Filed pursuant to Rule 424(b)(3)
Registration No. 333-41407
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PROSPECTUS
Issued December 29, 1997
1,061,500 SHARES
PACIFIC AEROSPACE & ELECTRONICS, INC.
COMMON STOCK
This Prospectus relates to up to 1,061,500 shares of common stock, $.001
par value per share (the "Common Stock"), of Pacific Aerospace & Electronics,
Inc., a Washington corporation (the "Company"), offered by certain shareholders
of the Company (the "Selling Shareholders"). The offered shares are comprised of
(a) 524,000 shares of Common Stock (the "Shares") sold by the Company to certain
of the Selling Shareholders in a private placement in November 1997 (the "Fall
1997 Offering"), and (b) 537,500 shares of Common Stock (the "Warrant Shares")
issuable upon the exercise of Common Stock Purchase Warrants (the "Warrants")
issued by the Company to certain of the Selling Shareholders in three separate
transactions in May 1996, June 1997 and December 1997, respectively.
The Selling Shareholders may offer the Shares and the Warrant Shares
pursuant to this Prospectus (the "Offering") from time to time in transactions
(a) through the Nasdaq National Market System ("Nasdaq NMS"), (b) in privately
negotiated transactions, (c) through the writing of options on the Shares or
Warrant Shares, or (d) through a combination of such methods of sale, at fixed
prices that may be changed, at prevailing market prices, at prices relating to
such prevailing market prices, or at negotiated prices. The Company will not
receive any of the proceeds from the sale of the Shares or Warrant Shares by the
Selling Shareholders, although the Company will receive the proceeds from the
exercise of the Warrants, when and if they are exercised. See "Selling
Shareholders" and "Plan of Distribution."
All of the Shares and the Warrant Shares were "restricted securities" under
the Securities Act of 1933, as amended (the "Securities Act"), before their
registration under the Registration Statement of which this Prospectus is a part
(the "Registration Statement"). This Prospectus has been prepared so that future
sales of the Shares or Warrant Shares by the Selling Shareholders will not be
restricted under the Securities Act. In connection with any sales, the Selling
Shareholders and any brokers participating in such sales may be deemed to be
"underwriters" within the meaning of the Securities Act. See "Selling
Shareholders."
The Common Stock is quoted on the Nasdaq NMS under the symbol "PCTH." On
December 18, 1997, the closing sale price for the Common Stock, as reported on
the Nasdaq NMS, was $4.7813 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
--------------------------------
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.
<PAGE>
No person is authorized in connection with any offering made by this Prospectus
to give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or by any underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the Shares or Warrant Shares offered by
this Prospectus, nor does it constitute an offer to sell or a solicitation of an
offer to buy any of the Shares or Warrant Shares offered by this Prospectus to
any person in any jurisdiction in which it is unlawful to make any such offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made by this Prospectus shall under any circumstances imply that the
information contained in this Prospectus is correct as of any date subsequent to
the date hereof.
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TABLE OF CONTENTS
Page
Available Information.....................................................3
Incorporation of Certain Documents by Reference...........................3
Risk Factors..............................................................5
Selling Shareholders ....................................................11
Plan of Distribution.....................................................14
Indemnification for Securities Act Liabilities...........................15
Legal Matters............................................................15
Experts..................................................................15
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and files reports and
other information with the Securities and Exchange Commission (the "Commission")
in accordance with the Exchange Act. The Company has also filed with the
Commission a Registration Statement under the Securities Act with respect to the
Shares and the Warrant Shares. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Shares and Warrant Shares offered by this Prospectus, reference is made to the
Registration Statement, exhibits and schedules. Statements contained in this
Prospectus as to the contents of any contract or other 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, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement and the reports and other
information filed pursuant to the Exchange Act may be inspected and copied at
the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661. Copies of all or any part of the Registration Statement
and the reports and other information filed pursuant to the Exchange Act may be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 on the payment of the fees prescribed by the Commission. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company. Its address is http://www.sec.gov. Copies of
such documents may also be inspected at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company will provide without charge to each person who receives a copy
of this Prospectus, on written or oral request, a copy of any and all of the
information that has been incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated). Requests should be directed to
Pacific Aerospace & Electronics, Inc., 434 Olds Station Road, Wenatchee,
Washington 98801, Attention: Nick A. Gerde, (509) 664-8000.
The following documents filed with the Commission by the Company are
incorporated by reference into this Prospectus:
(1) the Company's Annual Report on Form 10-KSB for the fiscal year ended
May 31, 1997;
(2) the Company's current report on Form 8-K dated June 23, 1997;
(3) the Company's Quarterly Report on Form 10-QSB for the three-month
period ended August 31, 1997;
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(4) the Company's current report on Form 8-K dated December 2, 1997;
(5) all other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year ended May
31, 1997; and
(6) the description of the capital stock contained in the Company's
Registration Statement on Form 8-B filed with the Commission on
February 6, 1997.
All documents filed with the Commission by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and before the termination of this Offering shall be deemed incorporated by
reference into this Prospectus. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed modified, superseded or replaced for purposes of this Prospectus to
the extent that a statement contained in this Prospectus or in any later-filed
document that also is or is deemed to be incorporated by reference in this
Prospectus modifies, supersedes or replaces such statement. Any statement so
modified, superseded or replaced shall not be deemed, except as so modified,
superseded or replaced, to constitute a part of this Prospectus.
The Company's principal offices are located at 434 Olds Station Road,
Wenatchee, Washington 98801, and its telephone number is (509) 664-8000.
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RISK FACTORS
Forward-looking statements in this Prospectus, or in the documents
incorporated by reference, are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties related to the Company's operations. These risks and uncertainties
include, but are not limited to, the following risk factors, and actual results
could differ materially from those projected in the forward-looking statements
as a result of those risk factors.
Past History of Net Losses. While the Company reported net profit of
$811,000 in the first quarter of fiscal 1998 and $1,682,000 in fiscal 1997, it
reported net losses of $1,411,000 in fiscal 1995 and $999,000 in fiscal 1996,
and has not demonstrated a continuing ability to achieve substantial profitable
operations. The Company's ability to maintain profitable operations in the
future will depend on many factors, including the Company's ability to
assimilate its recent and proposed 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 the markets in which the Company
operates. The Company's orders and backlog are growing, and the Company must
spend more to support a higher level of inventory and operations. These
requirements will affect cash flow and results of operations over the short term
and could result in significant future losses if expected growth is not
sustained.
Acquisition Risks. As part of its business strategy, the Company has
recently grown rapidly as a result of several acquisitions that have placed, and
will continue to place, a significant strain on its management, financial and
other resources. Past and future acquisitions may subject the Company to many
risks, including risks relating to integrating and managing the operations and
personnel of acquired companies, and maintaining and implementing uniform
standards, controls, procedures and policies. The success of future acquisitions
will depend, in part, upon the Company's ability to assess and manage the risks
typically associated with acquisitions, including the risks of assessing the
value, strengths, and weaknesses of acquisition candidates or new products,
possible diversion of management attention from the Company's existing
businesses, reduction of cash, disruption of product development cycles,
dilution of earnings per share, or other factors. 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.
Collection of Bridge Loans. The Company recently announced that it would
not be forming its proposed information technology group and that it was
terminating letters of intent with the four companies proposed to be acquired to
form that group. As of December 18, 1997, the Company had made bridge loans, in
the aggregate principal amount of $5,797,772, to three of the companies
originally under consideration for inclusion in the proposed information
technology group, and had guaranteed a $1,300,000 bank line of credit to one of
those companies. Each of those companies is currently pursuing alternative
financing sources, and the Company has agreed with one of the borrowing
companies to forbear from instituting legal action if it makes specified
payments to the Company from the proceeds of its alternative
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financing. However, there is no assurance that the Company will be able to
collect any or all of those loans. The failure of one or more of those companies
to repay its loans could have a detrimental effect on the Company's cash flow
and financial condition.
Dependence on Significant Customers. The Cashmere Manufacturing Co., Inc.
subsidiary of the Company ("Cashmere") depends almost entirely on sales to The
Boeing Company ("Boeing"). As a result of this dependence on Boeing, general
economic conditions and events affecting Boeing, all of which are outside the
Company's control, may have a significant impact on Cashmere's sales and
consequently on the Company's overall results of operations. Cashmere has
entered into contracts with Boeing that extend beyond one year to supply parts
at fixed prices. Accordingly, aluminum or other metal price increases or other
cost increases can adversely affect Cashmere's margins on the sale of those
parts. In addition, Boeing has considerable flexibility under its contract with
Cashmere to reduce its level of orders or to cease ordering products from
Cashmere. Similarly, the Company's Morel Industries, Inc. subsidiary ("Morel")
depends on sales to PACCAR Inc. and its Kenworth and Peterbilt divisions
(collectively, "PACCAR"). PACCAR has no contractual obligation to continue to
place orders for Morel's products. 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 if sales to these primary customers
decrease unexpectedly.
Possible Need for Additional Capital. The Company believes that the net
proceeds from its February 1997 private offering of Preferred Stock, its recent
convertible note offering, and the Fall 1997 Offering, together with its new
credit facility with Key Bank of Washington and internally generated funds, will
be sufficient to meet the Company's currently budgeted working capital
requirements for at least the next 12 months. The Company's actual capital
needs, however, will depend on many 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, future acquisitions, and the continuing availability of bank
financing, none of which can be predicted with certainty. The Company may
receive additional funds upon the exercise of outstanding warrants and stock
options, but there is no assurance that any such warrants or stock options will
be exercised. As a result of these factors, the Company is unable to predict
accurately the amount or timing of future capital that it will need. The
inability to obtain additional capital if and when needed could materially and
adversely affect the Company's business and results of operations.
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 currently competes are characterized by ongoing product
development efforts and evolving technology, and success depends in part on 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. The Company may not be
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able to compete successfully against current and future competitors, and the
competitive pressures faced by the Company may materially adversely affect the
Company's business and results of operations.
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. The Company may not succeed in
developing new products or enhancing its existing products on a timely basis,
and such new products or enhancements may not 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 the
Company's existing products obsolete. 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.
Dependence on Key Personnel. The Company's success depends significantly on
Donald A. Wright, the Company's Chief Executive Officer and President, 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 Company's ability to achieve its business objectives. The Company has key
man life insurance policies on the life of Mr. Wright in the total amount of $3
million. The Company's growth and future success will depend in large part on
its ability to attract and retain additional senior managers 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 needed to support
its 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.
Reliance on 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 33 U.S. patents, one U.S. patent application allowed, two U.S.
patent applications pending, one Canadian patent application pending, and one
European patent application allowed relating to certain of its technology and
products.
Patent Issuance, Enforceability and Expiration. 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 give the Company any
competitive advantages for its products or technology, or that, if challenged,
the Company's patents will be held valid and enforceable. The Company's issued
patents expire at various times over the next 18 years, with 17 patents expiring
over the next five years. Although the Company believes that the manufacturing
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processes of much of its patented technology, particularly the technology used
by the Company's Pacific Coast Technologies, Inc. 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 after these patents have expired.
Limits on Protection. 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 give 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. In fiscal 1996, the Company settled patent
infringement litigation instituted by a competitor by purchasing two patents and
granting the competitor a license to use the patents. The Company may be
required to enter into other 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.
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 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. 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.
Morel. Since the Company acquired 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, in
January 1996 Morel obtained a permit to discharge air emissions and in April
1997, the State of Washington issued a temporary waste water and storm water
permit to Morel. Although the Company believes that final permits will be
issued, there is no assurance that final permits will be issued, and the failure
to obtain these permits would have a material adverse effect on the Company.
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NTI. Since the Company's acquisition of its Northwest Technical
Industries, Inc. subsidiary ("NTI") in April 1997, the Company has been
conducting an assessment of NTI's environmental compliance, including assessment
of the possible need for permits to discharge air emissions and storm water.
Effect of Non-Compliance. From time to time, the Company's operations
may result in noncompliance with Environmental Laws. If Environmental Laws are
violated, the Company could be liable for damages and for the costs of remedial
actions and could also be subject to revocation of permits needed 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.
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 many regulations affecting the conduct of its
business generally. For example, the Company must adhere to federal acquisition
requirements and 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.
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 it needs to manufacture 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.
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.
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Shares Eligible for Future Sale. The 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 Company's Common Stock.
As of December 18, 1997, the Company had 12,198,707 shares of Common Stock
outstanding.
The Company has filed a Form S-3 Registration Statement covering the resale
of up to 2,172,690 shares of Common Stock issuable upon conversion of certain
convertible notes issued by the Company in August 1997 (the "Convertible
Notes"), which the Company has requested to have declared effective on December
31, 1997. Upon exercise of the Warrants and conversion of the Convertible Notes,
the Company will have a total of 14,908,897 outstanding shares of Common Stock,
assuming that (a) the Convertible Notes are fully converted into the entire
2,172,690 shares being registered under the above-referenced Registration
Statement, (b) the Warrants are fully exercised, (c) none of the Company's
outstanding stock options or other warrants are exercised, and (d) no additional
shares of Common Stock are issued. Of that total, 14,426,407 shares will be
publicly traded or unrestricted, and 482,490 shares will be subject to certain
restrictions on resale or vesting, assuming no changes from their current
status.
Additionally, at December 18, 1997, the Company had:
a. up to 2,975,000 shares of Common Stock that remain reserved for issuance
under the Company's Amended and Restated Stock Incentive Plan (as amended by
Amendment No. 1), and registered for issuance on Form S-8 Registration
Statements, under which 1,263,616 shares of Common Stock are subject to
outstanding options granted under the plan;
b. up to 160,000 shares of Common Stock issuable upon exercise of
outstanding non-public warrants held by employees, which have been registered
for issuance on a Form S-8 Registration Statement;
c. up to 277,794 shares of Common Stock issuable upon conversion of 7,950
outstanding shares of the Company's Series A Convertible Preferred Stock,
assuming an exercise price of $3.49 per share, the resale of which shares has
been registered on a Form S-3 Registration Statement;
d. up to 2,845,000 shares of Common Stock remaining issuable upon exercise
of the Company's publicly-traded warrants, and certain other warrants issued to
underwriters and a lender of the Company, and the resale of up to 370,900 of
those shares and certain of those warrants, covered by the Company's
Post-Effective Amendment No. 1 to a Registration Statement on Form SB-2;
e. up to 68,041 shares of Common Stock reserved but unissued under the
Company's Independent Director Stock Plan, which have been registered for
issuance on a Form S-8 Registration Statement;
f. up to 1,000,000 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan, of which no shares have been issued
to date; and
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g. approximately 217,054 shares of Common Stock issuable in a private
placement upon the consummation of the Company's proposed acquisition of Olympic
Tool & Engineering, Inc.
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SELLING SHAREHOLDERS
The Selling Shareholders are offering 1,061,500 shares of Common Stock
under this Prospectus. Of these, (a) 524,000 shares of Common Stock (the
"Shares") were sold by the Company to certain of the Selling Shareholders in a
private placement in November 1997 (the "Fall 1997 Offering"), and (b) 537,500
shares of Common Stock (the "Warrant Shares") are issuable upon the exercise of
Common Stock Purchase Warrants (the "Warrants") issued to certain of the Selling
Shareholders in three separate transactions in May 1996, June 1997 and December
1997, respectively. The Fall 1997 Offering was made pursuant to the exemption
from registration contained in Rule 506 of Regulation D under the Securities
Act. The Warrants were issued, and the Warrant Shares are issuable upon
exercise, pursuant to Section 4(2) of the Securities Act. See "Description of
the Warrants - Issuance History." Of the Warrant Shares, (a) 125,000 shares are
exercisable at $3.75 per share, (b) 37,500 shares are exercisable at $4.80 per
share, and (c) 375,000 are exercisable at $4.6875 per share. As of the date of
this Prospectus, none of the Warrants had been exercised. See "Description of
the Warrants Number; Exercise Price."
Each Selling Shareholder has represented to the Company that it purchased
the Shares, or accepted the Warrants, for investment purposes, with no present
intention of distribution. However, because the Selling Shareholders may wish to
be legally permitted to sell the Shares and Warrant Shares when they deem
appropriate, the Company has filed the Registration Statement with respect to
the resale of the Shares and Warrant Shares according to the plan of
distribution described in this Prospectus. See "Plan of Distribution."
After completion of this Offering, no Selling Shareholder will own any
shares of Common Stock if all of the Shares and Warrant Shares offered by this
Prospectus are sold, except as shown on the following chart, assuming that no
Selling Shareholder buys any other shares of Common Stock after the date of this
Prospectus. No Selling Shareholder has held any position or office or has had
any other material relationship with the Company or any of its affiliates within
the past three years, except that (a) Robert L. Smith was a director of the
Company until his death in May 1997 and provided short-term financing to the
Company in May 1996, (b) David A. Noyes & Company ("Noyes") and the Company are
parties to a June 1997 financial services agreement, (c) Gregory K. Smith was a
director of the Company from October 1996, until his resignation in June 1997,
and during a portion of such period was employed with Noyes, (d) Richard Cross
and Nestor Wiegand were employed with Noyes when their Warrants were issued, and
Mr. Cross is still employed with Noyes, and (e) Dominick & Dominick,
Incorporated ("Dominick") and the Company are parties to an August 1997
financial services agreement.
The following table sets forth the names of the Selling Shareholders and
the number of Shares held by each of them or Warrant Shares issuable to each of
them, to the best of the Company's knowledge. The table also shows the maximum
number of Shares or Warrant Shares being offered by each of them under this
Prospectus, to the best of the Company's knowledge, and the number of shares of
Common Stock to be held by each of them, if any, after this Offering.
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<TABLE>
<CAPTION>
Beneficial Maximum Shares Beneficial
Name and Address of Selling Ownership Before or Warrants Ownership After
Shareholders the Offering (1) % (2) Shares Offered (1) % (2) the Offering %
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Pensionskasse der 320,000 2.64% 320,000 2.62% 0 --
Siemens-Gesellschaften in
der Schweiz
Freilagerstr. 40,
PO Box CH-8047
Zurich, Switzerland
Capital International 204,000 (3) 1.67% 200,000 1.65% 4,000 (3) *
Fund, Ltd.
c/o LYSYS AG
Gessnerallee 38
PO Box CH-8023
Zurich, Switzerland
Peter Richner 4,000 * 4,000 * 0 --
c/o LYSYS AG
Gessnerallee 38
PO Box CH-8023
Zurich, Switzerland
Estate of Robert L. Smith 42,500 (4) * 37,500 * 5,000 --
c/o Richard Smith,
Executor
1232 Rucher
Everett, WA 98201
David A. Noyes & 50,000 (5) * 50,000 * 0 --
Company
208 South LaSalle St.
Chicago, IL 60604
Gregory K. Smith 52,900 (5) (6) * 50,000 * 2,900 *
208 South LaSalle St.
Chicago, IL 60604
Richard Cross 20,000 (5) * 20,000 * 0 --
208 South LaSalle St.
Chicago, IL 60604
Nestor Wiegand 5,000 (5) * 5,000 * 0 --
208 South LaSalle St.
Chicago, IL 60604
Dominick & Dominick, 375,000 (7) 3.07% 375,000 3.07% 0 --
Incorporated
Financial Square
32 Old Slip
New York, NY 10003
TOTAL 1,073,400 8.80% 1,061,500 8.70% 11,900 *
</TABLE>
- -----------
* Less than 1%.
(1) Assumes exercise of all of the Warrant Shares at the applicable Exercise
Price.
13
<PAGE>
(2) Based on total Common Stock of 12,198,707 shares outstanding on December
18, 1997.
(3) Includes 4,000 shares of Common Stock owned of record by Capital
International Fund, Ltd. before the Fall 1997 Offering.
(4) Comprised of (a) 5,000 shares of Common Stock issuable upon the exercise of
warrants issued to Mr. Smith in the Company's July 1996 registered public
offering and (b) the Warrant Shares issuable upon the exercise of the Smith
Warrant, which are being offered for resale under this Prospectus. See
"Description of the Warrants - Number; Exercise Price."
(5) Warrant Shares issuable upon the exercise of the Warrants held by Noyes,
Mr. Gregory Smith, Mr. Cross and Mr. Wiegand (collectively, the "Noyes
Warrants"), which Warrant Shares are being offered for resale under this
Prospectus. See "Description of the Warrants - Number; Exercise Price."
(6) Includes 2,900 shares of Common Stock issued to Gregory Smith under the
Company's Independent Director Plan when Mr. Smith was a director of the
Company, in addition to the Warrant Shares issuable upon the exercise of
the Noyes Warrant held by Mr. Smith. See "Description of the Warrants -
Number; Exercise Price."
(7) Warrant Shares issuable upon the exercise of the Dominick Warrant, which
are being offered for resale under this Prospectus. See "Description of the
Warrants - Number; Exercise Price."
Description of the Warrants
Number; Exercise Price. The Selling Shareholders who hold Warrants, and who
elect to exercise their Warrants in full, will receive upon such exercise and
payment of the Exercise Price, the number of Warrant Shares shown below:
<TABLE>
<CAPTION>
Exercise
Proceeds
Date Warrant Exercise to the Expiration
Issued Warrant Holder Shares Price Company Date
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/22/96 Estate of Robert L. Smith 37,500 $4.80 $180,000 5/22/01
6/3/97 David A. Noyes & 50,000 $3.45 $172,500 6/3/02
Company
6/3/97 Gregory K. Smith 50,000 $3.45 $172,500 6/3/02
6/3/97 Richard Cross 20,000 $3.45 $69,000 6/3/02
6/3/97 Nestor Wiegand 5,000 $3.45 $17,250 6/3/02
12/1/97 Dominick & Dominick, 375,000 $4.6875 $1,757,813 6/1/98
Incorporated
------- ----------
Totals 537,500 $2,369,063
</TABLE>
14
<PAGE>
As of the date of this Prospectus, none of the Warrants had been exercised.
Issuance History. The Company issued the Warrant held by the Estate of
Robert L. Smith (the "Smith Warrant") to Mr. Smith in May 1996 in connection
with a bridge loan made to the Company by Mr. Smith prior to the Company's July
1996 registered public offering. The Company issued the Noyes Warrants to Noyes,
Mr. Gregory Smith, Mr. Cross and Mr. Wiegand in June 1997, pursuant to a June
1997 agreement for Noyes to provide financial services to the Company. The
Company issued the Warrant held by Dominick (the "Dominick Warrant") on December
1, 1997 pursuant to an August 1997 financial services agreement between Dominick
and the Company.
Certain Provisions. Each of the Warrants are subject to 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 the Warrants. No holder of the Warrants will possess any rights as a
shareholder of the Company until such holder exercises such warrant. The above
discussion of certain terms and provisions of the Warrants is qualified in its
entirety by reference to the detailed provisions of the applicable warrant
agreements and certificates, each of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
Use of Exercise Proceeds. The Company intends to use the proceeds from
exercise of the Warrants, when and if they are exercised, primarily in
connection with acquisitions, working capital or other corporate purposes. The
Company will receive no cash as the result of the registration of the Shares or
Warrant Shares, or from any subsequent resale of the Shares or Warrant Shares by
the Selling Shareholders
PLAN OF DISTRIBUTION
The Selling Shareholders may resell the Shares or Warrant Shares from time
to time in transactions (a) on the Nasdaq NMS, (b) in privately negotiated
transactions, (c) by writing options on the Shares or Warrant Shares, or (d) by
a combination of such methods, at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices relating to such prevailing
market prices, or at negotiated prices. The Selling Shareholders may sell the
Shares or Warrant Shares to or through broker-dealers, and such broker-dealers
may receive compensation in the form of discounts, concessions or commissions
from the Selling Shareholders or the buyers of the Shares or Warrant Shares for
whom such broker-dealers may act as agents or to whom they may sell as
principals, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). Any broker-dealer may act as a
broker-dealer on behalf of the Selling Shareholders in connection with the
offering of certain of the Shares or Warrant Shares by the Selling Shareholders.
In addition, any of the Shares or Warrant Shares that qualify for sale
pursuant to Rule 144 under the Securities Act may be sold in transactions
complying with that Rule, rather than pursuant to this Prospectus. There is no
assurance (a) that the Selling Shareholders holding Shares will sell any or all
of the Shares, or (b) that the Selling Shareholders holding Warrant Shares will
exercise any or all of the Warrants, or sell any or all of the Warrant Shares,
under this Prospectus.
15
<PAGE>
The Selling Shareholders and any broker-dealers who act in connection with
the sale of the Shares or Warrant Shares under this Prospectus may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and profit on any resale of the Shares or
Warrant Shares as principals may be deemed to be underwriting discounts and
commissions under the Securities Act.
The Company will not receive any proceeds from sales of the Shares or the
Warrant Shares sold by the Selling Shareholders, although it will receive the
proceeds from the exercise of the Warrants, when and if they are exercised. See
"Selling Shareholders." The Company has agreed to pay all expenses (other than
any underwriting costs, selling commission and fees and certain expenses of
counsel and other advisors to the Selling Shareholders) in connection with the
registration of the Shares and Warrant Shares.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Company has agreed to indemnify the Selling Shareholders who hold the
Shares, and those Selling Shareholders have agreed to indemnify the Company,
against certain liabilities under the Securities Act. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity of the issuance of the Shares, the validity of the issuance of
the Warrant Shares when and if the Warrants are exercised, and certain other
related legal matters, have been passed upon for the Company by Stoel Rives LLP
of Seattle, Washington.
EXPERTS
The Company's consolidated financial statements incorporated by reference
in this Prospectus and elsewhere in the Registration Statement have been audited
by Moss Adams LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included in this Prospectus and the Registration
Statement in reliance upon the authority of said firm as experts in giving said
reports.
