-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N/L6pIcy6yZljfiVAiPvGZbyxXJeTvZK0vU7N5n2G7+6qSebKsgGyyyu5luVj1OH 1NnvPxrWo6IglqiBJY15XA== 0000893877-96-000276.txt : 19960826 0000893877-96-000276.hdr.sgml : 19960826 ACCESSION NUMBER: 0000893877-96-000276 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960823 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PCT HOLDINGS INC /NV/ CENTRAL INDEX KEY: 0000790023 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 870431483 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26088 FILM NUMBER: 96620054 BUSINESS ADDRESS: STREET 1: 434 OLDS STATION ROAD CITY: WENATCHEE STATE: WA ZIP: 98801 BUSINESS PHONE: 5096648000 MAIL ADDRESS: STREET 2: 434 OLDS STATION ROAD CITY: WENATCHEE STATE: WA ZIP: 98801 FORMER COMPANY: FORMER CONFORMED NAME: VERAZZANA VENTURES LTD DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VERAZZANA VENTURES SYSTEMS LTD DATE OF NAME CHANGE: 19890618 10KSB 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-26088 PCT HOLDINGS, INC. (Name of small business issuer in its charter) Nevada 87-0431483 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 434 Olds Station Road Wenatchee, Washington 98801 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (509) 664-8000 Securities registered pursuant to Section 12(b) of the Act Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of class) Common Stock Purchase Warrants (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $20,725,000 State the aggregate market value of the voting stock held by non-affiliates, based on the closing price for the registrant's Common Stock on the Nasdaq National Market System, as of August 14, 1996: approximately $19,629,503. State the number of shares outstanding of each of the issuer's classes of common equity, as of August 14, 1996: Common Stock, $.001 par value ("Common Stock"): 9,728,309 shares Common Stock Purchase Warrants ("Warrants"): 2,250,000 Warrants Documents Incorporated by Reference: None, except certain Exhibits referred to on the list of Exhibits, contained in Item 13 of this report. Transitional small business disclosure format: Yes ___ No X TABLE OF CONTENTS Item of Form 10-KSB Page PART I Item 1 - Description of Business........................................ 1 Item 2 - Description of Property........................................13 Item 3 - Legal Proceedings..............................................13 Item 4 - Submission of Matters to a Vote of Security Holders............13 PART II Item 5 - Market for the Registrant's Common Stock and Warrants and Related Shareholder Matters................................14 Item 6 - Management's Discussion and Analysis of Financial Condition and Results of Operations.................15 Item 7 - Financial Statements...........................................20 Item 8 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................41 PART III Item 9 - Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act..............42 Item 10 - Executive Compensation.........................................46 Item 11 - Security Ownership of Certain Beneficial Owners and Management..........................................53 Item 12 - Certain Relationships and Related Transactions...................................................56 Item 13 - Exhibits and Reports on Form 8-K...............................59 SIGNATURES.................................................................63 EXHIBIT INDEX..............................................................65 i PART I ITEM 1. DESCRIPTION OF BUSINESS Overview 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 intends to begin doing business in the near future under the trade name "Pacific Aerospace & Electronics." 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, 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., 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 Item 6 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Company's business segments. 1 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 the Verazzana 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 2 Company's Common Stock, after certain post-closing adjustments. The transaction was treated as a purchase for accounting purposes. Integration of Acquisitions; Management of Growth. 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. There is no assurance, however, 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 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. 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. Pacific Coast uses its proprietary hermetic sealant, Kryoflex(R), 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 3 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 4 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. 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 as of 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 an industrial 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 5 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(TM)." Beginning in March 1996, Seismic received initial orders from several large home improvement centers, including Eagle Hardware & Garden Inc., HomeBase 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 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 an industrial version of the natural gas shut-off valve and an electrical shut-off product currently under development. Future production plans could 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. 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. 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. The Company has begun to assess whether it should substantially revise its strategy with respect to Seismic. If the Company determines that it would not be in its best interests to invest further in a marketing program for Seismic, the Company may decide to pursue a completely different strategy, such as selling Seismic and retaining the right to manufacture its products or structuring a strategic relationship to do marketing. The Company is in the preliminary stages of this assessment and cannot currently predict the outcome. 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 6 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. 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 increased since that time. 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. Boeing has considerable flexibility under its contracts with Cashmere to reduce its level of orders or to cease ordering products from Cashmere. 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. There is no assurance, however, that Cashmere can successfully implement these or other strategies so as to reduce its reliance on Boeing to a degree that will protect the Company in the event of unexpected decreases in sales to Boeing. 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. 7 Customers. Morel is dependent on sales to 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 results for the first half of fiscal 1996 that reflect an approximately 11.5% decline in net sales compared to the first half of fiscal 1995. PACCAR has previously reported 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. Morel's other major customers include Deere & Company, Accra Manufacturing, Inc. and Boeing. 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. There is no assurance, however, that Morel can successfully implement these or other strategies so as to reduce its reliance on PACCAR to a degree that will protect the Company in the event of unexpected decreases in sales to 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. The Company has begun to assess whether it should substantially revise its strategy with respect to Seismic. See Item 1 - "Business - Seismic Safety Products, Inc." 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. 8 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. 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 "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. 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. 9 Suppliers and Production 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. 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. 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 10 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 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. 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. 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. 11 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 September 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 present or future noncompliance with Environmental Laws will not have a material adverse effect on the Company's results of operations or financial condition. Employees As of August 14, 1996, the Company and its subsidiaries had a total of 358 full-time employees, of which 293 were in manufacturing and quality assurance, 16 were in customer service, marketing and sales, 14 were in engineering, 31 were in administration, and 4 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. 12 ITEM 2. DESCRIPTION OF PROPERTY 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. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor its property is subject to any pending material legal proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND WARRANTS AND RELATED SHAREHOLDER MATTERS. Until March 13, 1995, there was no public market for the Company's Common Stock. From that date through September 14, 1995, the Common Stock was listed on the Nasdaq Electronic Bulletin Board. From September 15, 1995 through July 15, 1996, the Common Stock was traded on the Nasdaq - Small Cap Market System under the symbol "PCTH." Since July 16, 1996, the Company's Common Stock and Common Stock Purchase Warrants ("Warrants") have been traded on the Nasdaq National Market System under the symbols "PCTH" for the Common Stock and "PCTHW" for the Warrants. Each Warrant initially entitles the holder thereof to purchase one share of Common Stock at an exercise price of $4.6875 per share, 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 if such net income is $800,000 to $1.5 million, (b) $3.125 per share if such net income is $500,000 to $799,000, and (c) $2.34375 per share if such net income is less than $500,000. 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. Period High Low 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 August 14, 1996)....... 4.3125 2.125 The Warrants have been traded only since July 16, 1996. The high sales price reported on the Nasdaq National Market System for the Warrants from that date through August 14, 1996 was $0.75, and the low sales price was $0.50. As of August 14, 1996, the closing sales price on the Nasdaq National Market System for the Common Stock was $2.375 per share and the closing sales price on the Nasdaq National Market System for the Warrants was .625 per Warrant. As of August 14, 1996, there were 853 holders of record of 9,728,309 shares of Common Stock and three holders of record of 2,250,000 Warrants. 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 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Preliminary Note Regarding Forward-Looking Statements The information set forth in this report in Item 1 - "Business" and in Item 6 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by those sections. Certain factors that realistically could cause results to differ materially from those projected in the forward-looking statements are set forth in Item 6 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the captions "Overview" and "Liquidity and Capital Resources" and in Item 1 - "Business" under each of the captions. 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 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' 15 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. 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 Pacific Coast. 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. 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 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. On July 19, 1996, the Company closed an underwritten public offering of 2,250,000 Units, with each Unit consisting of one share of Common Stock and one Warrant, at a price of $3.125 per Unit (the "July 1996 public offering"). The proceeds of the July 1996 public offering, net of underwriting commissions and underwriters' expenses and before other expenses, were approximately $6,182,600, of which $1,841,700 had been used, as of August 9, 1996, to pay off certain short-term debt and certain interest and fees associated with such debt. The Company believes that the net proceeds from the July 1996 public offering, together with its existing credit facilities, will be sufficient to meet its budgeted working capital requirements for at least the next 12 months. However, there is no assurance that additional financing will be available to the Company, if and when needed, 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 and the net operating losses created as a consolidated group or groups subsequent to a qualifying tax free merger or 16 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 any relevant 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. 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 17 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 Item 1 - "Description of Business - 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 Item 7 - "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 renegotiated and refinanced certain loans that were due during fiscal 1996 so that $1,663,000 in principal amount plus accrued interest would be due on August 31, 1996 and September 1, 1996 to certain lenders to Ceramic Devices and Morel. The Company used a portion of the net proceeds from the July 1996 public offering to pay those obligations. 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. On July 26, 1996, the Company obtained a modification and renewal of that line of credit with revised covenants, which extends the line of credit until July 1997. 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, some of which have been or will be paid from the proceeds of the July 1996 public offering. See "Recent Developments." The Company believes that the net proceeds from the July 1996 public offering, together with its existing credit facilities, will be sufficient to meet its budgeted working capital requirements for at least the next 12 months. However, the Company may need to raise additional capital sooner than currently anticipated. The Company's actual capital needs 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, and any future acquisitions, none of which can be predicted with certainty. The Company may receive additional funds upon exercise of the Warrants and other 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 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 commercial credit will be available to the Company, if and when needed, or that the Company's working capital requirements will not exceed those currently budgeted. Although the Company believes it will be able to obtain satisfactory lending 18 arrangements from bank or other institutional lenders when and if additional financing becomes necessary, there is no assurance that additional financing will be available if required, or that any available financing will be on favorable terms. Inability to obtain additional future capital could have a material adverse effect on the Company's business and results of operations. 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. 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 accrued interest at 18% per annum and was due in full on September 27, 1996. This loan, plus accrued interest and a loan fee that together amounted to $15,000, was repaid in full on August 9, 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 Item 12 - "Certain Relationships and Related Transactions." In May 1996, the Company borrowed $1,200,000 from UTCO Associates, Ltd. ("UTCO") pursuant to a promissory note that accrued interest at 18% per annum, and was due in full on the earlier of the July 1996 public offering or September 1, 1996. This loan was repaid in full on July 19, 1996 out of the net proceeds of the July 1996 public offering. The Company issued UTCO 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. 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. 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. On July 19, 1996, the Company closed the July 1996 public offering, which was an underwritten public offering of 2,250,000 Units, with each Unit consisting of one share of Common Stock and one Warrant, at a price of $3.125 per Unit. The proceeds of the July 1996 public offering, net of underwriting commissions and underwriters' expenses and before other expenses, were approximately $6,182,600, of which $1,841,700 had been used, as of August 9, 1996, to pay off certain short-term debt of the Company and certain interest and fees associated with such debt. 19 ITEM 7. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Page ---- PCT Holdings, Inc. and Subsidiaries Consolidated Financial Statements Independent Auditor's Report............................................... 21 Consolidated Balance Sheet as of May 31, 1996 and 1995..................... 22 Consolidated Statement of Operations for the years ended May 31, 1996 and 1995................................................... 23 Consolidated Statement of Changes in Stockholders' Equity for the years ended May 31, 1996 and 1995............................... 24 Consolidated Statement of Cash Flows for the years ended May 31, 1996 and 1995................................................... 25 Notes to Consolidated Financial Statements................................. 27 20 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. 21
PCT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS May 31, ------------------------------ 1996 1995 ------------ ------------ 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 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
22 PCT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Year ended May 31, ----------------------------- 1996 1995 ------------ ------------ 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 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 23
PCT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MAY 31, 1996 AND 1995 Common Stock ------------------------- Accumulated Shares Amount Deficit --------- ----------- ----------- 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. The accompanying notes are an integral part of these consolidated financial statements.
24
PCT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended May 31, --------------------------------- 1996 1995 ------------ ------------ 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 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
25
PCT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Year Ended May 31, ---------------------------- 1996 1995 ------------ ------------ 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 The accompanying notes are an integral part of these consolidated financial statements.
26 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 27 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. 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. Year Ended May 31, ------------------------- 1996 1995 ----------- ----------- (Unaudited) 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 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. 28 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. (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: 29 May 31, 1996 May 31, 1995 --------------------------- ------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- Long-term debt......$6,099,000 $5,999,000 $3,136,000 $2,946,000 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. NOTE 4 -- INVENTORY May 31, ----------------------------- 1996 1995 ---------- ---------- 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 ========== ========== NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment, including assets under capital lease arrangement, are as follows: May 31, -------------------------- Estimated 1996 1995 Useful Life ----------- ----------- in Years ----------- 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 =========== ========== 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 30 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). 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. 31 NOTE 8 -- NOTES PAYABLE Year Ended May 31, ----------------------------- 1996 1995 ------------ ------------ 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 ========== ======== 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. NOTE 9 -- LONG-TERM DEBT May 31, -------------------------- 1996 1995 ---------- ---------- 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 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 32 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 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 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 ========== ========== 33 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: Year Ending May 31, Amount - ------------------- ---------- 1997......................... $4,290,000 1998......................... 677,000 1999......................... 346,000 2000......................... 265,000 2001......................... 153,000 Thereafter................... 368,000 ---------- $6,099,000 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. Minimum lease payments under the capital leases and the present value of the minimum lease payments are as follows: Year Ending May 31, Amount - ------------------- --------- 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 ======== (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. 34 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. Minimum lease payments under these leases are as follows: Year ending May 31, Amount - ------------------- ----------- 1997................................ $ 389,000 1998................................ 349,000 1999................................ 357,000 2000................................ 331,000 2001................................ 323,000 Thereafter.......................... 1,380,000 ---------- $3,129,000 ========== 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, 35 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: May 31, -------------------------------- 1996 1995 ------------ ------------ 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 $ -- ============ ========== 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. 36 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 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 37 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 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. 38 The following table summarizes option and warrant activity:
Year Ended ------------------------------------------------------------- May 31, 1996 May 31, 1995 ----------------------------- -------------------------- Options/ Price per Options/ Price per Warrants Share Warrants Share -------- ------------- -------- ------------ 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 ======= =======
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. 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. 39 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. 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. Year Ended May 31, ---------------------------- 1996 1995 ------------ ------------ Net sales Electronic and safety products............... $ 8,533,00 $ 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 ============ ============ 40 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective for fiscal 1996, the Company dismissed its principal independent accountant, Schvaneveldt and Company, a Salt Lake City, Utah, public accounting firm ("Schvaneveldt"). The purpose for dismissing Schvaneveldt was to replace that firm with the Seattle, Washington-based certified public accounting firm of Moss Adams LLP ("Moss Adams"). Moss Adams had been the independent accountant of Pacific Coast and its parent before the Verazzana merger. Because prior to the Verazzana merger the Company's sole business activity was seeking a possible merger candidate, and because Pacific Coast and its parent had significant pre-merger business operations with which Moss Adams was familiar, the Company's Board determined that it would be in the best interests of the Company to engage Moss Adams to continue as its independent certifying accountant after the merger. During the Company's past two fiscal years, Schvaneveldt prepared no financial statement for the Company which contained an adverse opinion or disclaimer of opinion, or was modified as to uncertainty, audit scope, or accounting principles. At the time the Board replaced Schvaneveldt with Moss Adams, Schvaneveldt was not preparing any financial statements for the Company. There were no disagreements between the Company and Schvaneveldt on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Schvaneveldt's satisfaction, would have caused it to make reference to the subject matter of such disagreement in connection with any report it may have prepared. Schvaneveldt furnished the Company a letter addressed to the SEC stating that it agreed with the above statements. A copy of that letter, dated June 20, 1995, is attached as Exhibit 16 to the Company's Form 8-K/A, filed on June 22, 1995. 41 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors and Executive Officers The following table sets forth information as of August 9, 1996 (unless otherwise noted) regarding the directors and executive officers of the Company.
Director or Name Age Officer Since Position with Company - ---- --- ------------- --------------------- Donald A. Wright(1) 44 02/95 Chairman of the Board, Chief Executive Officer and President Herman L. "Jack" Jones 65 02/95 Executive Vice President, Chief Operating Officer and Director Roger P. Vallo(1)(2)(3)(4) 61 02/95 Director Robert L. Smith(1)(4) 81 02/95 Director Nick A. Gerde 51 02/95 Vice President Finance, Chief Financial Officer and Treasurer Donald B. Cotton(2)(4) 58 02/95 Director Paul Schmidhauser(3) 47 11/95 Director Allen W. Dahl, M.D.(1)(2)(3)(4) 68 02/95 Director - ----------------------------- (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, has served as a director of Cashmere since 1969, and served as President of Cashmere from that time until August 21, 1996. 42 Nick A. Gerde has been the Vice President Finance and Chief Financial Officer of the Company since February 1995. He has been the Treasurer of the Company since August 9, 1996. 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 of the Company since February 1995 and was the Secretary of the Company from that date until August 9, 1996. Mr. Vallo 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. 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 Item 12 - "Certain Relationships and Related 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, 53, 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. 43 Mark Morel, 41, has been President of Morel since July 23, 1996 and was Vice President of Sales of Morel from July 1989 to July 23, 1996. He has been a director of Morel since December 1988. Stephen L. Morel, 43, has been Vice President of Technology of Morel since July 23, 1996 and was President of Morel from February 1989 to July 23, 1996. He has been a director of Morel since May 1976. Stephen Morel and Mark Morel, above, are brothers. 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. Garry R. Vandekieft, 55, has been President of Cashmere since August 21, 1996, and was General Manager of Cashmere from June 17, 1996 to August 21, 1996. Prior to being employed by Cashmere, Mr. Vandekieft served as Manufacturing Operations Manager of Advanced Wind Turbines during 1995 and 1996, and as Director of Manufacturing of Master-Halco from 1990 through 1994. 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 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. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on a review of the copies of the forms provided to the Company, or written representations that no other filing of forms was required, the Company believes that during the fiscal year ended May 31, 1996, all Section 16(a) filing requirements applicable to such reporting persons were complied with. An amended Form 3 was filed on August 22, 1996, to reflect certain shares that have been held on behalf of Donald A. Wright in an IRA account since July 18, 1994. The beneficial ownership of these shares has previously been disclosed in the Company's filings with the Securities and Exchange Commission, but Mr. Wright's Form 3, filed in fiscal 1995, had not previously included these shares. 44 ITEM 10. 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 stock options granted to Mr. Wright on July 15, 1996 for 845,000 shares of Common Stock, at $4.6875 per share. The tables also do not include stock options granted to Mr. Wright on July 30, 1996 for 60,000 shares of Common Stock, at an exercise price of at $2.375 per share, which are subject to shareholder approval of certain amendments to the Company's stock incentive plan. See "Benefit Plans," below.
Long-Term Compensation --------------------------------- Annual Compensation Awards Payouts ---------------------------------------- ------------------------- ------- Securities Other Restricted Underlying Annual Stock Options/ LTIP All Other Name and Fiscal Salary Bonus Compensation Awards SARs Payouts Compensation Principal Position Year(1) ($) ($) ($) ($) (#) ($) ($) - ------------------ ------- ------ ----- ----------- ----------- ----------- ------- ------------ Donald A. 1996 110,577 0 0 0 112,560 0 400(5) Wright(2)(3) 1995 83,654 0 0 0 100,000(4) 0 0 CEO and President 1994 75,000 0 0 0 0 0 0 - ----------------------------- (1) Information is shown for the May 31 fiscal years of the Company and, prior to February 1995, Original PCTH, which employed Mr. Wright during the relevant periods. (2) Mr. Wright became the Chief Executive Officer of the Company in February 1995, upon effectiveness of the merger of Original PCTH into a wholly owned subsidiary of the Company. See Item 1 - "Description of Business - Acquisition History." (3) The compensation shown for Mr. Wright for the fiscal year ended May 31, 1994 was paid by Original PCTH. (4) Represents unexercised, but exercisable, warrants to purchase 100,000 shares of Common Stock. See "Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values," below. (5) Represents estimated value of the personal use of a company car.
45 Option Grants The following table sets forth information on grants of stock options or other similar rights by the Company during the last fiscal year to the Named Executive.
Percent of Total Market Price Number of Securities Options/SARs Exercise or on Date of Underlying Options/ Granted to Employees Base Price Grant Expiration Name SARs Granted (#) in Fiscal Year ($/Share) ($/Share) Date - ---- -------------------- -------------------- ----------- ------------- ---------- Donald A. Wright 97,560 67% 5.125 5.125 10/30/2005 15,000 10% 4.875 4.875(1) 11/28/2005 - ----------------------------- (1) Documentation regarding these options originally reflected an exercise price of $2.00 per share, per Mr. Wright's employment agreement. During the fiscal year, the Board of Directors clarified that the exercise price of the options was to have been $4.875 per share, the closing sale price of the Common Stock on the Nasdaq SmallCap Market on the date the options were granted, and the documentation for the options was revised accordingly.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values. The following table sets forth information concerning exercise of stock options and warrants during the last fiscal year by the Named Executive and the fiscal year end value of unexercised options:
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/ Options/SARs at FY-end (#) SARs at FY-end ($) Shares Acquired Value ----------------------------- ----------------------------- Name on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable - ---- --------------- -------- ----------- ------------- ----------- ------------- Donald A. Wright 0 0 134,512(1) 78,048 209,000 N/A - ----------------------------- (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. 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 46 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. In fiscal 1996, 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, all of which are currently exercisable. During fiscal 1997, the Board of Directors awarded Mr. Wright an option to purchase 845,000 shares of Common Stock at $4.6875 per share. Also during fiscal 1997, the Board of Directors awarded Mr. Wright options to purchase up to 60,000 shares of Common Stock at $2.375 per share, all of which are subject to shareholder approval of the Plan Amendments referred to below (see "Benefit Plans"), and 30,000 of which will be exercisable upon shareholder approval of such amendments. Benefit Plans 1995 Stock Incentive Plan, as amended The Company's 1995 Stock Incentive Plan, as amended by the Board of Directors on July 30, 1996, subject to shareholder approval of such amendments (as amended, 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. The July 30, 1996 amendments to the Plan (the "Plan Amendments") would increase the number of shares reserved for issuance under the Plan from 1,000,000 to 2,000,000 and clarify the limitation on options that may be granted to any person in one fiscal year. 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. 47 Shares Available. Subject to adjustment as provided in the Plan, a maximum of 2,000,000 shares of Common Stock are reserved for issuance thereunder. The maximum number of shares with respect to which options may be granted to any person during any fiscal year is 1,000,000. 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. As of August 15, 1996, options to purchase an aggregate of 995,283 shares of Common Stock have been granted under the Plan, and options to purchase an additional 115,000 shares have been granted, subject to shareholder approval of the Plan Amendments. See "Description of Securities - Stock Options." 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 48 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 49 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 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. 50 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 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. 51 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 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 as of August 14, 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.
Amount and Nature Amount and Nature of Percentage of of Beneficial Beneficial Ownership Common Ownership of Percentage of Name and Address of Beneficial Owner of Common Stock(1) Stock(2) Warrants Warrants - ------------------------------------ -------------------- ------------- ----------------- ------------- Donald A. Wright(3) c/o PCT Holdings, Inc. ........................... 434 Olds Station Road Wenatchee, WA 98801 .............................. 1,246,282 11.6% 1,500 * Herman L. "Jack" Jones c/o PCT Holdings, Inc. ........................... 432 Olds Station Road Wenatchee, WA 98801 .............................. 701,437 7.2% ___ ___ Pensionfund of the Siemens Companies in Switzerland CH 8047 Zurich, Switzerland .............................. 650,000 6.7% ___ ___ Stephen Morel 224 Stoneybrook Lane Wenatchee, WA 98801 .............................. 398,433 4.1% ___ ___ Melvin B. Hoelzle(4) 8105 South Broadway Everett, WA 98203 ................................ 380,500 3.9% ___ ___ Roger Vallo(5) 2707 Colby Avenue Suite 1101 Everett, WA 98201 ................................ 219,026 2.2% ___ ___ Robert L. Smith(6) 20008 Grand Avenue, Apt. 201 Everett, WA 98201 ................................ 170,887 1.8% 5,000 * 52 Donald B. Cotton(7) 538 Timber Ridge Drive Trophy Club, TX 76262 ............................ 103,609 1.1% ___ ___ Allen W. Dahl 7300 Madrona Drive N.E Bainbridge Island, WA 98110 ...................... 29,276 * ___ ___ Paul Schmidhauser Rebbergstrasse 28 CH-8112 Otelfingen, Switzerland .................. 2,500 * 1,000 * All Executive Officers and ....................... 2,518,478(8) 23.4% 11,500 * Directors as a group (eight persons) - ----------------------------- * Less than 1%. (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 9,728,309 shares of Common Stock outstanding on August 14, 1996. (3) Includes 34,266 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 granted to Mr. Wright on July 15, 1996. Does not include options to purchase 60,000 shares of Common Stock that are subject to shareholder approval of the Plan Amendments. See Item 10 - "Executive Compensation - Benefit Plans." If the Plan Amendments are approved by the shareholders, options to purchase up to 30,000 shares of Common Stock will become immediately exercisable and options to purchase the remaining 30,000 shares of Common Stock will vest on June 1, 1997. (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. 53 (8) Includes currently exercisable warrants to purchase up to 162,500 shares of Common Stock, and currently exercisable options to purchase up to 892,723 shares of Common Stock. Does not include options granted to two executive officers of the Company to purchase an aggregate of 90,000 shares of Common Stock that are subject to shareholder approval of the Plan Amendments. If the Plan Amendments are approved by the shareholders at the next annual meeting of the Company, options to purchase up to 45,000 shares of Common Stock will become immediately exercisable and options to purchase the remaining 45,000 shares of Common Stock will vest on June 1, 1997.
54 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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. 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. 55 Mr. Dudley claims beneficial ownership of 88,433 of such shares, and disclaims beneficial ownership of the remaining shares. 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 Item 1 - "Description of Business - 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"). 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 were waived as to the July 1996 public offering. 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. 56 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 accrued interest at 18% per annum and was due in full on September 27, 1996. This loan, plus accrued interest and a loan fee that together amounted to $15,000, was paid in full on August 9, 1996. 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 on January 11, 1997. In addition, the warrant grants Mr. Smith certain rights to register the shares issuable upon exercise of the warrant. Mr. Smith waived his rights to register those shares in the July 1996 public offering. 57 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description 3.1 Articles of Incorporation of Verazzana Ventures, Ltd. (now known as PCT Holdings, Inc.), as filed on January 30, 1986, with the Secretary of State of the State of Nevada.(2) 3.2 Certificate of Amendment to the Articles of Incorporation of PCT Holdings, Inc., as filed on February 16, 1995, with the Secretary of State of the State of Nevada.(2) 3.3 Amended and Restated Bylaws of PCT Holdings, Inc.(7) 4.1 Form of specimen certificate for Common Stock.(2) 4.2 Form of specimen certificate for Warrants.(9) 4.3 Warrant Agreement between Interwest Transfer Co., Inc. and PCT Holdings, Inc. dated July 1, 1996.(11) 4.4 Purchase Warrant to Paulson Investment Company, Inc. dated July 15, 1996.(11) 4.5 Registration Rights Agreement, dated December 1, 1995, between PCT Holdings, Inc., a Nevada corporation, and Stephen L. Morel and Mark Morel.(6) 4.6 Registration Rights Agreement, dated November 30, 1995, between PCT Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc., a Florida corporation, and certain of its shareholders.(6) 4.7 Agreement and Plan of Merger, dated February 28, 1995, among PCT Holdings, Inc., Ceramic Devices, Inc., a Washington corporation, and Ceramic Devices, Inc., a California corporation.(1) 4.8 Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO Associates, Ltd. dated May 22, 1996.(2) 4.9 Purchase Warrant to Cohig & Associates, Inc. dated July 15, 1996.(11) 10.1 Loan and Security Agreement, dated April 24, 1995, between Silicon Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere Manufacturing Co., Inc., and Pacific Coast Technologies, Inc.(4) 10.2 Employment Agreement, dated as of January 1, 1995, between PCT Holdings, Inc. and Donald A. Wright.(4) 10.3 Amendment to Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(7) 10.4 Employment Agreement, dated as of June 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(7) 10.5 Common Stock Purchase Warrant from PCT Holdings, Inc. to Donald A. Wright dated as of February 17, 1995.(7) 10.6 Common Stock Purchase Warrant from PCT Holdings, Inc. to Nick A. Gerde dated as of February 17, 1995.(7) 10.7 1995 Stock Incentive Plan.(7) 10.8 Independent Director Stock Plan.(7) 10.9 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(7) 10.10 Amended and Restated Promissory Note from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(7) 10.11 Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd. dated as of May 22, 1996.(7) 58 10.12 Security Agreement between PCT Holdings, Inc. and UTCO Associates, Ltd. dated as of May 22, 1996.(8) 10.13 Asset Purchase Agreement, dated October 27, 1995, between PCT Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc., a Washington corporation, PCT Holdings, Inc., a Washington corporation, Seismic Safety Products, Inc., a Florida corporation, and certain of its affiliates.(5) 10.14 Patent Purchase Agreement, dated October 27, 1995, between PCT Holdings, Inc., a Washington corporation, Seismic Safety Products, Inc., a Washington corporation, and James C. McGill.(5) 10.15 Patent Purchase Agreement, dated October 24, 1995, between PCT Holdings, Inc., a Washington corporation, Seismic Safety Products, Inc., a Washington corporation, and James C. McGill and Antonio F. Fernandez.(5) 10.16 Agreement and Plan of Merger, dated November 30, 1995, between PCT Holdings, Inc., a Nevada corporation, Morel Acquisition Corporation, Morel Industries, Inc., Stephen L. Morel, and Mark Morel.(6) 10.17 Stock Purchase Agreement, dated May 19, 1994, between Cashmere Manufacturing Co., Inc., Herman L. Jones, John M. Eder, Fred R. Paquette, Dan A. Paquette and PCT Holdings, Inc.(4) 10.18 Exchange Agreement, dated May 31, 1994, between PCT Holdings, Inc. and its shareholders.(4) 10.19 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc. and Lysys Ltd.(4) 10.20 Agreement and Plan of Merger, dated February 15, 1995, between PCT Holdings, Inc., a Nevada corporation, PCT Merger Corporation, a Washington corporation, and PCT Holdings, Inc., a Washington corporation.(4) 10.21 Agreement and Plan of Merger, dated February 28, 1995, between PCT Holdings, Inc., Ceramic Devices, Inc., a Washington corporation, and Ceramic Devices, Inc., a California corporation.(4) 10.22 Promissory Note, dated May 10, 1995, in the principal amount of $200,000, from PCT Holdings, Inc. to William H. Payne, Ivan G. Sarda, Elinor A. Walters and Katrina A. Knowles.(4) 10.23 Security Agreement, dated May 10, 1995, between Ceramic Devices, Inc., and William H. Payne, Ivan G. Sarda, Elinor A. Walters and Katrina A. Knowles.(4) 10.24 Intellectual Property Acquisition and License Agreement, dated June 1, 1994, between Pacific Coast Technologies, Inc. and James C. Kyle.(4) 10.25 Promissory Note, dated June 1, 1994, in the principal amount of $400,000, from Pacific Coast Technologies, Inc. to James C. Kyle and Carol A. Kyle.(4) 10.26 Promissory Note Extension, dated January 1, 1995, in the principal amount of $387,800, from Pacific Coast Technologies, Inc. to James C. Kyle and Carol A. Kyle.(4) 10.27 Lease Agreement, dated February 1, 1993, between the Port of Chelan County and Pacific Coast Technologies, Inc.(4) 10.28 Addendum to Lease Agreement with Pacific Coast Technologies, Inc., dated April 22, 1993, between the Port of Chelan County and Pacific Coast Technologies, Inc.(4) 10.29 Standard Industrial Lease, dated April 20, 1994, between The Manufacturers Life Insurance Company and Ceramic Devices, Inc., for certain real property situated at 8170 Ronson Road, San Diego, California.(4) 10.30 Standard Industrial Lease, dated April 20, 1994, between The Manufacturers Life Insurance Company and Ceramic Devices, Inc., for certain real property situated at 8145 Ronson Road, San Diego, California.(4) 59 10.31 Employment and Non-Competition Agreement, dated May 31, 1994, between PCT Holdings, Inc. and Herman L. "Jack" Jones.(4) 10.32 Employment Agreement, dated January 1, 1995, between PCT Holdings, Inc. and Nick A. Gerde.(4) 10.33 Amended Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Nick A. Gerde.(7) 10.34 Employment Agreement, dated December 1, 1995, between Morel Industries, Inc. and Stephen L. Morel.(5) 10.35 Revised and Restated Promissory Note, dated May 17, 1996, from Morel Industries, Inc. to Richard and Jacquelyn Doane.(8) 10.36 Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(7) 10.37 Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(8) 10.38 Promissory Note, dated March 15, 1996, from Cashmere Manufacturing Co., Inc. to Cashmere Valley Bank, Inc.(8) 10.39 Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones to Cashmere Valley Bank.(8) 10.40 Amended and Restated Agreement, dated May 30, 1996, between Herman L. "Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(9) 10.41 Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings, Inc. dated March 15, 1996.(9) 10.42 Lease Agreement between the Port of Chelan County and Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8) 10.43 Building Construction Agreement between the Port of Chelan County and Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8) 10.44 General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group, effective as of February 5, 1990, as amended.(8) 10.45 Special Business Provisions No. L-890821-8140N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 18, 1992.(8)(10) 10.46 Special Business Provisions No. L-500660-8134N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 31, 1991.(8)(10) 10.47 Special Business Provisions No. L-435579-8180N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of August 11, 1994.(8)(10) 10.48 Special Business Provisions No. PLR-950A between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 5, 1990.(8)(10) 10.49 Administrative Agreement No. L-435579-8180N between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group effective as of August 11, 1994.(8) 10.50 Special Business Provisions No. POP-65311-0047 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(8)(10) 10.51 General Terms Agreement No. BCA-65311-0044 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(8) 10.52 Extension and Modification of Promissory Note, dated April 1996, between PCT Holdings, Inc. and William H. Payne, Ivan G. Sarda, the Waldal Family Trust and Katrina Knowles.(8) 10.53 Consent to Offering and Additional Indebtedness, dated June 7, 1996, between PCT Holdings, Inc. and William N. Payne, Ivan G. Sarda, the Waldal Family Trust and Katrina Knowles.(9) 60 10.54 Loan Modification Agreement, dated July 26, 1996, between Silicon Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast Technologies, Inc. and Seismic Safety Products, Inc.(11) 16.1 Letter from accountant regarding a change of accountants.(3) 21. List of Subsidiaries.(7) 23. Consent of Moss Adams LLP.(11) 27. Financial Data Schedule.(11) - ----------------------------- (1) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 1, 1995. (2) Incorporated by reference to the Company's Form 8-A filed on May 16, 1995. (3) Incorporated by reference to the Company's Current Report on Form 8-K/A filed on June 22, 1995. (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on August 29, 1995. (5) Incorporated by reference to the Company's Current Report on Form 10-QSB for the quarterly period ended November 30, 1995. (6) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 18, 1995. (7) Incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 31, 1996. (8) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form SB-2 filed on June 19, 1996. (9) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form SB-2 filed on July 12, 1996. (10) Subject to confidential treatment. Omitted confidential information was filed separately with the Securities and Exchange Commission. (11) Submitted with this Form 10-KSB. (b) Reports on Form 8-K. On May 7, 1996, the Company filed Amendment No. 3 to its report on Form 8-K dated November 30, 1995 (the "Amendment"). The Amendment contained certain historical and pro forma financial statements related to the acquisition of Morel by the Company as of November 30, 1995. The Amendment was filed to provide disclosure related to the Company's determination that the acquisition should be accounted for as a purchase rather than as if a pooling of interests, as had been reported earlier. 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PCT HOLDINGS, INC. Date: August 23, 1996 By /s/ DONALD A. WRIGHT ------------------------------------- DONALD A. WRIGHT President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the following capacities on August 23, 1996. Signature Title /s/ DONALD A. WRIGHT President, Chief Executive Officer, and - ----------------------------------- Chairman of the Board DONALD A. WRIGHT (Principal Executive Officer) /s/ NICK A. GERDE Vice President Finance, Chief Financial - ----------------------------------- Officer and Treasurer (Principal Financial NICK A. GERDE and Accounting Officer) /s/ ROGER P. VALLO Director ROGER P. VALLO /s/ ROBERT L. SMITH Director ROBERT L. SMITH /s/ JACK JONES Executive Vice President, Chief Operating - ----------------------------------- Officer and Director HERMAN L. "JACK" JONES /s/ DONALD B. COTTON Director - ----------------------------------- DONALD B. COTTON 62 /s/ ALLEN W. DAHL Director - ----------------------------------- ALLEN W. DAHL /s/ PAUL SCHMIDHAUSER Director - ----------------------------------- PAUL SCHMIDHAUSER 63 EXHIBIT INDEX The following documents are filed herewith or have been included as exhibits to previous filings with the Securities and Exchange Commission and are incorporated by reference as indicated below. Exhibit Number Description 3.1 Articles of Incorporation of Verazzana Ventures, Ltd. (now known as PCT Holdings, Inc.), as filed on January 30, 1986, with the Secretary of State of the State of Nevada.(2) 3.2 Certificate of Amendment to the Articles of Incorporation of PCT Holdings, Inc., as filed on February 16, 1995, with the Secretary of State of the State of Nevada.(2) 3.3 Amended and Restated Bylaws of PCT Holdings, Inc.(7) 4.1 Form of specimen certificate for Common Stock.(2) 4.2 Form of specimen certificate for Warrants.(9) 4.3 Warrant Agreement between Interwest Transfer Co., Inc. and PCT Holdings, Inc. dated July 1, 1996.(11) 4.4 Purchase Warrant to Paulson Investment Company, Inc. dated July 15, 1996.(11) 4.5 Registration Rights Agreement, dated December 1, 1995, between PCT Holdings, Inc., a Nevada corporation, and Stephen L. Morel and Mark Morel.(6) 4.6 Registration Rights Agreement, dated November 30, 1995, between PCT Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc., a Florida corporation, and certain of its shareholders.(6) 4.7 Agreement and Plan of Merger, dated February 28, 1995, among PCT Holdings, Inc., Ceramic Devices, Inc., a Washington corporation, and Ceramic Devices, Inc., a California corporation.(1) 4.8 Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO Associates, Ltd. dated May 22, 1996.(2) 4.9 Purchase Warrant to Cohig & Associates, Inc. dated July 15, 1996.(11) 10.1 Loan and Security Agreement, dated April 24, 1995, between Silicon Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere Manufacturing Co., Inc., and Pacific Coast Technologies, Inc.(4) 10.2 Employment Agreement, dated as of January 1, 1995, between PCT Holdings, Inc. and Donald A. Wright.(4) 10.3 Amendment to Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(7) 10.4 Employment Agreement, dated as of June 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(7) 10.5 Common Stock Purchase Warrant from PCT Holdings, Inc. to Donald A. Wright dated as of February 17, 1995.(7) 10.6 Common Stock Purchase Warrant from PCT Holdings, Inc. to Nick A. Gerde dated as of February 17, 1995.(7) 10.7 1995 Stock Incentive Plan.(7) 10.8 Independent Director Stock Plan.(7) 10.9 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(7) 10.10 Amended and Restated Promissory Note from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(7) 63 10.11 Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd. dated as of May 22, 1996.(7) 10.12 Security Agreement between PCT Holdings, Inc. and UTCO Associates, Ltd. dated as of May 22, 1996.(8) 10.13 Asset Purchase Agreement, dated October 27, 1995, between PCT Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc., a Washington corporation, PCT Holdings, Inc., a Washington corporation, Seismic Safety Products, Inc., a Florida corporation, and certain of its affiliates.(5) 10.14 Patent Purchase Agreement, dated October 27, 1995, between PCT Holdings, Inc., a Washington corporation, Seismic Safety Products, Inc., a Washington corporation, and James C. McGill.(5) 10.15 Patent Purchase Agreement, dated October 24, 1995, between PCT Holdings, Inc., a Washington corporation, Seismic Safety Products, Inc., a Washington corporation, and James C. McGill and Antonio F. Fernandez.(5) 10.16 Agreement and Plan of Merger, dated November 30, 1995, between PCT Holdings, Inc., a Nevada corporation, Morel Acquisition Corporation, Morel Industries, Inc., Stephen L. Morel, and Mark Morel.(6) 10.17 Stock Purchase Agreement, dated May 19, 1994, between Cashmere Manufacturing Co., Inc., Herman L. Jones, John M. Eder, Fred R. Paquette, Dan A. Paquette and PCT Holdings, Inc.(4) 10.18 Exchange Agreement, dated May 31, 1994, between PCT Holdings, Inc. and its shareholders.(4) 10.19 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc. and Lysys Ltd.(4) 10.20 Agreement and Plan of Merger, dated February 15, 1995, between PCT Holdings, Inc., a Nevada corporation, PCT Merger Corporation, a Washington corporation, and PCT Holdings, Inc., a Washington corporation.(4) 10.21 Agreement and Plan of Merger, dated February 28, 1995, between PCT Holdings, Inc., Ceramic Devices, Inc., a Washington corporation, and Ceramic Devices, Inc., a California corporation.(4) 10.22 Promissory Note, dated May 10, 1995, in the principal amount of $200,000, from PCT Holdings, Inc. to William H. Payne, Ivan G. Sarda, Elinor A. Walters and Katrina A. Knowles.(4) 10.23 Security Agreement, dated May 10, 1995, between Ceramic Devices, Inc., and William H. Payne, Ivan G. Sarda, Elinor A. Walters and Katrina A. Knowles.(4) 10.24 Intellectual Property Acquisition and License Agreement, dated June 1, 1994, between Pacific Coast Technologies, Inc. and James C. Kyle.(4) 10.25 Promissory Note, dated June 1, 1994, in the principal amount of $400,000, from Pacific Coast Technologies, Inc. to James C. Kyle and Carol A. Kyle.(4) 10.26 Promissory Note Extension, dated January 1, 1995, in the principal amount of $387,800, from Pacific Coast Technologies, Inc. to James C. Kyle and Carol A. Kyle.(4) 10.27 Lease Agreement, dated February 1, 1993, between the Port of Chelan County and Pacific Coast Technologies, Inc.(4) 10.28 Addendum to Lease Agreement with Pacific Coast Technologies, Inc., dated April 22, 1993, between the Port of Chelan County and Pacific Coast Technologies, Inc.(4) 10.29 Standard Industrial Lease, dated April 20, 1994, between The Manufacturers Life Insurance Company and Ceramic Devices, Inc., for certain real property situated at 8170 Ronson Road, San Diego, California.(4) 64 10.30 Standard Industrial Lease, dated April 20, 1994, between The Manufacturers Life Insurance Company and Ceramic Devices, Inc., for certain real property situated at 8145 Ronson Road, San Diego, California.(4) 10.31 Employment and Non-Competition Agreement, dated May 31, 1994, between PCT Holdings, Inc. and Herman L. "Jack" Jones.(4) 10.32 Employment Agreement, dated January 1, 1995, between PCT Holdings, Inc. and Nick A. Gerde.(4) 10.33 Amended Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Nick A. Gerde.(7) 10.34 Employment Agreement, dated December 1, 1995, between Morel Industries, Inc. and Stephen L. Morel.(5) 10.35 Revised and Restated Promissory Note, dated May 17, 1996, from Morel Industries, Inc. to Richard and Jacquelyn Doane.(8) 10.36 Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(7) 10.37 Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(8) 10.38 Promissory Note, dated March 15, 1996, from Cashmere Manufacturing Co., Inc. to Cashmere Valley Bank, Inc.(8) 10.39 Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones to Cashmere Valley Bank.(8) 10.40 Amended and Restated Agreement, dated May 30, 1996, between Herman L. "Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(9) 10.41 Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings, Inc. dated March 15, 1996.(9) 10.42 Lease Agreement between the Port of Chelan County and Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8) 10.43 Building Construction Agreement between the Port of Chelan County and Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8) 10.44 General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group, effective as of February 5, 1990, as amended.(8) 10.45 Special Business Provisions No. L-890821-8140N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 18, 1992.(8)(10) 10.46 Special Business Provisions No. L-500660-8134N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of December 31, 1991.(8)(10) 10.47 Special Business Provisions No. L-435579-8180N between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of August 11, 1994.(8)(10) 10.48 Special Business Provisions No. PLR-950A between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 5, 1990.(8)(10) 10.49 Administrative Agreement No. L-435579-8180N between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group effective as of August 11, 1994.(8) 10.50 Special Business Provisions No. POP-65311-0047 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(8)(10) 10.51 General Terms Agreement No. BCA-65311-0044 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(8) 65 10.52 Extension and Modification of Promissory Note, dated April 1996, between PCT Holdings, Inc. and William H. Payne, Ivan G. Sarda, the Waldal Family Trust and Katrina Knowles.(8) 10.53 Consent to Offering and Additional Indebtedness, dated June 7, 1996, between PCT Holdings, Inc. and William N. Payne, Ivan G. Sarda, the Waldal Family Trust and Katrina Knowles.(9) 10.54 Loan Modification Agreement, dated July 26, 1996, between Silicon Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast Technologies, Inc. and Seismic Safety Products, Inc.(11) 16.1 Letter from accountant regarding a change of accountants.(3) 21. List of Subsidiaries.(7) 23. Consent of Moss Adams LLP.(11) 27. Financial Data Schedule.(11) - ----------------------------- (1) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 1, 1995. (2) Incorporated by reference to the Company's Form 8-A filed on May 16, 1995. (3) Incorporated by reference to the Company's Current Report on Form 8-K/A filed on June 22, 1995. (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on August 29, 1995. (5) Incorporated by reference to the Company's Current Report on Form 10-QSB for the quarterly period ended November 30, 1995. (6) Incorporated by reference to the Company's Current Report on Form 8-K filed on December 18, 1995. (7) Incorporated by reference to the Company's Registration Statement on Form SB-2 filed on May 31, 1996. (8) Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form SB-2 filed on June 19, 1996. (9) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form SB-2 filed on July 12, 1996. (10) Subject to confidential treatment. Omitted confidential information was filed separately with the Securities and Exchange Commission. (11) Submitted with this Form 10-KSB. 66 EX-4.3 2 WARRANT AGREEMENT Exhibit 4.3 WARRANT AGREEMENT between PCT HOLDINGS, INC. and INTERWEST TRANSFER CO., INC. Dated as of July 1, 1996 This Warrant Agreement (this "Agreement"), dated as of July 1, 1996, is between PCT Holdings, Inc., a Nevada corporation (the "Company"), and Interwest Transfer Co., Inc., a Utah corporation (the "Warrant Agent"). The Company, at or about the time that it is entering into this Agreement, proposes to issue and sell to public investors up to 2,587,500 Units ("Units"). Each Unit consists of one share of common stock, $0.001 par value, of the Company ("Common Stock") and one Warrant (collectively, the "Warrants"), each Warrant exercisable to purchase one share of Common Stock for $4.6875, upon the terms and conditions and subject to adjustment in certain circumstances, all as set forth in this Agreement. The Company proposes to issue to the Underwriters in the public offering of Units referred to above warrants to purchase up to 225,000 additional Units. The Company wishes to retain the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, transfer, exchange and replacement of the certificates evidencing the Warrants to be issued under this Agreement (the "Warrant Certificates") and the exercise of the Warrants; The Company and the Warrant Agent wish to enter into this Agreement to set forth the terms and conditions of the Warrants and the rights of the holders thereof ("Warrantholders") and to set forth the respective rights and obligations of the Company and the Warrant Agent. Each Warrantholder is an intended beneficiary of this Agreement with respect to the rights of Warrantholders herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: Section 1. Appointment of Warrant Agent The Company appoints the Warrant Agent to act as agent for the Company in accordance with the instructions in this Agreement and the Warrant Agent accepts such appointment. -1- Section 2. Date, Denomination and Execution of Warrant Certificates The Warrant Certificates (and the Form of Election to Purchase and the Form of Assignment to be printed on the reverse thereof) shall be in registered form only and shall be substantially of the tenor and purport recited in Exhibit A hereto, and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law, or with any rule or regulation made pursuant thereto, or with any rule or regulation of any stock exchange or any automated quotation system on which the Common Stock or the Warrants may be listed, or to conform to usage. Each Warrant Certificate shall entitle the registered holder thereof, subject to the provisions of this Agreement and of the Warrant Certificate, to purchase, on or before the close of business on July 15, 2001 (the "Expiration Date"), one fully paid and non-assessable share of Common Stock for each Warrant evidenced by such Warrant Certificate, subject to adjustments as provided in Section 6 hereof, for the "Exercise Price," which initially shall be $4.6875, subject to adjustment as provided in Section 6 hereof. Each Warrant Certificate issued as a part of a Unit offered to the public as described in the recitals, above, shall be dated July 15, 1996; each other Warrant Certificate shall be dated the date on which the Warrant Agent receives valid issuance instructions from the Company or a transferring holder of a Warrant Certificate or, if such instructions specify another date, such other date. For purposes of this Agreement, the term "close of business" on any given date shall mean 5:00 p.m., Mountain time, on such date; provided, however, that if such date is not a business day, it shall mean 5:00 p.m., Mountain time, on the next succeeding business day. For purposes of this Agreement, the term "business day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in New York are authorized or obligated by law to be closed. Each Warrant Certificate shall be executed on behalf of the Company by the Chairman of the Board or its President or a Vice President, either manually or by facsimile signature printed thereon. Each Warrant Certificate shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any Warrant Certificate shall cease to be such officer of the Company before countersignature by the Warrant Agent and issue and delivery thereof by the Company, such Warrant Certificate, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificate had not ceased to be such officer of the Company. -2- Section 3. Subsequent Issuance of Warrant Certificates Subsequent to their original issuance, no Warrant Certificates shall be reissued except (i) Warrant Certificates issued upon transfer thereof in accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any combination, split-up or exchange of Warrant Certificates pursuant to Section 4 hereof, (iii) Warrant Certificates issued in replacement of mutilated, destroyed, lost or stolen Warrant Certificates pursuant to Section 5 hereof, (iv) Warrant Certificates issued upon the partial exercise of Warrant Certificates pursuant to Section 7 hereof, and (v) Warrant Certificates issued to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable thereunder pursuant to Section 22 hereof. The Warrant Agent is hereby irrevocably authorized to countersign and deliver, in accordance with the provisions of said Sections 4, 5, 7 and 22, the new Warrant Certificates required for purposes thereof, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purposes. Section 4. Transfers and Exchanges of Warrant Certificates The Warrant Agent will keep or cause to be kept books for registration of ownership and transfer of the Warrant Certificates issued hereunder. Such registers shall show the names and addresses of the respective holders of the Warrant Certificates and the number of Warrants evidenced by each such Warrant Certificate. The Warrant Agent shall, from time to time, register the transfer of any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Assignment duly filled in and executed with such signature guaranteed by a banking institution or NASD member and such supporting documentation as the Warrant Agent or the Company may reasonably require, to the Warrant Agent at its stock transfer office in Holladay, Utah, at any time on or before the Expiration Date, and upon payment to the Warrant Agent for the account of the Company of an amount equal to any applicable transfer tax. Payment of the amount of such tax may be made in cash, by wire transfer of good funds, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. Upon receipt of a Warrant Certificate, with the Form of Assignment duly filled in and executed, accompanied by payment of an amount equal to any applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered Warrant Certificate and countersign and deliver to the transferee a new Warrant Certificate for the number of full Warrants transferred to such transferee; provided, however, that in case the registered holder of any Warrant Certificate shall elect to transfer fewer than all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent in addition shall promptly -3- countersign and deliver to such registered holder a new Warrant Certificate or Warrant Certificates for the number of full Warrants not so transferred. Any Warrant Certificate or Warrant Certificates may be exchanged at the option of the holder thereof for another Warrant Certificate or Warrant Certificates of different denominations, of like tenor and representing in the aggregate the same number of Warrants, upon surrender of such Warrant Certificate or Warrant Certificates, with the Form of Assignment duly filled in and executed, to the Warrant Agent, at any time or from time to time after the close of business on the date hereof and prior to the close of business on the Expiration Date. The Warrant Agent shall promptly cancel the surrendered Warrant Certificate and deliver the new Warrant Certificate pursuant to the provisions of this Section. Section 5. Mutilated, Destroyed, Lost or Stolen Warrant Certificates Upon receipt by the Company and the Warrant Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of any Warrant Certificate, and in the case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and reimbursement to them of all reasonable expenses incidental thereto, and, in the case of mutilation, upon surrender and cancellation of the Warrant Certificate, the Warrant Agent shall countersign and deliver a new Warrant Certificate of like tenor for the same number of Warrants. Section 6. Adjustments of Number and Kind of Shares Purchasable and Exercise Price The number and kind of securities or other property purchasable upon exercise of a Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence, after the date hereof, of any of the following events: A. The initial Exercise Price shall be $4.6875. If the Company's audited fiscal 1997 net income (adjusted as provided in the next sentence) does not exceed $1,500,000, there shall be a one-time downward adjustment of the Exercise Price to (i) $3.90625 if such net income is $800,000 to $1,500,000, (ii) $3.125 if such net income is $500,000 to $799,000 or (iii) $2.34375 if such net income is less than $500,000. Solely for the purpose of determining whether any downward adjustment to the Exercise Price 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 of the Company (including any amortization of capitalized patent costs relating to such warrants or options) will be excluded in determining fiscal 1997 net income. -4- B. In case the Company shall (1) pay a dividend in, or make a distribution of, shares of capital stock on its outstanding Common Stock, (2) subdivide its outstanding shares of Common Stock into a greater number of such shares or (3) combine its outstanding shares of Common Stock into a smaller number of such shares, the total number of shares of Common Stock purchasable upon the exercise of each Warrant outstanding immediately prior thereto shall be adjusted so that the holder of any Warrant Certificate thereafter surrendered for exercise shall be entitled to receive at the same aggregate Exercise Price the number of shares of capital stock (of one or more classes) which such holder would have owned or have been entitled to receive immediately following the happening of any of the events described above had such Warrant been exercised in full immediately prior to the record date with respect to such event. Any adjustment made pursuant to this Subsection shall, in the case of a stock dividend or distribution, become effective as of the record date therefor and, in the case of a subdivision or combination, be made as of the effective date thereof. If, as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant Certificate thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive and shall be evidenced by a Board resolution filed with the Warrant Agent) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. C. In the event of a capital reorganization or a reclassification of the Common Stock (except as provided in Subsection B. above or Subsection E. below), any Warrantholder, upon exercise of Warrants, shall be entitled to receive, in substitution for the Common Stock to which he would have become entitled upon exercise immediately prior to such reorganization or reclassification, the shares (of any class or classes) or other securities or property of the Company (or cash) that he would have been entitled to receive at the same aggregate Exercise Price upon such reorganization or reclassification if such Warrants had been exercised immediately prior to the record date with respect to such event. In any such case, appropriate provision (as determined by the Board of Directors of the Company, whose determination shall be conclusive and shall be evidenced by a certified Board resolution filed with the Warrant Agent) shall be made for the application of this Section 6 with respect to the rights and interests thereafter of the Warrantholders (including but not limited to the allocation of the Exercise Price between or among shares of classes of capital stock), to the end that this Section 6 (including the adjustments of the number of shares of Common Stock or other securities purchasable and the Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably practicable, in all subsequent exercises of the Warrants for any shares or securities or other property (or cash) thereafter deliverable upon the exercise of the Warrants. D. Whenever the number of shares of Common Stock or other securities purchasable upon exercise of a Warrant or the Exercise Price is adjusted as provided in this Section 6, the Company will promptly file with the Warrant Agent a certificate signed by a -5- Chairman or co-Chairman of the Board or the President or a Vice President of the Company and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company setting forth the number and kind of securities or other property purchasable upon exercise of a Warrant, as so adjusted, or the Exercise Price as so adjusted, stating that such adjustments in the number or kind of shares or other securities or property or such adjustments in the Exercise Price, conform to the requirements of this Section 6, and setting forth a brief statement of the facts accounting for such adjustments. Promptly after receipt of such certificate, the Company, or the Warrant Agent at the Company's request, will deliver, by first-class, postage prepaid mail, a brief summary thereof (to be supplied by the Company) to the registered holders of the outstanding Warrant Certificates; provided, however, that failure to file or to give any notice required under this Subsection, or any defect therein, shall not affect the legality or validity of any such adjustments under this Section 6; and provided, further, that, where appropriate, such notice may be given in advance and included as part of the notice required to be given pursuant to Section 12 hereof. E. In case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the corporation formed by such consolidation or merger or the corporation which shall have acquired such assets, as the case may be, shall execute and deliver to the Warrant Agent a supplemental warrant agreement providing that the holder of each Warrant then outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, solely the kind and amount of shares of stock and other securities and property (or cash) receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Section. The above provision of this Subsection shall similarly apply to successive consolidations, mergers, sales or transfers. The Warrant Agent shall not be under any responsibility to determine the correctness of any provision contained in any such supplemental warrant agreement relating to either the kind or amount of shares of stock or securities or property (or cash) purchasable by holders of Warrant Certificates upon the exercise of their Warrants after any such consolidation, merger, sale or transfer or of any adjustment to be made with respect thereto, but subject to the provisions of Section 20 hereof, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, a certificate of a firm of independent certified public accountants (who may be the accountants regularly employed by the Company) with respect thereto. -6- F. Irrespective of any adjustments in the number or kind of shares issuable upon exercise of Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrant Certificates initially issuable pursuant to this Warrant Agreement. G. The Company may retain a firm of independent public accountants of recognized standing, which may be the firm regularly retained by the Company, selected by the Board of Directors of the Company or the Executive Committee of said Board, and not disapproved by the Warrant Agent, to make any computation required under this Section, and a certificate signed by such firm shall, in the absence of fraud or gross negligence, be conclusive evidence of the correctness of any computation made under this Section. H. For the purpose of this Section, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Articles of Incorporation of the Company, as amended, at the date of this Agreement, or (ii) any other class of stock resulting from successive changes or reclassification of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time as a result of an adjustment made pursuant to this Section, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section, and all other provisions of this Agreement, with respect to the Common Stock, shall apply on like terms to any such other shares. I. The Company may, from time to time and to the extent permitted by law, reduce the exercise price of the Warrants by any amount for a period of not less than 20 days. If the Company so reduces the exercise price of the Warrants, it will give not less than 15 days' notice of such decrease, which notice may be in the form of a press release, and shall take such other steps as may be required under applicable law in connection with any offers or sales of securities at the reduced price. Section 7. Exercise and Redemption of Warrants Unless the Warrants have been redeemed as provided in this Section 7, the registered holder of any Warrant Certificate may exercise the Warrants evidenced thereby, in whole at any time or in part from time to time at or prior to the close of business on the Expiration Date, subject to the provisions of Section 9, at which time the Warrant Certificates shall be and become wholly void and of no value. Warrants may be exercised by their holders or redeemed by the Company as follows: -7- A. Exercise of Warrants shall be accomplished upon surrender of the Warrant Certificate evidencing such Warrants, with the Form of Election to Purchase on the reverse side thereof duly filled in and executed, to the Warrant Agent at its stock transfer office in Holladay, Utah, together with payment to the Company of the Exercise Price (as of the date of such surrender) of the Warrants then being exercised and an amount equal to any applicable transfer tax and, if requested by the Company, any other taxes or governmental charges which the Company may be required by law to collect in respect of such exercise. Payment of the Exercise Price and other amounts may be made in cash, by wire transfer of good funds, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. No adjustment shall be made for any cash dividends, whether paid or declared, on any securities issuable upon exercise of a Warrant. B. Upon receipt of a Warrant Certificate, with the Form of Election to Purchase duly filled in and executed, accompanied by payment of the Exercise Price of the Warrants being exercised (and of an amount equal to any applicable taxes or government charges as aforesaid), the Warrant Agent shall promptly request from the Transfer Agent with respect to the securities to be issued and deliver to or upon the order of the registered holder of such Warrant Certificate, in such name or names as such registered holder may designate, a certificate or certificates for the number of full shares of the securities to be purchased, together with cash made available by the Company pursuant to Section 8 hereof in respect of any fraction of a share of such securities otherwise issuable upon such exercise. If the Warrant is then exercisable to purchase property other than securities, the Warrant Agent shall take appropriate steps to cause such property to be delivered to or upon the order of the registered holder of such Warrant Certificate. In addition, if it is required by law and upon instruction by the Company, the Warrant Agent will deliver to each Warrantholder a prospectus which complies with the provisions of Section 9 of the Securities Act of 1933, as amended, and the Company agrees to supply the Warrant Agent with sufficient number of prospectuses to effectuate that purpose. C. In case the registered holder of any Warrant Certificate shall exercise fewer than all of the Warrants evidenced by such Warrant Certificate, the Warrant Agent shall promptly countersign and deliver to the registered holder of such Warrant Certificate, or to his duly authorized assigns, a new Warrant Certificate or Warrant Certificates evidencing the number of Warrants that were not so exercised. D. Each person in whose name any certificate for securities is issued upon the exercise of Warrants shall for all purposes be deemed to have become the holder of record of the securities represented thereby as of, and such certificate shall be dated, the date upon which the Warrant Certificate was duly surrendered in proper form and payment of the Exercise Price (and of any applicable taxes or other governmental charges) was made; provided, however, that if the date of such surrender and payment is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares as of, and the certificate for such shares shall be -8- dated, the next succeeding business day on which the stock transfer books of the Company are open (whether before, on or after the Expiration Date) and the Warrant Agent shall be under no duty to deliver the certificate for such shares until such date. The Company covenants and agrees that it shall not cause its stock transfer books to be closed for a period of more than 20 consecutive business days except upon consolidation, merger, sale of all or substantially all of its assets, dissolution or liquidation or as otherwise provided by law. E. The Warrants outstanding at the time of a redemption may be redeemed at the option of the Company, in whole or in part on a pro rata basis, at any time if, at the time notice of such redemption is given by the Company as provided in Paragraph F, below, the Daily Price has equalled or exceeded 200% of the then-current Exercise Price for the twenty (20) consecutive trading days immediately preceding the date of such notice, at a price equal to $0.25 per Warrant (the "Redemption Price"). For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price on that day as reported by the principal exchange or quotation system on which prices for the Common Stock are reported. On the redemption date the holders of record of redeemed Warrants shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrants to the Company at the principal office of the Warrant Agent in Holladay, Utah. F. Notice of redemption of Warrants shall be given at least 30 days prior to the redemption date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Warrant Agent and to all of the holders of record of Warrants at their respective addresses appearing on the books or transfer records of the Company or such other address designated in writing by the holder of record to the Warrant Agent not less than 40 days prior to the redemption date. G. From and after the redemption date, all rights of the Warrantholders (except the right to receive the Redemption Price) shall terminate, but only if (a) no later than one day prior to the redemption date the Company shall have irrevocably deposited with the Warrant Agent as paying agent a sufficient amount to pay on the redemption date the Redemption Price for all Warrants called for redemption and (b) the notice of redemption shall have stated the name and address of the Warrant Agent and the intention of the Company to deposit such amount with the Warrant Agent no later than one day prior to the redemption date. H. The Warrant Agent shall pay to the holders of record of redeemed Warrants all monies received by the Warrant Agent for the redemption of Warrants to which the holders of record of such redeemed Warrants who shall have surrendered their Warrants are entitled. I. Any amounts deposited with the Warrant Agent that are not required for redemption of Warrants may be withdrawn by the Company. Any amounts deposited with the Warrant Agent that shall be unclaimed after six months after the redemption date may be -9- withdrawn by the Company, and thereafter the holders of the Warrants called for redemption for which such funds were deposited shall look solely to the Company for payment. The Company shall be entitled to the interest, if any, on funds deposited with the Warrant Agent, and the holders of redeemed Warrants shall have no right to any such interest. J. If the Company fails to make a sufficient deposit with the Warrant Agent as provided above, the holder of any Warrants called for redemption may at the option of the holder (a) by notice to the Company declare the notice of redemption a nullity as to such holder, or (b) maintain an action against the Company for the Redemption Price. If the holder brings such an action, the Company will pay reasonable attorneys' fees of the holder. If the holder fails to bring an action against the Company for the Redemption Price within 60 days after the redemption date, the holder shall be deemed to have elected to declare the notice of redemption to be a nullity as to such holder and such notice shall be without any force or effect as to such holder. Except as otherwise specifically provided in this Paragraph J, a notice of redemption, once mailed by the Company as provided in Paragraph F shall be irrevocable. Section 8. Fractional Interests The Company shall not be required to issue any Warrant Certificate evidencing a fraction of a Warrant or to issue fractions of shares of securities on the exercise of the Warrants. If any fraction (calculated to the nearest one-hundredth) of a Warrant or a share of securities would, except for the provisions of this Section, be issuable on the exercise of any Warrant, the Company shall, at its option, either purchase such fraction for an amount in cash equal to the current value of such fraction computed on the basis of the closing market price (as quoted on NASDAQ) on the trading day immediately preceding the day upon which such Warrant Certificate was surrendered for exercise in accordance with Section 7 hereof or issue the required fractional Warrant or share. By accepting a Warrant Certificate, the holder thereof expressly waives any right to receive a Warrant Certificate evidencing any fraction of a Warrant or to receive any fractional share of securities upon exercise of a Warrant, except as expressly provided in this Section 8. Section 9. Reservation of Equity Securities; Securities Law Matters The Company covenants that it will at all times reserve and keep available, free from any preemptive rights, out of its authorized and unissued equity securities, solely for the purpose of issuance upon exercise of the Warrants, such number of shares of equity securities of the Company as shall then be issuable upon the exercise of all outstanding Warrants ("Equity Securities"). The Company covenants that all Equity Securities which -10- shall be so issuable shall, upon such issuance, be duly authorized, validly issued, fully paid and nonassessable. The Company covenants that if any equity securities required to be reserved for the purpose of issuance upon exercise of the Warrants hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be issued upon exercise of Warrants, the Company will use all commercially reasonable efforts to cause such securities to be duly registered, or approved, as the case may be, and, to the extent practicable, the Company will take all such action in anticipation of and prior to the exercise of the Warrants, including, without limitation, filing any and all post-effective amendments to the Company's Registration Statement on Form SB-2 (Registration No. 333-5011) necessary to permit a public offering of the securities underlying the Warrants at any and all times during the term of this Agreement; provided, however, that in no event shall such securities be issued, and the Company is authorized to refuse to honor the exercise of any Warrant, if such exercise would result, in the opinion of the Company's Board of Directors upon advice of counsel, in the violation of any law. In the case of a Warrant exercisable solely for securities listed on a securities exchange or for which there are at least two independent market makers, in the event that a current registration statement is not in effect at the time when a Warrant is exercised, the Company may, at its option, in lieu of obtaining such registration or approval, elect to redeem Warrants submitted to the Warrant Agent for exercise for a price equal to the difference between the closing price of the securities for which such Warrant is exercisable on the date of such submission and the Exercise Price of such Warrants, and in the event of such redemption, the Company will pay to the holder of such Warrants the above-described redemption price in cash within 10 business days after receipt of notice from the Warrant Agent that such Warrants have been submitted for exercise. Section 10. Reduction of Conversion Price Below Par Value Before taking any action that would cause an adjustment pursuant to Section 6 hereof reducing the portion of the Exercise Price required to purchase one share of capital stock below the then par value (if any) of a share of such capital stock, the Company will use its best efforts to take any corporate action which, in the opinion of its counsel, may be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such capital stock. Section 11. Payment of Taxes The Company covenants and agrees that it will pay when due and payable any and all federal and state documentary stamp and other original issue taxes which may be payable in respect of the original issuance of the Warrant Certificates, or any shares of -11- Common Stock or other securities upon the exercise of Warrants. The Company shall not, however, be required (i) to pay any tax which may be payable in respect of any transfer involved in the transfer and delivery of Warrant Certificates or the issuance or delivery of certificates for Common Stock or other securities in a name other than that of the registered holder of the Warrant Certificate surrendered for purchase or (ii) to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of any Warrant Certificate until any such tax shall have been paid, all such tax being payable by the holder of such Warrant Certificate at the time of surrender. Section 12. Notice of Certain Corporate Actions In case the Company after the date hereof shall propose (i) to offer to the holders of Common Stock, generally, rights to subscribe to or purchase any additional shares of any class of its capital stock, any evidences of its indebtedness or assets, or any other rights or options or (ii) to effect any reclassification of Common Stock (other than a reclassification involving merely the subdivision or combination of outstanding shares of Common Stock) or any capital reorganization, or any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or any sale, transfer or other disposition of its property and assets substantially as an entirety, or the liquidation, voluntary or involuntary dissolution or winding-up of the Company, then, in each such case, the Company shall file with the Warrant Agent and the Company, or the Warrant Agent on its behalf, shall mail (by first-class, postage prepaid mail) to all registered holders of the Warrant Certificates notice of such proposed action, which notice shall specify the date on which the books of the Company shall close or a record be taken for such offer of rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up shall take place or commence, as the case may be, and which shall also specify any record date for determination of holders of Common Stock entitled to vote thereon or participate therein and shall set forth such facts with respect thereto as shall be reasonably necessary to indicate any adjustments in the Exercise Price and the number or kind of shares or other securities purchasable upon exercise of Warrants which will be required as a result of such action. Such notice shall be filed and mailed in the case of any action covered by clause (i) above, at least ten days prior to the record date for determining holders of the Common Stock for purposes of such action or, if a record is not to be taken, the date as of which the holders of shares of Common Stock of record are to be entitled to such offering; and, in the case of any action covered by clause (ii) above, at least 20 days prior to the earlier of the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up is expected to become effective and the date on which it is expected that holders of shares of Common Stock of record on such date shall be entitled to exchange their shares for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up. -12- Failure to give any such notice or any defect therein shall not affect the legality or validity of any transaction listed in this Section 12. Section 13. Disposition of Proceeds on Exercise of Warrant Certificates, etc. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all moneys received by the Warrant Agent for the purchase of securities or other property through the exercise of such Warrants. The Warrant Agent shall keep copies of this Agreement available for inspection by Warrantholders during normal business hours at its stock transfer office. Copies of this Agreement may be obtained upon written request addressed to the Warrant Agent at its stock transfer office in Holladay, Utah. Section 14. Warrantholder Not Deemed a Stockholder No Warrantholder, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise of the Warrants represented thereby for any purpose whatever. Nothing contained herein or in any Warrant Certificate may be construed to confer upon any Warrantholder, as such, any of the rights of a stockholder of the Company, any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, any right to give or withhold consent to any corporate action (whether at any meeting of stockholders or by giving or withholding consent to any merger, recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, conveyance or otherwise), or any right to receive notice of meetings or other actions affecting stockholders (except as provided in Section 12 hereof). No Warrantholder shall have any right to receive dividend or subscription rights or any other rights that any stockholders of the Company may have, until such Warrant Certificate shall have been exercised in accordance with the provisions hereof and the receipt of the Exercise Price and any other amounts payable upon such exercise by the Warrant Agent and the Common Stock purchasable upon such exercise shall have become deliverable as provided herein. Section 15. Right of Action All rights of action in respect to this Agreement are vested in the respective registered holders of the Warrant Certificates; and any registered holder of any Warrant Certificate, without the consent of the Warrant Agent or of any other holder of a Warrant -13- Certificate, may, in his own behalf for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, or otherwise in respect of, his right to exercise the Warrants evidenced by such Warrant Certificate, for the purchase of shares of the Common Stock in the manner provided in the Warrant Certificate and in this Agreement. Section 16. Agreement of Holders of Warrant Certificates Every holder of a Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent and with every other holder of a Warrant Certificate that: A. the Warrant Certificates are transferable on the registry books of the Warrant Agent only upon the terms and conditions set forth in this Agreement; and B. the Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the absolute owner of the Warrant (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Section 17. Cancellation of Warrant Certificates In the event that the Company shall purchase or otherwise acquire any Warrant Certificate or Warrant Certificates after the issuance thereof, such Warrant Certificate or Warrant Certificates shall thereupon be delivered to the Warrant Agent and be canceled by it and retired. The Warrant Agent shall also cancel any Warrant Certificate delivered to it for exercise, in whole or in part, or delivered to it for transfer, split-up, combination or exchange. Warrant Certificates so canceled shall be delivered by the Warrant Agent to the Company from time to time, or disposed of in accordance with the instructions of the Company. Section 18. Concerning the Warrant Agent The Company agrees to pay to the Warrant Agent from time to time, on demand of the Warrant Agent, reasonable compensation for all services rendered by it hereunder and also its reasonable expenses incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense, incurred without gross negligence, bad faith or willful misconduct on -14- the part of the Warrant Agent, arising out of or in connection with the acceptance and administration of this Agreement. Section 19. Merger or Consolidation or Change of Name of Warrant Agent Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor warrant agent under the provisions of Section 21 hereof. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement. Section 20. Duties of Warrant Agent The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrant Certificates, by their acceptance thereof, shall be bound: A. The Warrant Agent may consult with counsel satisfactory to it (who may be counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken, suffered or omitted by it in good faith and in accordance with such opinion; provided, however, that the -15- Warrant Agent shall have exercised reasonable care in the selection of such counsel. Fees and expenses of such counsel, to the extent reasonable, shall be paid by the Company. B. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by a Chairman or co- Chairman of the Board or the President or a Vice President or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. C. The Warrant Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct. D. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature on the Warrant Certificates and such statements or recitals as describe the Warrant Agent or action taken or to be taken by it) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. E. The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible for the making of any change in the number of shares of Common Stock for which a Warrant is exercisable required under the provisions of Section 6 or responsible for the manner, method or amount of any such change or the ascertaining of the existence of facts that would require any such adjustment or change (except with respect to the exercise of Warrant Certificates after actual notice of any adjustment of the Exercise Price); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock will, when issued, be validly issued, fully paid and non-assessable. F. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or take any other action likely to involve expense unless the Company or one or more registered holders of Warrant Certificates shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred. -16- All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrant Certificates, as their respective rights or interests may appear. G. The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. H. The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from a Chairman or co-Chairman of the Board or President or a Vice President or the Secretary or the Controller of the Company, and to apply to such officers for advice or instructions in connection with the Warrant Agent's duties, and it shall not be liable for any action taken or suffered or omitted by it in good faith in accordance with instructions of any such officer. I. The Warrant Agent will not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. J. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees and the Warrant Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct; provided, however, that reasonable care shall have been exercised in the selection and continued employment of such attorneys, agents and employees. K. The Warrant Agent will not incur any liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken, or any failure to take action, in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. L. The Warrant Agent will act hereunder solely as agent of the Company in a ministerial capacity, and its duties will be determined solely by the provisions hereof. The Warrant Agent will not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence, bad faith or willful conduct. -17- Section 21. Change of Warrant Agent The Warrant Agent may resign and be discharged from its duties under this Agreement upon 30 days' prior notice in writing mailed, by registered or certified mail, to the Company. The Company may remove the Warrant Agent or any successor warrant agent upon 30 days' prior notice in writing, mailed to the Warrant Agent or successor warrant agent, as the case may be, by registered or certified mail. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent and shall, within 15 days following such appointment, give notice thereof in writing to each registered holder of the Warrant Certificates. If the Company shall fail to make such appointment within a period of 15 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Company agrees to perform the duties of the Warrant Agent hereunder until a successor Warrant Agent is appointed. After appointment and execution of a copy of this Agreement in effect at that time, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed and the office of the Successor Warrant Agent named in the notice provided for in this Section shall be the office to which notices shall be sent and Warrant Certificates shall be tendered thereafter. The former Warrant Agent shall deliver and transfer to the successor Warrant Agent, within a reasonable time, any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. Section 22. Issuance of New Warrant Certificates Notwithstanding any of the provisions of this Agreement or the several Warrant Certificates to the contrary, the Company may, at its option, issue new Warrant Certificates in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Exercise Price or the number or kind of shares purchasable under the several Warrant Certificates made in accordance with the provisions of this Agreement. Section 23. Notices Notice or demand pursuant to this Agreement to be given or made on the Company by the Warrant Agent or by the registered holder of any Warrant Certificate shall -18- be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: PCT Holdings, Inc. 434 Olds Station Road Wenatchee, Washington 98801 Subject to the provisions of Section 21, any notice pursuant to this Agreement to be given or made by the Company or by the holder of any Warrant Certificate to or on the Warrant Agent shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: Interwest Transfer Co., Inc. 1981 E. Murray-Holladay Road Holladay, Utah 84117 Any notice or demand authorized to be given or made to the registered holder of any Warrant Certificate under this Agreement shall be sufficiently given or made if sent by first-class or registered mail, postage prepaid, to the last address of such holder as it shall appear on the registers maintained by the Warrant Agent. Section 24. Modification of Agreement The Warrant Agent may, without the consent or concurrence of the Warrantholders, by supplemental agreement or otherwise, concur with the Company in making any changes or corrections in this Agreement that the Warrant Agent shall have been advised by counsel (who may be counsel for the Company) are necessary or desirable to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, or to make any other provisions in regard to matters or questions arising hereunder and which shall not be inconsistent with the provisions of the Warrant Certificates and which shall not adversely affect the interests of the Warrantholders. As of the date hereof, this Agreement contains the entire and only agreement, understanding, representation, condition, warranty or covenant between the parties hereto with respect to the matters herein, supersedes any and all other agreements between the parties hereto relating to such matters, and may be modified or amended only by a written agreement signed by both parties hereto pursuant to the authority granted by the first sentence of this Section. -19- Section 25. Successors All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 26. Washington Contract This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Washington and for all purposes shall be construed in accordance with the laws of said state. Section 27. Termination This Agreement shall terminate as of the close of business on the Expiration Date, or such earlier date upon which all Warrants shall have been exercised or redeemed, except that the Warrant Agent shall account to the Company as to all Warrants outstanding and all cash held by it as of the close of business on the Expiration Date. Section 28. Benefits of this Agreement Nothing in this Agreement or in the Warrant Certificates shall be construed to give to any person or corporation other than the Company, the Warrant Agent, and their respective successors and assigns hereunder and the registered holders of the Warrant Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent, their respective successors and assigns hereunder and the registered holders of the Warrant Certificates. Section 29. Descriptive Headings The descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. -20- Section 30. Counterparts This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. PCT HOLDINGS, INC. INTERWEST TRANSFER CO., INC. By: DONALD A. WRIGHT By: KURTIS D. HUGHES ------------------------------- ------------------------------------ Donald A. Wright, President Title: Vice President -21- Exhibit A [Form of the Face of the Warrant Certificate] VOID AFTER 5 P.M. MOUNTAIN TIME ON JULY 15, 2001 WARRANTS TO PURCHASE COMMON STOCK W_____ _________ Warrants PCT HOLDINGS, INC. CUSIP 693259 11 1 THIS CERTIFIES THAT or registered assigns, is the registered holder of the number of Warrants ("Warrants") set forth above. Each Warrant entitles the holder thereof to purchase from PCT Holdings, Inc., a Nevada corporation ("Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agreement hereinafter more fully described ("Warrant Agreement"), one fully paid and nonassessable share of common stock, $0.001 par value, of the Company ("Common Stock") upon presentation and surrender of this Warrant Certificate, with the Election to Purchase on the reverse side of this Warrant Certificate filled in, together with payment of the Exercise Price (as defined in the Warrant Agreement) and any applicable taxes, paid either in cash, by wire transfer of good funds or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company, at any time prior to 5:00 P.M., Mountain time, on July 15, 2001 or, if such Warrant is redeemed as provided in the Warrant Agreement, at any time prior to the effective time of such redemption, at the stock transfer office in Holladay, Utah, of Interwest Transfer Co., Inc., warrant agent of the Company ("Warrant Agent"), or at the designated office of its successor warrant agent or, if there be no successor warrant agent, at the corporate offices of the Company. Each Warrant initially entitles the holder to purchase one share of Common Stock for $4.6875, 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 $1,500,000, a one-time downward adjustment of the Exercise Price to (i) $3.90625 if such net income is $800,000 to $1,500,000, (ii) $3.125 such net income is $500,000 to $799,999, or (iii) $2.34375 if such net income is less than $500,000. The number and kind of securities or other property for which the Warrants are exercisable are subject to further adjustment in certain events, such as mergers, splits, stock dividends, recapitalizations and the like, to prevent dilution, as described in the Warrant Agreement. The Company may redeem any or all outstanding and unexercised Warrants at any time upon 30 days' notice, at a price equal to $0.25 per Warrant, if the Daily Price (as defined below) has equaled or exceeded 200% of the then-current Exercise Price of the Warrants for 20 consecutive trading days immediately preceding the date of notice of such redemption. The term "Daily Price" means, for any relevant day, the closing bid price on that day as reported by the principal exchange or quotation system on which prices for the Common Stock are reported. All Warrants not previously exercised or redeemed will expire on July 15, 2001. This Warrant Certificate is subject to all of the terms, provisions and conditions of the Warrant Agreement, dated as of July 1, 1996, between the Company and the Warrant Agent ("Warrant Agreement"). The registered holder of this Warrant Certificate consents to all of such terms, provisions and conditions by acceptance of this Warrant Certificate. The Warrant Agreement is incorporated herein by reference and made a part hereof, and reference is made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities of the Warrant Agent, the Company and the holders of the Warrant Certificates. Copies of the Warrant Agreement are available for inspection at the stock transfer office of the Warrant Agent or may be obtained upon written request addressed to the Company at 434 Olds Station Road, Wenatchee, Washington 98801, Attention: President. The Company shall not be required upon the exercise of the Warrants evidenced by this Warrant Certificate to issue fractions of Warrants, Common Stock or other securities, but shall have the option to issue fractions of Warrants, Common Stock or other securities or to make adjustment therefor in cash on the basis of the current market value of any fractional interest as provided in the Warrant Agreement. In certain cases, the sale of securities by the Company upon exercise of Warrants would violate the securities laws of the United States, certain states thereof or other jurisdictions. The Company has agreed to use all commercially reasonable efforts to cause a registration statement to continue to be effective during the term of the Warrants with respect to such sales under the Securities Act of 1933, as amended, and to take such action under the laws of various states as may be required to cause the sale of securities upon exercise to be lawful. However, the Company will not be required to honor the exercise of Warrants if, in the opinion of the Board of Directors of the Company, upon advice of counsel, the sale of securities upon such exercise would be unlawful. In certain cases, the Company may, but is not required to, purchase Warrants submitted for exercise for a cash price equal to the difference between the market price of the securities obtainable upon such exercise and the exercise price of such Warrants. This Warrant Certificate, with or without other Warrant Certificates, upon proper surrender to the Warrant Agent, any successor warrant agent or, in the absence of any successor warrant agent, at the corporate offices of the Company, may be exchanged for another Warrant Certificate or Warrant Certificates evidencing in the aggregate the same number of Warrants as the Warrant Certificate or Warrant Certificates so surrendered. If the Warrants evidenced by this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Warrant Certificates evidencing the number of Warrants not so exercised. No holder of this Warrant Certificate, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose whatever. Nothing contained in the Warrant Agreement or herein may be construed to confer upon the holder of this Warrant Certificate, as such, any of the rights of a stockholder of the Company, any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, any right to give or withhold consent to any corporate action (whether at any meeting of stockholders or by giving or withholding consent to any merger, recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, conveyance or otherwise) or any right to receive notice of meetings or other actions affecting stockholders (except as provided in the Warrant Agreement). No holder of this Warrant Certificate shall have any right to receive dividends or subscription rights or any other rights that any stockholders of the Company may have until the Warrants evidenced by this Warrant Certificate shall have been exercised and the Common Stock purchasable upon the exercise thereof shall have become deliverable as provided in the Warrant Agreement. If this Warrant Certificate is surrendered for exercise within any period during which the transfer books for the Company's Common Stock or other class of stock purchasable upon the exercise of the Warrants evidenced by this Warrant Certificate are closed for any purpose, the Company shall not be required to deliver certificates for shares of Common Stock purchasable upon such transfer until the date of the reopening of said transfer books. Every holder of this Warrant Certificate by accepting the same consents and agrees with the Company, the Warrant Agent, and with every other holder of a Warrant Certificate that: (a) this Warrant Certificate is transferable on the transfer books of the Warrant Agent only upon the terms and conditions set forth in the Warrant Agreement, and (b) the Company and the Warrant Agent may deem and treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof (notwithstanding any notation of ownership or other writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes whatever, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The Company shall not be required to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of Warrants evidenced by this Warrant Certificate until any tax which may be payable in respect thereof by the holder of this Warrant Certificate pursuant to the Warrant Agreement shall have been paid, such tax being payable by the holder of this Warrant Certificate at the time of surrender. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. WITNESS the facsimile signature of a duly authorized officer of the Company. Dated: July 15, 1996. PCT HOLDINGS, INC. By: _______________________________ President Countersigned INTERWEST TRANSFER CO., INC. By: ____________________________ Authorized Officer [Form of the Reverse of the Warrant Certificate] ELECTION TO PURCHASE [To be executed by the Registered Holder to exercise Warrants] The undersigned Registered Holder hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _______________________ shares and herewith tenders payment for such shares in cash or by a certified or official bank check payable to the order of the Company or has made a wire transfer to the Company of good funds in the amount of _______________________ and in accordance with the terms hereof. The undersigned requests that a certificate for such shares be registered in the name of ________________________________________________________ whose address is ________________________________________________ and that such certificate be delivered to ___________________________________________ whose address is___________________________________________________________________. If said number of shares is less than all of the shares purchasable hereunder, the undersigned requests that a new Warrant Certificate representing Warrants to purchase the remaining balance of the shares be registered in the name of __________________________________ whose address is _______________________________________________________________ and that such certificate be delivered to ____________________________________________. Dated: __________________________ Signature ___________________________________ (Signature must conform in all respects to name of Registered Holder as it appears on the face of the Warrant Certificate.) INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------ Signature Guaranteed: ASSIGNMENT (To be executed by the Registered Holder to transfer Warrants) FOR VALUE RECEIVED, the undersigned Registered Holder hereby sells, assigns and transfers unto - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Please print name and address of assignee) __________________________________ of the Warrants evidenced by this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________________________ as Attorney to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated:___________________________ Signature___________________________________ (Signature must conform in all respects to name of Registered Holder as it appears on the face of the Warrant Certificate.) INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------- Signature Guaranteed: EX-4.4 3 PURCHASE WARRANT Exhibit 4.4 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN PCT HOLDINGS, INC. PURCHASE WARRANT Issued to: PAULSON INVESTMENT COMPANY, INC. Exercisable to Purchase 180,000 Units of PCT HOLDINGS, INC. Void after July 15, 2001 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time on or after July 15, 1997, and on or before July 15, 2001, up to 180,000 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Closing Date" means the date on which the Offering is closed. (c) "Commission" means the Securities and Exchange Commission. (d) "Common Stock" means the common stock, $0.001 par value, of the Company. (e) "Company" means PCT Holdings, Inc., a Nevada corporation, and any successor corporation. (f) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (g) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (h) "Exercise Price" means the price at which the Warrantholder may purchase one complete Unit (or Securities obtainable in lieu of one complete Unit) upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is exercised for a component of a Unit or Units, then the price payable in connection with such exercise shall be determined by allocating $0.001 to the Unit Warrant and the balance of the Exercise Price to the share of Common Stock, or, in each case, to any securities obtainable in addition to or in lieu of such share of Unit Warrant or Common Stock by virtue of the application of Section 3 of this Warrant. (i) "Offering" means the public offering of Units made pursuant to the Registration Statement. -1- (j) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (k) "Registration Statement" means the Company's registration statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing Date. (l) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (m) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (n) "Unit" means, as the case may require, either one of the Units offered to the public pursuant to the Registration Statement or one of the Units obtainable on exercise of a Warrant. (o) "Unit Warrant" means a Common Stock purchase warrant included as a component of a Unit. (p) "Warrant Certificate" means a certificate evidencing the Warrant. (q) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. (r) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholders that will be paid by the Company. (s) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. 2. Exercise of Warrants. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention: President, or at such other office or agency as the Company -2- may designate. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. The number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property -3- to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. (d) No fractional shares of Common Stock and no fractional Units Warrants or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares or fractional Unit Warrants, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock, or Unit Warrants, as the case may be, in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Units or other Securities purchasable upon exercise of the Warrant. 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock, Unit Warrants or other Securities sufficient to provide for the exercise of the -4- Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Units were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement at its expense. The Company will register the Securities on Form S-3 if the Company is eligible to use such form. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Closing Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the -5- independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration -6- statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: -7- If to the Company: 434 Olds Station Road Wenatchee, Washington 98801 Attn: President If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. Dated as of July 15, 1996. PCT HOLDINGS, INC. By: ------------------------------------- Its: ------------------------------------ Agreed and Accepted as of July 15, 1996. PAULSON INVESTMENT COMPANY, INC. By: ------------------------------------- Its: ------------------------------------ -8- EX-4.9 4 PURCHASE WARRANT Exhibit 4.9 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN PCT HOLDINGS, INC. PURCHASE WARRANT Issued to: COHIG & ASSOCIATES, INC. Exercisable to Purchase 45,000 Units of PCT HOLDINGS, INC. Void after July 15, 2001 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time on or after July 15, 1997, and on or before July 15, 2001, up to 45,000 Units (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. Definitions of Certain Terms. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Closing Date" means the date on which the Offering is closed. (c) "Commission" means the Securities and Exchange Commission. (d) "Common Stock" means the common stock, $0.001 par value, of the Company. (e) "Company" means PCT Holdings, Inc., a Nevada corporation, and any successor corporation. (f) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (g) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (h) "Exercise Price" means the price at which the Warrantholder may purchase one complete Unit (or Securities obtainable in lieu of one complete Unit) upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $3.75 per Unit. If a Warrant is exercised for a component of a Unit or Units, then the price payable in connection with such exercise shall be determined by allocating $0.001 to the Unit Warrant and the balance of the Exercise Price to the share of Common Stock, or, in each case, to any securities obtainable in addition to or in lieu of such share of Unit Warrant or Common Stock by virtue of the application of Section 3 of this Warrant. (i) "Offering" means the public offering of Units made pursuant to the Registration Statement. -1- (j) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (k) "Registration Statement" means the Company's registration statement on Form SB-2 (Registration No. 333-5011) as amended on the Closing Date. (l) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. (m) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (n) "Unit" means, as the case may require, either one of the Units offered to the public pursuant to the Registration Statement or one of the Units obtainable on exercise of a Warrant. (o) "Unit Warrant" means a Common Stock purchase warrant included as a component of a Unit. (p) "Warrant Certificate" means a certificate evidencing the Warrant. (q) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Cohig & Associates, Inc. (r) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholders that will be paid by the Company. (s) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. 2. Exercise of Warrants. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 434 Olds Station Road, Wenatchee, Washington 98801, attention: President, or at such other office or agency as the Company -2- may designate. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. Adjustments in Certain Events. The number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property -3- to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. Upon the occurrence of any such event, the number of Unit Warrants for which the Warrant is then exercisable shall not be adjusted, if such event results in an adjustment of the number of shares purchasable or the exercise price (or both) under the Unit Warrants. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. (d) No fractional shares of Common Stock and no fractional Units Warrants or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares or fractional Unit Warrants, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock, or Unit Warrants, as the case may be, in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Units or other Securities purchasable upon exercise of the Warrant. 4. Reservation of Securities. The Company agrees that the number of shares of Common Stock, Unit Warrants or other Securities sufficient to provide for the exercise of the -4- Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. Validity of Securities. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. Registration of Securities Issuable on Exercise of Warrant Certificate. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Units were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement at its expense. The Company will register the Securities on Form S-3 if the Company is eligible to use such form. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Closing Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the -5- independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. Indemnification in Connection with Registration. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration -6- statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; provided, however, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. Restrictions on Transfer. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. No Rights as a Shareholder. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. Notice. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: -7- If to the Company: 434 Olds Station Road Wenatchee, Washington 98801 Attn: President If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. Applicable Law. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. Dated as of July 15, 1996. PCT HOLDINGS, INC. By: ------------------------------------ Its: ----------------------------------- Agreed and Accepted as of July 15, 1996. COHIG & ASSOCIATES, INC. By: ------------------------------------- Its: ------------------------------------ -8- EX-10.54 5 LOAN MODIFICATION AGREEMENT Exhibit 10.54 LOAN MODIFICATION AGREEMENT BETWEEN: PCT Holdings, Inc., a Nevada corporation; Ceramic Devices, Inc., a Washington corporation; Cashmere Manufacturing Co., Inc., a Washington corporation; Pacific Coast Technologies, Inc., a Washington corporation; and Seismic Safety Products, Inc., a Washington corporation (each, a "Borrower," and collectively, the "Borrowers"), whose address is c/o PCT Holdings, Inc., 434 Olds Station Road, Wenatchee, WA 98801; AND: Silicon Valley Bank ("Silicon") whose address is 3003 Tasman Drive, Santa Clara, California 95054; DATE: July 26, 1996. This Loan Modification Agreement ("Agreement") is entered into on the above date by Borrowers and Silicon. 1. Background. The Borrowers listed above other than Seismic Safety Products, Inc. entered into a Loan and Security Agreement with accompanying Schedule with Silicon in April 1995 (as amended, the "Loan Agreement"). Capitalized terms used in this Loan Modification Agreement shall, unless otherwise defined in this Agreement, have the meaning given to such terms in the Loan Agreement. 2. Modifications to Loan Agreement and Schedule. a. The Amended and Restated Schedule attached to this Loan Modification Agreement is a revised Schedule, which modifies certain terms contained in the Schedule attached to the Loan Agreement. The Schedule attached to this Loan Modification supersedes in its entirety the Schedule attached to the Loan Agreement, as modified prior to the date of this Loan Modification Agreement. b. The term "Obligations," as used in the Loan Agreement, shall include, without limitation, the obligations of each of the Borrowers, including Seismic Safety Products, Inc. to repay all amounts advanced by Silicon from time to time under the Loan Agreement, whether such advances were made before or after the date of this Agreement, and all other obligations described in Section 2.1 of the Loan Agreement, all of which shall be joint and several obligations of the Borrowers. Each Borrower jointly and severally agrees to repay the Loans and all other Obligations, and to perform all other covenants in the Loan Agreement and Schedule, on the terms stated in the Loan Agreement and Schedule, as modified from time to time by agreement of the parties. The occurrence of any of the events described in Section 6.1 of the Loan Agreement with respect to any Borrower shall constitute an "Event of Default" for purposes of the Loan Agreement with respect to all Borrowers. -1- c. The term "Permitted Liens," as used in the Loan Agreement, shall include the liens set forth on the attached Exhibit C, provided, however, that the liens identified in items 1 and 2 on Exhibit C shall be terminated within ten business days after the closing of the pending registered public offering of PCT Holdings, Inc. d. Section 4.5 of the Loan Agreement is modified to provide as follows: Access to Collateral, Books and Records. At all reasonable times, and upon one business day notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy the Borrowers' accounting books, records, ledgers, journals, or registers and the Borrowers' books and records relating to the Collateral. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies and attorneys, and pursuant to any subpoena or other legal process. The Borrowers shall reimburse Silicon for Silicon's actual costs for conducting two audits per year. Silicon may debit the Borrowers' deposit accounts with Silicon for the cost of such accounts receivable audits, in which event Silicon shall send notification thereof to the Borrowers. Notwithstanding the foregoing, during the continuation of an Event of Default all audits shall be at the Borrower's expense. e. Notwithstanding any other provision of the Loan Agreement, no Borrower shall merge with any other entity, or purchase all or substantially all of the assets of another entity, without the prior written consent of Silicon. 3. Security Interests. a. As security for the Obligations, as defined above, each Borrower, including Seismic Safety Products, Inc., grants Silicon a continuing security interest in all of each Borrower's interest in the types of property described in Section 2.2 of the Loan Agreement, including, without limitation, all accounts, instruments, chattel paper, documents, inventory, goods, equipment and general intangibles (as such terms are defined in the Washington Uniform Commercial Code) of each Borrower. b. Each Borrower acknowledges and agrees that all Obligations, as defined above, including without limitation each Borrower's obligation to repay amounts advanced by Silicon to Borrowers on the terms of the Loan Agreement and Schedule as modified by this Loan Modification Agreement, and all obligations evidenced by promissory notes made by any Borrower and held by Silicon, are secured by all liens and security -2- interests granted by any Borrower to Silicon in Agreement, the Loan Agreement or by any other document or agreement. c. Silicon consents to the borrowing of approximately $1,200,000 (the "Bridge Loan") by the Borrowers to pay off a line of credit to Morel Industries, Inc. from Seattle-First National Bank, and to the granting of security interests in assets of PCT Holdings, Inc., Pacific Coast Technologies, Inc., Ceramic Devices, Inc. and Cashmere Manufacturing Co., Inc. to secure this Bridge Loan. Borrowers agree that the Bridge Loan shall be repaid out of the proceeds of the pending registered public offering of PCT Holdings, Inc. within ten business days after the closing of the offering. 4. No Other Modifications; No Defenses. Except as expressly modified by this Loan Modification Agreement, the terms of the Loan Agreement shall remain unchanged and in full force and effect. Silicon's agreement to modify the Loan Agreement pursuant to this Loan Modification Agreement shall not obligate Silicon to make any future modifications to the Loan Agreement or any other loan document. Nothing in this Loan Modification Agreement shall constitute a satisfaction of any indebtedness of any Borrower to Silicon. It is the intention of Silicon and Borrowers to retain as liable parties all makers and endorsers of the Loan Agreement or any other loan document. No maker, endorser, or guarantor shall be released by virtue of this Loan Modification Agreement. The terms of this paragraph shall apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. Borrowers agree that they have no defenses against the obligations to pay any amounts of the Obligations. 5. Representations and Warranties. a. Each Borrower represents and warrants to Silicon that the execution, delivery and performance of this Agreement are within such Borrower's corporate powers, and have been duly authorized and are not in contravention of law or the terms of such Borrower's charter, bylaws or other incorporation papers, or of any undertaking to which such Borrower is a party or by which such Borrower is bound. b. Each Borrower understands and agrees that in entering into this Agreement, Silicon is relying upon the Borrowers' representations, warranties and agreements as set forth in the Loan Agreement and other loan documents. Each Borrower jointly and severally represents and warrants to Silicon that the representations and warranties stated in the Loan Agreement and Schedule are true as of the date of this Agreement, and will continue to be true during the term of the Loan Agreement, with respect to each Borrower. -3- Borrowers: PCT HOLDINGS, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO CERAMIC DEVICES, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO CASHMERE MANUFACTURING CO., INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO PACIFIC COAST TECHNOLOGIES, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO SEISMIC SAFETY PRODUCTS, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO Silicon: SILICON VALLEY BANK By: /S/ ------------------------------------ Title: Vice President -4- AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT Co-Borrowers: PCT Holdings, Inc. Ceramic Devices, Inc. Cashmere Manufacturing Co., Inc. Pacific Coast Technologies, Inc. Seismic Safety Products, Inc. Address: 434 Olds Station Road Wenatchee, WA 98801 Date: July 27, 1996 Secured Accounts Receivable Line of Credit Credit Limit: (Section 1.1) An amount not to exceed the lesser of: (i) $2,500,000.00 at any one time outstanding; or (ii) the amount of the "Borrowing Base", as defined below. For purposes of this Schedule, the "Borrowing Base" shall mean the sum of (a) 75% of the Net Amount of Borrowers' eligible accounts receivable; plus (b) 40% of the book value of Borrowers' eligible inventory, as defined below, as reported to Silicon on a monthly basis, up to a maximum advance of $1,000,000. "Net Amount" means the gross amount of the account, minus all applicable sales, use, excise and other similar taxes and minus all discounts, credits and allowances of any nature granted or claimed. The amount of all letters of credit issued by Silicon at the request of the Borrowers (other than the $2,000,000 Standby Letter of Credit described below) shall reduce, dollar for dollar, the amount otherwise available to be borrowed under the formula described in this paragraph. With respect to the Standby Letter of Credit, $1,000,000 of this Secured Accounts Receivable Line of Credit shall be held in reserve against amounts otherwise available for borrowing under this Secured Accounts Receivable Line of Credit during all periods in which the Standby Letter of Credit has been issued and remains in effect. Without limiting the fact that the determination of which accounts are eligible for borrowing is a matter of Silicon's discretion, the following shall not be deemed eligible for borrowing: accounts outstanding for more than 90 days from the invoice date, accounts subject to any contingencies, accounts owing from an account debtor outside the United States (except for those backed by a letter of credit in form and -5- substance satisfactory to Silicon), accounts owing from governmental agencies, accounts owing from one account debtor to the extent they exceed 25% of the total eligible accounts outstanding (35% on accounts receivable from Boeing), accounts owing from one Borrower to another or owing from an affiliate of a Borrower, and accounts owing from an account debtor to whom a Borrower is or may be liable for goods purchased from such account debtor or otherwise. In addition, if more than 50% of the accounts owing from an account debtor are outstanding more than 90 days from the invoice date or are otherwise not eligible accounts, then all accounts owing from that account debtor shall be deemed ineligible for borrowing. Without limiting the fact that the determination of which inventory is eligible for borrowing is a matter of Silicon's discretion, the following shall not be deemed eligible for borrowing: any inventory other than raw material or finished goods that are owned by a Borrower and located in Wenatchee, Washington, inventory that is used, obsolete or returned goods, inventory that is stored at a location other than the Borrowers' Address or any location owned, leased or rented by Borrowers and previously identified to Silicon, inventory that is subject to a landlord's lien, and inventory that is not in the possession of the Borrowers. Interest Rate: (Section 1.2) The interest rate applicable to the Secured Accounts Receivable Line of Credit shall be a rate equal to the "Prime Rate" in effect from time to time, plus 2.0% per annum. Interest calculations shall be made on the basis of a 360-day year and the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its 'prime rate"; it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. Commitment Fee: (Section 1.3) $12,500, which is fully earned and payable at closing. (Any fee previously paid by the Borrowers in connection with Silicon's commitment letter for this Loan shall be credited against this Fee.) Amortization: Borrowers shall pay Silicon monthly payments of interest on or before the last day of each month. -6- Maturity Date: (Section 1.3) July _, 1997, at which time all unpaid principal and accrued but unpaid interest shall be due and payable. Maturities of Letters of Credit: Commercial or standby letters, of credit issued by Silicon shall have a maximum maturity of not later than the Maturity Date. Repayment: The Borrowers shall repay on demand any amount drawn on a letter of credit issued by Silicon. Silicon may, but is not obligated to, add to the principal amount outstanding under the Secured Accounts Receivable Line of Credit any amount drawn on a letter of credit issued by Silicon. Any such amount shall be subject to the terms applicable to the Secured Accounts Receivable Line of Credit. Issuance: The issuance of any letter of credit under this Agreement is subject to Silicon's written approval and must be in form and content satisfactory to Silicon and in favor of a beneficiary reasonably acceptable to Silicon. The Borrowers shall execute Silicon's then-current application forms, reimbursement agreement and related documents as a condition to Silicon's issuance of any letter of credit. Fees: The Borrowers shall pay Silicon the fees and costs customarily charged by Silicon (at the time of issuance of the letter of credit) with respect to the issuance of letters of credit. Secured Equipment Revolving Term Loan Credit Limit: An amount not to exceed (i) $250,000.00 at any one time outstanding; or (ii) the amount of the "Equipment Borrowing Base," as defined below. For purposes of this Schedule, the "Equipment Borrowing Base" shall mean 80% of the invoice value of equipment purchased by the Borrowers after the date of this Agreement. Silicon shall have no obligation to advance against taxes, freight charges, installation charges or other similar amounts relating to the Borrowers' equipment, whether or not such amounts are identified on the invoices submitted to Silicon. Equipment to be included in the Equipment Borrowing Base must be new equipment, at the time of purchase by a Borrower, owned by a Borrower, in good working order, must not be subject to any liens in favor of any person or entity other than Silicon, and must be subject to a first perfected security interest in favor of Silicon. Silicon shall make advances under this Secured Equipment Line of Credit from time to time, based on invoices and other documentation as shall be requested by Silicon to support such advances. -7- The Borrowers shall submit to Silicon such invoices, advance requests and other information, in form acceptable to Silicon, as Silicon shall require from time to time. Once the total amount of the principal has been advanced under this Secured Equipment Revolving Term Loan, the Borrowers are no longer entitled to further advances. Advances may be requested in writing by the Borrowers or an authorized person. Silicon may, but need not, require that all oral requests be confirmed in writing. The unpaid principal balance owing on this Secured Equipment Line of Credit at any time may be evidenced by endorsements to this Schedule or by Silicon's internal records, including daily computer print-outs. Purpose: Borrowers shall use the proceeds of this Revolving Term Loan to finance the purchase of capital equipment. Interest Rate: The interest rate applicable to the Secured Equipment Revolving Term Loan shall be a rate equal to the "Prime Rate" (as defined above) in effect from time to time, plus 1.75% per annum. Interest calculations shall be made on the basis of a 360-day year and the actual number of days elapsed. Revolving Period: The Revolving Period shall be from the date of closing until September 30, 1995. Term Period: The Term Period shall be the period from September 30, 1995 to September 30, 1998. Amortization: Borrowers shall pay Silicon monthly payments of interest only during the Revolving Period. Commencing on October 31, 1995, the Borrowers shall pay Silicon 36 equal monthly payments of principal, in the amount necessary to repay fully the outstanding principal of Secured Equipment Revolving Tenn Loan in 36 payments, plus interest calculated as provided in this Schedule. Subsequent payments are due on the last day of each month after October 31, 1995. Maturity Date: September 30, 1998, at which time all unpaid principal and accrued but unpaid interest shall be due and payable. Commitment Fee: (Section 1.3) $1,250.00, which has previously been paid by the Borrowers. -8- Standby Letter of Credit Credit Limit: $2,000,000. Purpose: To provide credit enhancement to Chelan County and/or the State of Washington Department of Community Trade and Economic Development. Maturity Date: The Standby Letter of Credit shall have an expiry date of not later than May 18, 1997, the date on which this Standby Letter of Credit facility shall terminate. Repayment: The Borrowers shall repay on demand any amount drawn on the Standby Letter of Credit. Silicon may, but is not obligated to, add to the principal amount outstanding under the Secured Accounts Receivable Line of Credit any amount drawn on a letter of credit issued by Silicon. Any such amount shall be subject to the terms applicable to the Secured Accounts Receivable Line of Credit. Issuance: The issuance of the Standby Letter of Credit must be in form and content satisfactory to Silicon and in favor of a beneficiary reasonably acceptable to Silicon. The Borrowers shall execute Silicon's then-current application forms, reimbursement agreement and related documents as a condition to Silicon's issuance of the Standby Letter of Credit. Security: The Borrowers shall pledge to Silicon a Silicon Valley Bank Certificate of Deposit, as part of the Collateral, in the amount of not less than $1,000,000 as security for the Borrowers' obligations with respect to this Standby Letter of Credit and all other Obligations of the Borrowers. As additional Collateral, in addition to the pledge of this Certificate of Deposit, Silicon shall have the right to require the Borrowers to either (i) draw $1,000,000 on the Secured Accounts Receivable Line of Credit and pledge the cash to Silicon (with such funds to be held exclusively in a deposit account maintained at Silicon) or (ii) purchase and pledge to Silicon an additional $1,000,000 Silicon Valley Bank Certificate of Deposit. Commitment Fee: $20,000, which is fully earned and payable at closing. (Any fee previously paid by the Borrowers in connection with Silicon's commitment letter shall be credited against this Fee.) -9- Prior Names of Borrowers: (Section 3.2) See attached Exhibit B Trade Names of Borrowers: (Section 3.2) See attached Exhibit B Trademarks of Borrowers: See attached Exhibit B Other Locations and Addresses: (Section 3.3) See attached Exhibit B Material Adverse Litigation: (Section 3.10) None. Financial Covenants: (Section 4.1) The Borrowers shall comply with all of the following covenants, all of which shall be determined and measured on a consolidated basis (excluding Morel Industries, Inc.) in accordance with generally accepted accounting principles, except as otherwise stated below: Tangible Net Worth: The Borrowers shall at all times maintain a Tangible Net Worth (defined below) of not less than $5,500,000, plus 50% of the net proceeds of the pending registered public offering by PCT Holdings, Inc., measured quarterly as of February 29, 1996 and each quarter thereafter. Debt to Tangible Net Worth Ratio: The Borrowers shall at all times maintain a ratio of total liabilities (excluding deferred revenues and subordinated debt) to Tangible Net Worth of not more than the amounts provided below for the periods provided below, measured quarterly: Quarterly Ending Maximum Ratio 2/29/96, 5/31/96 and 8/31/96 1.75:1.0 11/30/96 and thereafter 1.0:1.0 -10- Current Ratio: The Borrowers shall at all times maintain a ratio of current assets to current liabilities of not less than the amounts provided below for the periods provided below, measured quarterly. The note payable to the County of Chelan for $2,000,000 shall not be considered a current liability solely due to its demand provisions, but rather shall be characterized as a current or long term liability based upon its maturity date. "Current assets" and "current liabilities" shall be determined in accordance with generally accepted accounting principles. Quarterly Ending Maximum Ratio 2/29/96, 5/31/96 and 8/31/96 1.5:1.0 Quick Ratio: The Borrowers shall maintain a ratio of Quick Assets (defined below) to current liabilities less deferred revenue of not less than 0.9:1.0 for the quarter ending 11/30/96 and each quarter thereafter. Debt Service Coverage Ratio: The Borrowers shall at all times maintain a ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to current maturities of long-term debt plus interest in excess of 0.65:1.0 for the quarter ending 8/31/96 and in excess of 2.0:1.0 for the quarter ending 11/30/96 and thereafter, measured quarterly by annualizing EBITDA. Profitability: The Borrowers shall not incur a quarterly operating loss before tax and extraordinary expenses incurred in raising additional equity in excess of $100,000. The Borrowers' annual net income (after tax and extraordinary expenses incurred in raising additional equity) must be more than $0.00. Definitions: "Tangible Net Worth" means stockholders' equity plus debt that has been subordinated to the Loans on terms satisfactory to Silicon, and accrued interest thereon, less goodwill, patents, capitalized software costs, deferred organizational costs, tradenames, trademarks, and all other assets which would be classified as intangible assets under generally accepted accounting principles. "Quick Assets" means cash on hand or on deposit in banks, readily marketable securities issued by the United States, readily marketable commercial paper rated "A-I" by Standard & Poor's Corporation (or a similar rating by a similar rating organization), certificates of deposit and banker's acceptances, and accounts receivable (net of allowance for doubtful accounts). -11- Other Covenants: (Section 4.1) The Borrowers shall at all times comply with all of the following additional covenants: Banking Relationship. The Borrowers shall maintain their primary banking relationship with Silicon until such time as the Secured Accounts Receivable Line of Credit described in this Schedule has been repaid in full and Silicon's obligations with respect to the Secured Accounts Receivable Line of Credit under the Agreement and this Schedule have been terminated. Financial Statements and Reports. Notwithstanding any other provision of the Loan Agreement, the Borrowers shall provide Silicon: (a) within 30 days after the end of each month, a monthly financial statement (consisting of a income statement and a balance sheet) prepared by the Borrowers in accordance with generally accepted accounting principles; (b) within 5 days after the 15th day and the last day of each month, an accounts receivable report and an accounts payable report for the prior period, in such form as Silicon shall reasonably specify; (c) within 20 days after the end of each month, an inventory report in such form as Silicon shall reasonably specify; (d) within 5 days after 15th and the last day of each month, a Borrowing Base Certificate in the form attached to this Agreement as Exhibit A, as Silicon may reasonably modify such Certificate from time to time, signed by the Chief Financial Officer or President of PCT Holdings, Inc.; (e) within 50 days after the end of each quarter, a Compliance Certificate in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer or President of PCT Holdings, Inc., setting forth calculations showing compliance (at the end of each such calendar quarter) with the financial covenants set forth on the Schedule, and certifying that throughout such quarter the Borrowers were in full compliance with all other terms and conditions of this Agreement and the Schedule, and providing such other information as Silicon shall reasonably request; (f) within 120 days following the end of the Borrowers' fiscal year, complete annual CPA-audited financial statements, such audit being conducted by independent certified public accountants reasonably acceptable to Silicon, together with an unqualified opinion of such accountants; and (g) within five days after filing, a copy of all 10Q and 10K filings and other filings made by any Borrower with the Securities Exchange Commission. -12- Conditions to Closing: Before requesting any advance under this Agreement, the Borrowers shall satisfy each of the following conditions: 1. Loan Documents: Silicon shall have received the Agreement and this Schedule, and such other loan documents as Silicon shall require, each duly executed and delivered by the Borrowers, including a Patent and Trademark Security and Conditional Assignment from Seismic Safety Products, Inc. 2. Documents Relating to Authority, Etc.: Silicon shall have received each of the following in form and substance satisfactory to it: (a) Certified copies of the Articles of Incorporation and Bylaws of each of the Borrowers; (b) A Certificate of good standing issued by the Secretary of State of each Borrower's state of incorporation with respect to each such Borrower; (c) A certified copy of a resolution adopted by the Board of Directors of each of the Borrowers authorizing the execution, delivery and performance of the Agreement, and any other documents or certificates to be executed by such Borrower in connection with this transaction; and (d) Incumbency certificates describing the office and identifying the specimen signatures of the individuals signing all such loan documents on behalf of each of the Borrowers. 3. Perfection and Priority of Security: Silicon shall have received evidence satisfactory to it that its security interest in the Collateral has been duly perfected and that such security interest is prior to all other liens, charges, security interests, encumbrances and adverse claims in or to the Collateral other than Permitted Liens, which evidence shall include, without limitation, evidence from the Washington Department of Licensing showing the due filing of the UCC Financing Statements to be signed by the Borrowers covering the Collateral and evidence of the first priority of Silicon's security interests in the Collateral as required under the Agreement. -13- 4. Insurance: Silicon shall have received evidence satisfactory to it that all insurance required by the Agreement is in full force and effect, with loss payee designations and additional insured designations as required by the Agreement. 5. Other Information: Silicon shall have received such other statements, opinions, certificates, documents and information with respect to matters contemplated by the Agreement as it may reasonably request. Silicon and the Borrowers agree that the terms of this Schedule supplement the Loan and Security Agreement between Silicon and the Borrowers, as modified, and agree to be bound by the terms of this Schedule. Borrowers: PCT HOLDINGS, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO CERAMIC DEVICES, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO CASHMERE MANUFACTURING CO., INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO PACIFIC COAST TECHNOLOGIES, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO SEISMIC SAFETY PRODUCTS, INC. By: NICK A. GERDE ------------------------------------ Title: VicePresident/CFO -14- Silicon: SILICON VALLEY BANK By: /S/ ------------------------------------ Title: Vice President -15- EXHIBIT A [Insert Borrowing Base Certificate] -16- EXHIBIT B [Insert List of Tradenames, Trademarks and other Locations and Addresses] -17- EXHIBIT C Permitted Liens 1. UTCO Associates, Inc. - Security interest in all personal property of Morel Industries, Inc., PCT Holdings, Inc., Pacific Coast Technologies, Inc., Cashmere Manufacturing Co., Inc., Seismic Safety Products, Inc. 2. William Payne, Ivan Sarda, Katrina Knowles and the Waldal Family Trust, as successor in interest to Elinor A. Walter - Security interest in all personal property of Ceramic Devices, Inc. 3. James C. Kyle and Carol A. Kyle - Subordinated security interest in the accounts receivable and patents of Pacific Coast Technologies, Inc. 4. George H. Baldwin - Security interest in Dyna Mechtronics DM4800 Milling Machine, Serial No. 8157, owned by Seismic Safety Products, Inc. -18- EX-23 6 CONSENT OF INDPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Annual Report on Form 10-KSB of our report dated June 15, 1996, except for Note 7 and Note 15(b), as to which the date is July 15, 1996, on our audits of the consolidated financial statements of PCT Holdings, Inc. and its subsidiaries. /S/ MOSS ADAMS LLP Everett, Washington August 20, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 12-MOS MAY-31-1996 MAY-31-1996 1,725,000 0 3,433,000 (74,000) 6,699,000 13,009,000 12,888,000 (2,232,000) 27,649,000 12,057,000 6,304,000 0 0 19,102,000 (6,563,000) 27,649,000 20,725,000 20,725,000 16,439,000 4,765,000 104,000 0 353,000 (1,066,000) 67,000 (999,000) 0 0 0 (999,000) (0.16) (0.16)
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