrants contain provisions that protect
the holders against dilution by adjustment of the number of shares that may be
purchased by the holders. Such adjustment will occur in the event, among others,
that the Company makes certain distributions to holders of its Common Stock. The
Company is not required to issue fractional shares upon the exercise of a
Warrant or the Underwriters' Warrants. The holder of a Warrant or Underwriters'
Warrants will not possess any rights as a shareholder of the Company until such
holder exercises the Warrant or Underwriters' Warrants.
A Warrant may be exercised upon surrender of the Warrant certificate on or
before the expiration date of the Warrant at the offices of the Warrant Agent,
with the form of "Election To Purchase" on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by payment of the
exercise price (by certified or bank check payable to the order of the Company
or wire transfer of good funds) for the number of shares with respect to which
the Warrant is being exercised.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of shares or other securities underlying the Warrants. The Company has agreed to
use all commercially reasonable efforts to cause a registration statement with
respect to such securities under the Securities Act to be filed and to become
and remain effective in anticipation of and prior to the exercise of the
Warrants and to take such other actions under the laws of various states as may
be required to cause the sale of Common Stock (or other securities) issuable
upon exercise of Warrants to be lawful. If a current registration statement is
not in effect at the time a Warrant is exercised, the Company may at its option
redeem the Warrant by paying to the holder cash equal to the difference between
the market price of the Common Stock on the exercise date and the exercise price
of the Warrant. The Company will not be required to honor the exercise of
Warrants if, in the opinion of the Company's Board of Directors upon advice of
counsel, the sale of securities upon exercise would be unlawful.
The foregoing discussion of certain terms and provisions of the Warrants and
Underwriters' Warrants is qualified in its entirety by reference to the detailed
provisions of the Warrant Agreement and the purchase warrants issued to the
Underwriters, the form of each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
For the life of the Warrants and Underwriters' Warrants, the holders thereof
have the opportunity to profit from a rise in the market price of the Common
Stock without assuming the risk of ownership of the shares of Common Stock
issuable upon the exercise of the Warrants. The Warrant holders may be expected
to exercise their Warrants at a time when the Company would, in all likelihood,
be able to obtain any needed capital by an offering of Common Stock on terms
more favorable than those provided for by the Warrants. Further, the terms on
which the Company could obtain additional capital during the life of the
Warrants may be adversely affected.
OTHER WARRANTS. As of May 31, 1996, the Company had outstanding warrants to
purchase 497,500 shares of Common Stock. A warrant to purchase 100,000 shares is
held by Donald A. Wright and a warrant to purchase 25,000 shares is held by Nick
A. Gerde. These warrants are immediately exercisable in full at an exercise
price of $2.00 per share and will expire in 2004. A warrant to purchase 35,000
shares was issued to an employee of Pacific Coast, in connection with an
assignment of certain technology to the Company. This warrant has an exercise
price of $2.00 per share and expires December 31, 2000. Under this warrant,
15,000 shares of Common Stock are currently exercisable, and an additional
10,000 shares may vest on each of January 1997 and January 1998, if Pacific
Coast
44
<PAGE>
meets or exceeds certain gross sales benchmarks for calendar years 1996 and
1997. In connection with certain short-term debt incurred by the Company in
March 1996 and May 1996, respectively, the Company issued to Robert L. Smith, a
director of the Company, a warrant to purchase 37,500 shares of Common Stock,
and issued to the Selling Shareholder a warrant to purchase 300,000 shares of
Common Stock. Each of these warrants is currently exercisable in full at an
exercise price of $4.80 per share, and expires May 22, 2001. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Developments" and "Selling Shareholder."
STOCK OPTIONS
The Company has stock options outstanding under the Plan to purchase up to
145,283 shares of Common Stock at exercise prices of between $4.875 and $5.125
per share. Of these, options to purchase up to 47,723 shares are currently
exercisable and will expire in November 2005. The remainder of those options
vest, if at all, in increments of 24,390 shares on each of June 1, 1997, 1998,
1999 and 2000, and also will expire in November 2005. The Company has also
agreed to grant Mr. Wright an option under the Plan to purchase 845,000 shares
of Common Stock upon the date of this Prospectus, at an exercise price of
$4.6875 per share, which will expire ten years from the date of this Prospectus.
The shares issuable upon exercise of this option will be subject to a
contractual restriction on sale, expiring one year after the date of this
Prospectus. See "Management -- Benefit Plans."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth certain U.S. federal income tax
consequences, under current law, relating to the purchase and ownership of the
Units and the Common Stock and Warrants constituting the Units. The discussion
is a summary and does not purport to deal with all aspects of federal taxation
that may be applicable to an investor, nor does it consider specific facts and
circumstances that may be relevant to a particular investor's tax position.
Certain holders (such as dealers in securities, insurance companies, tax exempt
organizations, and those holding Common Stock or Warrants as part of a straddle
or hedge transaction) may be subject to special rules that are not addressed in
this discussion. This discussion is based on current provisions of the U.S.
Internal Revenue Code of 1986, as amended, and on administrative and judicial
interpretations as of the date hereof, all of which are subject to change
retroactively and prospectively. ALL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THIS OFFERING, INCLUDING
THE APPLICABILITY OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
ALLOCATION OF PURCHASE PRICE. Each Unit as a whole will have a tax basis
equal to the cost of the Unit. The measure of income or loss from certain
transactions described below depends upon the tax basis in each of the Warrants
and the Common Stock comprising the Unit. The tax basis for each of the Warrants
and the Common Stock will be determined by allocating the cost of the Unit among
the securities which comprise the Unit in proportion to the relative fair market
values of those elements at the time of acquisition.
U.S. HOLDERS OF COMMON STOCK OR WARRANTS
The following discussion concerns the material U.S. federal income tax
consequences of the ownership and disposition of Common Stock or Warrants
applicable to a U.S. Holder of such Common Stock or Warrants. In general, a
"U.S. Holder" is (i) a citizen or resident of the U.S., (ii) a corporation or
partnership created or organized in the U.S. or under the laws of the U.S. or
any state, or (iii) an estate or trust whose income is includable in gross
income for U.S. federal income tax purposes regardless of its source.
DIVIDENDS. Dividends, if any, paid to a U.S. Holder generally will be
includable in the gross income of such U.S. Holder as ordinary income to the
extent of such U.S. Holder's share of the Company's current or accumulated
earnings and profits. See "Price Range of Common Stock and Dividend Policy."
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SALE OF COMMON STOCK. The sale of Common Stock should generally result in
the recognition of gain or loss to a U.S. Holder thereof in an amount equal to
the difference between the amount realized and such U.S. Holder's tax basis in
the Common Stock. If the Common Stock constitutes a capital asset in the hands
of a U.S. Holder, gain or loss upon the sale of the Common Stock will be
characterized as long-term or short-term capital gain or loss, depending on
whether the Common Stock has been held for more than one year.
EXERCISE AND SALE OF WARRANTS. No gain or loss will be recognized by a U.S.
Holder of a Warrant on the purchase of shares of Common Stock for cash pursuant
to an exercise of a Warrant (except that gain will be recognized to the extent
cash is received in lieu of fractional shares). The tax basis of Common Stock
received upon the exercise of a Warrant will equal the sum of the U.S. Holder's
tax basis for the exercised Warrant and the exercise price. The holding period
of the Common Stock acquired upon the exercise of the Warrant will begin on the
date the Warrant is exercised and the Common Stock is purchased (i.e., it does
not include the period during which the Warrant was held).
Gain or loss from the sale or other disposition of a Warrant (or loss in the
event that the Warrant expires unexercised as discussed below), other than
pursuant to a redemption by the Company, will be capital gain or loss to its
U.S. Holder if the Common Stock to which the Warrant relates would have been a
capital asset in the hands of such holder. Such capital gain or loss will be
long-term capital gain or loss if the U.S. Holder has held the Warrant for more
than one year at the time of the sale, disposition or lapse. It is unclear
whether the redemption of a Warrant by the Company would generate ordinary or
capital income or loss.
EXPIRATION OF WARRANTS WITHOUT EXERCISE. If a holder of a Warrant allows it
to expire without exercise, the expiration will be treated as a sale or exchange
of the Warrant on the expiration date. The U.S. Holder will have a taxable loss
equal to the amount of such U.S. Holder's tax basis in the lapsed Warrant. If
the Warrant constitutes a capital asset in the hands of the U.S. Holder, such
taxable loss will be characterized as long-term or short-term capital loss
depending upon whether the Warrant was held for the required long-term holding
period.
BACKUP WITHHOLDING. A shareholder who is a U.S. Holder may be subject to
backup withholding at the rate of 31% in connection with distributions received
with respect to his or her shares, unless the shareholder (i) is a corporation
or comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a correct taxpayer identification number, certifies
as to no loss of exemption for backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. Any amount paid as
backup withholding will be creditable against such shareholder's income tax
liability. The Company will report to the shareholders and the I.R.S. the amount
of any "reportable payments" distributed and the amount of tax withheld, if any,
with respect to the shares.
NON-U.S. HOLDERS OF COMMON STOCK OR WARRANTS
The following discussion concerns the material U.S. federal income and
estate tax consequences of the ownership and disposition of shares of Common
Stock or Warrants applicable to Non-U.S. Holders of such shares of Common Stock
or Warrants. In general, a "Non-U.S. Holder" is any holder other than a U.S.
Holder, as defined in the preceding section.
DIVIDENDS. Dividends, if any, paid to a Non-U.S. Holder generally will be
subject to U.S. withholding tax at a 30% rate (or a lower rate as may be
prescribed by an applicable tax treaty) unless the dividends are effectively
connected with a trade or business of the Non-U.S. Holder within the United
States. See "Price Range of Common Stock and Dividend Policy." Dividends
effectively connected with such a trade or business will generally not be
subject to withholding (if the Non-U.S. Holder properly files an executed IRS
Form 4224 with the payor of the dividend) and generally will be subject to
federal income tax on a net income basis at regular graduated rates. In the case
of a Non-U.S. Holder which is a corporation, such effectively connected income
also may be subject to the branch profits tax (which is generally imposed on a
foreign corporation on the repatriation from the U.S. of
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effectively connected earnings and profits). The branch profits tax may not
apply if the recipient is a qualified resident of certain countries with which
the U.S. has an income tax treaty. To determine the applicability of a tax
treaty providing for a lower rate of withholding, dividends paid to an address
in a foreign country are presumed, under the current I.R.S. position, to be paid
to a resident of that country, unless the payor had definite knowledge that such
presumption is not warranted or an applicable tax treaty (or U.S. Treasury
Regulations thereunder) requires some other method for determining a Non-U.S.
Holder's treaty status. The Company must report annually to the I.R.S. and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of these information returns also may be made available under the
provisions of a specific treaty or agreement to the tax authorities in the
country in which the Non-U.S. Holder resides.
SALE OF COMMON STOCK. Generally, a Non-U.S. Holder will not be subject to
federal income tax on any gain realized upon the disposition of such holder's
shares of Common Stock unless (i) the gain is effectively connected with a trade
or business carried on by the Non-U.S. Holder within the U.S. (in which case the
branch profits tax may apply); (ii) the Non-U.S. Holder is an individual who
holds the shares of Common Stock as a capital asset and is present in the U.S.
for 183 days or more in the taxable year of the disposition and to whom such
gain is U.S. source; (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of U.S. tax law applicable to certain former U.S. citizens or
residents; or (iv) the Company is or has been a "U.S. real property holding
corporation" for federal income tax purposes (which the Company does not believe
that it is or is likely to become) at any time during the five-year period
ending on the date of disposition (or such shorter period that such shares were
held) and, subject to certain exceptions, the Non-U.S. Holder held, directly or
indirectly, more than 5% of the Common Stock.
EXERCISE AND SALE OF WARRANTS. Generally, a Non-U.S. Holder who recognizes
capital gain from the sale of a Warrant, other than pursuant to a redemption by
the Company, will not be subject to U.S. federal income tax unless (i) the gain
is effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States (in which case the branch profits tax may
apply); (ii) the Non-U.S. Holder is an individual who is present in the U.S. for
183 days or more in the taxable year of sale and to whom the gain is U.S.
source; (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions
of U.S. law applicable to certain former U.S. citizens or residents; or (iv) the
Company is or has been a "U.S. real property holding corporation" for federal
income tax purposes (which the Company does not believe it is or is likely to
become) at any time during the five-year period ending on the date of sale (or
such shorter period such Warrants were held) and, subject to certain exceptions,
the Non-U.S. Holder held, directly or indirectly more than 5% of the Warrants.
ESTATE TAX. Shares of Common Stock and Warrants owned or treated as owned
by an individual who is not a citizen or resident (as specially defined for U.S.
federal estate tax purposes) of the U.S. at the time of death will be includable
in the individual's gross estate for U.S. federal estate tax purposes, unless an
applicable tax treaty provides otherwise, and may be subject to U.S. federal
estate tax.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Under current U.S. federal
income tax law, backup withholding tax (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain required information) and information reporting apply to payments of
dividends (actual and constructive) made to certain non-corporate U.S. persons.
The backup withholding tax and information reporting requirements applicable to
U.S. persons will generally not apply to dividends paid on Common Stock to a
Non-U.S. Holder at an address outside the U.S., although dividends paid to
Non-U.S. Holders will be reported and taxed as described above under
"Dividends."
The payment of the proceeds from the disposition of shares of Common Stock
or Warrants through the U.S. office of a broker will be subject to information
reporting and backup withholding unless the holder, under penalties of perjury,
certifies, among other things, its status as a Non-U.S.
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<PAGE>
Holder or otherwise establishes an exemption. Generally, the payment of the
proceeds from the disposition of shares of Common Stock or Warrants to or
through a non-U.S. office of a broker will not be subject to backup withholding
and will not be subject to information reporting. In the case of the payment of
proceeds from the disposition of shares of Common Stock or Warrants through a
non-U.S. office of a broker that is a U.S. person or a "U.S.-related person,"
existing regulations require information reporting (but not backup withholding)
on the payment unless the broker receives a statement from the owner, signed
under penalties of perjury, certifying, among other things, its status as a
non-U.S. Holder or the broker has documentary evidence in its files that the
owner is a Non-U.S. Holder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S.-related person" is (i) a "controlled foreign
corporation" for U.S. federal income tax purposes or (ii) a foreign person 50%
or more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment (or for such part of
the period that the broker has been in existence) is derived from activities
that are effectively connected with the conduct of a U.S. trade or business.
Any amounts withheld from a payment to a Non-U.S. Holder under the backup
withholding rules will be allowed as a credit against such holder's U.S. federal
income tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the I.R.S. Non-U.S. Holders should consult
their tax advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom and the procedure for
obtaining such an exemption, if available.
REGISTRATION RIGHTS
UNDERWRITERS' WARRANTS. The Underwriters' Warrants provide certain rights
with respect to the registration under the Securities Act of the 450,000 shares
issuable upon exercise thereof (including the Warrants included therein). The
Company has agreed that during the period between the first anniversary and
fifth anniversary after the date of this Prospectus it will register the
issuance of such shares upon the exercise of the Underwriters' Warrants (and, if
necessary, their resale) so as to permit their public resale without
restriction. These registration rights could result in substantial future
expense to the Company and could adversely affect the Company's ability to
complete future equity or debt financings. Furthermore, the registration and
sale of Common Stock of the Company held by or issuable to the holders of
registration rights, or even the potential of such sales, could have an adverse
effect on the market price of the securities offered hereby.
OTHER REGISTRATION RIGHTS. Holders of 587,083 shares of Common Stock and
warrants to purchase 337,500 shares of Common Stock (collectively, the
"Registrable Shares"), or their transferees, are entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of agreements between the Company and such holders, if the Company
proposes to register any of its Common Stock under the Securities Act in
connection with a public offering thereof, either for its own account or for the
account of others, such holders are, with limited exceptions, entitled to notice
of such registration and to include their Registrable Shares therein.
In addition, once the Company is eligible to use a Form S-3 Registration
Statement, holders of 133,333 of the Registrable Shares may require the Company
to file, on not more than one occasion, a registration statement under the
Securities Act at the Company's expense with respect to such Registrable Shares,
and the Company is required to use its reasonable efforts to effect such
registration, subject to certain conditions and limitations. Such holders are
also entitled to registration rights on an equal basis with any other
shareholders to whom the Company grants registration rights.
These rights are subject to certain conditions, including the right of the
underwriters of any offering by the Company to limit the number of Registrable
Shares included in such registration. Holders of 624,583 of the Registrable
Shares have agreed to waive their registration rights with respect to this
Offering. The remaining 300,000 Registrable Shares are being registered by the
Registration Statement of which this Prospectus is a part, but the Selling
Shareholder has agreed not to sell such shares for a period of 180 days from the
date of this Prospectus. See "Selling Shareholder."
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ANTI-TAKEOVER LAWS
The Company, as a Nevada corporation, is subject to certain provisions of
Nevada law governing the exercise of powers by the Board of Directors, certain
combinations with interested stockholders, and certain acquisitions of a
controlling interest in the Company. In addition, the Company is also subject to
certain provisions of Washington law regarding significant business transactions
and certain "fair price restrictions." These statutes may have the effect of
delaying or deterring a hostile takeover of the Company.
NEVADA STATUTE ON EXERCISE OF POWERS OF DIRECTORS AND OFFICERS. Nevada's
"Exercise of Directors' and Officers' Powers" statute (Nevada Revised Statutes
Section 78.138) provides that directors and officers, in exercising their
respective powers with a view to the interests of the corporation, may consider
the following factors: (a) the interests of the corporation's employees,
suppliers, creditors and customers; (b) the economy of Nevada and the nation;
(c) the interests of the community and of society; and (d) the long-term as well
as short-term interests of the corporation and its stockholders, including the
possibility that these interests may be best served by the continued
independence of the corporation. This statute also provides that directors may
resist a change or potential change in control of the corporation if the
directors by a majority vote of a quorum determine that the change or potential
change is opposed to or not in the best interest of the corporation: (i) upon
consideration of the interests of the corporation's stockholders and any of the
foregoing factors or (ii) because the amount or nature of the indebtedness and
other obligations to which the corporation or any successor may become subject
in connection with the change or potential change in control provides reasonable
grounds to believe that within a reasonable time the corporation would become
insolvent or a bankruptcy proceeding concerning the corporation would be
commenced.
NEVADA COMBINATION WITH INTERESTED STOCKHOLDERS STATUTE. Nevada's
"Combination with Interested Stockholders" statute (Nevada Revised Statutes
SectionSection 78.411-78.444) applies to Nevada public corporations having at
least 200 stockholders, which includes the Company. This statute prohibits a
corporation from entering into any "combination" with an "interested
stockholder" (defined as (a) a person who beneficially owns 10% or more of the
corporation's voting securities, or (b) an affiliate or associate of the
corporation who, in the three years preceding the transaction, beneficially
owned 10% or more of the corporation's voting securities) for a period of three
years after such person becomes an interested stockholder, unless the Board of
Directors approved the combination or the share acquisition before the
interested stockholder acquired the shares. After such three-year period has
elapsed, combinations with an interested stockholder remain prohibited unless
the combination meets any applicable requirements of the corporation's articles
of incorporation, and (i) the Board of Directors approved the combination or the
share acquisition before the interested stockholder's acquisition of the shares,
or (ii) a majority of the disinterested stockholders vote to approve the
combination at a meeting called after such three-year period has elapsed, or
(iii) the aggregate amount of cash and the market value of non-cash
consideration to be received by the disinterested stockholders meets certain
minimum requirements, and, prior to the consummation of the combination, the
interested stockholder has not become the beneficial owner of additional voting
shares of the corporation, except in limited circumstances. For purposes of this
statute, the term "combination" includes a merger or consolidation of the
corporation and the interested stockholder or its affiliate, or any sale, lease,
exchange, mortgage, pledge, transfer or other disposition to or with an
interested stockholder or its affiliate in excess of certain dollar thresholds.
NEVADA ACQUISITION OF CONTROLLING INTEREST STATUTE. Nevada's "Acquisition
of Controlling Interest Statute" (Nevada Revised Statutes SectionSection
78.378-78.3793) applies to Nevada corporations that have at least 200
stockholders, at least 100 of whom are Nevada residents, and that do business
directly or indirectly in Nevada. If the Company is determined to be "doing
business" in Nevada (a term that is not defined in the statute), and has more
than 100 Nevada residents that are stockholders, it will become subject to the
statute. The statute prohibits an acquiror from voting shares of a target
corporation's stock after exceeding certain threshold ownership percentages,
until the acquiror provides certain information to the corporation and a
majority of the disinterested stockholders vote to
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restore the voting rights of the acquiror's shares at a meeting called at the
request and expense of the acquiror. If the voting rights of such shares are
restored, stockholders voting against such restoration may demand payment for
the "fair value" of their shares (which is generally equal to the highest price
paid in the transaction subjecting the stockholder to the statute). If the
stockholders fail to restore the voting rights of the acquiror's shares or if
the acquiror fails to timely deliver the required information, then the
corporation may call such shares for redemption by the corporation, if so
provided in the corporation's articles of incorporation or bylaws. The Company's
articles of incorporation and bylaws do not currently permit it to call an
acquiror's shares for redemption.
WASHINGTON ANTI-TAKEOVER STATUTE. Washington's "Significant Business
Transactions Statute" (Chapter 23B.19 of the Washington Business Corporation
Act) applies to foreign corporations, such as the Company, (i) that have a class
of voting shares registered pursuant to Section 12 or 15 of the Exchange Act;
(ii) that have their principal executive offices in the state; (iii) more than
10% of whose shares are owned of record by residents of the state; (iv) a
majority of whose employees reside in the state; and (v) a majority of whose
tangible assets are located in the state. The statute prohibits, subject to
certain exceptions, a corporation from entering into any "significant business
transactions" with an "Acquiring Person" (defined generally as a person who or
an affiliated group that beneficially owns 10% or more of the outstanding voting
securities of a corporation) for a period of five years after such person or
affiliated group becomes an Acquiring Person unless the transaction or share
acquisition made by the Acquiring Person is approved prior to the share
acquisition by a majority of the target corporation's directors. In addition,
this statute prohibits a corporation subject thereto from entering into a
significant business transaction with an Acquiring Person unless the
consideration to be received by the corporation's shareholders in connection
with the proposed transaction satisfies the "fair price" provisions set forth in
the statute.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's securities is Interwest
Transfer Co., Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
9,728,309 shares of Common Stock, assuming no exercise of the Overallotment
Option, the Warrants, the Underwriters' Warrants or any other options or
warrants. The following shares will be freely tradeable without restriction
under Securities Act: the 2,250,000 shares of Common Stock which are included in
the Units and sold in this Offering (plus up to 337,500 shares that may be sold
in the Units as a result of exercise of the Overallotment Option); the 2,250,000
shares of Common Stock issuable upon exercise of the Warrants (plus up to
337,500 shares issuable upon the exercise of Warrants subject to the
Overallotment Option); the 125,000 shares of Common Stock issued in the
Company's 1986 public offering; and, commencing approximately 12 months after
the date of this Prospectus, up to 450,000 shares of Common Stock that are
issuable upon exercise of the Underwriters' Warrants (including exercise of the
Warrants included therein). The 300,000 shares of Common Stock underlying the
warrant held by the Selling Shareholder are subject to a lock-up agreement, and
will first become eligible for sale in the public market 180 days after the date
of this Prospectus. However, any shares purchased by an "affiliate" of the
Company (as that term is defined in Rule 144 under the Securities Act), subject
to certain conditions, will be subject to the resale limitations of Rule 144.
The 2,408,170 shares of Common Stock issued by the Company in connection
with two Regulation S offerings to Swiss investors in July 1995 and November
1995, to the extent not previously resold into the United States, are available
for resale into the United States without restriction at such time as an
exemption from registration under the Securities Act is or becomes available.
The 490,000 shares of Common Stock issued by the Company in connection with a
Regulation S offering in May 1996 are subject to a lock-up agreement until
December 16, 1996, and will be available for resale into the United States after
that date without restriction at such time as an exemption from registration is
or becomes available.
The remaining 4,446,058 shares of Common Stock are "restricted" shares
subject to the restrictions upon resale under Rule 144 under the Securities Act
(the "Restricted Shares"). Of this number, the 62,500 shares issued to the
Company's original shareholders are eligible for immediate resale in the public
market pursuant to Rule 144(k), described below. An aggregate of 3,176,175
shares issued by the Company to the security holders of Original PCTH and others
in connection with the Verazzana merger will become eligible for sale under Rule
144 on February 17, 1997. See "Acquisition History." Another 295,300 shares of
Restricted Shares issued in July 1995 in connection with the Company's first
Regulation S offering, will become eligible for sale under Rule 144 in July
1997.
An aggregate of 587,083 shares of the Restricted Shares issued in connection
with the Company's acquisitions of Ceramic Devices, Seismic and Morel and 37,500
shares issuable upon the exercise of a warrant held by Robert L. Smith, a
director of the Company, are subject to certain registration rights which may
subsequently permit such shares to be registered under the Securities Act. In
the absence of such registration, such shares would become eligible for sale
under Rule 144 as follows: 133,333 shares on April 27, 1997; 128,750 on November
30, 1997; 325,000 on December 1, 1997; and 37,500 on a date two years after
exercise of Mr. Smith's warrant. All of the holders of these registration rights
have waived their right to participate in this Offering. However, if such
registration rights are exercised subsequently, those shares would become
eligible for resale upon the effectiveness of a future registration statement
covering such shares. Another 325,000 shares of the Restricted Shares which were
issued in the Company's acquisition of Morel, but which are not subject to
registration rights, will become eligible for sale under Rule 144 on December 1,
1997.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 97,283 shares immediately after
this Offering) or (ii) the average weekly trading volume of the Company's Common
Stock during the four calendar weeks immediately preceding the date on which
notice of the sale is filed with the
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Securities and Exchange Commission. Sales pursuant to Rule 144 also are subject
to certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person who is not deemed to have
been an affiliate of the Company at any time during the three months immediately
preceding the sale and whose Restricted Shares have been fully paid for three
years since the later of the date on which they were acquired from the Company
or from an affiliate of the Company may sell such Restricted Shares under Rule
144(k) without regard to the limitations and requirements described above.
Shortly after this Offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock reserved for
issuance under the Company's 1995 Stock Incentive Plan and Independent Director
Stock Plan, and under warrants issued to Mr. Wright, Mr. Gerde and an employee
of Pacific Coast in connection with their employment. Based on the number of
shares reserved for issuance under such stock plans, warrants and options, the
registration statement would cover approximately 1,260,000 shares. Such
registration statement will automatically become effective upon filing. Of the
shares held by officers issuable under such stock plans and warrants, 270,283
shares are subject to a six-month lock-up period following the date of this
Prospectus, and 845,000 shares of Common Stock issuable upon exercise of an
option which the Company has agreed to issue under the Plan to Mr. Wright upon
the date of this Prospectus are subject to a contractual restriction on sale,
expiring one year after the date of this Prospectus. See "Description of
Securities -- Stock Options" and "Management -- Benefit Plans."
Prior to this Offering, there has been only a limited public market for the
Common Stock and no public market for the Warrants. No prediction can be made of
the effect, if any, that future market sales of shares that are subject to Rule
144 or that were sold pursuant to Regulation S, or the availability of such
shares for sale, will have on the market price of the Common Stock or the
Warrants prevailing from time to time after this Offering. The Company is unable
to estimate the number of such shares that may be sold in the public market,
because such amount will depend on the trading volume in, and the market price
for, the Common Stock, the Warrants and other factors. Nevertheless, sales of
substantial amounts of such shares in the public market, or the perception that
such sales could occur, following this Offering could adversely affect the
prevailing market price of the Common Stock and the Warrants.
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UNDERWRITING
The Underwriters named below have agreed, severally and not jointly, subject
to the terms and conditions contained in an Underwriting Agreement dated the
date hereof, to purchase the Units offered hereby from the Company in the
amounts set forth below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Paulson Investment Company, Inc. ............................................ 1,700,000
Cohig & Associates, Inc. .................................................... 550,000
---------------
Total.................................................................... 2,250,000
---------------
---------------
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the Units offered hereby, if any are purchased. The Company has
been advised by the Underwriters that the Underwriters propose to offer the
Units to the public initially at the offering price set forth on the cover page
of this Prospectus, and to selected dealers at that price less a concession in
an amount to be determined by the Underwriters. After the initial public
offering of the Units, the public offering price and other offering terms may
vary.
The Underwriting Agreement provides that the Underwriters will purchase the
Units (including the Units subject to the Overallotment Option) offered hereby
for $2.84375 per Unit, representing a discount of nine percent from the Unit
Offering Price.
The Company has granted the Underwriters an Overallotment Option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to a maximum of an additional 337,500 Units on the same terms as the
Units being purchased by the Underwriters from the Company. The Underwriters may
exercise the Overallotment Option only to cover overallotments made in
connection with this Offering.
The Company has agreed to sell and issue to the Underwriters warrants (the
"Underwriters' Warrants") to purchase up to 225,000 Units. The Underwriters'
Warrants are exercisable for a period of four years beginning one year from the
date of this Prospectus. The Underwriters' Warrants are exercisable at a price
of $3.75 per Unit (120% of the Unit Offering Price). The Underwriters' Warrants
are nontransferable except to one of the Underwriters or to any individual who
is either a partner or an officer of an Underwriter, or by will or the laws of
descent and distribution. The holders of the Underwriters' Warrants will have,
in that capacity, no voting, dividend, or other shareholder rights. Any profit
realized by the Underwriters on the sale of the securities issuable upon
exercise of the Underwriters' Warrants may be deemed to be additional
underwriting compensation.
The Underwriters will also receive at closing a nonaccountable expense
allowance equal to three percent of the aggregate Unit Offering Price of the
Units sold in this Offering, reduced by $35,000 previously paid by the Company
as an advance against this allowance.
The securities underlying the Underwriters' Warrants are being registered on
the Registration Statement of which this Prospectus is a part. The Company has
agreed to maintain an effective registration statement at its expense to permit
the sale of the securities underlying the Underwriters' Warrants at any time
during the period in which the Underwriters' Warrants are exercisable.
By virtue of holding the Underwriters' Warrants, the Underwriters have the
opportunity to profit, at a nominal cost, from an increase in the market price
of the Company's securities. Furthermore, the exercise of the Underwriters'
Warrants could dilute the interests of the holders of Common Stock and the
existence of the Underwriters' Warrants may make it more difficult for the
Company to raise additional equity capital. Although the Company will obtain
additional equity capital upon exercise of the Underwriters' Warrants, it is
likely that the Company could then raise additional capital on more favorable
terms than those of the Underwriters' Warrants.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act and to contribute in
certain events to any liabilities incurred by the
53
<PAGE>
Underwriters in connection with the sale of the Units. The Company and its
executive officers and directors and certain other holders have agreed with the
Underwriters that, without their written consent, neither the Company nor such
persons will sell shares of Common Stock for a period of six months from the
date hereof.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be passed
upon for the Company by Lionel Sawyer & Collins of Reno, Nevada. Certain legal
matters related to this Offering will be passed upon for the Company by Stoel
Rives LLP of Seattle, Washington. Certain legal matters related to this Offering
will be passed upon for the Underwriters by Weiss, Jensen, Ellis & Howard of
Portland, Oregon.
EXPERTS
The consolidated financial statements of the Company as of May 31, 1996 and
1995, and for the years then ended, have been audited by Moss Adams LLP,
independent public accountants. The consolidated financial statements as of May
31, 1996 and 1995 appear in this Prospectus and the Registration Statement. The
auditor's reports with respect to the consolidated financial statements of the
Company as of May 31, 1996 and 1995 and for the years then ended are included in
reliance upon the authority of said firm as experts in auditing and accounting
in giving said reports.
The financial statements of Morel included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus, filed as part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and to the exhibits and
schedules thereto, which may be inspected at the Commission's offices without
charge, or copies of which may be obtained from the Commission upon payment of
the prescribed fees. Statements made in this Prospectus as to the contents of
any contract, agreement, or document referred to are not necessarily complete,
and in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, and each such
statement is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports and other information with the
Commission via electronic filing. Reports, proxy statements, and other
information filed by the Company with the Commission pursuant to the information
requirements of the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington, D. C. 20549 and the regional
offices of the Commission located at 75 Park Place, 14th Floor, New York, New
York 10007 and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661.
Copies of such material may be obtained at prescribed rates from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza Building, 450
Fifth Street, N.W., Washington, D.C. 20549 or from the Commission's Web site at
"http://www.sec.gov".
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PCT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report.............................................................................. F-2
Consolidated Balance Sheet as of May 31, 1996 and 1995.................................................... F-3
Consolidated Statement of Operations for the years ended May 31, 1996 and 1995............................ F-4
Consolidated Statement of Changes in Stockholders' Equity for the years ended May 31, 1996 and 1995....... F-5
Consolidated Statement of Cash Flows for the years ended May 31, 1996 and 1995............................ F-6
Notes to Consolidated Financial Statements................................................................ F-8
PCT HOLDINGS, INC. AND SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENT
Pro Forma Combined Financial Statement -- Notes and Management's Statement................................ F-22
Pro Forma Combined Statement of Operations for the year ended May 31, 1996................................ F-23
MOREL INDUSTRIES, INC. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants........................................................ F-24
Balance Sheets as of June 30, 1995 and 1994............................................................... F-25
Statements of Income for the years ended June 30, 1995 and 1994........................................... F-26
Statements of Stockholders' Equity for the years ended June 30, 1995 and 1994............................. F-27
Statements of Cash Flow for the years ended June 30, 1995 and 1994........................................ F-28
Summary of Accounting Policies and Notes to Financial Statements.......................................... F-29
MOREL INDUSTRIES, INC. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheet as of September 30, 1995.................................................................... F-34
Statements of Operations for the three months ended September 30, 1995 and 1994........................... F-35
Statements of Cash Flow for the three months ended September 30, 1995 and 1994............................ F-36
Notes to Interim Financial Statements..................................................................... F-37
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PCT Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of PCT Holdings,
Inc. and Subsidiaries (the Company) as of May 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PCT
Holdings, Inc. and Subsidiaries as of May 31, 1996 and 1995, and the results of
their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ MOSS ADAMS LLP
Everett, Washington
June 15, 1996, except for Note 7 and
Note 15(b), as to which
the date is July 15, 1996.
F-2
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash........................................................................... $ 725,000 $ 1,079,000
Restricted cash................................................................ 1,000,000
Stock subscriptions receivable................................................. 1,030,000
Accounts receivable............................................................ 3,359,000 1,076,000
Inventory...................................................................... 6,699,000 4,375,000
Current portion of note receivable from related party.......................... 52,000 44,000
Prepaid expenses and other..................................................... 144,000 40,000
-------------- --------------
Total current assets......................................................... 13,009,000 6,614,000
-------------- --------------
PROPERTY AND EQUIPMENT........................................................... 10,656,000 3,684,000
-------------- --------------
OTHER ASSETS
Notes receivable from related party, net of current portion.................... 183,000 235,000
Costs in excess of net book value of acquired subsidiaries..................... 1,938,000 463,000
Patents........................................................................ 1,387,000 478,000
Non-compete agreement.......................................................... 79,000 100,000
Other.......................................................................... 397,000 56,000
-------------- --------------
Total other assets........................................................... 3,984,000 1,332,000
-------------- --------------
TOTAL ASSETS............................................................... $ 27,649,000 $ 11,630,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable.................................................................. $ 2,438,000 $ 600,000
Bank line of credit............................................................ 1,224,000
Accounts payable............................................................... 3,142,000 1,527,000
Accrued liabilities............................................................ 840,000 518,000
Current portion of long-term debt.............................................. 4,290,000 2,508,000
Current portion of capital lease obligations................................... 53,000 51,000
Current portion of non-compete agreement payable............................... 70,000 35,000
-------------- --------------
Total current liabilities.................................................... 12,057,000 5,239,000
LONG-TERM LIABILITIES
Long-term debt, net of current portion......................................... 1,809,000 628,000
Capital lease obligations, net of current portion.............................. 152,000 115,000
Non-compete agreement payable, net of current portion.......................... 30,000 65,000
Deferred income tax............................................................ 592,000
Deferred rent and other........................................................ 470,000 129,000
-------------- --------------
Total liabilities............................................................ 15,110,000 6,176,000
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock................................................................... 19,102,000 11,018,000
Accumulated deficit............................................................ (6,563,000) (5,564,000)
-------------- --------------
Total stockholders' equity................................................... 12,539,000 5,454,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 27,649,000 $ 11,630,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
NET SALES........................................................................ $ 20,725,000 $ 11,035,000
COST OF SALES.................................................................... 16,439,000 9,092,000
-------------- --------------
GROSS PROFIT..................................................................... 4,286,000 1,943,000
OPERATING EXPENSES............................................................... 4,765,000 2,789,000
-------------- --------------
LOSS FROM OPERATIONS............................................................. (479,000) (846,000)
-------------- --------------
OTHER INCOME AND EXPENSE
Interest income................................................................ 37,000 74,000
Interest expense............................................................... (535,000) (356,000)
Merger, acquisition and capital costs.......................................... (104,000) (538,000)
Other.......................................................................... 15,000 14,000
-------------- --------------
(587,000) (806,000)
-------------- --------------
LOSS BEFORE FEDERAL INCOME TAX................................................... (1,066,000) (1,652,000)
FEDERAL INCOME TAX BENEFIT....................................................... 67,000 241,000
-------------- --------------
NET LOSS......................................................................... $ (999,000) $ (1,411,000)
-------------- --------------
-------------- --------------
LOSS PER SHARE OF COMMON STOCK................................................... $ (0.16) $ (0.41)
-------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE PERIOD............................ 6,209,000 3,469,000
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT
----------- -------------- --------------
<S> <C> <C> <C>
BALANCE, May 31, 1994............................................... 2,764,952 $ 5,379,000 $ (4,153,000)
Common stock issued............................................... 2,137,680 4,682,000
Stock options and warrants exercised.............................. 160,043 317,000
Acquisition of Ceramic Devices, Inc............................... 133,333 640,000
Net loss.......................................................... (1,411,000)
----------- -------------- --------------
BALANCE, May 31, 1995............................................... 5,196,008 11,018,000 (5,564,000)
Common stock issued............................................... 1,503,551 4,932,000
Stock warrant issued for patents.................................. 57,000
Acquisition of Seismic Safety Products, Inc....................... 128,750 483,000
Acquisition of Morel Industries, Inc.............................. 650,000 2,600,000
Warrants issued for bridge financing.............................. 12,000
Net loss.......................................................... (999,000)
----------- -------------- --------------
BALANCE, May 31, 1996............................................... 7,478,309 $ 19,102,000 $ (6,563,000)
----------- -------------- --------------
----------- -------------- --------------
The Company has authorized 100,000,000 shares of common stock.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Cash received from customers................................................. $ 19,730,000 $ 11,152,000
Cash paid to suppliers and employees......................................... (21,801,000) (11,310,000)
Interest paid................................................................ (658,000) (333,000)
Interest received............................................................ 37,000 74,000
--------------- ---------------
Net cash from operating activities......................................... (2,692,000) (417,000)
--------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES
Transfer of cash to restricted cash.......................................... (1,000,000)
Purchase of property and equipment........................................... (754,000) (605,000)
Proceeds from sale of property and equipment................................. 9,000
Purchase of patents.......................................................... (400,000) (461,000)
Payments received on note receivable from related party...................... 44,000 20,000
Increase in other assets, net................................................ (79,000)
--------------- ---------------
Net cash from investing activities......................................... (2,180,000) (1,046,000)
--------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES
Net change in bank line of credit............................................ 308,000 (1,387,000)
Proceeds from long-term debt................................................. 767,000 2,229,000
Payments on long-term debt and capital lease obligations..................... (1,457,000) (1,299,000)
Proceeds from notes payable.................................................. 1,338,000 50,000
Payments on notes payable to stockholders.................................... (1,660,000)
Sale of common stock......................................................... 3,878,000 4,582,000
Sale of warrants............................................................. 12,000
Increase in stock issue costs................................................ (328,000)
--------------- ---------------
Net cash from financing activities......................................... 4,518,000 2,515,000
--------------- ---------------
NET CHANGE IN CASH............................................................. (354,000) 1,052,000
CASH, beginning of year........................................................ 1,079,000 27,000
--------------- ---------------
CASH, end of year.............................................................. $ 725,000 $ 1,079,000
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH FROM OPERATING ACTIVITIES
Net loss........................................................................ $ (999,000) $ (1,411,000)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization................................................. 871,000 408,000
Loss on sale of property and equipment........................................ 8,000
Merger, acquisition and capital costs paid in common stock.................... 337,000
Director compensation paid in common stock.................................... 24,000
Federal income tax benefit.................................................... (67,000) (241,000)
Changes in operating assets and liabilities
Accounts receivable......................................................... (1,018,000) 102,000
Inventory................................................................... (1,303,000) (215,000)
Prepaid expenses and other.................................................. 8,000 71,000
Accounts payable and accrued liabilities.................................... (216,000) 532,000
-------------- --------------
NET CASH FROM OPERATING ACTIVITIES................................................ $ (2,692,000) $ (417,000)
-------------- --------------
-------------- --------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Subsidiaries (Note 1):
Fair value of assets acquired, other than cash................................ $ 10,286,000 $ 1,589,000
Liabilities assumed........................................................... (7,203,000) (370,000)
Notes payable issued.......................................................... (600,000)
-------------- --------------
Common stock issued........................................................... $ 3,083,000 $ 619,000
-------------- --------------
-------------- --------------
Stock subscriptions receivable for issuance of common stock..................... $ 1,030,000
Seller financed purchase of property and equipment.............................. $ 389,000 $ 203,000
Equipment purchased through capital leases...................................... $ 150,000 $ 151,000
Seller financed purchase of patents............................................. $ 520,000
Patent acquired through issuance of warrant..................................... $ 57,000
Note payable reduction through issuance of stock................................ $ 100,000
Seller financed non-compete agreement payable................................... $ 100,000
Collateral recovery of building for note receivable............................. $ 673,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
NOTE 1 -- FORMATION AND ACQUISITIONS
During the year ended May 31, 1995, the original PCT Holdings, Inc., a
Washington corporation (Original PCTH), merged with PCT Merger Corporation, a
Washington corporation and wholly owned subsidiary of an inactive public
company, Verazzana Ventures, Ltd. (Verazzana). Subsequent to the merger
Verazzana changed its name to PCT Holdings, Inc., a Nevada corporation (the
Company) and PCT Merger Corporation changed its name to PCT Holdings, Inc., a
Washington corporation (PCTH Washington). As consideration for the merger,
2,963,675 shares of the Company's authorized, but previously unissued, common
stock were issued to the shareholders of Original PCTH. A finders and consulting
fee related to the merger of $50,000 cash and 212,500 shares of the Company's
common stock was paid to a consultant. Included in merger, acquisition and
capital costs during the year ended May 31, 1995 is $155,000 related to the cash
payment and the fair market value of the stock issued. The merger was accounted
for as if a pooling of interests. These consolidated financial statements report
results of operations as if the business combination occurred as of the
beginning of the year ended May 31, 1995.
Effective for accounting purposes as of February 28, 1995, the Company
acquired and took control of Ceramic Devices, Inc., a California corporation.
The acquisition was accomplished through the merger of the California
corporation into Ceramic Devices, Inc., a newly formed Washington corporation
and wholly owned subsidiary of the Company (Ceramic Devices), that closed in
April 1995. As consideration for the merger, the Company paid the California
corporation's shareholders $1.24 million, consisting of 133,333 shares of the
Company's common stock valued at $4.80 per share, or $640,000, and notes payable
totaling $600,000 (Note 8). The merger resulted in costs in excess of net book
value of Ceramic Devices of $471,000.
In November 1995, Seismic Safety Products, Inc. (Seismic), a newly formed
Washington corporation wholly owned by PCTH Washington, acquired all of the
assets of Seismic Safety Products, Inc., a Florida corporation. The asset
purchase price consisted of $70,000 in cash and 128,750 shares of the Company's
common stock valued at $3.75 per share, or $483,000, for a total of $553,000. In
connection with the transaction, Seismic acquired from related parties of the
Florida corporation certain patents for a total consideration of $520,000 (Note
9). Costs in excess of net book value of $535,000 were recorded as a result of
this acquisition.
During the year ended May 31, 1996, the Company acquired Morel Industries,
Inc. (Morel) through the merger of Morel Acquisition Corporation, a newly formed
Washington corporation wholly owned by the Company, into Morel. The transaction
was effective for accounting purposes as of November 30, 1995 and the Company
issued 650,000 shares of common stock, after certain post-closing adjustments,
valued at $4.00 per share for a total purchase price of approximately $2.6
million. Costs in excess of net book value of $939,000 were recorded as a result
of this merger.
The Seismic acquisition and the Ceramic Devices and Morel mergers described
above were accounted for by the purchase method. Accordingly, assets and
liabilities have been reflected at fair value. The operating results of these
acquired companies are included in the consolidated statements of operations
from their respective acquisition dates. Any costs in excess of net book value
as a result of these transactions are being amortized over 15 years.
In May 1996, PCTH Washington transferred its sole assets, the stock of
Pacific Coast Technologies, Inc. (Pacific Coast), Cashmere Manufacturing Co.,
Inc. (Cashmere) and Seismic to the Company, and was dissolved. There was no
effect on these consolidated financial statements and there were no federal
income tax consequences as a result of the dissolution.
F-8
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 1 -- FORMATION AND ACQUISITIONS (CONTINUED)
The following summary, prepared on a pro forma basis, combines the
consolidated condensed results of operations as if Ceramic Devices, Morel and
Seismic had been acquired as of the beginning of the year ended May 31, 1995.
There are no material adjustments which impact the summary.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1996 1995
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Net sales.............................................................. $ 25,217,000 $ 22,779,000
Loss from operations................................................... $ (961,000) $ (1,086,000)
Net loss............................................................... $ (1,704,000) $ (1,480,000)
Loss per share of common stock......................................... $ (0.27) $ (0.43)
Weighted average shares outstanding during the period.................. 6,209,000 4,119,000
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
indicated nor are they intended to indicate results that may occur in the
future.
NOTE 2 -- OPERATIONS
The Company is located in Wenatchee, Washington. Its fiscal year end is May
31.
The Company operates through five wholly owned subsidiaries. Two of these
businesses are engaged in the production of electronic devices, with Pacific
Coast producing a variety of electronics packages and connectors shielded from
their environment by the Company's proprietary ceramic seals, and Ceramic
Devices producing devices designed to filter out electromagnetic interference
detrimental to other electronic devices. Seismic designs, manufactures and sells
automatic natural gas shut-off valves for use in earthquake sensitive
environments. Cashmere and Morel manufacture machined or cast metal products for
many applications, including products that are incorporated into or
complementary with the products of other subsidiaries of the Company.
The Company's customers are located throughout the United States and Europe.
Included in accounts receivable at May 31, 1996 are $250,000 and $569,000 which
are due from The Boeing Company and PACCAR, respectively. Included in accounts
receivable at May 31, 1995 is $134,000, which is due from The Boeing Company.
Sales to The Boeing Company were approximately $5.9 million and $5.3 million in
the years ended May 31, 1996 and 1995, respectively. Sales to PACCAR were
approximately $3.1 million in the year ended May 31, 1996.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
material intercompany transactions and balances have been eliminated.
(b) INVENTORY Inventory is generally stated at the lower of cost
(first-in, first-out method) or market.
(c) DEPRECIATION Property and equipment is depreciated for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets. For federal income tax purposes, accelerated methods are
used over statutory lives.
(d) PATENTS Purchased patents are recorded at cost. Developed patents are
recorded at the value of related compensation awarded. Patents are amortized on
the straight-line basis over the estimated useful lives of the patents of 11 to
17 years.
F-9
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) EXCESS PURCHASE PRICE Costs in excess of the net book value of
acquired subsidiaries is amortized over 15 years. The Company assesses the
recoverability of this intangible asset on a regular basis by determining
whether the amortization of the balance over its remaining life can be recovered
through projected undiscounted future cash flows.
(f) STOCK ISSUANCE COSTS During 1996, the Company incurred $318,000 of
costs related to the issuance of common stock in a proposed public offering.
These costs were deferred as of May 31, 1996 and are included in other assets.
These costs will be charged against the proceeds of the stock offering.
(g) FEDERAL INCOME TAX Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between the tax bases
of assets and liabilities and their reported amounts. The Company and its
subsidiaries file a consolidated federal income tax return.
(h) PER SHARE INFORMATION Loss per share of common stock is based upon the
weighted average number of shares of common stock outstanding during the period,
retroactively adjusted for stock splits. The weighted average number of shares
outstanding was 6,209,000 and 3,469,000 during the years ended May 31, 1996 and
1995, respectively. Stock options which have been granted are not included in
the weighted average number of shares outstanding as their effect would be
anti-dilutive.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. The carrying amounts of cash, accounts
receivable, other noncurrent assets, accounts payable, accrued expenses and
notes payable are a reasonable estimate of their fair value. The carrying value
of long-term debt differs from the estimated fair value as follows:
<TABLE>
<CAPTION>
MAY 31, 1996 MAY 31, 1995
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Long-term debt............................. $ 6,099,000 $ 5,999,000 $ 3,136,000 $ 2,946,000
</TABLE>
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of the year end or that
will be realized in the future.
(j) USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
(k) REVENUE RECOGNITION Revenue is recognized when products are shipped to
customers.
(l) RECLASSIFICATIONS Certain 1995 amounts have been reclassified to
conform with the 1996 presentation.
F-10
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 4 -- INVENTORY
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Raw materials............................................................. $ 1,900,000 $ 1,479,000
Work in progress.......................................................... 2,134,000 1,143,000
Purchased and manufactured
components and finished goods............................................ 2,665,000 1,753,000
------------- -------------
$ 6,699,000 $ 4,375,000
------------- -------------
------------- -------------
</TABLE>
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital lease arrangement,
are as follows:
<TABLE>
<CAPTION>
ESTIMATED MAY 31,
USEFUL LIFE -----------------------------
IN YEARS 1996 1995
----------- -------------- -------------
<S> <C> <C> <C>
Land........................................................ $ 470,000 $ 230,000
Buildings................................................... 20-39 3,915,000 446,000
Machinery and equipment..................................... 5-20 7,376,000 3,981,000
Furniture and fixtures...................................... 3-15 854,000 478,000
Leasehold improvements...................................... 7-31 273,000 119,000
-------------- -------------
12,888,000 5,254,000
Less accumulated depreciation and amortization.............. 2,232,000 1,570,000
-------------- -------------
$ 10,656,000 $ 3,684,000
-------------- -------------
-------------- -------------
</TABLE>
Machinery and equipment and furniture and fixtures at May 31, 1996 and 1995,
includes $226,000 and $230,000, respectively, of assets acquired under capital
lease. Accumulated amortization related to leased assets was $44,000 and $34,000
for the years ended May 31, 1996 and 1995, respectively.
The Company recognized depreciation of property and equipment of $670,000
and $344,000 during the years ended May 31, 1996 and 1995, respectively.
Amortization of intangible assets was recognized in the amount of $201,000 and
$64,000, of which capital lease amortization was $26,000 and $27,000,
respectively, for the years ended May 31, 1996 and 1995, respectively.
In October 1995, the Company began to utilize a building located in
Cashmere, Washington which had previously been considered real estate held for
resale. The asset was reclassified to an operating asset during the year ended
May 31, 1996, and the May 31, 1995 balance sheet was reclassified to conform to
the 1996 presentation.
NOTE 6 -- NOTE RECEIVABLE FROM RELATED PARTY
In May 1995, the Company reacquired a portion of land and buildings
originally sold to two stockholders during the year ended May 31, 1994. At the
time of the repurchase, a note receivable which was part of the original sale
transaction and due from one stockholder was reduced to $279,000, and the
remainder of that note was canceled in exchange for the land and buildings based
on a negotiated fair market value of $673,000. The stockholder agreed to assume
the remaining note payable collateralized by the land and building. The terms of
the note receivable mirror the terms of the note payable, with interest at a
designee's prime rate (8.25% at May 31, 1996) plus 1%, due in installments of
$5,900 to the maturity date of the note payable in March 1999 (Note 9).
F-11
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 7 -- BANK LINE OF CREDIT
The Company is negotiating to renew a bank line of credit arrangement which
expired July 1, 1996. The interest on the outstanding balance owing at May 31,
1996 is being paid monthly at the bank's prime rate (8.25% at May 31, 1996) plus
2%. The bank has issued a standby letter of credit which provides collateral for
borrowings from Chelan County, State of Washington (Note 9). The Company has
established a $1.0 million certificate of deposit at the bank as security for
the letter of credit which expires September 18, 1996. The security for
obligations under the expired loan agreement is all of the assets of the
Company, Pacific Coast, Cashmere and Ceramic Devices.
NOTE 8 -- NOTES PAYABLE
<TABLE>
<CAPTION>
MAY 31,
--------------------------
1996 1995
------------- -----------
<S> <C> <C>
Former stockholders of Ceramic Devices
Notes payable bearing interest at 10% with principal and interest all due August
1996. Collateralized by the assets of Ceramic Devices............................... $ 600,000 $ 600,000
UTCO Associates, Ltd.
Note payable, net of original issue discount of $12,000, in monthly interest only
payments at 18% through September 1996 at which time the principal balance is due.
The note provides, with certain contingencies, renewal options through December
1996. Collateralized by all of the personal property assets of the Company, Pacific
Coast, Cashmere, Morel and Seismic.................................................. 1,188,000
Individual
Note payable in monthly installments of $20,000 plus interest at 15% through
September 1996. Collateralized by the real property of Morel, subordinate to the
industrial revenue bond debt (Note 9), and all personal property of Morel, of which
accounts receivable and inventory are subordinate to the security interests of UTCO
Associates, Ltd..................................................................... 500,000
Related party
Note payable bearing interest at 18% with principal and interest all due September
1996 and unsecured.................................................................. 150,000
------------- -----------
$ 2,438,000 $ 600,000
------------- -----------
------------- -----------
</TABLE>
In connection with the UTCO and related party loans above, the Company
issued the lenders warrants to purchase 337,500 shares of common stock at an
exercise price of $4.80 per share. The warrants expire in five years and were
independently valued at approximately $12,000. This amount represents original
issue discount which is expected to be charged to operations in the first
quarter of fiscal 1997.
F-12
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MAY 31, 1996 AND 1995
NOTE 9 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Chelan County, State of Washington
Principal amount is payable in June 1997. Holder may demand payment at any time.
Interest is payable quarterly at 3%. Collateralized by a $2,000,000 million letter
of credit and personal guarantees of certain stockholders (Note 7)................ $ 2,000,000 $ 2,000,000
Bank
Industrial revenue bond payable in monthly installments of $19,200, including
interest at 8.12% through November 2009. Collateralized by land, building and
equipment of Morel, personal guarantees of certain stockholders and the guarantee
of the Company.................................................................... 1,367,000
City of Entiat
Note payable in monthly installments of $7,300, including interest at 8% through
May 2001 at which time the balance of $200,100 will be due. Collateralized by
accounts receivable, inventory, equipment and real property of Morel and the
guarantee of the Company. Subordinated to the bank industrial revenue bond
debt.............................................................................. 600,000
Individual
Note payable in monthly installments of $8,300, including interest at 10.25% until
February 1998 at which time the balance of $179,000 will be due. Collateralized by
patents and accounts receivable of Pacific Coast.................................. 303,000 368,000
Bank
Note payable in monthly installments of $5,900, including interest at a designee's
prime rate plus 1% through March 1999, at which time the balance of $82,000 is
due. Collateralized by real property of Cashmere and personal guarantee of a
certain stockholder (Note 6)...................................................... 235,000 279,000
Bank
Note payable in monthly installments of $7,800, plus interest at the bank's prime
rate plus 1.75% through September 1998. Cross collateralized and cross-defaulted
with bank loan agreement (Note 7)................................................. 219,000
Corporation
Note payable in quarterly installments of $12,200, including interest at 8%
through March 2001, unsecured..................................................... 200,000
Various
Notes payable in total monthly installments of $15,000, including interest at 9%
to 14%. Collateralized by equipment of the Company................................ 621,000 489,000
Title Company
Note payable in quarterly interest only payments at 12% through February 1997 at
which time the balance of $177,000 will be due. Collateralized by the real and
personal property of Morel. Subordinated to certain other debt.................... 177,000
</TABLE>
F-13
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 9 -- LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1996 1995
------------- -------------
Quest for Economic Development
Note payable in monthly installments of $1,700 including interest at 10.5% through
April 2000 at which time the balance of $58,000 will be due. Collateralized by the
personal residences and guarantees of certain stockholders........................ 92,000
<S> <C> <C>
Former stockholders of Seismic (Florida corporation)
Notes payable due November 1996, unsecured........................................ 200,000
Former stockholder of Seismic (Florida corporation)
Note payable in monthly installments of $5,000 through October 1997, unsecured.... 85,000
------------- -------------
6,099,000 3,136,000
Less current portion................................................................ 4,290,000 2,508,000
------------- -------------
Long-term portion................................................................... $ 1,809,000 $ 628,000
------------- -------------
------------- -------------
</TABLE>
The industrial revenue bond agreements require, among other matters, that
the Company maintain minimum working capital, tangible net worth and debt to
tangible net worth ratios. In conjunction with the merger of Morel, the bank
restructured the covenants through the expiration of the agreements. The Company
was not in compliance with the covenants at May 31, 1996. The bank has provided
a waiver of the covenants through September 1, 1996 at which time the entire
balance due under the bond agreements is callable. The outstanding principal
balance has been classified as a current liability.
Long-term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31, AMOUNT
- ------------------------------------------------------------------------ -------------
<S> <C>
1997.................................................................... $ 4,290,000
1998.................................................................... 677,000
1999.................................................................... 346,000
2000.................................................................... 265,000
2001.................................................................... 153,000
Thereafter.............................................................. 368,000
-------------
$ 6,099,000
-------------
-------------
</TABLE>
NOTE 10 -- LEASING ARRANGEMENTS AND COMMITMENTS
(a) CAPITAL LEASE OBLIGATIONS -- The Company is obligated under several
capital lease arrangements to finance the acquisition of machinery and office
equipment. Assets under capital leases are capitalized using interest rates
appropriate at the inception of the lease.
F-14
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 10 -- LEASING ARRANGEMENTS AND COMMITMENTS (CONTINUED)
Minimum lease payments under the capital leases and the present value of the
minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31, AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................. $ 79,000
1998............................................................................. 64,000
1999............................................................................. 56,000
2000............................................................................. 45,000
2001............................................................................. 25,000
Thereafter....................................................................... 16,000
-----------
Total minimum lease payments..................................................... 285,000
Less: Amount representing interest............................................... 80,000
-----------
Present value of minimum lease payments.......................................... 205,000
Current portion.................................................................. 53,000
-----------
Long-term portion................................................................ $ 152,000
-----------
-----------
</TABLE>
(b) OPERATING LEASES -- The Company leases the manufacturing facilities in
which Pacific Coast, Cashmere, Ceramic Devices and Seismic are located through
November 2005 from the Port of Chelan County. Rent payments through September
2000 are based on a percentage of the base rent, resulting in a deferred rent
liability. Rental expense is recorded ratably over the term of the lease.
Beginning in October 1998, the base rent is subject to annual adjustments for
increases in the Consumer Price Index.
In February 1995, the Company agreed to cancel the existing lease on the
Cashmere facility with a shareholder upon completion of the new facilities to be
leased from the Port of Chelan County. A lease cancellation fee of $108,000 was
paid and charged to operations in the year ended May 31, 1995.
In April 1996, the Company moved the manufacturing facilities of Ceramic
Devices to Wenatchee. The Company remains obligated under two leases which
housed Ceramic Devices' manufacturing facilities in San Diego through April
1997. Monthly payments on the leases are $6,775. While the Company is attempting
to sublease the space, there is no assurance that the Company will be
successful. The Company has recorded a loss of $73,000 in the year ended May 31,
1996 for the remaining lease payments under the leases.
The Company has several vehicle and equipment leases with minimum monthly
lease payments in the aggregate of approximately $2,700. The lease terms range
from three to six years.
Total rental expense was $516,000 and $421,000 for the years ended May 31,
1996 and 1995, respectively.
F-15
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 10 -- LEASING ARRANGEMENTS AND COMMITMENTS (CONTINUED)
Minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31, AMOUNT
- ------------------------------------------------------------------------ -------------
<S> <C>
1997.................................................................... $ 389,000
1998.................................................................... 349,000
1999.................................................................... 357,000
2000.................................................................... 331,000
2001.................................................................... 323,000
Thereafter.............................................................. 1,380,000
-------------
$ 3,129,000
-------------
-------------
</TABLE>
NOTE 11 -- FEDERAL INCOME TAX
The federal income tax benefit represents the expected utilization of net
operating loss (NOL) carryforwards generated subsequent to the Morel and
Cashmere mergers. Loss carryforwards generated by the Company prior to such
mergers may, subject to certain limitations, reduce tax liabilities on future
earnings, or in part, reduce remaining deferred tax liabilities by reduction of
the costs in excess of net book value of acquired assets in the Morel merger.
The benefits of $67,000 and $241,000 recognized in the years ended May 31, 1996
and 1995, respectively, resulted from recording net operating losses available
to offset deferred tax liabilities. The income tax benefit reflected in the
statement of operations is less than the statutory rate of 34% because of
certain nondeductible expenses and limitations on the utilization of net
operating losses.
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $8,829,000, the benefits of which expire in the tax
year 2001 through the tax year 2011. The net operating losses created by the
subsidiaries prior to their acquisition and the net operating losses created as
a consolidated group or groups subsequent to a qualifying tax free merger or
acquisition, have limitations related to the amount of usage by each subsidiary
or taxable consolidated group as described in the Internal Revenue Code. The
following approximate net operating losses are available on an individual
company basis, without taking into account the aforementioned expirations or
limitations: PCT Holdings, Inc. $126,000, Pacific Coast $5,584,000, Ceramic
Devices $342,000, Morel $1,979,000, Seismic $107,000, and Cashmere $691,000. If
the subsidiaries achieve profitable operations, the net operating loss
carryforwards available should reduce the federal income taxes due in future tax
years.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Deferred tax assets
Inventory................................................... $ 91,000 $ 185,000
Net operating loss carryforward............................. 3,002,000 2,130,000
Other....................................................... 183,000 55,000
Valuation allowances........................................ (2,429,000) (2,015,000)
-------------- --------------
847,000 355,000
Deferred tax liabilities
Depreciation................................................ 1,439,000 355,000
-------------- --------------
Net deferred tax liability.................................... $ 592,000 $ --
-------------- --------------
-------------- --------------
</TABLE>
F-16
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 11 -- FEDERAL INCOME TAX (CONTINUED)
SFAS No. 109 requires the Company to record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets will
not be realized." Management believes that some of the excess of NOL
carryforwards over temporary differences may be utilized in future periods.
However, due to the uncertainty of future federal taxable income, a valuation
allowance for the full amount of the net deferred tax asset has been recorded at
May 31, 1996 and 1995. Due to limitations on the availability of certain of the
NOL's referred to above, deferred tax liabilities associated with fixed assets
acquired in the Morel merger have not been fully offset.
NOTE 12 -- COMPENSATION PLANS AND COMMITMENTS
LONG-TERM INVESTMENT AND INCENTIVE PLAN. The Company has a long-term stock
investment and incentive plan (the Option Plan) under which directors, officers,
key employees and other key individuals may be awarded stock options, stock
appreciation rights, stock bonuses and cash bonuses. Under the plan, the option
exercise price is generally no less than fair market value at the date of grant.
Options expire no later than ten years from the grant date.
The Company has evaluated the effect of the recent accounting pronouncement,
SFAS No. 123 "Accounting for Stock-Based Compensation." The Company intends to
continue to apply APB Opinion No. 25 in accounting for stock-based compensation
for purposes of determining net income and to adopt the pro forma disclosure
requirements of SFAS No. 123 in the year ending May 31, 1997.
During the year ended May 31, 1996, the Company granted options to purchase
145,283 shares of the Company's common stock under the Option Plan, with a
weighted average exercise price of $5.08 per share. The exercise price of the
options granted equaled the fair market value of the Company's common stock on
the dates of grant. No options granted were exercised or canceled during the
year ended May 31, 1996. Of the options outstanding, 23,333 are currently
exercisable. The remaining 121,950 outstanding options vest, if at all, in
increments of 24,390 shares on each of June 1, 1996, 1997, 1998, 1999 and 2000.
All outstanding options will expire in November 2005. There were no options
under the Option Plan granted prior to the year ended May 31, 1996, and
therefore there were no outstanding options under the Option Plan at May 31,
1995.
In May 1996, the Company agreed to grant an officer an option to purchase
845,000 shares of the Company's common stock under the Option Plan, upon the
effective date of the public offering. The exercise price is contingent upon the
price of the public offering, but in no event will it be less than $3.75 per
share. The option will expire ten years after the date of grant.
INDEPENDENT DIRECTOR STOCK PLAN -- During the year ended May 31, 1996, the
Company adopted an Independent Director Stock Plan (the Director Plan) under
which non-employee directors (Independent Directors) of the Company are awarded
stock. The Director Plan provides for an initial award of 500 shares of the
Company's common stock to each of the Independent Directors serving upon
adoption of the Director Plan, and an initial award of 500 shares of the
Company's common stock to each new Independent Director. In addition, the
Director Plan provides for an annual award to each Independent Director
equivalent to the result of $5,000 divided by the fair market value of the
Company's common stock on the award date. The initial award is fully vested upon
the date of the award. The annual award vests in full on the first anniversary
following the date of the annual award if the Independent Director has attended
at least 75% of the regularly scheduled meetings of the Board during the year.
If an Independent Director does not attend 75% of the regularly scheduled
meetings of the board between the date of award of an annual award and the first
anniversary thereof, the
F-17
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 12 -- COMPENSATION PLANS AND COMMITMENTS (CONTINUED)
shares shall be forfeited. In November 1995, 9,000 shares of the Company's
common stock were issued to the Independent Directors. Included in the year
ended May 31, 1996 is $24,000 of compensation expense resulting from the shares
issued.
EMPLOYMENT AGREEMENTS. The Company has employment agreements with certain
officers and key employees. The agreements are generally for three year terms
and are cancelable for cause. Compensation under the agreements includes base
compensation plus incentives including up to 136,666 stock options, under the
Option Plan, with exercise prices ranging from $2.00 to $8.00 per share. The
incentives are awarded at the discretion of the Board of Directors on an annual
basis. The stock options are not considered granted until awarded by the Board
of Directors.
OTHER AGREEMENTS. The Company, from time to time, enters into other
agreements with employees.
Effective as of February 15, 1995, the Company converted warrants issued by
Original PCTH into warrants for the purchase of an aggregate of 125,000 shares
of the Company's common stock to certain management employees, exercisable at
$2.00 per share, the fair value on the date of grant. The warrants expire in
December 2004 and February 2005, respectively. The warrants were outstanding at
May 31, 1996 and 1995.
On January 31, 1995, the Company granted warrants for the purchase of up to
35,000 shares of common stock at $2.00 per share, the fair value on the date of
the agreement, to a certain employee. The exercise of the warrants was
contingent upon the issuance of a patent and Pacific Coast achieving certain
sales goals for calendar years 1996 and 1997. On July 18, 1995, the measurement
date, the patent was issued and 15,000 of the warrants vested and became
exercisable. The fair market value of the Company's common stock was $5.80 per
share at the date the warrants vested. The Company has capitalized patent costs
of $57,000 related to the excess of the fair market value of the common stock
over the exercise price of the warrants at the measurement date.
RETIREMENT PLAN. The Company maintains a 401(k) plan covering all eligible
employees who meet service requirements as provided in the plan. Company
contributions to the profit sharing plan are determined annually by the Board of
Directors. No contributions were made by the Company to the plan during the
years ended May 31, 1996 and 1995.
NOTE 13 -- COMMON STOCK
On July 18, 1994, the Original PCTH Board of Directors approved a
one-for-three reverse split of Original PCTH's common stock. This split resulted
in a decrease of 10,309,834 shares of common stock outstanding. On January 26,
1995, the Original PCTH Board of Directors approved a one-for-two reverse split
of Original PCTH's common stock. This split resulted in a decrease of 2,963,675
shares of common stock outstanding. All share and per share amounts have been
restated to retroactively reflect these stock splits.
During the year ended May 31, 1995, just prior to the Verazzana merger (Note
1) the Original PCTH Board of Directors gave all option and warrant holders the
choice of exercising options and warrants at one-half the original exercise
price, or exercising the options at no price and receiving one share of common
stock for every four shares issuable upon exercise of options or warrants held.
Options and warrants to purchase a total of 94,444 shares and 292,965 shares,
respectively, were exercised with resulting proceeds of $30,000 and $54,995,
respectively. The holders of the options and warrants received 48,610 and
111,433 shares of Original PCTH common stock, respectively. The fair
F-18
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 13 -- COMMON STOCK (CONTINUED)
market value of the common stock at the date of exercise was $1.98 per share.
Included in merger, acquisition and capital costs during the year ended May 31,
1995 is $231,888 related to the repricing of the options and warrants. No
options or warrants were exercised during the year ended May 31, 1996.
The Company entered into funding agreements with a Swiss company to find
suitable and qualified investors to purchase shares of the Company's common
stock in an offering exempt from registration under Regulation S of the
Securities Act of 1933, as amended (Regulation S). The Swiss company facilitated
the sale of 1,429,470 shares of the Company's common stock with net proceeds of
$4,908,000, or an average of $3.43 per share, during the year ended May 31, 1996
and 699,000 shares of the Company's common stock with net proceeds of
$3,596,000, or an average of $5.14 per share, during the year ended May 31,
1995. The Swiss company received a commission of $375,000 and a designee of the
Swiss company received 65,000 shares of the Company's common stock during the
year ended May 31, 1996. The Swiss company received $478,000 and designees of
the Swiss company received 1,000,000 shares of the Company's common stock during
the year ended May 31, 1995.
At May 31, 1996, the Company had stock subscriptions receivable of
$1,030,000 after deduction of commissions related to the sales of 390,000 shares
of common stock at $2.54 and $3.00 per share sold under a Regulation S offering
in May 1996. The Company received the stock subscription funds in June 1996.
The following table summarizes option and warrant activity:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------
MAY 31, 1996 MAY 31, 1995
-------------------------- -------------------------
OPTIONS/ PRICE PER OPTIONS/ PRICE PER
WARRANTS SHARE WARRANTS SHARE
--------- --------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 160,000 $ 2.00 387,409 $ 0.60 - 9.00
Options/warrants granted............ 482,783 4.80 - 5.125 160,000 2.00
Exercised........................... 387,409 0 - 1.98
Canceled............................
--------- --------------- --------- --------------
Outstanding at end of year.......... 642,783 $ 2.00 - 5.125 160,000 $ 2.00
</TABLE>
NOTE 14 -- CONTINGENCIES
In the normal course of business, the Company disposes of potentially
hazardous material which could result in claims related to environmental
cleanup. The Company has not been notified of any related claims. The Company is
subject to various other environmental and governmental regulations, however,
the extent of any non-compliance with those regulations is not ascertainable.
The Company is currently a party to various legal actions or claims arising
out of the normal course of business, none of which is expected to have a
material effect on the Company's financial position or results of operations.
F-19
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 15 -- SUBSEQUENT EVENTS
(a) During June 1996, the Company reduced the principal amount of certain
notes payable, as described in Note 8, utilizing proceeds from the May 1996
Regulation S offering, as described in Note 13.
(b) The Company has entered into an underwriting agreement to sell 2,250,000
units composed of one share of the Company's common stock and a warrant to
purchase one share of the Company's common stock at a price of $3.125 per unit.
A portion of the proceeds will be used to repay approximately $2,190,000 of
notes payable and long-term debt.
NOTE 16 -- OTHER RELATED PARTY TRANSACTIONS
On October 9, 1995, a director of the Company loaned Morel $100,000 pursuant
to the terms of a promissory note for working capital until consummation of the
Morel merger. In December 1995, Morel paid the principal balance of the note,
plus $5,000 as consideration for making this loan.
In February 1995, a director of the Company from February 1995 to April 1996
and of Original PCTH and its successor from May 1994 to April 1996, exchanged
his rights in a consulting contract with Original PCTH for shares of common
stock of Original PCTH, which were subsequently converted to 17,361 shares of
the Company's common stock.
NOTE 17 -- BUSINESS SEGMENT INFORMATION
The Company operates through five subsidiaries and operates in two general
business segments, "Electronic and Safety Products" and "Machined and Cast Metal
Products." In the first segment, Pacific Coast and Ceramic Devices develop,
manufacture, market and sell electronic packaging, connectors, and filter
devices, and Seismic designs and sells natural gas shut-off valves. In the
second segment, Cashmere and Morel manufacture machined and cast metal products.
There is vertical integration at various levels and segment transfers are
accounted for on an arm's length pricing basis.
In computing income (loss) from continuing operations for each segment, all
costs have been allocated to segments except merger, acquisition and capital
costs.
F-20
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1996 AND 1995
NOTE 17 -- BUSINESS SEGMENT INFORMATION (CONTINUED)
Identifiable assets are those assets used in the Company's operations in
each business segment, and the identifiable assets do not include advances or
loans between the business segments. There are no identifiable corporate assets,
and no allocations were necessary for assets used jointly by the business
segments.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Net sales
Electronic and safety products....................................... $ 8,533,000 $ 4,280,000
Machined and cast metal products..................................... 12,192,000 6,755,000
-------------- --------------
$ 20,725,000 $ 11,035,000
-------------- --------------
-------------- --------------
Loss from continuing operations
Electronic and safety products....................................... $ (376,000) $ (847,000)
Machined and cast metal products..................................... (586,000) (267,000)
-------------- --------------
Loss................................................................... (962,000) (1,114,000)
Corporate expenses, adjustments and other............................ (104,000) (538,000)
-------------- --------------
$ (1,066,000) $ (1,652,000)
-------------- --------------
-------------- --------------
Identifiable assets
Electronic and safety products....................................... $ 1,383,000 $ 1,287,000
Machined and cast metal products..................................... 9,273,000 2,397,000
-------------- --------------
$ 10,656,000 $ 3,684,000
-------------- --------------
-------------- --------------
Capital expenditures
Electronic and safety products....................................... $ 469,000 $ 876,000
Machined and cast metal products..................................... 1,424,000 209,000
-------------- --------------
$ 1,893,000 $ 1,085,000
-------------- --------------
-------------- --------------
Depreciation and amortization
Electronic and safety products....................................... $ 270,000 $ 209,000
Machined and cast metal products..................................... 426,000 162,000
-------------- --------------
$ 696,000 $ 371,000
-------------- --------------
-------------- --------------
</TABLE>
F-21
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENT
YEAR ENDED MAY 31, 1996
(UNAUDITED)
NOTES AND MANAGEMENT'S STATEMENT
The Company entered into an agreement and plan of merger with Morel, which
owns and operates an aluminum foundry located in Entiat, Washington,
approximately 15 miles north of the Company's operations in Wenatchee,
Washington. Under terms of the agreement, Morel and a wholly owned subsidiary of
the Company merged with Morel as the surviving entity, and the Morel
shareholders received 650,000 shares of common stock of the Company, after
certain post-closing adjustments. The merger was closed on December 1, 1995, and
was effective November 30, 1995 for accounting purposes under the purchase
method of accounting.
The pro forma combined unaudited statement of operations for the year ended
May 31, 1996 was prepared as if the purchase transaction had occurred at the
beginning of the year.
In the opinion of the Company's management, all adjustments necessary to
present fairly the pro forma combined unaudited statement of operations have
been made based upon the terms and conditions of the Morel agreement and plan of
merger. The pro forma combined unaudited statement of operations is not
necessarily indicative of what actual results would have been had the
transactions occurred at the beginning of the year nor does it purport to
indicate the results of future operations of the Company.
This pro forma combined unaudited statement of operations should be read in
conjunction with the audited financial statements and notes thereto of the
Company at and for the years ended May 31, 1996 and 1995 included elsewhere in
this Prospectus and the audited financial statements and notes thereto of Morel
at and for the years ended June 30, 1995 and 1994 included elsewhere in this
Prospectus.
F-22
<PAGE>
PCT HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PCT HOLDINGS, MOREL INDUSTRIES, PRO FORMA PRO FORMA
INC. INC. ADJUSTMENTS COMBINED
-------------- -------------------- ----------- --------------
<S> <C> <C> <C> <C>
NET SALES.................................... $ 20,725,000 $ 4,492,000 $ 25,217,000
COST OF SALES................................ 16,439,000 3,853,000 20,292,000
-------------- ----------- --------------
GROSS PROFIT................................. 4,286,000 639,000 4,925,000
OPERATING EXPENSES........................... 4,765,000 1,118,000 $ 3,000 5,886,000
-------------- ----------- ----------- --------------
LOSS FROM OPERATIONS......................... (479,000) (479,000) (3,000) (961,000)
-------------- ----------- ----------- --------------
OTHER INCOME AND EXPENSE
Interest income............................ 37,000 2,000 39,000
Interest expense........................... (535,000) (171,000) (706,000)
Other...................................... (89,000) (54,000) (143,000)
-------------- ----------- --------------
(587,000) (223,000) (810,000)
-------------- ----------- ----------- --------------
LOSS BEFORE FEDERAL INCOME TAX............... (1,066,000) (702,000) (3,000) (1,771,000)
FEDERAL INCOME TAX........................... 67,000 67,000
-------------- ----------- ----------- --------------
NET LOSS FOR THE YEAR........................ $ (999,000) $ (702,000) $ (3,000) $ (1,704,000)
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
LOSS PER SHARE OF COMMON STOCK............... $ (0.16) $ (0.11) $ (0.27)
-------------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of the pro forma combined financial
statement.
F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Morel Industries, Inc.
Entiat, Washington
We have audited the accompanying balance sheets of Morel Industries, Inc. as
of June 30, 1995 and 1994, and the related statements of income, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Morel Industries, Inc. at
June 30, 1995 and 1994, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ BDO SEIDMAN, LLP
November 8, 1995, except as to
Notes 4 and 9 which date is December 1, 1995
Seattle, Washington
F-24
<PAGE>
MOREL INDUSTRIES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash.............................................................................. $ 152,000 $ 636,000
Accounts receivable (Note 3)...................................................... 1,395,000 1,416,000
Project receivable (Note 8)....................................................... 126,000 897,000
Inventories (Notes 1 and 3)....................................................... 936,000 821,000
Prepaid expenses and other........................................................ 113,000 29,000
------------- -------------
Total current assets.......................................................... 2,722,000 3,799,000
PROPERTY AND EQUIPMENT, less accumulated depreciation (Notes 2 and 3)............... 6,667,000 2,626,000
RECEIVABLE FROM STOCKHOLDERS........................................................ 111,000
DEFERRED BOND COSTS................................................................. 25,000
------------- -------------
$ 9,414,000 $ 6,536,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line-of-credit (Note 3)........................................................... $ 969,000 $ 890,000
Accounts payable.................................................................. 1,106,000 937,000
Accrued expenses.................................................................. 541,000 454,000
Current maturities of long-term debt (Note 4)..................................... 1,001,000 103,000
Pre-billed moving expenditures (Note 8)........................................... 768,000
------------- -------------
Total current liabilities..................................................... 3,617,000 3,152,000
DEFERRED SALES TAX.................................................................. 145,000
LONG-TERM DEBT, net of current maturities (Note 4).................................. 2,148,000
DEFERRED INCOME TAXES (Note 6)...................................................... 728,000 682,000
------------- -------------
Total liabilities............................................................. 6,638,000 3,834,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 9)
Common stock, $100 par value; 2,500 shares authorized; 416 shares issued and
outstanding...................................................................... 42,000 42,000
Common stock, non-voting, $2,000 par value; 2,500 shares authorized; 87.5 shares
issued and outstanding........................................................... 175,000 175,000
Additional paid-in capital........................................................ 825,000 825,000
Retained earnings................................................................. 1,734,000 1,660,000
------------- -------------
Total stockholders' equity.................................................... 2,776,000 2,702,000
------------- -------------
$ 9,414,000 $ 6,536,000
------------- -------------
------------- -------------
</TABLE>
See accompanying summary of acounting policies and notes to financial
statements.
F-25
<PAGE>
MOREL INDUSTRIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
SALES.............................................................................. $ 10,708,000 $ 9,895,000
COST OF SALES...................................................................... 9,623,000 8,327,000
-------------- -------------
GROSS PROFIT....................................................................... 1,085,000 1,568,000
OPERATING EXPENSES................................................................. 1,189,000 1,240,000
-------------- -------------
INCOME (LOSS) FROM OPERATIONS...................................................... (104,000) 328,000
-------------- -------------
OTHER INCOME (EXPENSE)
Interest income.................................................................. 31,000 18,000
Interest expense................................................................. (268,000) (131,000)
Realized recovery (loss) on investment........................................... 29,000 (77,000)
Other expense.................................................................... (14,000) (40,000)
-------------- -------------
Total other income (expense)................................................... (222,000) (230,000)
-------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................................ (326,000) 98,000
EXTRAORDINARY ITEM, gain on sale of foundry less applicable income taxes of
$152,000 and $988,000 (Note 8).................................................... 295,000 1,918,000
-------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES.................................................. (31,000) 2,016,000
DEFERRED INCOME TAX (PROVISION) BENEFIT (Note 6)................................... 105,000 (39,000)
-------------- -------------
NET INCOME......................................................................... $ 74,000 $ 1,977,000
-------------- -------------
-------------- -------------
</TABLE>
See accompanying summary of accounting policies and note to financial
statements.
F-26
<PAGE>
MOREL INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NON-VOTING PAID-IN RETAINED EARNINGS
COMMON STOCK COMMON STOCK CAPITAL (DEFICIT) TOTAL
-------------- -------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, July 1, 1993.......... $ 42,000 $ 175,000 $ 825,000 $ (317,000) $ 725,000
Net income..................... 1,977,000 1,977,000
-------------- -------------- -------------- ----------------- -------------
BALANCE, June 30, 1994......... 42,000 175,000 825,000 1,660,000 2,702,000
Net income..................... 74,000 74,000
-------------- -------------- -------------- ----------------- -------------
BALANCE, June 30, 1995......... $ 42,000 $ 175,000 $ 825,000 $ 1,734,000 $ 2,776,000
-------------- -------------- -------------- ----------------- -------------
-------------- -------------- -------------- ----------------- -------------
</TABLE>
See accompanying summary of accounting policies and note to financial
statements.
F-27
<PAGE>
MOREL INDUSTRIES, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1995 1994
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 74,000 $ 1,977,000
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Gain on sale of foundry........................................................ (295,000) (1,918,000)
Depreciation and amortization.................................................. 356,000 112,000
Deferred income taxes.......................................................... (105,000) 39,000
Settlement of stockholder receivable as a bonus................................ 111,000
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable 21,000 (195,000)
Inventories................................................................ (115,000) (119,000)
Prepaid expenses and other................................................. (84,000) (17,000)
Increase (decrease) in liabilities:
Accounts payable........................................................... 169,000 (262,000)
Accrued expenses........................................................... 86,000 248,000
------------- --------------
Net cash provided by (used in) operating activities.......................... 218,000 (135,000)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and relocation of foundry..................................... 2,509,000 3,336,000
Acquisition of property and equipment............................................ (4,492,000) (1,937,000)
Payment of relocation costs...................................................... (1,964,000) (513,000)
Increase in deferred sales tax................................................... 145,000
Increase in receivable from stockholder.......................................... (111,000)
------------- --------------
Net cash provided by (used in) investing activities.......................... (3,802,000) 775,000
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in line-of-credit............................................ 79,000 90,000
Proceeds from long-term borrowings............................................... 3,439,000
Principal payments on long-term debt............................................. (393,000) (436,000)
Increase in deferred bond costs.................................................. (25,000)
------------- --------------
Net cash provided by (used in) financing activities.......................... 3,100,000 (346,000)
------------- --------------
NET INCREASE (DECREASE) IN CASH.................................................... (484,000) 294,000
CASH, beginning of period.......................................................... 636,000 342,000
------------- --------------
CASH, end of period................................................................ $ 152,000 $ 636,000
------------- --------------
------------- --------------
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Cash paid for interest........................................................... $ 261,000 $ 131,000
------------- --------------
------------- --------------
</TABLE>
See accompanying summary of accounting policies and note to financial
statements.
F-28
<PAGE>
MOREL INDUSTRIES, INC.
SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS AND SIGNIFICANT CUSTOMER -- Morel Industries, Inc.
(Morel) is a manufacturer of aluminum castings located in Entiat, Washington.
During 1994, Morel changed its name from Morel Foundry Corporation to emphasize
Morel's expanding capabilities in machining and powder coat painting.
In 1995 and 1994 sales to a major customer in the Class 8 truck industry
were 75% and 78% of total sales.
INVENTORIES -- Inventories are valued at the lower of cost (first-in,
first-out) or market. Work-in-process is valued at the lower of estimated cost
or market. Estimated cost is derived through an analysis of historical gross
profit margins.
PROPERTY AND EQUIPMENT -- Property and equipment is recorded at cost and is
depreciated using the straight-line method over estimated useful lives as
follows:
<TABLE>
<S> <C>
Office equipment....................................... 3-7 years
Foundry equipment...................................... 7-10 years
Building............................................... 15-40 years
</TABLE>
Expenditures for repairs and maintenance which do not extend the useful life
of the related asset are expensed as incurred.
INCOME TAXES -- Deferred taxes are provided for temporary differences in the
basis of assets and liabilities for book and income tax reporting purposes. If
it is more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.
F-29
<PAGE>
MOREL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
NOTE 1 -- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Work-in-process..................................................... $ 695,000 $ 593,000
Raw materials....................................................... 113,000 101,000
Foundry supplies.................................................... 128,000 127,000
----------- -----------
$ 936,000 $ 821,000
----------- -----------
----------- -----------
</TABLE>
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1995 1994
------------- --------------
<S> <C> <C>
Machinery, equipment and furniture............................. $ 3,769,000 $ 2,874,000
Land and building.............................................. 3,684,000 824,000
Accumulated depreciation....................................... (786,000) (1,072,000)
------------- --------------
Net property and equipment..................................... $ 6,667,000 $ 2,626,000
------------- --------------
------------- --------------
</TABLE>
NOTE 3 -- LINE-OF-CREDIT
Morel has a line-of-credit with a bank with interest at the bank's prime
rate (9% at June 30, 1995) plus 2%. The agreement allows Morel to borrow up to
the lesser of $1.0 million or 80% of eligible accounts receivable as defined by
the bank. At June 30, 1995, $968,000 was outstanding and $31,000 was available
for borrowing. The line-of-credit is secured by accounts receivable, inventories
and equipment and is personally guaranteed by the stockholders, see Notes 4 and
9.
F-30
<PAGE>
MOREL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1994
NOTE 4 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1995 1994
------------- -----------
<S> <C> <C>
Industrial revenue bond payable to a bank with monthly payments of $19,000, including
interest at 8.12% through November 2009, secured by land, building and equipment, and
personally guaranteed by the stockholders............................................ $ 1,953,000
Note payable to a supplier with quarterly interest payments of 12% on the outstanding
balance; principal due February 1996 and 1997, secured by property and equipment..... 277,000
Note payable to an organization with monthly payments of $2,000, including interest at
10.5% through September 2000, secured by personal residences and guarantee of the
stockholders......................................................................... 100,000
Note payable to an individual, interest only at 14% through September 30, 1995, when
interest increases to 15%. Due in full in March 1996. Secured by substantially all
assets of Morel and subordinated to the industrial revenue bond...................... 500,000
Notes payable to suppliers with monthly payments of $1,000 to $45,000, including
interest at 10%. Unsecured with maturities through February 1996..................... 318,000
Note payable to a supplier in quarterly installments of $25,000, plus interest at 12%
through May 1995, unsecured.......................................................... 100,000
Other................................................................................. 1,000 3,000
------------- -----------
3,149,000 103,000
Less current maturities............................................................... 1,001,000 103,000
------------- -----------
Total long-term debt.................................................................. $ 2,148,000 $ --
------------- -----------
------------- -----------
</TABLE>
Scheduled maturities of long-term debt as of June 30, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1996........................................................................... $ 1,002,000
1997........................................................................... 270,000
1998........................................................................... 100,000
1999........................................................................... 109,000
2000........................................................................... 119,000
Thereafter..................................................................... 1,549,000
-------------
$ 3,149,000
-------------
-------------
</TABLE>
Morel's line-of-credit and industrial revenue bond agreements require, among
other matters, that Morel maintain minimum working capital, tangible net worth
and debt to tangible net worth ratios. Morel was not in compliance with the
covenants at June 30, 1995. In conjunction with the merger of Morel on December
1, 1995, the bank provided a waiver of the covenants through November 30, 1995,
and restructured the covenants through the expiration of the agreements, see
Note 9. Management believes Morel will be in compliance with the covenants
through June 30, 1996.
F-31
<PAGE>
MOREL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1994
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Morel leases equipment and vehicles under noncancelable operating leases.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1996............................................................................... $ 32,000
1997............................................................................... 22,000
1998............................................................................... 5,000
1999............................................................................... 2,000
2000............................................................................... 1,000
---------
$ 62,000
---------
---------
</TABLE>
Rent expense for the years ended June 30, 1995 and 1994 was $57,000 and
$67,000.
During the normal course of business, matters arise which may ultimately
subject Morel to claims and litigation. Management believes that the resolution
of these matters will not have a material adverse effect on Morel's financial
condition.
NOTE 6 -- INCOME TAXES
Deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Property and equipment.................................................. $ (1,226,000) $ (1,065,000)
Officers' bonus......................................................... 93,000 48,000
Other................................................................... 58,000 39,000
Net operating loss carryforward......................................... 347,000 296,000
-------------- --------------
$ (728,000) $ (682,000)
-------------- --------------
-------------- --------------
</TABLE>
Morel has net operating loss carryforwards of approximately $1.0 million
with expiration dates through fiscal year 2010.
The difference between Morel's effective income tax rate and the statutory
rate of 34% consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
Income tax (provision) benefit at the statutory rate........................... $ 111,000 $ (33,000)
Amortization of goodwill....................................................... (3,000)
Meals and entertainment........................................................ (3,000) (1,000)
Officer's life insurance....................................................... (2,000) (2,000)
----------- ----------
$ 106,000 $ (39,000)
----------- ----------
----------- ----------
</TABLE>
F-32
<PAGE>
MOREL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
NOTE 7 -- EMPLOYEE BENEFIT PLANS
Morel participates in a multi-employer pension plan pursuant to an agreement
between Morel and its employee bargaining unit. Although the plan is a defined
benefit plan, the specific benefit levels are not negotiated with or known by
Morel. Contributions expense related to the plan was $36,000 and $29,000 for the
years ended June 30, 1995 and 1994. Subsequent to year end, Morel's collective
bargaining agreement expired and was not renewed. Accordingly, Morel no longer
participates in the multi-employer plan.
Morel has a 401(k) employee benefit plan for those employees who meet the
eligibility requirements set forth in the plan. Eligible employees may
contribute up to 15% of their compensation. Morel's annual contribution to the
plan is determined by the board of directors. Morel made no contributions during
the years ended June 30, 1995 and 1994.
NOTE 8 -- SALE OF FOUNDRY PROPERTY
In 1994, Morel was required to sell its facility in Seattle, Washington, to
the Port of Seattle (the Port). Under terms of the sale Morel received
$2,533,000 for the facility and $3,626,000 for relocation costs. In March 1994,
Morel purchased a facility in Entiat, Washington, and began operations in Entiat
during August 1994.
For financial statement purposes, Morel recognized an extraordinary gain of
$295,000 and $1,918,000 for the years ended June 30, 1995 and 1994. For tax
reporting purposes, Morel retained its original basis in the assets sold and,
accordingly, did not recognize a taxable gain.
At June 30, 1995 and 1994, Morel was due $126,000 and $898,000 from the Port
for relocation costs. During the year ended June 30, 1994, Morel billed the Port
$769,000 for relocation costs which had not yet been incurred, and which are
recorded in the accompanying balance sheet as a liability.
NOTE 9 -- SUBSEQUENT EVENTS
On December 1, 1995, Morel entered into an agreement to merge with PCT
Holdings, Inc. (PCTH), in a transaction expected to be accounted for as a
pooling of interests. PCTH serves as a holding company for subsidiaries
providing sealed connectors and components, ceramic capacitors and filters and
machined aluminum parts for the medical, energy, aerospace, communications and
electronics industries.
Morel has reported a loss before extraordinary item of $326,000 in 1995 and
as of June 30, 1995, has a working capital deficit of $895,000. Additionally, at
June 30, 1995, Morel was in violation of certain debt covenants on the
line-of-credit and industrial revenue bond agreements. Subsequent to the merger,
PCTH provided Morel with $1 million of working capital. The proceeds of the loan
were used primarily to repay $500,000 of the industrial revenue bond. The
balance was used to fund $260,000 of accounts payable, prepayment penalties of
$140,000 and provide working capital for Morel.
In conjunction with the repayment of the industrial revenue bond, the bank
provided Morel with a waiver of its debt covenants through November 30, 1995,
and restructured the covenants through the expiration of the agreements.
Morel's 1996 operating plan has been developed to improve operating
efficiency and continue to broaden Morel's revenue base. Additionally, PCTH has
committed to provide Morel with sufficient working capital until profitable
operations are restored. Although Morel believes that its operating plan and
working capital available from PCTH will be adequate to meet its 1996 working
capital needs and maintain compliance with the restructured debt covenants,
there can be no assurance that Morel may not experience liquidity problems
because of adverse market conditions or other unfavorable events.
F-33
<PAGE>
MOREL INDUSTRIES, INC.
BALANCE SHEET
SEPTEMBER 30, 1995
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash......................................................................... $ 89,000
Receivables.................................................................. 1,556,000
Inventory.................................................................... 839,000
Prepaid expense.............................................................. 46,000
----------
Total current assets....................................................... 2,530,000
NET PROPERTY AND EQUIPMENT..................................................... 6,594,000
OTHER.......................................................................... 24,000
----------
Total assets............................................................... $9,148,000
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line-of-credit.......................................................... $ 964,000
Accounts payable............................................................. 1,373,000
Accrued liabilities.......................................................... 502,000
Current portion -- long-term debt............................................ 799,000
----------
Total current liabilities.................................................. 3,638,000
Long-term debt, net............................................................ 2,129,000
Deferred sales tax............................................................. 145,000
Deferred rent/taxes............................................................ 637,000
----------
Total liabilities.......................................................... 6,549,000
----------
STOCKHOLDERS' EQUITY
Common stock................................................................. 42,000
Common stock, non-voting..................................................... 175,000
Additional paid-in capital................................................... 825,000
Accumulated deficit.......................................................... 1,557,000
----------
Total stockholders' equity............................................... 2,599,000
----------
Total liabilities and stockholders' equity............................... $9,148,000
----------
----------
</TABLE>
See accompanying notes to unaudited interim financial statements.
F-34
<PAGE>
MOREL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
NET SALES........................................................................... $ 2,785,000 $ 2,454,000
COST OF SALES....................................................................... 2,669,000 2,386,000
------------- -------------
GROSS PROFIT........................................................................ 116,000 68,000
OPERATING EXPENSES.................................................................. 245,000 225,000
------------- -------------
LOSS FROM OPERATIONS................................................................ (129,000) (157,000)
OTHER INCOME AND EXPENSE
Interest income................................................................... 1,000 28,000
Interest expense.................................................................. (103,000) (26,000)
Gain on the sale of property...................................................... (29,000)
Other............................................................................. (36,000) (7,000)
------------- -------------
(138,000) (34,000)
------------- -------------
NET LOSS BEFORE FEDERAL INCOME TAX.................................................. (267,000) (191,000)
FEDERAL INCOME TAX -- DEFERRED...................................................... 90,000 62,000
------------- -------------
NET LOSS FOR THE PERIOD............................................................. $ (177,000) $ (129,000)
------------- -------------
------------- -------------
LOSS PER SHARE...................................................................... $ (0.27) $ (0.20)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to unaudited interim financial statements.
F-35
<PAGE>
MOREL INDUSTRIES, INC.
STATEMENTS OF CASH FLOW
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------------ --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net cash provided by operating activities......................................... $ 54,000 $ 316,000
------------ --------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment................................................ (17,000) (1,634,000)
Proceeds from sale and relocation of foundry...................................... 126,000 89,000
------------ --------------
Net cash provided by (used in) investing activities............................. 109,000 (1,545,000)
------------ --------------
CASH FLOW FROM FINANCING ACTIVITIES
Payments of debt and capital leases............................................... (222,000) (27,000)
Proceeds from financing debt...................................................... 661,000
Other changes, net................................................................ (4,000)
------------ --------------
Net cash provided by (used in) financing activities............................. (226,000) 634,000
------------ --------------
NET DECREASE IN CASH................................................................ (63,000) (595,000)
CASH, beginning of period........................................................... 152,000 636,000
------------ --------------
CASH, end of period................................................................. $ 89,000 $ 41,000
------------ --------------
------------ --------------
</TABLE>
See accompanying notes to unaudited interim financial statements.
F-36
<PAGE>
MOREL INDUSTRIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
The accompanying unaudited interim financial statements have been prepared
in accordance with Regulation S-B Item 310 instructions and, in the opinion of
management, contain all adjustments (consisting of only normal accruals)
necessary to present fairly Morel Industries, Inc.'s (Morel) financial position
at September 30, 1995, and the results of operations and cash flows for the
three month periods ended September 30, 1995 and 1994. These results have been
determined on the basis of generally accepted accounting principles and
practices applied consistently with those used in the preparation of Morel's
annual audited financial statements.
Certain information and footnote disclosures normally included in audited
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with Morel's audited financial statements and notes thereto
at and for the years ended June 30, 1995 and 1994, included elsewhere in this
Prospectus.
The results of operations for the three month periods ended September 30,
1995 and 1994 are not necessarily indicative of the results to be expected for
the full year.
SUBSEQUENT EVENT
Subsequent to September 30, 1995, Morel entered into an agreement and plan
of merger with PCT Holdings, Inc. Under terms of the agreement, Morel merged
with a wholly owned subsidiary of PCT Holdings, Inc., with Morel as the
surviving entity, and the shareholders of Morel received 650,000 shares of
common stock of PCT Holdings, Inc., after certain post-closing adjustments. The
merger was closed on December 1, 1995, and was effective for accounting purposes
on November 30, 1995. The merger was accounted for using the purchase method of
accounting. See "Certain Transactions" for additional information on this event.
F-37
<PAGE>
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN AS CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Acquisition History............................ 12
Use of Proceeds................................ 13
Price Range of Common Stock and Dividend
Policy........................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Information................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 22
Management..................................... 30
Principal Shareholders......................... 38
Selling Shareholder............................ 40
Certain Transactions........................... 41
Description of Securities...................... 43
Shares Eligible for Future Sale................ 51
Underwriting................................... 53
Legal Matters.................................. 54
Experts........................................ 54
Additional Information......................... 54
Index to Financial Statements.................. F-1
</TABLE>
2,250,000 UNITS
[LOGO]
EACH UNIT CONSISTING OF ONE SHARE
OF COMMON STOCK
AND ONE COMMON STOCK
PURCHASE WARRANT
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
COHIG & ASSOCIATES, INC.
JULY 15, 1996
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