-----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, VgHP9PtR4rk7v80O4rFvQEwotofXo9DsL0aZRI+pxRtPG/yij57cr9Pk3ThoNfJP p4ijxIlcGVokP601O+yHUg== 0000912057-96-012699.txt : 19960729 0000912057-96-012699.hdr.sgml : 19960729 ACCESSION NUMBER: 0000912057-96-012699 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19960619 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PCT HOLDINGS INC /NV/ CENTRAL INDEX KEY: 0000790023 STANDARD INDUSTRIAL CLASSIFICATION: 3640 IRS NUMBER: 870431483 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05011 FILM NUMBER: 96583129 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 S-1/A 1 PCT HOLDINGS S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1996 REGISTRATION NO. 333-5011 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PCT HOLDINGS, INC. (Name of small business issuer in its charter) NEVADA 3679 87-0431483 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification Number) incorporation)
434 OLDS STATION ROAD, WENATCHEE, WASHINGTON 98801 (509) 664-8000 (Address and telephone number of Registrant's principal executive offices and principal place of business) DONALD A. WRIGHT PRESIDENT 434 OLDS STATION ROAD WENATCHEE, WASHINGTON 98801 (509) 664-8000 (Name, address, and telephone number of agent for service) ------------------------ COPIES TO: Sheryl A. Symonds Mark A. von Bergen L. John Stevenson, Jr. W. Wells Talmadge Eugenie D. Mansfield Weiss, Jensen, Ellis & Howard Stoel Rives LLP 2300 U.S. Bancorp Tower 3600 Union Square 111 S.W. Fifth Avenue 600 University Street Portland, Oregon 97204 Seattle, Washington 98101-3197
------------------------ Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. /X/ ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION JUNE 19, 1996 2,250,000 UNITS [LOGO] EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK PURCHASE WARRANT PCT HOLDINGS, INC., a Nevada corporation (the "Company"), is hereby offering 2,250,000 units (the "Units"), each Unit consisting of one share (the "Shares") of the Company's common stock, $.001 par value (the "Common Stock"), and one warrant to purchase one share of Common Stock (the "Warrants"), for the initial offering price of $ per Unit (the "Unit Offering Price"). The Units will separate immediately upon issuance, and the Common Stock and Warrants that make up the Units will trade only as separate securities. Each Warrant initially entitles the holder thereof to purchase one share of Common Stock at an exercise price of $ per share (150% of the Unit Offering Price), subject to certain adjustments including, if the Company's audited fiscal 1997 net income (adjusted to exclude any expense relating to the vesting of any employee options or warrants) does not exceed $1.5 million, a one-time downward adjustment of the exercise price to (a) 125% of the Unit Offering Price if such net income is $800,000 to $1.5 million, (b) 100% of the Unit Offering Price if such net income is $500,000 to $799,999, and (c) 75% of the Unit Offering Price if such net income is less than $500,000. The Warrants are exercisable at any time, unless previously redeemed, until the fifth anniversary of the effective date of this Prospectus, subject to certain conditions. The Company may redeem the Warrants, in whole or in part, at any time upon at least 30 days prior written notice to the registered holders thereof, at a price of $.25 per Warrant, provided that the closing bid price of the Common Stock has been at least 200% of the then-current exercise price of the Warrants for each of the 20 consecutive trading days immediately preceding the date of the notice of redemption. The Common Stock is included in the Nasdaq Small Cap Market System ("Nasdaq - - -- Small Cap") under the symbol "PCTH." On June 17, 1996, the last reported sale price of the Common Stock on Nasdaq -- Small Cap was $4.50 per share. Before this Offering, there has been only a limited market for the Common Stock and no market for the Warrants, and there is no assurance that an active public market will develop or that, if it does develop, it will be sustained. The Company has applied for listing on the Nasdaq National Market System under the symbols "PCTH" and "PCTHW" for the Common Stock and the Warrants, respectively. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING AT PAGE 6. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) Per Unit........................ $ $ $ Total(3)........................ $ $ $
(SEE ACCOMPANYING FOOTNOTES ON NEXT PAGE.) The Units are offered by the several Underwriters, subject to prior sale, when, as, and if delivered to and accepted by the Underwriters, and subject to their right to reject orders in whole or in part. It is expected that delivery of the Units will be made in New York, New York, on or about , 1996. ------------------------ PAULSON INVESTMENT COMPANY, INC. COHIG & ASSOCIATES, INC. THE DATE OF THIS PROSPECTUS IS , 1996 - - ------------------------ (1) Excludes a nonaccountable expense allowance payable by the Company to Paulson Investment Company, Inc., and Cohig & Associates, Inc., the representatives (the "Representatives") of the several underwriters (the "Underwriters"), equal to 3% of the aggregate Unit Offering Price. The Company has also agreed (i) to issue to the Representatives warrants (the "Representatives' Warrants") to purchase an aggregate of up to 225,000 Units, exercisable at $ per Unit (120% of the Unit Offering Price), and (ii) to grant certain registration rights with respect to the securities underlying the Representatives' Warrants. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of this Offering payable by the Company estimated at $985,000, including the Representatives' nonaccountable expense allowance. (3) The Company has granted the Underwriters a 45-day option (the "Overallotment Option") to purchase up to 337,500 additional Units on the same terms and conditions as set forth above, solely for the purpose of covering overallotments, if any. If the Overallotment Option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." Kryoflex-Registered Trademark- is a registered trademark and Partners with Tomorrow-TM- and Northridge Valve-TM- are trademarks of the Company. ------------------------ The Company is subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Company intends to furnish its shareholders with annual reports containing audited financial statements and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. ------------------------ The Company will provide without charge to each person who receives a Prospectus, upon written or oral request of such person, a copy of any of the information that is incorporated by reference in the Prospectus (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference) and the address (including title and department) and telephone number to which such request is to be directed. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PICTURE SUMMARIES 1. [Picture of various EMI filters surrounding a dime to indicate relative size] Miniature solder-in EMI filters for feedthru applications 2. [Picture of several discoidal capacitors next to a nickel to indicate relative size] Multi-layer ceramic discoidal capacitors for EMI filter applications 3. [Picture of many EMI filters] High reliability screw-in low pass EMI filters 4. [Picture of a worker pouring molten metal into a mold] Pouring of a sandcasting mold 5. [Picture of aluminum castings] High volume precision aluminum castings 6. [Picture showing equipment in Cashmere machine shop] Precision machine shop 7. [Picture of emergency exit window frame for passenger aircraft] Emergency exit window frame for passenger aircraft 8. [Picture of the reset mechanism used in the Seismic valve] Seismic's valve includes a patented mechanism for resetting the valve without special tools 9. [Picture of the Seismic natural gas shut-off valve] Seismic's natural gas shut-off valve is manufactured by Cashmere 10. [Picture of the Seismic residential natural gas shut-off valve and its packaging] Seismic markets its residential valve under the brand name "Northridge Valve-TM-" 11. [Picture of electronic components welded onto an aluminum housing] Lightweight components laser welded into an aluminum housing for aircraft applications 12. [Picture of five electrical connectors made for the International Space Station] Connectors for International Space Station 13. [Picture of two aluminum Aamram missile modules] Aluminum Aamram missile modules with laser welded hermetic connectors 14. [Reproduction of the Company's logo including the words "Partners With Tomorrow-TM-"] Partners With Tomorrow 15. [Picture of the Company's facility in Wenatchee, Washington] A substantial percentage of the Company's customers consists of large manufacturing companies in the aerospace, defense, energy, medical and general electronics industries. The Company also markets and sells its products to a variety of smaller specialized electronics companies and has recently entered the consumer home improvement market with its natural gas shut-off valves. 16. [Picture of four hermetic electronic packages] Laser welded hermetic electronic packages are used in sophisticated communications and radar equipment 17. [Picture of various electrical connectors] Space-age connectors involve many complex machined shapes and sizes 18. [Picture of several formulations of Kryoflex-Registered Trademark- materials] Proprietary Kryoflex-Registered Trademark- materials are produced in many different formulations 3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE OVERALLOTMENT OPTION, THE WARRANTS OR THE REPRESENTATIVES' WARRANTS. SEE "DESCRIPTION OF SECURITIES" AND "UNDERWRITING." UNLESS THE CONTEXT INDICATES OTHERWISE, REFERENCES HEREIN TO THE "COMPANY" ARE TO PCT HOLDINGS, INC. AND ITS CONSOLIDATED SUBSIDIARIES. THE COMPANY PCT Holdings, Inc. (the "Company") develops, manufactures, markets and sells a broad range of precision electronic components designed to operate with a high degree of reliability in harsh environments such as the ocean, space and the human body. These environments experience extremes in temperature, pressure and corrosiveness that can make product repair or replacement difficult or impossible. The Company uses its patented technologies to produce electronic components for a wide variety of applications in the aerospace, defense, energy, medical and general electronics industries. The Company operates through five wholly owned subsidiaries. Two of these businesses are engaged in the production of electronic devices, with one producing a variety of electronics packages and connectors shielded from their environment by the Company's proprietary ceramic seals, and the other producing devices designed to filter out electromagnetic interference detrimental to other electronic devices. The Company has recently acquired a business that designs, manufactures and sells automatic natural gas shut-off valves for use in earthquake sensitive areas. The Company also has two businesses that manufacture machined or cast metal products for many applications, including products that are incorporated into or complementary with the products of its other subsidiaries. A substantial percentage of the Company's customers for its electronic products consists of large manufacturing companies in the aerospace, defense, energy, medical and general electronics industries. These include Hughes Aircraft Company, Honeywell Inc.'s Military Avionics Division, Lockheed Martin Corporation, Northrop Grumman Corporation, Space Systems/Loral, Inc., Westinghouse Electric Corporation and TRW, Inc. The Company's metal products customers include The Boeing Company, Kawasaki Heavy Industries, Ltd., Deere & Company, Northrop Grumman Corporation and PACCAR Inc. The Company also markets and sells its products to a variety of smaller, specialized electronics companies. The Company, with its natural gas shut-off valves, has recently entered the consumer home improvement market and has received initial orders for its valves from home improvement centers such as Eagle Hardware & Garden Inc., Ernst Home Center, Inc., HomeBase Inc., Home Depot U.S.A., Inc. and Ace Hardware Corp. The Company's strategy is to expand the range of products it offers within its core areas of competence, and to produce a larger portion of the customer's total product requirement, through internal growth and the acquisition or development of new technologies. The Company has recently experienced significant growth in revenues, as a result of both the acquisition of complementary businesses and internal growth within each of its operating subsidiaries. The Company hopes to continue to experience growth and to exploit both technological and marketing synergies resulting from the integration of the businesses it has acquired and other businesses or technologies that it may acquire in the future. The Company is incorporated under the laws of the State of Nevada. Its corporate offices are located at 434 Olds Station Road, Wenatchee, Washington, and its telephone number is (509) 664-8000. 3 THE OFFERING Securities offered................ 2,250,000 Units, each Unit consisting of one share of Common Stock and one Warrant to acquire one share of Common Stock. The Common Stock and Warrants will be separately transferrable immediately upon commencement of trading. Common Stock to be outstanding after the Offering.............. 9,728,309 shares.(1) Use of proceeds................... To repay indebtedness, acquire equipment, expand facili- ties, fund potential acquisitions, and provide working capital. See "Use of Proceeds." Risk factors...................... Investment in the Units involves a high degree of risk. See "Risk Factors." Proposed Nasdaq National Market System symbols.................. Common Stock ...................................... PCTH Warrants ......................................... PCTHW
- - ------------------------ (1) Excludes 642,783 shares of Common Stock issuable upon exercise of stock options and warrants at a weighted average exercise price of $4.174 per share outstanding at May 31, 1996. Also excludes 845,000 shares of Common Stock issuable upon the exercise of a stock option that the Company has agreed to grant to Donald A. Wright on the effective date of this Prospectus at 150% of the Unit Offering Price, but not less than $3.75 per share. An additional 9,717 shares of Common Stock are reserved for issuance under the Company's 1995 Stock Incentive Plan and an additional 91,000 shares of Common Stock are reserved for issuance under the Company's Independent Director Stock Plan. See "Capitalization," "Management -- Benefit Plans" and "Description of Securities -- Stock Options." 4 SUMMARY FINANCIAL INFORMATION (in thousands, except per share data)
FISCAL YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 --------- --------- --------- STATEMENT OF OPERATIONS DATA:(1) Net sales.................................................................... $ 2,940 $ 11,035 $ 20,725 Gross profit................................................................. 80 1,943 4,286 Loss from operations......................................................... (884) (846) (479) Net loss..................................................................... (1,098) (1,411) (999) Loss per share of Common Stock............................................... (.60) (.41) (.16) Shares used in computation of loss per share................................. 1,826 3,469 6,209
MAY 31, 1996 ------------------------- ACTUAL AS ADJUSTED(2) --------- -------------- BALANCE SHEET DATA: Working capital...................................................................... $ 952 $ 9,181 Total assets......................................................................... 27,649 35,859 Short-term debt...................................................................... 8,005 4,449 Long-term debt....................................................................... 1,961 1,961 Stockholders' equity................................................................. 12,539 20,768
- - ------------------------ (1) The increases in net sales are attributable to acquisitions by the Company and internal growth. See "Acquisition History" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Adjusted to reflect the sale of the Units offered hereby, assuming the application of the estimated net proceeds therefrom. See "Use of Proceeds." Does not include proceeds that would be received upon exercise of stock options and warrants outstanding at May 31, 1996, to acquire an aggregate of 642,783 shares of Common Stock, or the proceeds that would be received upon the exercise of a stock option that the Company has agreed to grant to Donald A. Wright on the effective date of this Prospectus to purchase 845,000 shares of Common Stock. See "Capitalization," "Management -- Benefit Plans" and "Description of Securities -- Stock Options." 5 RISK FACTORS THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND INFORMATION ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS: HISTORY OF NET LOSSES. The Company reported net losses of $1,098,000 in fiscal 1994, $1,411,000 in fiscal 1995, and $999,000 in fiscal 1996. The Company has not demonstrated an ability to achieve substantial profitable operations. There is no assurance that profitable operations will be achieved in fiscal 1997 or at any time thereafter or that any profitable operations will be sustained. The Company's ability to achieve a profitable level of operations in the future will depend on many factors, including the Company's ability to assimilate its recent and potential future acquisitions and to finance its subsidiaries' production, the degree of market penetration of its products, its ability to develop new products, the degree of market acceptance of new products, and the level of competition in those markets in which the Company operates. The Company is currently experiencing growth in orders and backlog, which will require additional expenditures to support a higher level of inventory and operations. These requirements will affect cash flow and results of operations over the short term and may result in significant future losses if anticipated growth is not sustained. NEED FOR IMMEDIATE ADDITIONAL CAPITAL. The Company is experiencing an immediate need for additional capital to fund its current operations and to repay matured and maturing debt. The Company also needs to refinance certain of its existing indebtedness. The Company's primary line of credit expired on May 26, 1996, at which time the Company was in default under one of its covenants. The Company owed $1,224,000 under that line of credit as of the expiration date, and is currently negotiating to obtain renewal of that line of credit with revised covenants. The Company has recently incurred $1,350,000 in short-term debt maturing in September 1996 which the Company plans to repay using a portion of the proceeds of this Offering. See "Use of Proceeds." The Company has also extended the repayment time on a number of its accounts payable. The Company has obtained a waiver, until September 1, 1996, of defaults under certain financial and funding covenants with the Morel subsidiary's bank lender, and has obtained a repayment extension for a $313,000 short-term debt obligation of the Morel subsidiary, in anticipation of the closing of this Offering. Although the Company believes it will be able to obtain satisfactory lending arrangements from bank or other institutional lenders, there is no assurance that its primary line of credit will be renewed, that alternative financing will be available, or that any available financing will be on favorable terms. The audit opinion with respect to the Company's fiscal 1996 financial statements will be qualified as to the Company's ability to continue as a going concern if this Offering does not close. The Company believes that the proceeds of this Offering will allow it to repay necessary debt obligations and accounts payable, and to fund its ongoing operations for at least the next 12 months. However, the Company may need to raise additional capital in the future. See "Risk Factors -- Need for Additional Long-Term Capital," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." INTEGRATION OF ACQUISITIONS; MANAGEMENT OF GROWTH. As part of its business strategy, the Company has recently experienced rapid growth as a result of several acquisitions that have placed, and will continue to place, a significant strain on its management, financial and other resources. The Company intends to continue to evaluate opportunities for growth through expansion of current operations and the acquisition of other entities, products or technology, although no material acquisitions are currently planned. There is no assurance that the Company will be able to implement its growth strategy or that such strategy ultimately will prove successful. Recent and any future acquisitions may subject the Company to many risks, including risks relating to integrating and managing the operations and personnel of acquired companies, maintaining uniform standards, controls, procedures and policies, potential disruption of the Company's ongoing business, and possible impairment of relationships with employees and customers as a result of the integration of any new management 6 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. See "Acquisition History" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON SIGNIFICANT CUSTOMERS. The Cashmere subsidiary of the Company historically has been almost entirely dependent upon The Boeing Company ("Boeing"), although the percentage of its Boeing sales decreased to approximately 73% of Cashmere's total net sales in fiscal 1996. Sales by Cashmere and other Company subsidiaries to Boeing constituted approximately 28% of the Company's consolidated net sales for fiscal 1996. As a result, general economic conditions and events affecting Boeing, all of which are outside the control of the Company, may have a significant impact on Cashmere's sales and consequently on the overall results of operations of the Company. For example, a change in inventory practices at Boeing and a general downturn in the aerospace market led to an almost 50% drop in Cashmere's sales in calendar year 1993. A machinist's union strike at Boeing during the winter of 1995-1996 adversely affected Cashmere sales to Boeing, although such sales have recently begun to increase. Cashmere has entered into contracts with Boeing which extend beyond one year to supply parts at fixed prices, and, accordingly, aluminum or other metal price increases or other cost increases can adversely affect Cashmere's margins on the sale of those parts. The Morel subsidiary, which was acquired by the Company in December 1995, is dependent on PACCAR Inc., including its Kenworth and Peterbilt divisions (collectively, "PACCAR"). Net sales to PACCAR constituted 75% of Morel's net sales in fiscal 1995. Net sales to PACCAR in the last six months of fiscal 1996 constituted 15% of the Company's consolidated net sales for that period. PACCAR has reported that its first quarter 1996 net sales declined 9% from first quarter 1995 net sales, due to an industry-wide decrease in demand for trucks from the record sales levels of 1995. PACCAR has no contractual obligation to continue to place orders for products of Morel, and Boeing has considerable flexibility under its contracts with Cashmere to reduce its level of orders or to cease ordering products from Cashmere. Both Cashmere and Morel have developed and are implementing strategies intended to decrease their reliance on sales to these primary customers. However, there is no assurance that either Cashmere or Morel can successfully reduce its reliance on Boeing and PACCAR, respectively, to a degree that will protect the Company in the event of unexpected decreases in sales to these primary customers. See "Business." NEED FOR ADDITIONAL LONG-TERM CAPITAL. The Company anticipates that, if its primary line of credit is renewed or replaced on satisfactory terms, the Company's existing capital resources and expected revenue from operations, together with the net proceeds of this Offering, will be adequate to satisfy its capital requirements for at least the next 12 months. The Company's actual capital needs, however, will depend upon numerous factors, including the amount of revenue generated from operations, the cost of increasing the Company's sales and marketing activities, the ability of third-party suppliers to meet product commitments, the willingness of the Company's primary lender to renew its line of credit, and any future acquisitions, none of which can be predicted with certainty. There is no assurance that the Company's primary line of credit will be renewed or that the Company will not require additional capital sooner than currently anticipated. The Company may receive 7 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 any additional financing will be available to the Company on acceptable terms, or at all, when required by the Company. The inability to obtain necessary financing could materially and adversely affect the Company's business and results of operations. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." COMPETITION. The Company operates in highly competitive markets. Most of its competitors have greater financial resources, broader experience, better name recognition and more substantial marketing operations than does the Company, and represent substantial long-term competition. The industries in which the Company competes are characterized by ongoing product development efforts and evolving technology, and success depends in part upon the ability to gain a competitive advantage through proprietary technology. Although the Company believes that its proprietary technology may give it a competitive advantage with respect to its technology-based products, new developments by competitors are expected to continue. The Company's competitors may develop products that are viewed by customers as more effective or more economic than the Company's product lines. There is no assurance that the Company will be able to compete successfully against current and future competitors or that the competitive pressures faced by the Company will not materially or adversely affect the Company's business and results of operations. See "Business -- Competition." RECENT INTRODUCTION OF NEW PRODUCT INTO NEW MARKET. Unlike the other businesses acquired by the Company, there had been no sales of the Seismic subsidiary's natural gas shut-off valve before the Company acquired the technology for that product in November 1995. In addition, the natural gas shut-off valve is intended for consumer use and is being marketed to retail distributors of home improvement products and to natural gas utilities for sale to consumers. This represents a different type of product than the Company has previously manufactured, and a different kind of market than the markets in which the Company's other subsidiaries operate. The Company began marketing the natural gas shut-off valve in December 1995, and received initial orders for the product beginning in March 1996. There is no assurance that this product will achieve market acceptance, or that the Company will be able to market the product successfully or to compete in this new market. Failure of the natural gas shut-off valve to achieve market acceptance and to compete successfully could have a material adverse effect on the Company's business and results of operation. See "Business -- Seismic Safety Products, Inc." TECHNOLOGICAL CHANGE; DEVELOPMENT OF NEW PRODUCTS. The market for the Company's products is characterized by steadily evolving technology and industry standards, changes in customer needs and new product introductions. The Company's success will depend on its ability to enhance its current products, develop new products that meet changing customer needs, advertise and market its products, and respond to evolving industry standards and other technological changes on a timely and cost-effective basis. There is no assurance that the Company will be successful in developing new products or enhancing its existing products on a timely basis, or that such new products or enhancements will achieve market acceptance. Furthermore, from time to time the Company and others may announce new products, enhancements or technologies that have the potential to replace or render obsolete the Company's existing products. Any failure by the Company to anticipate or respond adequately to changes in technology and customer preferences, the introduction of new products or enhancements by others or any significant delays in the development or introduction of new products by the Company could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business." DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant extent on the Company's Chief Executive Officer and President, Donald A. Wright, and a small number of other senior management and operational personnel. The loss of the services of any of these employees could have a material adverse effect on the ability of the Company to achieve its business objectives. The 8 Company has key man life insurance policies on the life of Mr. Wright in the aggregate amount of $3 million. The Company's growth and future success will depend in large part upon its ability to attract and retain additional senior management and highly skilled personnel to provide management and technological depth and support, to enhance and market its existing products and to develop new products. Competition for skilled management, technical, marketing and sales personnel is intense. There is no assurance that the Company will be successful in attracting and retaining the key management, technical, marketing and sales personnel necessary to support the Company's business and its recent and future acquisitions, and its failure to do so would materially and adversely affect the Company's business and results of operations. See "Management." LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. The Company regards elements of its technology as proprietary and relies primarily on a combination of patent, trade secret, copyright and trademark laws, confidentiality procedures, and other intellectual property protection methods to protect its proprietary technology. The Company has 32 United States patents, two United States patent applications pending and one international patent application pending relating to certain of its technology and products. There is no assurance that the Company's patent applications will result in issued patents, that the Company's existing patents or any future patents will provide the Company with any competitive advantages for its products or technology, or that, if challenged, the Company's patents will be held valid and enforceable. Despite the precautions taken by the Company, unauthorized parties may attempt to copy aspects of the Company's products or obtain and use information that the Company regards as proprietary, and existing intellectual property laws afford only limited protection. Policing violations of such laws is difficult. The laws of certain countries in which the Company's products are or may be distributed do not protect the Company's products and intellectual property rights to the same extent as do the laws of the United States. There is no assurance that these protections will be adequate or that the Company's competitors will not independently develop similar technology, gain access to the Company's trade secrets or other proprietary information, or design around the Company's patents. The Company may be required to enter into costly litigation to enforce its intellectual property rights or to defend infringement claims by others. Such infringement claims could require the Company to license the intellectual property rights of third parties. There is no assurance that such licenses would be available on reasonable terms, or at all. The Company has recently settled patent infringement litigation instituted by a competitor by purchasing two patents and granting the competitor a license to use these and certain other related patents of the Company. The Company's issued patents expire at various times over the next 16 years beginning in September 1997. Although the Company believes that the manufacturing processes of much of its technology that is currently protected by patents, particularly that of its Pacific Coast subsidiary, are sufficiently complex that competing products made with the same technology are unlikely, there is no assurance that the Company's competitors will not design competing products using the same or similar technology once these patents have expired. See "Business -- Proprietary Rights." ENVIRONMENTAL MATTERS. The Company is subject to federal, state and local laws, regulations and ordinances concerning solid waste disposal, hazardous materials storage, use and disposal, air emissions, waste water and storm water disposal, employee health and other environmental matters (together, "Environmental Laws"). Proper waste disposal and environmental regulation are major considerations for the Company because certain metals and chemicals used in its manufacturing processes are classified as hazardous substances. Since the Company's acquisition of the Morel subsidiary in December 1995, the Company has initiated an environmental compliance program for the Morel facility, which includes obtaining all permits necessary for that facility to operate in compliance with applicable Environmental Laws. As part of this program, Morel in January 1996 obtained a permit to discharge air emissions. Morel is operating without a permit required under Environmental Laws to discharge waste water and storm water. In May 1996, Morel submitted an application to the State of Washington for this permit. A failure by Morel to obtain the required permit could result in regulatory authorities imposing fines on Morel or ordering Morel to cease operations or both. The Company is obtaining the necessary environmental data to support the permit application and expects to submit such data in July 1996. Although the Company believes that the necessary 9 permit will be issued in the first 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. See "Business -- Environmental Matters." GOVERNMENT REGULATION. Certain of the Company's products are manufactured and sold under United States government contracts or subcontracts. As with all companies that provide products or services to the federal government, the Company is directly and indirectly subject to various federal rules, regulations and orders applicable to government contractors. Certain of these government regulations relate specifically to the vendor-vendee relationship with the government, such as the bidding and pricing rules. Under regulations of this type, the Company must observe certain pricing restrictions, produce and maintain detailed accounting data, and meet various other requirements. The Company is also subject to a number of regulations affecting the conduct of its business generally. For example, the Company must adhere to federal acquisition requirements and to standards established by the Occupational Safety and Health Act relating to labor practices and occupational safety standards. Violation of applicable government rules and regulations could result in civil liability, in cancellation or suspension of existing contracts or in ineligibility for future contracts or subcontracts funded in whole or in part with federal funds. See "Business -- Government Regulation." AVAILABILITY AND COST OF MATERIALS. The Company does not have fixed price contracts or arrangements for all of the raw materials and other supplies it purchases. The Company generally has readily available sources of raw materials and other supplies required for the manufacture of its products and, where possible, the Company maintains alternate sources of supply. However, shortages of, and price increases for, certain raw materials and supplies used by the Company have occurred in the past and may occur in the future. Future shortages or price fluctuations could have a material adverse effect on the Company's ability to manufacture and sell its products in a timely and cost effective manner. See "Business -- Supplies and Production." PRODUCT LIABILITY. The Company is subject to the risk of product liability claims and lawsuits for harm caused by products of the Company. The Company maintains product liability insurance with a maximum coverage of $2 million. However, there is no assurance that the Company's insurance will be sufficient to cover any claims that may arise. A successful product liability claim in excess of the Company's insurance coverage could have a material adverse effect on the Company. NO LIQUID MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION. Prior to this Offering, there has been a limited public market for the Common Stock and no public market for the Warrants. There is no assurance that an active trading market for the Common Stock or the Warrants will develop or be sustained after this Offering. The Unit Offering Price for the Units being sold by the Company in this Offering has been determined by negotiations between the Company and the Representatives of the Underwriters. See "Underwriting." The trading price of the Common Stock and Warrants could be subject to significant fluctuations in response to factors such as, among others, variations in the Company's anticipated or actual results of operations, announcements of new products or technological innovations by the Company or its competitors, and changes in earnings estimates by analysts. In addition, the stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small capitalization, emerging growth companies in particular, and are often unrelated to their operating performance. These broad market fluctuations may adversely affect 10 the market prices of the Common Stock or the Warrants. Purchasers of the Units will incur an immediate book value dilution, and certain events, such as the issuance of Common Stock pursuant to the exercise of outstanding warrants and stock options, could result in additional dilution. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE. Sale of substantial amounts of the Company's Common Stock in the public market or the prospect of such sales could materially and adversely affect the market price of the Common Stock and the Warrants. Upon completion of this Offering, the Company will have outstanding 9,728,309 shares of Common Stock. The 2,250,000 shares of Common Stock contained in the Units offered hereby, and the 125,000 shares sold in the Company's first public offering, will be immediately eligible for sale in the public market without restriction on the date of this Prospectus. The 2,408,170 shares that were issued by the Company in connection with two offerings under Regulation S ("Regulation S") of the Securities Act, in July 1995 and November 1995, to the extent not previously resold into the United States, are available for resale into the United States without restriction at such time as an exemption from registration under the Securities Act is or becomes available. The 490,000 shares that were issued by the Company in connection with a third Regulation S offering in May 1996 will become available for resale into the United States without restriction at such time as an exemption from registration under the Securities Act is or becomes available, but not sooner than December 16, 1996, under the terms of a lock-up agreement. An additional 4,446,058 shares are restricted shares ("Restricted Shares") subject to the restrictions upon resale under Rule 144 of the Securities Act. Of the Restricted Shares, the 62,500 shares issued to the Company's original shareholders are eligible for immediate resale in the public market pursuant to Rule 144(k). An aggregate of 3,176,175 shares issued in connection with the Verazzana merger (see "Acquisition History - - -- Acquisition of Cashmere") will become eligible for resale on February 17, 1997; 295,300 shares issued in connection with the Company's first Regulation S offering will be available for resale in July 1997 (see "Certain Transactions"); and 325,000 shares issued in connection with the Morel acquisition which are not subject to registration rights will become eligible for resale on December 1, 1997. Another 587,083 shares of the Restricted Shares and a warrant to purchase 37,500 shares are subject to registration rights, which have been waived for this Offering but which if exercised subsequently would become eligible for resale upon the effectiveness of a future registration statement covering such shares. The 300,000 shares of Common Stock issuable to UTCO Associates, Ltd. under a currently exercisable warrant to purchase such shares, are being registered by the Registration Statement of which this Prospectus is a part. However, those shares are subject to a lock-up agreement and, once issued, will first become eligible for sale in the public market 180 days after the date of this Prospectus. See "Selling Shareholder." Shortly after this Offering, the Company intends to file a registration statement under the Securities Act to register approximately 1,260,000 shares reserved for issuance under the Company's outstanding stock options and warrants, stock option plans, and stock option commitments, of which 172,723 shares will be exercisable and eligible for sale upon the expiration of lock-up agreements six months after the date of this Prospectus, and of which 845,000 shares will be exercisable and eligible for sale upon the expiration of a contractual restriction on sale expiring one year from the date of this Prospectus. See "Description of Securities -- Stock Options" and "Management -- Benefit Plans." Sales in the public market of substantial amounts of Common Stock or the perception that such sales could occur could depress prevailing market prices for the Common Stock and Warrants. See "Description of Securities" and "Shares Eligible for Future Sale." 11 ACQUISITION HISTORY The Company is the result of an initial acquisition in 1990, four additional acquisitions that have occurred since May 1994, and a merger with a non-operating public company in February 1995. ACQUISITION OF PACIFIC COAST. Donald A. Wright purchased Pacific Coast Technologies, Inc. ("Pacific Coast") in April 1990. Pacific Coast designs, manufactures and markets hermetically sealed electrical connectors, electronic sealants and instrument packages, using patented and proprietary technology. Mr. Wright acquired Pacific Coast in exchange for cash and a promissory note to the sellers. In May 1994, PCT Holdings, Inc., a Washington corporation ("Original PCTH"), was formed to hold the stock of Pacific Coast and to acquire Cashmere Manufacturing Co., Inc. ("Cashmere"). See "Acquisition of Cashmere," below. The formation of Original PCTH was treated as if a pooling of interests for accounting purposes. In 1994, Mr. Wright initiated a series of strategic acquisitions of companies whose operations and products the Company believes are complementary to the products designed, manufactured and marketed by Pacific Coast. ACQUISITION OF CASHMERE. The first such company acquired was Cashmere in May 1994. Cashmere operates a precision machine shop that produces diversified components and assemblies for the aerospace, defense, electronics and transportation industries, including products and services provided to the Company's other subsidiaries. Cashmere was acquired in May 1994 by Original PCTH in exchange for common stock of Original PCTH. The transaction was treated as a purchase for accounting purposes. In February 1995, Original PCTH was merged into a wholly owned subsidiary of Verazzana Ventures, Ltd., an inactive public company (the "Verazzana merger"). In that merger, the Original PCTH stock paid as consideration for the Cashmere acquisition was converted into 791,666 shares of the Company's Common Stock. The successor to Original PCTH was dissolved in May 1996, leaving Pacific Coast and Cashmere as subsidiaries of the Company. ACQUISITION OF CERAMIC DEVICES. The Company acquired Ceramic Devices, Inc. ("Ceramic Devices") in April 1995 (effective for accounting purposes as of February 28, 1995). Ceramic Devices designs and manufactures a line of specialized filtering devices for use with electronic circuits operating in hostile environments and has a customer base similar to that of Pacific Coast. The purchase price for the Ceramic Devices acquisition was the issuance by the Company to the sellers of two promissory notes totaling $600,000 in principal amount and 133,333 shares of the Company's Common Stock. The transaction was treated as a purchase for accounting purposes. ACQUISITION OF SEISMIC. In November 1995, the Company formed Seismic Safety Products, Inc. ("Seismic"), which acquired substantially all of the assets of a Florida corporation of the same name and certain patents from affiliates of the Florida corporation. Seismic develops and markets automatic natural gas shut-off valves activated by earthquakes and plans to market other earthquake safety products. Cashmere manufactures the natural gas shut-off valve for Seismic. The purchase price for the Seismic asset and patent acquisition was cash, certain deferred payment obligations and 128,750 shares of the Company's Common Stock. The transaction was treated as a purchase for accounting purposes. ACQUISITION OF MOREL. Most recently, the Company acquired Morel Industries, Inc. ("Morel") in December 1995 (effective for accounting purposes as of November 30, 1995). Morel manufactures precision cast aluminum parts used principally in the transportation, heavy trucking and aerospace industries. The purchase price for the Morel acquisition was the issuance of 650,000 shares of the Company's Common Stock, after certain post-closing adjustments. The transaction was treated as a purchase for accounting purposes. The Company intends to continue to evaluate opportunities for growth through expansion of current operations, or through the acquisition of other entities or lines of business, or both, although no material expansions or acquisitions are currently planned. 12 USE OF PROCEEDS The net proceeds of this Offering are estimated to be approximately $8,229,000 (approximately $9,661,000 if the Overallotment Option is exercised in full) assuming a Unit Offering Price of $4.50, and after deducting the underwriting discount and estimated offering expenses. The Company intends to use a portion of the net proceeds to repay approximately $3,556,500 of indebtedness. Of that amount, approximately $2,206,500 represents the following indebtedness that was incurred or acquired in connection with acquisitions by the Company: approximately $312,500 under a promissory note to certain individual lenders to Morel, due on September 1, 1996 and bearing interest at the rate of 15% per annum; approximately $1,367,000 under an industrial revenue bond of Morel, due on November 16, 1996 and bearing interest at the rate of 8.12% per annum; approximately $177,000 under a promissory note held by a title company in connection with Morel's facility due on February 14, 1997 and bearing interest at the rate of 12% per annum; approximately $150,000 under a promissory note held by the individuals who sold Ceramic Devices to the Company, due on August 31, 1996 and bearing interest at the rate of 10% per annum; and obligations of approximately $200,000 of the purchase price for the Seismic patent acquisition, due on November 30, 1996, which do not bear interest. The remaining approximately $1,350,000 in indebtedness to be repaid from net proceeds of this Offering represents short-term debt recently incurred by the Company, including $150,000 owed to Robert L. Smith, a director of the Company, due on September 27, 1996, and bearing interest at the rate of 18% per annum, and $1,200,000 owed to UTCO Associates, Ltd., due on the earlier of the closing of this Offering or September 1, 1996, and bearing interest at the rate of 18% per annum. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments," "Selling Shareholder" and "Certain Transactions." The Company intends to use the balance of the net proceeds of this Offering primarily to acquire additional processing and manufacturing equipment, to fund certain facilities expansion, to fund potential acquisitions, and to increase working capital. If the net proceeds are insufficient to accomplish all of the purposes set forth above, the proceeds will be applied first to repay the foregoing indebtedness, and then in an order of priority determined by the Company. Pending the foregoing uses, the Company may invest the net proceeds in short-term, interest-bearing obligations. The Company expects that, if its primary line of credit is renewed or replaced on satisfactory terms, the net proceeds from this Offering will allow the Company to fund operations for at least the next 12 months. The Company expects that additional capital will be required to fund longer-term operations and acquisitions. There is no assurance that the Company will be able to obtain such financing or that such financing will be available on favorable terms. See "Risk Factors -- Need for Immediate Additional Capital," "Risk Factors -- Need for Additional Long-Term Capital" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 13 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Until March 13, 1995, there was no public market for the Common Stock. From that date through September 14, 1995, the Common Stock was listed on the Nasdaq Electronic Bulletin Board. Since September 15, 1995, the Common Stock has been traded on Nasdaq -- Small Cap under the symbol "PCTH." The Units will separate immediately upon issuance, and the Common Stock and Warrants that make up the Units will trade only as separate securities. The Company has applied for listing of the Common Stock and the Warrants on the Nasdaq National Market System on the effectiveness of this Offering under the symbols "PCTH" for the Common Stock and "PCTHW" for the Warrants. The following table shows the range of high and low sales prices reported by Nasdaq for the Common Stock for each period in the calendar years shown below.
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 (through June 17, 1996)............................................... 5.00 2.75
As of June 17, 1996, the closing sales price on Nasdaq - Small Cap for the Common Stock was $4.50 per share. As of June 17, 1996, there were 857 holders of record of 7,478,309 shares of Common Stock. The Company has never declared or paid cash dividends on the Common Stock. The Company currently anticipates that it will retain all future earnings to fund the operation of its business and does not anticipate paying dividends on the Common Stock in the foreseeable future. The Company's agreement with its principal lender restricts the Company's ability to pay dividends. 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of May 31, 1996, and as adjusted to give effect to the issuance of 2,250,000 Units (at an assumed Unit Offering Price of $4.50 per Unit offered hereby), and receipt of the net proceeds therefrom, after deducting the estimated underwriting discount and offering expenses.
MAY 31, 1996 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Short-term debt................................................................ $ 8,005 $ 4,449 Long-term debt................................................................. 1,961 1,961 Stockholders' equity Common Stock, par value $.001, 100,000,000 shares authorized, 7,478,309 shares issued(1)............................................................ 19,102 27,331 Accumulated deficit.......................................................... (6,563) (6,563) Total stockholders' equity..................................................... 12,539 20,768 Total capitalization........................................................... 22,505 27,178
- - ------------------------ (1) Does not include 642,783 shares of Common Stock issuable upon exercise of stock options and warrants outstanding at May 31, 1996. Also excludes an option to purchase 845,000 shares of Common Stock that the Company has agreed to grant to Donald A. Wright on the effective date of this Prospectus. See "Description of Securities -- Stock Options" and "Management -- Benefit Plans." 15 DILUTION The net tangible book value of the Company's Common Stock as of May 31, 1996 was approximately $8,686,000, or approximately $1.16 per share. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities divided by the 7,478,309 shares of Common Stock outstanding as of May 31, 1996. Net tangible book value dilution per share represents the difference between the amount per share paid by new investors who purchase Units in this Offering and the net tangible book value per share of Common Stock immediately after completion of this Offering. After giving effect to the sale by the Company of 2,250,000 Units in this Offering at an estimated Unit Offering Price of $4.50 per Unit and the receipt of the estimated proceeds therefrom (after deduction of estimated underwriting discounts and offering expenses and attributing no portion of the value of a Unit to a Warrant), the net tangible book value of the Company as of May 31, 1996 would have been approximately $16,915,000 or $1.74 per share. This represents an immediate increase in net book value of $.58 per share to existing shareholders and an immediate dilution in net tangible book value of $2.76 per share to new investors purchasing Units in this Offering, as illustrated in the following table: Assumed initial public offering price per share...................... $ 4.50 Net tangible book value per share at May 31, 1996.................. $ 1.16 Increase per share attributable to new investors................... .58 --------- Pro forma net tangible book value per share after this Offering...... 1.74 --------- Net tangible book value dilution per share to new investors.......... $ 2.76 --------- ---------
The following table summarizes, on a pro forma basis as of May 31, 1996 to reflect the same adjustments described above, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by (i) the existing holders of Common Stock and (ii) the new investors in this Offering, assuming the sale of 2,250,000 Units by the Company hereby at a Unit Offering Price of $4.50 per Unit. The calculations are based upon total consideration given by new and existing shareholders (after deduction of estimated underwriting discounts and offering expenses and attributing no portion of the value of a Unit to a Warrant).
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- ---------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------------ -------------- ------------ ------------- Existing shareholders................... 7,478,309 77% $ 19,102,000 70% $ 2.55 New investors........................... 2,250,000 23% 8,229,000 30% $ 3.66 ----------- --- -------------- --- TOTAL............................... 9,728,309 100% $ 27,331,000 100% ----------- --- -------------- --- ----------- --- -------------- ---
The above computations assume no exercise of the following warrants and stock options: (i) warrants held by Donald A. Wright, Nick A. Gerde and an employee of Pacific Coast to purchase 160,000 shares of Common Stock at an exercise price of $2.00 per share, (ii) outstanding options to purchase 145,283 shares of Common Stock at a weighted average exercise price of $5.09 per share, (iii) an option to purchase 845,000 shares of Common Stock at 150% of the Unit Offering Price, but no less than $3.75 per share, that the Company has agreed to grant to Mr. Wright on the effective date of this Prospectus; and (iv) warrants held by the Selling Shareholder and Robert L. Smith, a director of the Company, to purchase an aggregate of 337,500 shares of Common Stock at an exercise price of $4.80 per share. To the extent that such warrants and options are exercised, there may be further dilution to investors in this Offering. See "Description of Securities," "Management -- Benefit Plans" and "Certain Transactions." 16 SELECTED FINANCIAL INFORMATION (in thousands, except per share data) The following table presents selected historical information of the Company. The selected financial information as of and for the years ended May 31, 1995 and 1996 is derived from and should be read in conjunction with the information set forth in the audited financial statements and related notes of the Company included in this Prospectus. The selected financial information as of and for the year ended May 31, 1994 has been derived from audited financial statements of the Company not presented herein. This information should be read in conjunction with the financial statements and other financial information included in this Prospectus.
YEAR ENDED MAY 31, ------------------------------- 1994 1995 1996 --------- --------- --------- STATEMENT OF OPERATIONS DATA: Net sales...................................................................... $ 2,940 $ 11,035 $ 20,725 Gross profit................................................................... 80 1,943 4,286 Loss from operations........................................................... (884) (846) (479) Net loss....................................................................... (1,098) (1,411) (999) Loss per share of Common Stock................................................. (.60) (.41) (.16) Shares used in computation of loss per share................................... 1,826 3,469 6,209
1994 1995 1996 --------- --------- --------- MAY 31, ------------------------------- 1994 1995 1996 --------- --------- --------- BALANCE SHEET DATA: Working capital (deficit)...................................................... $ (1,237) $ 1,375 $ 952 Total assets................................................................... 7,894 11,630 27,649 Short-term debt................................................................ 4,403 3,009 8,005 Long-term debt................................................................. 649 743 1,961 Stockholders' equity........................................................... 1,226 5,454 12,539
17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below and in "Use of Proceeds" and "Business" includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and is subject to the safe harbor created by those sections. Factors that realistically could cause results to differ materially from those projected in the forward-looking statements are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below and in "Risk Factors." OVERVIEW The Company's financial condition and results of operations have been substantially affected by a corporate acquisition at the end of fiscal 1994, another acquisition in fiscal 1995 and two additional acquisitions in fiscal 1996. These acquisitions, as well as internal growth in the Company's existing business and the acquired businesses, have resulted in substantial increases in net sales from $3,456,000 in the first quarter of fiscal 1995 to $7,238,000 in the fourth quarter of fiscal 1996. Approximately $2,891,000 of this growth in net sales resulted from the acquisitions and approximately $891,000 resulted from internal growth. Operating expenses and margins have also been substantially affected by acquisitions. Expenses directly associated with acquisitions, including transaction-related legal, accounting and other expenses and merger and equity capital costs, amounted to approximately $538,000 in fiscal 1995 and approximately $104,000 in fiscal 1996. The Company has also experienced substantial increases in all other expense categories as a result of the increase in operations. A portion of these expenses can be attributed to the assimilation of acquired operations into the existing business. The Company's electronic products business is characterized by relatively low volumes and high margins, as compared with its metal products business where volumes have historically been higher and margins lower than in the electronic products business. The Company believes that margins will remain higher for electronic products than for metal products, although products incorporating both electronic and metal parts are expected to generate margins closer to electronic product margins. As a result of margin differences, changes in product mix between electronic and metal products can be expected to affect overall margins for the Company. Due to the lack of sales history for its natural gas shut-off valves, the Company is unable to assess accurately the effect that product line may have on margins. As a result of the foregoing factors, the Company's historical results of operations are not necessarily indicative of future operating performance. The Company's net sales for the six months ended May 31, 1996 were approximately $13,594,000. Of that amount, Pacific Coast's net sales were $3,874,000, or 29%; Ceramic Devices' net sales were $1,029,000, or 8%; Seismic's net sales were $190,000, or 1%; Cashmere's net sales were $3,213,000, or 23%; and Morel's net sales were $5,288,000, or 39%. The Company expects that the most substantial rates of growth in revenue, if any, in the future will come principally from the Pacific Coast and Seismic operations. The Company and certain of its subsidiaries have relied on commercial borrowing arrangements, as well as equity infusions, to supply significant portions of their required working capital. The Company's working capital requirements have been substantially increased by the growth in its operations and by the significant transaction-related expenses associated with acquisitions. The Company's principal operating line of credit expired on May 26, 1996, and the Company is in default on one of its covenants to that lender. The audit opinion with respect to the Company's fiscal 1996 financial statements will be qualified as to the Company's ability to continue as a going concern if this Offering does not close. In March and May 1996, the Company received aggregate net proceeds of 18 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. The Company believes that the net proceeds from this Offering, together with credit facilities that it expects will be available to it upon receipt of such proceeds, will be sufficient to meet its budgeted working capital requirements for at least the next 12 months. However, there is no assurance that commercial credit will be available to the Company following this Offering or that the Company's working capital requirements will not exceed those currently budgeted. The Company has not experienced any material seasonality in its operations. The Company has evaluated the effect of the recent accounting pronouncements, SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and SFAS No. 123 "Accounting for Stock-Based Compensation." The Company will implement SFAS No. 121 in fiscal 1997. Implementation is not expected to have a material impact on the Company's financial statements. The Company intends to continue to apply APB Opinion No. 25 in accounting for stock-based compensation for purposes of determining net income and to adopt the pro forma disclosure requirements of SFAS No. 123 in fiscal 1997. The Company has net operating loss carryforwards for federal income tax purposes of approximately $7,848,000, the benefits of which expire beginning in fiscal 2001 through fiscal 2011. The net operating losses created by the subsidiaries prior to their acquisition are limited to use by the subsidiary which originally generated the net operating loss, and may be further limited as to the amount which may be used in any one year. The following approximate net operating losses are available on an individual company basis, without taking into account these expirations or limitations: PCT Holdings, Inc. $126,000, Pacific Coast $5,657,000, Ceramic Devices $306,000, Cashmere $737,000, Morel $934,000, and Seismic $88,000. 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. 19 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 debt acquired upon the acquisition of Morel. Interest expense attributable to Morel in fiscal 1996, from December 1, 1995, when the Company acquired Morel, totaled $205,000. Merger and equity capital costs of $104,000 in fiscal 1996 represent expenses related to the acquisitions of Morel and Seismic. Merger and equity capital costs of $538,000 in fiscal 1995 represent the cost of converting options and warrants of Original PCTH to common stock immediately prior to the Verazzana merger, the acquisition costs associated with that merger, and the Ceramic Devices acquisition in April 1995. See "Acquisition History." The federal income tax benefits of $67,000 for fiscal 1996 and $241,000 for fiscal 1995 resulted from recording deferred tax assets for net operating losses generated during those periods. The Company has determined that it operates in two business segments within the guidelines of SFAS No. 14. These business segments are "Electronic and Safety Products" (Pacific Coast, Ceramic Devices and Seismic) and "Machined and Cast Metal Products" (Cashmere and Morel). Accordingly, the Company has included the appropriate disclosure in Note 17, Business Segment Information, in its audited financial statements. See "Index to Financial Statements -- PCT Holdings, Inc. and Subsidiaries Consolidated Financial Statements." LIQUIDITY AND CAPITAL RESOURCES At May 31, 1996, the Company had $13,009,000 in total current assets and $12,057,000 in total current liabilities, resulting in net working capital of $952,000 and a current ratio of 1.08 to 1.00. At May 31, 1995, the Company had $6,614,000 in current assets and $5,239,000 in current liabilities, resulting in net working capital of $1,375,000 and a current ratio of 1.26 to 1.00. The Company has renegotiated and refinanced certain loans that were due during fiscal 1996 so that $1,663,000 in principal amount plus accrued interest will be due on August 31, 1996 and September 1, 1996 to certain lenders to Ceramic Devices and Morel. The Company intends to use a portion of the net proceeds from this Offering to pay those obligations. See "Use of Proceeds." The Company is experiencing an immediate need for additional capital to fund its current operations. The Company's primary line of credit expired on May 26, 1996, at which time the Company was in default under one of its covenants. The Company owed $1,224,000 under that line of credit as of the expiration date, and is currently negotiating renewal of that line of credit with revised covenants. The Company has obtained a waiver, until September 1, 1996, of defaults under certain financial and funding covenants with Morel's bank lender. The Company has also extended the repayment time on a number of its accounts payable. Although the Company believes it will be able to obtain satisfactory lending arrangements from bank or other institutional lenders, there is no assurance that its primary line of credit will be renewed, that alternative financing will be available, or that any available financing will be on favorable terms. Inability to renew or replace the Company's line of credit on satisfactory terms and failure to obtain the additional capital it needs to pay its obligations and fund the growth of its 20 operations could have a material adverse effect on the Company's business and results of operations. See "Risk Factors -- Need for Immediate Additional Capital" and "Risk Factors -- Need for Additional Long-Term Capital." The Company currently has no material purchase commitments for capital equipment. Additions and replacements of plant and equipment are generally funded through working capital, trade-in credits for the replaced equipment, or capital leases or long-term notes secured by the equipment purchased. The Company may use a portion of the net proceeds of this Offering to acquire additional processing and manufacturing equipment and to fund certain facilities expansion. See "Use of Proceeds." RECENT DEVELOPMENTS In the fourth quarter of fiscal 1996, the Company obtained an aggregate of $2,690,000 in additional debt and equity financing. In March 1996, the Company borrowed $150,000 from Robert L. Smith, a director of the Company, pursuant to a promissory note that accrues interest at 18% per annum and is due in full on September 27, 1996. The Company issued Mr. Smith a warrant to purchase 37,500 shares of Common Stock at an exercise price of $4.80 per share, expiring on May 22, 2001, as additional consideration for this loan. See "Certain Transactions." In May 1996, the Company borrowed $1,200,000 from the Selling Shareholder pursuant to a promissory note that accrues interest at 18% per annum, and is due in full on the earlier of the closing of this Offering or September 1, 1996, with monthly extensions to December 1, 1996 available for additional fees. The Company issued the Selling Shareholder a warrant to purchase 300,000 shares of Common Stock at an exercise price of $4.80 per share, expiring on May 22, 2001, as additional consideration for this loan. See "Selling Shareholder." The proceeds from these loans were used to pay off a line of credit from a bank lender to Morel and to provide working capital. These loans are expected to be repaid using a portion of the proceeds of this Offering. See "Use of Proceeds." In May 1996, the Company sold 490,000 shares of Common Stock in a Regulation S offering to Swiss investors at prices of $2.54 and $3.00 per share, raising proceeds, net of commissions, of approximately $1,340,000. The proceeds of this Regulation S offering were used to pay approximately $500,000 in principal and accrued interest on two promissory notes incurred in connection with the acquisition of Ceramic Devices, to pay $250,000 in principal and accrued interest on a $500,000 promissory note acquired upon the acquisition of Morel, and to provide working capital. 21 BUSINESS The Company develops, manufactures, markets and sells a broad range of precision electronic components designed to operate with a high degree of reliability in harsh environments such as the ocean, space and the human body. These environments experience extremes in temperature, pressure and corrosiveness that can make product repair or replacement difficult or impossible. The Company uses its patented technologies to produce electronic components for a wide variety of applications in the aerospace, defense, energy, medical and general electronics industries. The Company operates through five wholly owned subsidiaries. Two of these businesses are engaged in the production of electronic devices, with one producing a variety of electronics packages and connectors shielded from their environment by the Company's proprietary ceramic seals, and the other producing devices designed to filter out electromagnetic interference detrimental to other electronic devices. The Company has recently acquired a business that designs, manufactures and sells automatic natural gas shut-off valves for use in earthquake sensitive areas. The Company also has two businesses that manufacture machined or cast metal products for many applications, including products that are incorporated into or complementary with the products of its other subsidiaries. A substantial percentage of the Company's customers for its electronic products consists of large manufacturing companies in the aerospace, defense, energy, medical and general electronics industries. These include Hughes Aircraft Company ("Hughes Aircraft"), Honeywell Inc.'s Military Avionics Division, Lockheed Martin Corporation ("Lockheed Martin"), Northrop Grumman Corporation ("Northrop Grumman"), Space Systems/Loral, Inc., Westinghouse Electric Corporation and TRW, Inc. The Company's metal products customers include Boeing, Kawasaki Heavy Industries, Ltd., Deere & Company, Northrop Grumman and PACCAR. The Company also markets and sells its products to a variety of smaller, specialized electronics companies. The Company, with its natural gas shut-off valves, has recently entered the consumer home improvement market and has received initial orders for its valves from home improvement centers such as Eagle Hardware & Garden Inc., Ernst Home Center, Inc., HomeBase Inc., Home Depot U.S.A., Inc. and Ace Hardware Corp. The Company's strategy is to expand the range of products it offers within its core areas of competence, and to produce a larger portion of the customer's total product requirement, through internal growth and the acquisition or development of new technologies. The Company has recently experienced significant growth in revenues, as a result of both the acquisition of complementary businesses and internal growth within each of its operating subsidiaries. The Company hopes to continue to experience growth and to exploit both technological and marketing synergies resulting from the integration of the businesses it has acquired and other businesses or technologies that it may acquire in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the Company's business segments. PACIFIC COAST TECHNOLOGIES, INC. PRODUCTS. Pacific Coast designs, manufactures and markets hermetically sealed electrical connectors, electronic sealants and instrument packages, using patented and proprietary technology. Pacific Coast was founded in 1976, and was acquired by Mr. Wright in 1990. See "Acquisition History." Pacific Coast's products are specifically designed for use in applications that operate in harsh environments, such as the ocean, space and the human body, which experience extremes in temperature, pressure or corrosiveness. Pacific Coast distributes its products primarily to the defense, aerospace, and communications industry, the energy industry, and the medical industry. In the aerospace, defense and communications industry, Pacific Coast's largest customer group, its products are used in radar, avionics, and telecommunications applications. Pacific Coast participated in the production of the world's first hermetically sealed fiber optic connector for use on the international space station Alpha. In the energy industry, Pacific Coast's products are used in tools for drilling oil wells. In the medical industry, Pacific Coast's products can be found in pacemakers, bone growth stimulators and other implantable electronic devices such as audio implants for the hearing impaired. Pacific Coast's products generally range in price from approximately $50 to $1,000. 22 Pacific Coast uses its proprietary hermetic sealant, Kryoflex, in many of its products to provide a high level of hermetic seal protection in harsh environments. Kryoflex is a multiple-phase derivative of ceramic oxide crystalline silicate. A Kryoflex seal is mechanically stronger, and withstands and dissipates more heat, than the glass or brazed ceramic seals used by many of Pacific Coast's competitors. Unlike many of its competitors, a Kryoflex seal can bond to a number of different metals and can bond dissimilar metals. The composition and method of making Kryoflex is a proprietary trade secret of Pacific Coast. Pacific Coast has patented its technology in the field of explosively bonded metals. This technology allows dissimilar metals to be welded together to make electronic connectors and packages. The resulting devices are lighter than those made entirely of stainless steel but have equivalent hermetic seal protection. This technology makes Pacific Coast products competitive where light weight is a requirement, such as in space applications. Pacific Coast has recently patented several metal matrix composite technologies. Metal matrix composites allow Pacific Coast to make lighter, more durable electronic packages. In March 1996, Hughes Aircraft, an existing customer of Pacific Coast, placed the first order for products utilizing the Company's metal matrix composite technology. Pacific Coast intends to make this technology available to Morel for use in casting sealed electronic packaging for customers of Pacific Coast. Pacific Coast generally develops new products from its existing technologies in response to specific customer needs, with such development almost exclusively funded by its customers. Pacific Coast plans to continue developing new technologies to meet the changing requirements of its customers and, where appropriate, to file additional patent applications for those new technologies. Pacific Coast may also purchase additional strategic proprietary technology from third-party developers. Pacific Coast does not expect to devote substantial resources to research and development that is not funded by customers. CUSTOMERS. Pacific Coast's customer base includes Fortune 1000 companies as well as smaller, specialized firms. For fiscal 1996, Pacific Coast's major customers in the defense, aerospace and communications market included ST Olektron Corp., Honeywell Inc.'s Military Avionics Division, Amphenol Corporation, AlliedSignal Inc.'s Aerospace Equipment Systems division, Space Systems/ Loral, Inc., Hughes Aircraft, Westinghouse Electric Corporation, TRW Space and Electronics Group, and Lockheed Martin. Pacific Coast's major customers in the energy market during that period included Schlumberger Industries, Inc. and its French parent company (collectively, "Schlumberger"), Baker Hughes, INTEQ and Western Atlas International, Inc. Pacific Coast's major customers in the medical market during that year were Advanced Bionics Corporation and Electro-Biology, Inc. Pacific Coast has a varied customer base, and no single customer accounted for more than 10% of its net sales for fiscal 1996, except for ST Olektron Corp. (13.7%) and Schlumberger (10.8%). STRATEGY. Pacific Coast's strategy is to increase its sales and market share by developing increasingly sophisticated electronic packages, modules and subsystems that integrate its proprietary technology and products made by the Company's other subsidiaries. Pacific Coast also plans to expand its cross-marketing with the Company's other subsidiaries. As sales volumes increase, Pacific Coast intends to increase its automation in order to obtain additional efficiencies. In addition, Pacific Coast is developing a number of standard products that it believes can be produced and sold more cost effectively than custom products. In the aerospace and defense industries, the Company believes that there is a significant potential for increased use of its products in satellite and ground-based radar applications. In the communications industry, Pacific Coast believes that there is similar potential for use of its products in radio frequency applications. In the energy market, Pacific Coast plans to continue to develop new devices to be incorporated on oil drilling tools in order to take advantage of the emerging development of oil fields in Russia, China, and other areas. In the medical devices market, Pacific Coast expects to develop standard and custom devices to support more sophisticated audio implants, bone growth stimulators, pacemakers and other implantable electronic devices. 23 CERAMIC DEVICES, INC. PRODUCTS. Ceramic Devices designs and manufactures a line of specialized filtering devices for use with electronic circuits operating in hostile environments. Ceramic Devices was founded in 1982, and the Company purchased it in February 1995 to obtain a source of ceramic filters for Pacific Coast's connectors and electronic products. Ceramic Devices' products filter out electromagnetic interference and other electrical signals that pose significant problems for the manufacturers and users of high-performance, high-reliability electronic systems. Ceramic Devices is an approved supplier of ceramic filtering devices to military contractors. Ceramic Devices fabricates all components of its multilayer capacitors and filters to military requirements and individualized customer specifications. Ceramic Devices' product development is generally funded by its customers. Ceramic Devices' products generally range in price from approximately $5 to $100. CUSTOMERS. Ceramic Devices' customer base is generally the same as the customer base of Pacific Coast, including large defense, aerospace and communications companies. Such customers purchase Ceramic Devices products for incorporation into sophisticated electronic systems. Ceramic Devices' major customers include Hughes Electro-Optical Operations, Inc., Hughes Aircraft, Lockheed Martin, Rockwell International Corporation, AlliedSignal Inc.'s Aerospace Equipment Systems division, and EMS Technologies, Inc. No one customer accounted for more than 10% of Ceramic Devices' net sales for fiscal 1996, except for Lockheed Martin (13.9%) and Hughes Aircraft (12%). Because the customer base of Pacific Coast represents potential customers for Ceramic Devices, the companies use the same direct sales force and manufacturers' representative group. STRATEGY. The Ceramic Devices growth strategy includes increasing its marketing efforts to existing and potential customers in the defense, aerospace and communications industries, and targeting customers of Pacific Coast in the medical industry. In May 1996, Ceramic Devices completed its move from San Diego, California to the Pacific Coast facility in Wenatchee, Washington. The Ceramic Devices strategy also includes increasing the efficiency of its production process through interaction with Pacific Coast, combining its filters with Pacific Coast products, and marketing Ceramic Devices products together with products of Pacific Coast. SEISMIC SAFETY PRODUCTS, INC. PRODUCTS. Seismic develops and markets natural gas shut-off valves that are automatically activated by earthquakes, and plans to market other earthquake safety products for use in residential applications. Cashmere manufactures the natural gas shut-off valve for Seismic, using patented technology that Seismic purchased in November 1995 from the inventors after six years of development. The technology for a commercial version of this valve is currently being completed by Seismic. Seismic's valves are designed to be installed in new and existing natural gas lines and to automatically shut off the supply of gas in an earthquake. The valve may also be used as a manual natural gas shut-off valve to avert fires in other emergency situations. Significant patented features of the valve include a mechanism for manual reset of the shut-off valve without special tools and a seamless design to prevent potential leakage. Seismic's natural gas shut-off valve is certified by the American Gas Association and the State of California. The price for Seismic's residential natural gas shut-off valve generally ranges from approximately $100 wholesale to $200 retail. CUSTOMERS. Seismic began marketing its residential valve in December 1995 under the brand name "Northridge Valve." Beginning in March 1996, Seismic received initial orders from several large home improvement centers, including Eagle Hardware & Garden Inc., HomeBase Inc., Ernst Home Center, Inc., Home Depot U.S.A., Inc. and Ace Hardware Corp. Southern California Gas Company and Northwest Water Heater have purchased initial quantities of the shut-off valves in order to evaluate the product's potential for distribution to their customers. Prospective purchasers of Seismic's valve include builders, plumbers, security companies and utility companies. 24 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 a commercial version of the natural gas shut-off valve and an electrical shut-off product currently under development. Future production plans may include the use of aluminum cast components made by Morel, which the Company believes may reduce production costs, in addition to the precision machined parts currently made by Cashmere which are included in the shut-off valve. CASHMERE MANUFACTURING CO., INC. PRODUCTS. Cashmere operates a precision machine shop that produces diversified components and assemblies for the aerospace, defense, electronics and transportation industries. Cashmere was founded in 1969, and the Company purchased it in 1994 to provide precision machined products initially for Pacific Coast. Cashmere now provides products for other subsidiaries of the Company as well. Cashmere produces principally aluminum products, ranging from small connectors to very complex assemblies. Cashmere builds to order only, in conformance with the machining specifications of its customers. Cashmere is ISO 9000 approved, which qualifies it to perform work for most aerospace and general electronic companies. Cashmere's products generally range in price from approximately $10 to $200. CUSTOMERS. Prior to fiscal 1995, Cashmere's sales were almost exclusively to Boeing. Through a diversification program, the percentage of Cashmere's sales to Boeing was approximately 73% for fiscal 1996. Sales to Boeing by Cashmere and other Company subsidiaries constituted approximately 28% of the Company's consolidated net sales for that year. See "Risk Factors -- Dependence on Significant Customers." At May 31, 1996, Cashmere's major customers were Boeing, Pacific Coast, Nissho Iwai American Corporation, Kawasaki Heavy Industries, Ltd. and Northrop Grumman. Pacific Coast, Morel, and Seismic together accounted for 9.4% of Cashmere's sales for fiscal 1996. Cashmere manufactures a variety of aluminum and stainless steel connector shells and electronic packages for Pacific Coast, machines cast parts for Morel, and is the sole manufacturer of the natural gas shut-off valve marketed by Seismic. STRATEGY. Through access to the customer base of Pacific Coast, Cashmere is pursuing strategies intended to continue reducing its dependency on Boeing. Cashmere plans to expand its direct sales effort, concentrate on customer service, and offer additional value-added services. Most Pacific Coast products require machining which is increasingly being provided by Cashmere, allowing Cashmere to benefit from the sales and marketing efforts of Pacific Coast. Morel is also currently a customer of Cashmere. Cashmere, together with Morel, has recently implemented direct sales coverage in the Pacific Northwest and Southern California in an effort to expand the market for products of both companies. MOREL INDUSTRIES, INC. PRODUCTS. Morel manufactures precision cast aluminum parts used principally in the transportation, heavy trucking and aerospace industries. Morel was founded in 1909, and the Company purchased Morel in 1995 to provide cast parts for its other subsidiaries and to expand its presence in the transportation industry. Morel uses sand castings, lost foam and permanent molds to contain and shape molten aluminum. These components are often further shaped or patterned on Morel's milling equipment to meet a customer's specific needs. Morel also provides additional services such as painting, machining and general assembly work. Morel is currently operating at less than full capacity and believes that it could use its remaining capacity without significant additional capital expenditures. Morel's products generally range in price from approximately $5 to $100. 25 CUSTOMERS. Morel is dependent on sales to PACCAR, which constituted 75% of Morel's net sales in fiscal year 1995. Net sales to PACCAR in the last six months of fiscal 1996 constituted 15% of the Company's consolidated net sales for that period. See "Risk Factors -- Dependence on Significant Customers." Morel's other major customers include Deere & Company, Accra Manufacturing, Inc. and Boeing. STRATEGY. Morel's customers are increasingly requesting products that are cast and machined by a single provider. The Company believes that Morel's ability to machine its aluminum parts, combined with additional capacity at Cashmere, will increase its ability to compete for finished cast aluminum business. The Company plans to diversify Morel's customer base by taking advantage of its access to the customers and marketing of the Company's other subsidiaries. The Company also has plans to provide Morel access to proprietary technology, such as the metal matrix composite technology recently patented by Pacific Coast, in order to enhance Morel's competitive advantages in its industry. The Company believes the recent addition of direct sale representatives in the Pacific Northwest and Southern California for Morel and Cashmere will allow Morel to diversify its customer base and reduce its dependence on PACCAR. MARKETING PACIFIC COAST AND CERAMIC DEVICES. Pacific Coast and Ceramic Devices market their products in the United States, Europe and Japan through a network of 22 manufacturer representatives and resellers as of May 31, 1996, generally established on a geographic basis. These representatives and resellers are subject to agreements that prevent them from selling the products of competitors of Pacific Coast and Ceramic Devices. In addition, Pacific Coast and Ceramic Devices maintain a joint internal sales and customer service staff and engineering capability to meet customer requirements for technical support. SEISMIC. The Company currently markets Seismic's natural gas shut-off valve in California, Oregon, Utah and Washington. In addition, the Company believes that there is a significant market for Seismic's valves in other earthquake-prone areas, such as Japan. Seismic's strategy is to increase its marketing efforts in two domestic distribution channels: large regional natural gas utilities for direct sales to their customers and large home improvement centers for sales to consumers. Seismic also intends to implement a direct mail program as part of its marketing campaign. In the future, Seismic may enter into a strategic arrangement with a Japanese firm to market Seismic's natural gas shut-off valve in Japan. CASHMERE AND MOREL. Cashmere and Morel have a similar existing and potential customer base and use the same direct sales approach and personnel. They currently have direct regional sales personnel covering the West Coast. The Company expects to engage additional salespeople for other geographic regions as business warrants. COMPETITION PACIFIC COAST AND CERAMIC DEVICES. The market for Pacific Coast and Ceramic Devices products is highly competitive and is composed of numerous competitors, none of which dominates the market. Competition is based primarily on product quality, price, custom product development capability, and technical support. Pacific Coast's principal competitors include Balo Precision Parts, Inc. ("Balo"), Amphenol Corporation, Hermetic Seal Corporation, Kemlon Products and Development Co., ITT Cannon Inc. and Alberox Corporation. Pacific Coast recently purchased two patents from Balo and licensed certain rights under these and certain other related patents of the Company to Balo under the terms of a settlement agreement between Pacific Coast and Balo. See "Business -- Proprietary Rights." Pacific Coast is not aware of any competitor that competes with all of its product lines, although competitors do exist in each market. Ceramic Devices' principal competitors in all of its markets include AVX Corporation, Spectrum Control, Inc. and Maxwell Laboratories, Inc.'s Sierra Capacitor/Filter Division. Many of these companies have greater financial and technical resources 26 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. See "Risk Factors -- Competition." SUPPLIERS AND PRODUCTION PACIFIC COAST AND CERAMIC DEVICES. Pacific Coast and Ceramic Devices have multiple competitive sources generally available to supply all of their needs for raw, processed and machined materials. However, Pacific Coast and Ceramic Devices occasionally experience delivery and quality difficulties with their vendors, and maintain secondary sources of supply for outside purchases. Pacific Coast and Ceramic Devices also maintain a quality control program to monitor supplier compliance with their supply requirements. CASHMERE, MOREL AND SEISMIC. Cashmere has a readily available source of supply for the raw materials it requires through numerous product distributors. Morel has several suppliers of aluminum for its casting process, including Aluminum Company of America, Inc. (ALCOA), Morel's largest supplier, which has a supply facility located within approximately 35 miles of Morel's facility. However, delivery and quality of supplies may vary or change from time to time. In addition, the price of aluminum fluctuates with the market, which is generally absorbed by Cashmere but which Morel can generally pass through to its customers. All of Seismic's products are supplied by Cashmere. See "Risk Factors - - -- Availability and Cost of Materials." PROPRIETARY RIGHTS The Company relies primarily on a combination of patent, trade secret, copyright and trademark laws, confidentiality procedures, and other intellectual property protection methods to protect its proprietary technology. The Company currently holds 32 United States patents and has three patent applications pending. Of these, Pacific Coast owns 28 patents and has one patent application pending, and Seismic owns three 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 27 precautions taken by the Company, unauthorized parties may attempt to copy aspects of the Company's products or obtain and use information that the Company regards as proprietary, and existing intellectual property laws afford only limited protection. Policing violations of such laws is difficult. The laws of certain countries in which the Company's products are or may be distributed do not protect the Company's products and intellectual property rights to the same extent as do the laws of the United States. There is no assurance that these protections will be adequate or that the Company's competitors will not independently develop similar technology, gain access to the Company's trade secrets or other proprietary information, or design around the Company's patents. The Company may be required to enter into costly litigation to enforce its intellectual property rights or to defend infringement claims by others. Such infringement claims could require the Company to license the intellectual property rights of third parties. There is no assurance that such licenses would be available on reasonable terms, or at all. The Company recently settled litigation with Balo, a competitor of Pacific Coast, involving patent infringement claims by and against Balo. As a result of the settlement, Pacific Coast acquired two patents from Balo in the field of explosively bonded hermetic connectors and packages, which was the subject of the litigation, and granted Balo a license to use these and certain other related patents of the Company. See "Risk Factors -- Limited Protection of Proprietary Technology." GOVERNMENT REGULATION Certain of the Company's products are manufactured and sold under United States government contracts or subcontracts. As with all companies that provide products or services to the federal government, the Company is directly and indirectly subject to various federal rules, regulations and orders applicable to government contractors. Certain of these government regulations relate specifically to the vendor-vendee relationship with the government, such as the bidding and pricing rules. Under regulations of this type, the Company must observe certain pricing restrictions, produce and maintain detailed accounting data, and meet various other requirements. The Company is also subject to a number of regulations affecting the conduct of its business generally. For example, the Company must adhere to federal acquisition requirements and to standards established by the Occupational Safety and Health Act relating to labor practices and occupational safety standards. Violation of applicable government rules and regulations could result in civil liability, in cancellation or suspension of existing contracts or in ineligibility for future contracts or subcontracts funded in whole or in part with federal funds. See "Risk Factors -- Governmental Regulation." ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws, regulations and ordinances concerning solid waste disposal, hazardous materials storage, use and disposal, air emissions, waste water and storm water disposal, employee health and other environmental matters (together, "Environmental Laws"). Proper waste disposal and environmental regulation are major considerations for the Company because certain metals and chemicals used in its manufacturing processes are classified as hazardous substances. Since the Company's acquisition of Morel in December 1995, the Company has initiated an environmental compliance program for the Morel facility, which includes obtaining all permits necessary for that facility to operate in compliance with applicable Environmental Laws. As part of this program, Morel in January 1996 obtained a permit to discharge air emissions. Morel is operating without a permit required by Environmental Laws to discharge waste water and storm water. In May 1996, Morel submitted an application to the State of Washington for this permit. A failure by Morel to obtain the required permit could result in regulatory authorities imposing fines on Morel or ordering Morel to cease operations or both. The Company is obtaining the necessary environmental data to support the permit application and expects to submit such data in July 1996. Although the Company believes that the necessary permit will be issued in the first 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. 28 From time to time, the Company's operations may result in other noncompliance with Environmental Laws. If any violations of Environmental Laws occur, the Company could be liable for damages and for the costs of remedial actions and could also be subject to revocation of permits necessary to conduct its business. Any such revocation could require the Company to cease or limit production at one or more of its facilities, which could have a material adverse effect on the Company. As a generator of hazardous materials, the Company is subject to financial exposure even if it fully complies with these laws. Environmental Laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violations. There is no assurance that any present or future noncompliance with Environmental Laws will not have a material adverse effect on the Company's results of operations or financial condition. See "Risk Factors -- Environmental Matters." FACILITIES All of the Company's subsidiaries are now located in the greater Wenatchee, Washington area. All of the operating subsidiaries except Morel operate from adjacent buildings in Wenatchee, and Morel is located 15 miles away in Entiat. The close proximity of the operating subsidiaries is part of the Company's strategy to enhance the efficiencies between these companies. Pacific Coast operates from facilities in Wenatchee, Washington of approximately 31,000 square feet, which it has leased from the Port of Chelan County since September 1994. An additional 7,500 square feet were added to the lease in January 1996 to house Ceramic Devices' operations. Ceramic Devices completed its move to Wenatchee from San Diego, California in May 1996. Cashmere and Seismic operate from an adjacent facility of approximately 42,000 square feet which Cashmere has leased from the Port of Chelan County since October 1995. This facility was built to suit Cashmere by the Port of Chelan. The leases for these facilities expire in the year 2005 and both contain options to renew for two additional five-year terms. Total lease costs for these facilities are $342,000 per year. Morel operates from facilities in Entiat, Washington of approximately 84,000 square feet. Morel purchased these facilities and relocated from Seattle in August 1994, at which time the facilities were renovated into a modern foundry operation. Cashmere owns a portion of its previous facility of approximately 46,000 square feet located in nearby Cashmere, Washington. Although the Company held this property for sale during a portion of fiscal 1996, it is currently using the property for staging and storage. The Company is assessing its long-term plans for the property, including retaining the property as an operating asset. Ceramic Devices is subject to two leases for its previous facilities in San Diego, California. Those facilities total approximately 9,900 square feet of office and manufacturing space in two buildings. Both leases expire on April 30, 1997, and the total rent is $6,775 per month. Ceramic Devices is seeking to sublease this space through the end of the lease term. EMPLOYEES As of June 1, 1996, the Company and its subsidiaries had a total of 352 full-time employees, of which 298 were in manufacturing and quality assurance, 14 were in customer service, marketing and sales, 12 were in engineering, 25 were in administration, and 3 were in customer-sponsored product development. None of the Company's employees is covered by an ongoing collective bargaining agreement, the Company has experienced no work stoppages, and the Company believes that its relationship with its employees is good. 29 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are:
NAME AGE POSITION - - ---------------------------------- --- ------------------------------------------------------------------------ Donald A. Wright(1) 44 Chairman of the Board, Chief Executive Officer and President Herman L. "Jack" Jones 65 Executive Vice President, Chief Operating Officer and Director Nick A. Gerde 51 Vice President Finance and Chief Financial Officer Roger P. Vallo(1)(2)(3)(4) 61 Secretary and Director Robert L. Smith(1)(4) 81 Treasurer and Director Donald B. Cotton(2)(4) 58 Director Allen W. Dahl, M.D.(1)(2)(3) 68 Director Paul Schmidhauser(3) 47 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 and has served as President and a director of Cashmere since 1969. Nick A. Gerde has been the Vice President Finance and Chief Financial Officer of the Company since February 1995. Mr. Gerde is also an officer and director of each of the Company's operating subsidiaries. Mr. Gerde served as Controller/CFO of Hydraulic Repair & Design, Inc., a regional hydraulic component repair and wholesale distribution company, from March 1990 through April 1993; Business Development Specialist with the Economic Development Council of North Central Washington from July 1993 to June 1994; and vice president of Televar Northwest, Inc., a closely held telecommunications company, from July 1994 to February 1995. Mr. Gerde is a certified public accountant. Roger P. Vallo has been a director and the Secretary of the Company since February 1995, and held those same positions with Original PCTH and its successor from May 1994 until the successor was dissolved. Mr. Vallo served as a director of Pacific Coast from February 1991 to November 1995 and as Secretary from July 1993 to October 1994. From 1990, he served as a director of the predecessor of Pacific Coast and subsequently as a director of Pacific Coast. Mr. Vallo also is the President and Chief Executive Officer of Prudential Preferred Properties in Everett, Washington. 30 Robert L. Smith has been a director and the Treasurer of the Company since February 1995, and those same positions with Original PCTH and its successor from May 1994 until the successor was dissolved. Prior to May 1994, he served as a director and officer of Pacific Coast. Mr. Smith is engaged in the commercial real estate business for Prudential Preferred Properties in Everett, Washington. Donald B. Cotton has been a director of the Company since February 1995, and was a director of Original PCTH and its successor from May 1994 until the successor was dissolved. He was a director of Pacific Coast from October 1993 to October 1994. Mr. Cotton retired from GTE in 1993, where he served most recently as a vice president. He is currently self-employed as a software consultant. Allen W. Dahl, M.D. has been a director of the Company since February 1995, and was a director of Original PCTH and its successor from October 1994 until the successor was dissolved. Dr. Dahl is a semi-retired physician, practicing in the Puget Sound region of Washington. Paul Schmidhauser has been a director of the Company since November 1995. Mr. Schmidhauser currently manages SIR Schmidhauser Industrial Representations AG, a Swiss company. From January 1994 to January 1995, Mr. Schmidhauser was a private investor. Prior to January 1994, Mr. Schmidhauser was a Vice President of ABB W&E Umwelttechnik AG, a Swiss company. Directors of the Company hold office until the next annual meeting of the Company's shareholders and until their successors have been elected and duly qualified. Under the terms of an agreement between Lysys Ltd. ("Lysys") and the Company, dated January 3, 1995, Lysys has the right to nominate one of the Company's Board members, until July 1998. Mr. Schmidhauser is the current designee of Lysys to the Board of Directors. See "Certain Transactions." Executive officers are elected by the Board of Directors of the Company at the first Board meeting after each annual meeting of shareholders and hold office until their successors are elected and duly qualified. SIGNIFICANT EMPLOYEES John M. Eder, 52, has been President and a director of Seismic since October 1995. He also has served as Executive Vice President of Cashmere since September 1990, and as a director of Cashmere since October 1994. Stephen L. Morel, 43, has been President of Morel since February 1989, and a director of Morel since May 1976. Stephen Morel and Mark Morel, below, are brothers. Mark Morel, 44, has been Vice President of Sales of Morel since July 1989, and a director of Morel since December 1988. Ivan G. Sarda, 63, has been President and a director of Ceramic Devices since April 1995. Before the Company's acquisition of Ceramic Devices, Mr. Sarda was a founder and served as President and a director of Ceramic Devices' predecessor. Lewis L. Wear, 55, has been President of Pacific Coast since February 1996, and a director of Pacific Coast since November 1995. He also has been a director of Ceramic Devices since November 1995. Prior to November 1995, Mr. Wear was Vice President of Sales for Vacuum Atmospheres, a division of WEMS, Inc. DIRECTOR COMPENSATION The Independent Director Stock Plan, approved by the shareholders of the Company in November 1995, provides for an initial award of 500 shares of Common Stock and an annual award of $5,000 worth of Common Stock to each non-employee director. Each non-employee director who serves on a committee of the Board of Directors is entitled to receive a fee of $1,000 per year for each committee on which that director serves, and the chairperson of each committee is entitled to receive an additional $500 fee per year. In addition, each non-employee director of a subsidiary of the Company, who is not a director of the Company, will receive a fee of up to $1,000 per year. At the Board's option, persons who serve as directors of a subsidiary of the Company may be eligible for additional fees. Each of the cash fees may be paid, at the Board's option, in shares of Common Stock. Non-employee directors receive 31 no salary for their services and receive no fee from the Company for their participation in meetings, although all directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in attending meetings of the Board. As of May 31, 1996, 9,000 shares have been issued to Directors under the Independent Director Plan, with 6,000 shares subject to forfeiture if certain conditions are not met. See "Management -- Benefit Plans." EXECUTIVE COMPENSATION SUMMARY COMPENSATION. The following table sets forth the annual and long-term compensation of Donald A. Wright ("Named Executive") for services in all capacities to the Company for the last three fiscal years. No other officer of the Company received annual salary and bonuses exceeding $100,000 in the fiscal year ended May 31, 1996. This table and the following tables do not include a stock option that the Company has agreed to grant to Mr. Wright in fiscal 1997 on the effective date of this Prospectus for 845,000 shares of Common Stock at 150% of the Unit Offering Price, but not less than $3.75 per share.
LONG-TERM COMPENSATION ------------------------------ AWARDS ANNUAL COMPENSATION ------------------------------ --------------------------------------------- SECURITIES OTHER RESTRICTED UNDERLYING ANNUAL STOCK OPTIONS/ NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS SARS PRINCIPAL POSITION YEAR(1) ($) ($) ($) ($) (#) - - ------------------------------- ----------- --------- ------ ------------------- --------------- ------------- Donald A. Wright(2)(3) 1996 110,577 0 0 0 112,560 CEO and President 1995 83,654 0 0 0 100,000(4) 1994 75,000 0 0 0 0 PAYOUTS ------------- LTIP ALL OTHER NAME AND PAYOUTS COMPENSATION PRINCIPAL POSITION ($) ($) - - ------------------------------- ------------- ---------------- Donald A. Wright(2)(3) 0 400(5) CEO and President 0 0 0 0
- - ------------------------ (1) Information is shown for the May 31 fiscal years of the Company and, prior to February 1995, Original PCTH, which employed Mr. Wright during the relevant periods. (2) Mr. Wright became the Chief Executive Officer of the Company in February 1995, upon effectiveness of the merger of Original PCTH into a wholly owned subsidiary of the Company. See "Acquisition History." (3) The compensation shown for Mr. Wright for the fiscal year ended May 31, 1994 was paid by Original PCTH. (4) Represents unexercised, but exercisable, warrants to purchase 100,000 shares of Common Stock. See "Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values," below. (5) Represents estimated value of the personal use of a company car. OPTION GRANTS. The following table sets forth information on grants of stock options or other similar rights by the Company during the last fiscal year to the Named Executive.
NUMBER OF PERCENT OF TOTAL MARKET PRICE SECURITIES OPTIONS/SARS EXERCISE OR ON DATE OF UNDERLYING OPTIONS/ GRANTED TO EMPLOYEES BASE PRICE GRANT EXPIRATION NAME SARS GRANTED (#) IN FISCAL YEAR ($/SHARE) ($/SHARE) DATE - - ---------------------------- ------------------- ------------------------- ----------- ------------- ------------- Donald A. Wright 97,560 67% 5.125 5.125 10/30/2005 15,000 10% 4.875 4.875 11/28/2005
32 AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES. The following table sets forth information concerning exercise of stock options and warrants during the last fiscal year by the Named Executive and the fiscal year end value of unexercised options:
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/ OPTIONS/SARS AT FY-END (#) SARS AT FY-END ($) 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. Based on Mr. Wright's performance as judged by the Board of Directors, Mr. Wright also may be entitled to receive stock options to purchase 15,000 shares of Common Stock per year at an exercise price equal to the fair market value of the Common Stock on the date of grant for each of the fiscal years 1996, 1997 and 1998. The Board of Directors awarded Mr. Wright options to purchase up to 15,000 shares of Common Stock at $4.875 per share for his performance during fiscal year 1995. In addition, under the New Employment Agreement, if a "change of control" of the Company occurs and within six months thereafter Mr. Wright is terminated without "cause" or terminates his employment for "good reason" (as such terms are defined in the New Employment Agreement), Mr. Wright would be entitled to receive a severance payment equal to twice his annual base salary then in effect, subject to certain exceptions provided in the New Employment Agreement. The term "change of control" includes the following events: (i) a change in composition of the Board of Directors over any two-year period such that the directors at the beginning of the period, together with directors subsequently approved by the continuing directors, no longer constituted a majority of the Board, or (ii) any person becoming the beneficial owner of securities having 30% or more of the voting power of the Company's outstanding voting securities, subject to certain exceptions in the New Employment Agreement. Any such severance payment under the New Employment Agreement would be reduced to the extent necessary to avoid subjecting the payment to penalty taxes on parachute payments. In addition to such severance payment, Mr. Wright and his family would be entitled to continue to participate for one year after such termination in employee health and medical benefits plans and programs in which they were participants when employment terminated, to the extent permitted by such plans and programs. BENEFIT PLANS 1995 STOCK INCENTIVE PLAN The Company's 1995 Stock Incentive Plan (the "Plan") provides for the award of incentive stock options ("ISOs") to key employees and the award of non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"), bonus rights, and other incentive grants to employees and certain non-employees (other than non-employee directors) who have important relationships with the Company or its subsidiaries. 33 ADMINISTRATION. The Plan may be administered by the Board of Directors or by a committee of directors or officers of the Company. The Board of Directors has designated an Option Committee to administer the Plan. The Option Committee determines and designates the individuals to whom awards under the Plan should be made and the amount and terms and conditions of the awards, except that if officers of the Company serve on the Option Committee it may not grant options to such officers. The Option Committee may adopt and amend rules relating to the administration of the Plan, but only the Board of Directors may amend or terminate the Plan. The Plan is administered in accordance with Rule 16b-3 adopted under the Exchange Act. ELIGIBILITY. Awards under the Plan may be made to employees, including employee directors, of the Company and its subsidiaries, and to nonemployee agents, consultants, advisors, and other persons (but not including nonemployee directors) that the Option Committee believes have made or will make an important contribution to the Company or any subsidiary thereof. SHARES AVAILABLE. Subject to adjustment as provided in the Plan, a maximum of 1,000,000 shares of Common Stock are reserved for issuance thereunder. If an option, SAR or performance unit granted under the Plan expires or is terminated or canceled, the unissued shares subject to such option, SAR or performance unit are again available under the Plan. In addition, if shares sold or awarded as a bonus under the Plan are forfeited to the Company or repurchased thereby, the number of shares forfeited or repurchased are again available under the Plan. TERM. Unless earlier terminated by the Board, the Plan will continue in effect until the earlier of: (i) ten years from the date on which the Plan is adopted by the Board, and (ii) the date on which all shares available for issuance under the Plan have been issued and all restrictions on such shares have lapsed. The Board may suspend or terminate the Plan at any time except with respect to options, performance units, and shares subject to restrictions then outstanding under the Plan. STOCK OPTION GRANTS. The Option Committee may grant ISOs and NSOs under the Plan. With respect to each option grant, the Option Committee determines the number of shares subject to the option, the option price, the period of the option, the time or times at which the option may be exercised (including whether the option will be subject to any vesting requirements and whether there will be any conditions precedent to exercise of the option), and the other terms and conditions of the option. ISOs are subject to special terms and conditions. The aggregate fair market value, on the date of the grant, of the Common Stock for which an ISO is exercisable for the first time by the optionee during any calendar year, may not exceed $100,000. An ISO may not be granted to an employee who possesses more than 10% of the total voting power of the Company's stock unless the option price is at least 110% of the fair market value of the Common Stock subject to the option on the date it is granted and the option is not exercisable five years after the date of grant. No ISO may be exercisable after ten years from the date of grant. The option price may not be less than 100% of the fair market value of the Common Stock covered by the option at the date of grant. In general, no vested option may be exercised unless at the time of such exercise the optionee is employed by or in the service of the Company or any subsidiary thereof, within 12 months following termination of employment by reason of death or disability, or within three months following termination for any other reason except for cause. Options are nonassignable and nontransferable by the optionee except by will or by the laws of descent and distribution at the time of the optionee's death. No shares may be issued pursuant to the exercise of an option until full payment therefor has been made. Upon the exercise of an option, the number of shares reserved for issuance under the Plan will be reduced by the number of shares issued upon exercise of the option. Options to purchase an aggregate of 145,283 shares of Common Stock have been granted under the Plan, and the Company has agreed to issue Mr. Wright an option under the Plan to purchase 845,000 shares upon the effective date of this Prospectus. See "Description of Securities -- Stock Options." 34 STOCK APPRECIATION RIGHTS. The Option Committee may grant SARs under the Plan. Each SAR entitles the holder, upon exercise, to receive from the Company an amount equal to the excess of the fair market value on the date of exercise of one share of Common Stock of the Company over its fair market value on the date of grant (or, in the case of a SAR granted in connection with an option, the excess of the fair market value of one share of Common Stock of the Company over the option price per share under the option to which the SAR relates), multiplied by the number of shares covered by the SAR or the option. Payment by the Company upon exercise of a SAR may be made in Common Stock, in cash, or by a combination of Common Stock and cash. If a SAR is granted in connection with an option, the following rules shall apply: (i) the SAR shall be exercisable only to the extent and on the same conditions that the related option could be exercised; (ii) the SAR shall be exercisable only when the fair market value of the stock exceeds the option price of the related option; (iii) the SAR shall be for no more than 100% of the excess of the fair market value of the stock at the time of exercise over the option price; (iv) upon exercise of the SAR, the option or portion thereof to which the SAR relates terminates; and (v) upon exercise of the option, the related SAR or portion thereof terminates. Each SAR is nonassignable and nontransferable by the holder except by will or by the laws of descent and distribution at the time of the holder's death. Upon the exercise of a SAR for shares, the number of shares reserved for issuance under the Plan will be reduced by the number of shares issued. Cash payments of SARs will not reduce the number of shares of Common Stock reserved for issuance under the Plan. No SARs have been granted under the Plan. RESTRICTED STOCK. The Option Committee may issue shares of Common Stock under the Plan subject to the terms, conditions, and restrictions determined thereby. Upon the issuance of restricted stock, the number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued. No restricted shares have been granted under the Plan. STOCK BONUS AWARDS. The Option Committee may award shares of Common Stock as a stock bonus under the Plan. The Option Committee may determine the recipients of the awards, the number of shares to be awarded, and the time of the award. Stock received as a stock bonus is subject to the terms, conditions, and restrictions determined by the Option Committee at the time the stock is awarded. No stock bonus awards have been granted under the Plan. CASH BONUS RIGHTS. The Option Committee may grant cash bonus rights under the Plan in connection with (i) options granted or previously granted, (ii) SARs granted or previously granted, (iii) stock bonuses awarded or previously awarded, and (iv) shares issued under the Plan. Bonus rights granted in connection with options entitle the optionee to a cash bonus if and when the related option is exercised. The amount of the bonus is determined by multiplying the excess of the total fair market value of the shares acquired upon the exercise over the total option price for the shares by the applicable bonus percentage. The bonus rights granted in connection with a SAR entitle the holder to a cash bonus when the SAR is exercised. The amount of the bonus is determined by multiplying the total fair market value of the shares or cash received pursuant to the exercise of the SAR by the applicable percentage. The bonus percentage applicable to any bonus right is determined by the Option Committee but may in no event exceed 75%. Bonus rights granted in connection with stock bonuses entitle the recipient to a cash bonus, in an amount determined by the Option Committee, when the stock is awarded or purchased or any restrictions to which the stock is subject lapse. No bonus rights have been granted under the Plan. PERFORMANCE UNITS. The Option Committee may grant performance units consisting of monetary units which may be earned if the Company achieves certain goals established by the Committee over a designated period of time. The goals established by the Option Committee may include earnings per share, return on shareholders' equity, return on invested capital, and similar benchmarks. Payment of an award earned may be in cash or in Common Stock or partly in both, and may be made when earned, or vested and deferred, as the Option Committee determines. Each performance unit will be 35 nonassignable and nontransferable by the holder except by will or by the laws of descent and distribution at the time of the holder's death. The number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued upon payment of an award. No performance units have been granted under the Plan. CHANGES IN CAPITAL STRUCTURE. The Plan provides that if the outstanding Common Stock of the Company is increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any recapitalization, stock split or certain other transactions, appropriate adjustment will be made by the Option Committee in the number and kind of shares available for grants under the Plan. In addition, the Option Committee will make appropriate adjustments in the number and kind of shares as to which outstanding options will be exercisable. In the event of a merger, consolidation or other fundamental corporate transformation, the Board may, in its sole discretion, permit outstanding options to remain in effect in accordance with their terms; to be converted into options to purchase stock in the surviving or acquiring corporation in the transaction; or to be exercised, to the extent then exercisable, during a 30-day period prior to the consummation of the transaction. INDEPENDENT DIRECTOR STOCK PLAN The Company's Independent Director Stock Plan (the "Director Plan") provides for the award of shares of Common Stock to non-employee directors of the Company to attract, reward, and retain qualified individuals to serve as directors and to provide added incentive to such persons by increasing their ownership interest in the Company. ADMINISTRATION. The Director Plan may be administered by the Board of Directors or by a committee of directors and officers of the Company. The Board has delegated to the Compensation Committee the responsibility of administering the Director Plan. Subject to the requirements of the Director Plan, the Compensation Committee has the authority to, among other things, determine the fair market value of the Common Stock, interpret the Director Plan and prescribe, amend, and rescind rules and regulations relating thereto, and make all determinations deemed necessary or advisable to administer the Director Plan, except that only the Board of Directors may suspend, amend or terminate the Director Plan. No director may vote on any action by the Board of Directors with respect to any matter relating to an award held by such director. The Director Plan is administered in accordance with Rule 16b-3 adopted under the Exchange Act. ELIGIBILITY. Shares may be awarded under the Director Plan only to Independent Directors. The term "Independent Director" means a director who is not an employee of the Company or any of its subsidiaries. SHARES AVAILABLE. The total number of shares of Common Stock that may be awarded as bonuses under the Director Plan may not exceed 100,000 shares. If any share awarded under the Director Plan is forfeited, such share will again be available for purposes of the Director Plan. TERM. Unless earlier suspended or terminated by the Board, the Director Plan will continue in effect until the earlier of: (i) ten years from the date on which it is adopted by the Board, and (ii) the date on which all shares available for issuance under the Director Plan have been issued. INITIAL AWARD. The Independent Directors who were elected at the 1995 annual shareholders meeting each received 500 shares of Common Stock (the "Initial Award") for a total of 3,000 shares. In the future, each new Independent Director will receive an Initial Award upon such Independent Director's first election or appointment to the Board. ANNUAL AWARD. Each Independent Director also will be awarded additional shares (the "Annual Award") in an amount determined in accordance with the formula set forth below, on an annual basis, each time he or she is elected to the Board (or, if directors are elected to serve terms longer than one year, as of the date of each annual shareholders' meeting during that term). The number of shares awarded in the Annual Award will be equivalent to the result of $5,000 divided by the fair market 36 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. 37 PRINCIPAL SHAREHOLDERS The following table shows, to the best of the Company's knowledge based on the records of the Company's transfer agent and the Company's records on issuances of shares, as adjusted to reflect changes in ownership documented in filings with the Securities and Exchange Commission made by certain shareholders and provided to the Company pursuant to Section 16 of the Exchange Act and statements provided to the Company by certain shareholders, Common Stock ownership on May 31, 1996, by (i) each person known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock ("Principal Shareholder"), (ii) each of the Company's directors, (iii) the Named Executive in the Summary Compensation Table, and (iv) all executive officers and directors of the Company as a group.
PERCENTAGE OF COMMON STOCK (2) AMOUNT AND NATURE OF -------------------------- BENEFICIAL BEFORE AFTER NAMES AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) OFFERING OFFERING - - --------------------------------------------------------------------- ---------------------- ------------ ------------ Donald A. Wright (3) c/o PCT Holdings, Inc. 434 Olds Station Road Wenatchee, WA 98801................................................. 1,245,850 14.7% 11.6% Herman L. "Jack" Jones c/o PCT Holdings, Inc. 432 Olds Station Road Wenatchee, WA 98801................................................. 701,437 9.4% 7.2% Pensionfund of the Siemens Companies in Switzerland CH 8047 Zurich, Switzerland................................................. 650,000 8.7% 6.7% Stephen Morel 224 Stoneybrook Lane Wenatchee, WA 98801................................................. 398,433 5.3% 4.1% Melvin B. Hoelzle (4) 8105 South Broadway Everett, WA 98203................................................... 380,500 5.1% 3.9% Roger Vallo (5) 2707 Colby Avenue Suite 1101 Everett, WA 98201................................................... 219,026 2.9% 2.3% Robert L. Smith (6) 20008 Grand Avenue, Apt. 201 Everett, WA 98201................................................... 161,887 2.2% 1.7% Donald B. Cotton (7) 538 Timber Ridge Drive Trophy Club, TX 76262............................................... 103,609 1.4% 1.1% Allen W. Dahl 7300 Madrona Drive N.E. Bainbridge Island, WA 98110......................................... 29,276 * * Paul Schmidhauser Rebbergstrasse 28 CH-8112 Otelfingen, Switzerland..................................... 1,500 * * All Executive Officers and Directors as a group (eight persons)(8)....................................... 2,503,946 29.3% 23.2%
- - ------------------------ * Less than 1%. 38 (1) Shares not outstanding but deemed beneficially owned by virtue of the right of an individual to acquire them within 60 days are treated as outstanding for determining the amount and percentage of Common Stock owned by such individual. Shares for which beneficial ownership is disclaimed by an individual also are included for purposes of determining the amount and percentage of Common Stock owned by such individual. To the Company's knowledge, each person has sole voting and sole investment power with respect to the shares shown except as noted, subject to community property laws, where applicable. (2) Rounded to the nearest 1/10th of one percent, based on 7,478,309 shares of Common Stock outstanding before this Offering and 9,728,309 shares of Common Stock outstanding after this Offering. (3) Includes 34,666 shares held by Ragen MacKenzie, Incorporated, custodian for Donald A. Wright, in two IRA accounts. Also includes currently exercisable warrants to purchase 100,000 shares of Common Stock, and currently exercisable options to purchase 34,512 shares of Common Stock. Also includes an option to purchase 845,000 shares of Common Stock that the Company has agreed to grant to Mr. Wright on the effective date of this Prospectus. (4) Includes 85,416 shares held by Dain Bosworth, Incorporated, custodian for Melvin B. Hoelzle IRA. (5) Includes 216,666 shares held by or on behalf of Seattle-First National Bank, custodian for Roger P. Vallo IRA. (6) Includes a currently exercisable warrant to purchase 37,500 shares of Common Stock. (7) Includes 69,443 shares held by Lincoln Trust Company, custodian for Donald B. Cotton IRA. (8) Includes currently exercisable warrants to purchase up to 162,500 shares of Common Stock, and currently exercisable options to purchase up to 47,723 shares of Common Stock. Also includes an option to purchase 845,000 shares of Common Stock that the Company has agreed to grant to Mr. Wright on the effective date of this Prospectus. 39 SELLING SHAREHOLDER The table below sets forth certain information as of May 31, 1996 with respect to the beneficial ownership of Common Stock by UTCO Associates, Ltd., a Utah limited partnership (the "Selling Shareholder"). Other than providing short-term financing to the Company in May 1996, the Selling Shareholder has not had any position, office or other material relationship with the Company within the past three years. The shares of Common Stock offered by the Selling Shareholder may be offered for sale, beginning 180 days after the date of this Prospectus, from time to time at market prices prevailing at the time of sale or at negotiated prices, and without payment of any underwriting discounts or commissions except for usual and customary selling commissions paid to brokers or dealers. The Company will not receive any proceeds from the sale of the Common Stock by the Selling Shareholder.
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY OWNED PRIOR TO OFFERING SHARES OFFERED OWNED AFTER OFFERING ------------------------------ BY SELLING -------------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER(1) PERCENTAGE(2) SHAREHOLDER(1) NUMBER(3) PERCENTAGE(3) - - ----------------------------------------- ----------- ----------------- -------------- ----------------- ------------------- UTCO Associates, Ltd. ................... 300,000 3.9% 300,000 0 0% 230 West 200 South, Suite 2601 Salt Lake City, Utah 84101
- - ------------------------ (1) Represents shares issuable upon exercise of a warrant held by the Selling Shareholder issued in connection with the short-term financing referenced above. The warrant is exercisable at $4.80 per share and is immediately exercisable in full. The warrant and a promissory note were issued by the Company to the Selling Shareholder in May 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." See "Use of Proceeds" as to the repayment of the promissory note. (2) Excludes any shares of Common Stock issuable upon exercise of any outstanding stock options and warrants of the Company, other than the warrant held by the Selling Shareholder, and excludes 845,000 shares of Common Stock issuable upon the exercise of an option that the Company has agreed to grant to Donald A. Wright on the effective date of this Prospectus. See "Description of Securities -- Stock Options." (3) Assumes the exercise of the Selling Shareholder's warrant to purchase 300,000 shares of Common Stock at an exercise price of $4.80 per share and the sale by the Selling Shareholder of all shares of Common Stock issued pursuant to such exercise. 40 CERTAIN TRANSACTIONS On May 18, 1994, Pacific Coast received a $2,000,000 loan from the County of Chelan, Washington, secured by a standby letter of credit from the Frontier Bank of Everett, Washington. To secure the Company's obligations under the letter of credit, Melvin B. Hoelzle, a Principal Shareholder, and Robert L. Smith, a director of the Company, each provided a certificate of deposit and executed a guaranty. The Company retired the letter of credit and the obligations of Messrs. Hoelzle and Smith on September 21, 1995. On May 31, 1994, Original PCTH acquired all of the outstanding shares of Cashmere from the shareholders of Cashmere, in exchange for common stock of Original PCTH. Herman L. "Jack" Jones, a Principal Shareholder, executive officer, and director of the Company received shares of Original PCTH in that transaction, which were later exchanged for 791,666 shares of the Company. In connection with the acquisition, Cashmere sold the land and buildings, located in Cashmere, Washington, where its manufacturing facilities were then located, to Mr. Jones and John M. Eder, a former director of the Company and presently an Executive Vice President of Cashmere and President of Seismic, for $975,207. Cashmere received a note from Mr. Jones for the sales price, payable in monthly installments of $7,600 through May 2014, including interest at 7% per annum. The note was collateralized by the land and the buildings that then housed Cashmere's operations. No significant gain or loss to the Company resulted from this transaction. Cashmere leased these premises from Mr. Jones for a term of three years with monthly lease payments of $9,000. In May 1995, the Company and Messrs. Jones and Eder reached an agreement for Cashmere to reacquire a portion of the land and buildings. Under that agreement, Cashmere canceled $673,990 of the outstanding note from Mr. Jones, Mr. Jones agreed to assume the payment obligation of Cashmere under certain bank debt related to the property, although Cashmere remains an obligor under that bank debt, and Cashmere renewed the $278,795 balance of the note from Mr. Jones under the same terms as the bank debt. Mr. Jones is negotiating to refinance the bank debt in his name and remove Cashmere as an obligor. There is no assurance that Cashmere will be removed as an obligor on the bank debt. The Company paid Mr. Jones $108,000 in May 1995 for the cancellation of the lease, which was terminated upon completion of Cashmere's new facility in Wenatchee, Washington. On January 3, 1995, Original PCTH entered into a funding agreement (the "Funding Agreement") with Lysys Ltd. ("Lysys"). Under the Funding Agreement, Lysys agreed to use its best efforts to find suitable and qualified investors to purchase the Company's Common Stock. Subsequent to the Verazzana merger, Lysys facilitated the sale by the Company of 800,000 shares of Common Stock pursuant to the Funding Agreement in an offering exempt from registration under Regulation S of the Securities Act, which raised approximately $4.6 million. As compensation for its services, Lysys was paid a commission of $478,400 in cash and 739,700 shares of the Company's Common Stock were issued to designees of Lysys. Pensionfund of the Siemens Companies in Switzerland ("Siemens"), a Principal Shareholder, purchased 150,000 shares in the offering. Under the Funding Agreement, Lysys has the right to nominate one of the Company's Board members until July 1998. Paul Schmidhauser, who was elected as a director of the Company at the 1995 annual shareholders meeting, was nominated as a director by Lysys. Mr. Schmidhauser has no ownership or other pecuniary interest in or association with Lysys. See "Management -- Directors and Executive Officers." Roger D. Dudley, one of the Company's directors from February 1995 to November 1995, is associated with Lysys although he is not a director, executive officer or equity owner of Lysys. Mr. Dudley provided certain services to Lysys in connection with its performance under the Funding Agreement. As compensation for such services, 295,300 of the shares of Common Stock issuable to Lysys pursuant to the Funding Agreement were issued to SMD Ltd., LLC, a limited liability company, one-third of which is owned by another limited liability company owned by Mr. Dudley's family. Mr. Dudley claims beneficial ownership of 88,433 of such shares, and disclaims beneficial ownership of the remaining shares. 41 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 an affiliate of Lysys as additional compensation in connection with the offering. Siemens, a Principal Shareholder, purchased 500,000 shares of Common Stock in the offering. On October 9, 1995, Allen W. Dahl, a director of the Company, loaned Morel $100,000 pursuant to the terms of a promissory note, for working capital until consummation of the Morel Merger, as defined in the following paragraph. All amounts due under this note were paid in full by Morel in December 1995. On December 1, 1995 (effective for accounting purposes on November 30, 1995), the Company effected a merger between a subsidiary of the Company that was formed for such purpose and Morel (the "Morel merger"). See "Acquisition History." As consideration for the Morel merger, the Company, after certain post-closing adjustments, issued 650,000 shares of Common Stock to Stephen L. Morel and Mark Morel (the "Morel Shareholders"). As a result, the Morel Shareholders own an aggregate of approximately 9% of the outstanding Common Stock prior to this Offering. Also in connection with the Morel merger, the Company entered into a registration rights agreement with the Morel Shareholders, pursuant to which the Morel Shareholders were granted the right, under certain circumstances, to have up to 50% of their shares registered, at the Company's expense, on an equal basis with other shareholders of the Company within two years after the date of closing. These registration rights have been waived as to this Offering. See "Description of Securities -- Registration Rights." Prior to the Morel merger, no material relationship existed between Morel and the Company or any of its affiliates, directors, officers, or their associates, except that Morel and certain subsidiaries of the Company transacted business from time to time in the ordinary course of business. On March 28, 1996, Robert L. Smith, a director of the Company, loaned the Company $150,000 pursuant to a promissory note from the Company to Mr. Smith that accrues interest at 18% per annum and is due in full on September 27, 1996. The Company expects to use a portion of the net proceeds of this Offering to repay that note. See "Use of Proceeds." The Company also issued Mr. Smith a warrant to purchase 37,500 shares of Common Stock at $4.80 per share that is immediately exercisable, but those shares cannot be sold until the expiration of a lock-up period of 180 days from the date of this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." In addition, the warrant grants Mr. Smith certain rights to register the shares issuable upon exercise of the warrant. Mr. Smith has waived his rights to register those shares in this Offering. See "Description of Securities -- Registration Rights." 42 DESCRIPTION OF SECURITIES UNITS The Common Stock and the Warrants offered hereby will be sold only in Units. Each Unit consists of one share of Common Stock and one Warrant. The Units will separate immediately upon issuance, and the Common Stock and Warrants that make up the Units will trade only as separate securities. COMMON STOCK The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, $.001 par value per share. As of June 17, 1996, there were 7,478,309 shares of Common Stock, fully paid and nonassessable, outstanding. Each share of outstanding Common Stock is entitled to participate equally in dividends as and when declared by the Board of Directors of the Company, out of funds legally available therefor, and is entitled to participate equally in any distribution of net assets made to the Company's shareholders in liquidation of the Company after payment to all creditors thereof. There are no preemptive rights or rights to convert Common Stock into any other securities. The holders of the Common Stock are entitled to one vote for each share held of record on all matters voted upon by the Company's shareholders and may not cumulate votes for the election of directors. Thus, the owners of a majority of the shares of the Common Stock outstanding may elect all of the directors of the Company and the owners of the balance of the shares of the Common Stock would not be able to elect any directors of the Company. WARRANTS REPRESENTATIVES' WARRANTS. In connection with this Offering, the Company has authorized the issuance of the Representatives' Warrants and has reserved 450,000 shares of Common Stock for issuance upon exercise of such warrants (including the Warrants issuable upon exercise of the Representatives' Warrants). The Representatives' Warrants will entitle the holders to acquire 225,000 Units at an exercise price of $ per Unit (120% of the Unit Offering Price). The Representatives' Warrants will be exercisable at any time from the first anniversary of the date of this Prospectus until the fifth anniversary of the date of this Prospectus. THE WARRANTS. Each Warrant will entitle the holder to purchase one share of Common Stock at a price of $ per share (150% of the Unit Offering Price), subject to certain adjustments including, if the Company's audited fiscal 1997 net income does not exceed $1.5 million, a one-time downward adjustment of the exercise price to (a) 125% of the Unit Offering Price if such net income is $800,000 to $1.5 million, (b) 100% of the Unit Offering Price if such net income is $500,000 to $799,000, and (c) 75% of the Unit Offering Price if such net income is less than $500,000. The vesting of one outstanding warrant is dependent upon Pacific Coast being issued a patent, which occurred in fiscal 1996, and meeting or exceeding certain gross sales benchmarks for calendar years 1996 and 1997. See "Other Warrants" below. The Company may grant additional performance-based options or warrants to its employees. The vesting of performance-based options or warrants may result in certain expenses that would reduce net income for financial accounting purposes. Solely for the purpose of determining whether a downward adjustment to the exercise price of the Warrants will be made based on fiscal 1997 net income, any expense relating to the vesting of any performance-based options or warrants held by employees (including any amortization of capitalized patent costs relating to such warrants or options) will be excluded in determining fiscal 1997 net income. The Warrants will, subject to certain conditions, be exercisable at any time until the fifth anniversary of the date of this Prospectus, unless earlier redeemed. The Warrants are redeemable by the Company, at $.25 per Warrant, upon at least 30 days prior written notice to the registered holders, if the closing bid price (as defined in the Warrant Agreement described below) per share of Common Stock for the 20 consecutive trading days immediately preceding the date notice of redemption is given equals or exceeds 200% of the then-current exercise price of the Warrants. If the Company gives notice of its intention to redeem, a holder would be forced either to exercise his or her Warrant before the date specified in the redemption notice or accept the redemption price. 43 The Warrants will be issued in registered form under a Warrant Agreement (the "Warrant Agreement") between the Company and Interwest Transfer Co., Inc., as warrant agent (the "Warrant Agent"). The shares of Common Stock underlying the Warrants, when issued upon exercise of a Warrant, will be fully paid and nonassessable, and the Company will pay any transfer tax incurred as a result of the issuance of Common Stock to the holder upon its exercise. The Warrants and the Representatives' Warrants contain provisions that protect the holders against dilution by adjustment of the exercise price. Such adjustment will occur in the event, among others, that the Company makes certain distributions to holders of its Common Stock. The Company is not required to issue fractional shares upon the exercise of a Warrant or the Representatives' Warrants. The holder of a Warrant or Representatives' Warrants will not possess any rights as a shareholder of the Company until such holder exercises the Warrant or Representatives' Warrants. A Warrant may be exercised upon surrender of the Warrant certificate on or before the expiration date of the Warrant at the offices of the Warrant Agent, with the form of "Election To Purchase" on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by payment of the exercise price (by certified or bank check payable to the order of the Company) for the number of shares with respect to which the Warrant is being exercised. For a holder to exercise the Warrants, there must be a current registration statement in effect with the Securities and Exchange Commission and qualification in effect under applicable state securities laws (or applicable exemptions from state qualification requirements) with respect to the issuance of shares or other securities underlying the Warrants. The Company has agreed to use all commercially reasonable efforts to cause a registration statement with respect to such securities under the Securities Act to be filed and to become and remain effective in anticipation of and prior to the exercise of the Warrants and to take such other actions under the laws of various states as may be required to cause the sale of Common Stock (or other securities) upon exercise of Warrants to be lawful. If a current registration statement is not in effect at the time a Warrant is exercised, the Company may at its option redeem the Warrant by paying to the holder cash equal to the difference between the market price of the Common Stock on the exercise date and the exercise price of the Warrant. The Company will not be required to honor the exercise of Warrants if, in the opinion of the Company's Board of Directors upon advice of counsel, the sale of securities upon exercise would be unlawful. The foregoing discussion of certain terms and provisions of the Warrants and Representatives' Warrants is qualified in its entirety by reference to the detailed provisions of the Warrant Agreement and the purchase warrant issued to the Representatives, respectively, the form of each of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. For the life of the Warrants and Representatives' Warrants, the holders thereof have the opportunity to profit from a rise in the market price of the Common Stock without assuming the risk of ownership of the shares of Common Stock issuable upon the exercise of the Warrants. The Warrant holders may be expected to exercise their Warrants at a time when the Company would, in all likelihood, be able to obtain any needed capital by an offering of Common Stock on terms more favorable than those provided for by the Warrants. Further, the terms on which the Company could obtain additional capital during the life of the Warrants may be adversely affected. OTHER WARRANTS. As of May 31, 1996, the Company had outstanding warrants to purchase 497,500 shares of Common Stock. A warrant to purchase 100,000 shares is held by Donald A. Wright and a warrant to purchase 25,000 shares is held by Nick A. Gerde. These warrants are immediately exercisable in full at an exercise price of $2.00 per share and will expire in 2004. A warrant to purchase 35,000 shares was issued to an employee of Pacific Coast, in connection with an assignment of certain technology to the Company. This warrant has an exercise price of $2.00 per share and expires December 31, 2000. Under this warrant, 15,000 shares of Common Stock are currently exercisable, and an additional 10,000 shares may vest on each of January 1997 and January 1998, if Pacific Coast meets or exceeds certain gross sales benchmarks for calendar years 1996 and 1997. In connection with 44 certain short-term debt incurred by the Company in March 1996 and May 1996, respectively, the Company issued to Robert L. Smith, a director of the Company, a warrant to purchase 37,500 shares of Common Stock, and issued to the Selling Shareholder a warrant to purchase 300,000 shares of Common Stock. Each of these warrants is currently exercisable in full at an exercise price of $4.80 per share, and expires May 22, 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments" and "Selling Shareholder." STOCK OPTIONS The Company has stock options outstanding under the Plan to purchase up to 145,283 shares of Common Stock at exercise prices of between $4.875 and $5.125 per share. Of these, options to purchase up to 47,723 shares are currently exercisable and will expire in November 2005. The remainder of those options vest, if at all, in increments of 24,390 shares on each of June 1, 1997, 1998, 1999 and 2000, and also will expire in November 2005. The Company has also agreed to grant Mr. Wright an option under the Plan to purchase 845,000 shares of Common Stock upon the effective date of this Prospectus, at an exercise price of $ (150% of the Unit Offering Price), but not less than $3.75 per share, which will expire ten years from the effective date of this Prospectus. The shares issuable upon exercise of this option will be subject to a contractual restriction on sale, expiring one year after the date of this Prospectus. See "Management -- Benefit Plans." CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion sets forth certain U.S. federal income tax consequences, under current law, relating to the purchase and ownership of the Units and the Common Stock and Warrants constituting the Units. The discussion is a summary and does not purport to deal with all aspects of federal taxation that may be applicable to an investor, nor does it consider specific facts and circumstances that may be relevant to a particular investor's tax position. Certain holders (such as dealers in securities, insurance companies, tax exempt organizations, and those holding Common Stock or Warrants as part of a straddle or hedge transaction) may be subject to special rules that are not addressed in this discussion. This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, and on administrative and judicial interpretations as of the date hereof, all of which are subject to change retroactively and prospectively. ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THIS OFFERING, INCLUDING THE APPLICABILITY OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS. ALLOCATION OF PURCHASE PRICE. Each Unit as a whole will have a tax basis equal to the cost of the Unit. The measure of income or loss from certain transactions described below depends upon the tax basis in each of the Warrants and the Common Stock comprising the Unit. The tax basis for each of the Warrants and the Common Stock will be determined by allocating the cost of the Unit among the securities which comprise the Unit in proportion to the relative fair market values of those elements at the time of acquisition. U.S. HOLDERS OF COMMON STOCK OR WARRANTS The following discussion concerns the material U.S. federal income tax consequences of the ownership and disposition of Common Stock or Warrants applicable to a U.S. Holder of such Common Stock or Warrants. In general, a "U.S. Holder" is (i) a citizen or resident of the U.S., (ii) a corporation or partnership created or organized in the U.S. or under the laws of the U.S. or any state, or (iii) an estate or trust whose income is includable in gross income for U.S. federal income tax purposes regardless of its source. DIVIDENDS. Dividends, if any, paid to a U.S. Holder generally will be includable in the gross income of such U.S. Holder as ordinary income to the extent of such U.S. Holder's share of the Company's current or accumulated earnings and profits. See "Price Range of Common Stock and Dividend Policy." 45 SALE OF COMMON STOCK. The sale of Common Stock should generally result in the recognition of gain or loss to a U.S. Holder thereof in an amount equal to the difference between the amount realized and such U.S. Holder's tax basis in the Common Stock. If the Common Stock constitutes a capital asset in the hands of a U.S. Holder, gain or loss upon the sale of the Common Stock will be characterized as long-term or short-term capital gain or loss, depending on whether the Common Stock has been held for more than one year. EXERCISE AND SALE OF WARRANTS. No gain or loss will be recognized by a U.S. Holder of a Warrant on the purchase of shares of Common Stock for cash pursuant to an exercise of a Warrant (except that gain will be recognized to the extent cash is received in lieu of fractional shares). The tax basis of Common Stock received upon the exercise of a Warrant will equal the sum of the U.S. Holder's tax basis for the exercised Warrant and the exercise price. The holding period of the Common Stock acquired upon the exercise of the Warrant will begin on the date the Warrant is exercised and the Common Stock is purchased (i.e., it does not include the period during which the Warrant was held). Gain or loss from the sale or other disposition of a Warrant (or loss in the event that the Warrant expires unexercised as discussed below), other than pursuant to a redemption by the Company, will be capital gain or loss to its U.S. Holder if the Common Stock to which the Warrant relates would have been a capital asset in the hands of such holder. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder has held the Warrant for more than one year at the time of the sale, disposition or lapse. It is unclear whether the redemption of a Warrant by the Company would generate ordinary or capital income or loss. EXPIRATION OF WARRANTS WITHOUT EXERCISE. If a holder of a Warrant allows it to expire without exercise, the expiration will be treated as a sale or exchange of the Warrant on the expiration date. The U.S. Holder will have a taxable loss equal to the amount of such U.S. Holder's tax basis in the lapsed Warrant. If the Warrant constitutes a capital asset in the hands of the U.S. Holder, such taxable loss will be characterized as long-term or short-term capital loss depending upon whether the Warrant was held for the required long-term holding period. BACKUP WITHHOLDING. A shareholder who is a U.S. Holder may be subject to backup withholding at the rate of 31% in connection with distributions received with respect to his or her shares, unless the shareholder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption for backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Any amount paid as backup withholding will be creditable against such shareholder's income tax liability. The Company will report to the shareholders and the I.R.S. the amount of any "reportable payments" distributed and the amount of tax withheld, if any, with respect to the shares. NON-U.S. HOLDERS OF COMMON STOCK OR WARRANTS The following discussion concerns the material U.S. federal income and estate tax consequences of the ownership and disposition of shares of Common Stock or Warrants applicable to Non-U.S. Holders of such shares of Common Stock or Warrants. In general, a "Non-U.S. Holder" is any holder other than a U.S. Holder, as defined in the preceding section. DIVIDENDS. Dividends, if any, paid to a Non-U.S. Holder generally will be subject to U.S. withholding tax at a 30% rate (or a lower rate as may be prescribed by an applicable tax treaty) unless the dividends are effectively connected with a trade or business of the Non-U.S. Holder within the United States. See "Price Range of Common Stock and Dividend Policy." Dividends effectively connected with such a trade or business will generally not be subject to withholding (if the Non-U.S. Holder properly files an executed IRS Form 4224 with the payor of the dividend) and generally will be subject to federal income tax on a net income basis at regular graduated rates. In the case of a Non-U.S. Holder which is a corporation, such effectively connected income also may be subject to the branch profits tax (which is generally imposed on a foreign corporation on the repatriation from the U.S. of 46 effectively connected earnings and profits). The branch profits tax may not apply if the recipient is a qualified resident of certain countries with which the U.S. has an income tax treaty. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country are presumed, under the current I.R.S. position, to be paid to a resident of that country, unless the payor had definite knowledge that such presumption is not warranted or an applicable tax treaty (or U.S. Treasury Regulations thereunder) requires some other method for determining a Non-U.S. Holder's treaty status. The Company must report annually to the I.R.S. and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement to the tax authorities in the country in which the Non-U.S. Holder resides. SALE OF COMMON STOCK. Generally, a Non-U.S. Holder will not be subject to federal income tax on any gain realized upon the disposition of such holder's shares of Common Stock unless (i) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the U.S. (in which case the branch profits tax may apply); (ii) the Non-U.S. Holder is an individual who holds the shares of Common Stock as a capital asset and is present in the U.S. for 183 days or more in the taxable year of the disposition and to whom such gain is U.S. source; (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to certain former U.S. citizens or residents; or (iv) the Company is or has been a "U.S. real property holding corporation" for federal income tax purposes (which the Company does not believe that it is or is likely to become) at any time during the five-year period ending on the date of disposition (or such shorter period that such shares were held) and, subject to certain exceptions, the Non-U.S. Holder held, directly or indirectly, more than 5% of the Common Stock. EXERCISE AND SALE OF WARRANTS. Generally, a Non-U.S. Holder who recognizes capital gain from the sale of a Warrant, other than pursuant to a redemption by the Company, will not be subject to U.S. federal income tax unless (i) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States (in which case the branch profits tax may apply); (ii) the Non-U.S. Holder is an individual who is present in the U.S. for 183 days or more in the taxable year of sale and to whom the gain is U.S. source; (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. law applicable to certain former U.S. citizens or residents; or (iv) the Company is or has been a "U.S. real property holding corporation" for federal income tax purposes (which the Company does not believe it is or is likely to become) at any time during the five-year period ending on the date of sale (or such shorter period such Warrants were held) and, subject to certain exceptions, the Non-U.S. Holder held, directly or indirectly more than 5% of the Warrants. ESTATE TAX. Shares of Common Stock and Warrants owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the U.S. at the time of death will be includable in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable tax treaty provides otherwise, and may be subject to U.S. federal estate tax. BACKUP WITHHOLDING AND INFORMATION REPORTING. Under current U.S. federal income tax law, backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain required information) and information reporting apply to payments of dividends (actual and constructive) made to certain non-corporate U.S. persons. The backup withholding tax and information reporting requirements applicable to U.S. persons will generally not apply to dividends paid on Common Stock to a Non-U.S. Holder at an address outside the U.S., although dividends paid to Non-U.S. Holders will be reported and taxed as described above under "Dividends." The payment of the proceeds from the disposition of shares of Common Stock or Warrants through the U.S. office of a broker will be subject to information reporting and backup withholding unless the holder, under penalties of perjury, certifies, among other things, its status as a Non-U.S. 47 Holder or otherwise establishes an exemption. Generally, the payment of the proceeds from the disposition of shares of Common Stock or Warrants to or through a non-U.S. office of a broker will not be subject to backup withholding and will not be subject to information reporting. In the case of the payment of proceeds from the disposition of shares of Common Stock or Warrants through a non-U.S. office of a broker that is a U.S. person or a "U.S.-related person," existing regulations require information reporting (but not backup withholding) on the payment unless the broker receives a statement from the owner, signed under penalties of perjury, certifying, among other things, its status as a non-U.S. Holder or the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no actual knowledge to the contrary. For this purpose, a "U.S.-related person" is (i) a "controlled foreign corporation" for U.S. federal income tax purposes or (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a U.S. trade or business. Any amounts withheld from a payment to a Non-U.S. Holder under the backup withholding rules will be allowed as a credit against such holder's U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the I.R.S. Non-U.S. Holders should consult their tax advisors regarding the application of these rules to their particular situations, the availability of an exemption therefrom and the procedure for obtaining such an exemption, if available. REGISTRATION RIGHTS REPRESENTATIVES' WARRANTS. The Representatives' Warrants provides certain rights with respect to the registration under the Securities Act of the 450,000 shares issuable upon exercise thereof (including the Warrants included therein). The Company has agreed that during the period between the first anniversary and fifth anniversary after the date of this Prospectus it will register the issuance of such shares upon the exercise of the Representatives' Warrants (and, if necessary, their resale) so as to permit their public resale without restriction. These registration rights could result in substantial future expense to the Company and could adversely affect the Company's ability to complete future equity or debt financings. Furthermore, the registration and sale of Common Stock of the Company held by or issuable to the holders of registration rights, or even the potential of such sales, could have an adverse effect on the market price of the securities offered hereby. OTHER REGISTRATION RIGHTS. Holders of 587,083 shares of Common Stock and warrants to purchase 337,500 shares of Common Stock (collectively, the "Registrable Shares"), or their transferees, are entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of agreements between the Company and such holders, if the Company proposes to register any of its Common Stock under the Securities Act in connection with a public offering thereof, either for its own account or for the account of others, such holders are, with limited exceptions, entitled to notice of such registration and to include their Registrable Shares therein. In addition, once the Company is eligible to use a Form S-3 Registration Statement, holders of 133,333 of the Registrable Shares may require the Company to file, on not more than one occasion, a registration statement under the Securities Act at the Company's expense with respect to such Registrable Shares, and the Company is required to use its reasonable efforts to effect such registration, subject to certain conditions and limitations. Such holders are also entitled to registration rights on an equal basis with any other shareholders to whom the Company grants registration rights. These rights are subject to certain conditions, including the right of the underwriters of any offering by the Company to limit the number of Registrable Shares included in such registration. Holders of 624,583 of the Registrable Shares have agreed to waive their registration rights with respect to this Offering. The remaining 300,000 Registrable Shares are being registered by the 48 Registration Statement of which this Prospectus is a part, but the Selling Shareholder has agreed not to sell such shares for a period of 180 days from the effective date of this Prospectus. See "Selling Shareholder." ANTI-TAKEOVER LAWS The Company, as a Nevada corporation, is subject to certain provisions of Nevada law governing the exercise of powers by the Board of Directors, certain combinations with interested stockholders, and certain acquisitions of a controlling interest in the Company. In addition, the Company is also subject to certain provisions of Washington law regarding significant business transactions and certain "fair price restrictions." These statutes may have the effect of delaying or deterring a hostile takeover of the Company. NEVADA STATUTE ON EXERCISE OF POWERS OF DIRECTORS AND OFFICERS. Nevada's "Exercise of Directors' and Officers' Powers" statute (Nevada Revised Statutes Section 78.138) provides that directors and officers, in exercising their respective powers with a view to the interests of the corporation, may consider the following factors: (a) the interests of the corporation's employees, suppliers, creditors and customers; (b) the economy of Nevada and the nation; (c) the interests of the community and of society; and (d) the long-term as well as short-term interests of the corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the corporation. This statute also provides that directors may resist a change or potential change in control of the corporation if the directors by a majority vote of a quorum determine that the change or potential change is opposed to or not in the best interest of the corporation: (i) upon consideration of the interests of the corporation's stockholders and any of the foregoing factors or (ii) because the amount or nature of the indebtedness and other obligations to which the corporation or any successor may become subject in connection with the change or potential change in control provides reasonable grounds to believe that within a reasonable time the corporation would become insolvent or a bankruptcy petition concerning the corporation would be commenced. NEVADA COMBINATION WITH INTERESTED STOCKHOLDERS STATUTE. Nevada's "Combination with Interested Stockholders" statute (Nevada Revised Statutes SectionSection 78.411-78.444) applies to Nevada public corporations having at least 200 stockholders, which includes the Company. This statute prohibits a corporation from entering into any "combination" with an "interested stockholder" (defined as (a) a person who beneficially owns 10% or more of the corporation's voting securities, or (b) an affiliate or associate of the corporation who, in the three years preceding the transaction, beneficially owned 10% or more of the corporation's voting securities) for a period of three years after such person becomes an interested stockholder, unless the Board of Directors approved the combination or the share acquisition before the interested stockholder acquired the shares. After such three-year period has elapsed, combinations with an interested stockholder remain prohibited unless the combination meets any applicable requirements of the corporation's articles of incorporation, and (i) the Board of Directors approved the combination or the share acquisition before the interested stockholder's acquisition of the shares, or (ii) a majority of the disinterested stockholders vote to approve the combination at a meeting called after such three-year period has elapsed, or (iii) the aggregate amount of cash and the market value of non-cash consideration to be received by the disinterested stockholders meets certain minimum requirements, and, prior to the consummation of the combination, the interested stockholder has not become the beneficial owner of additional voting shares of the corporation, except in limited circumstances. For purposes of this statute, the term "combination" includes a merger or consolidation of the corporation and the interested stockholder or its affiliate, or any sale, lease, exchange, mortgage, pledge, transfer or other disposition to or with an interested stockholder or its affiliate in excess of certain dollar thresholds. NEVADA ACQUISITION OF CONTROLLING INTEREST STATUTE. Nevada's "Acquisition of Controlling Interest Statute" (Nevada Revised Statutes SectionSection 78.378-78.3793) applies to Nevada corporations that have at least 200 stockholders, at least 100 of whom are Nevada residents, and that do business directly or indirectly in Nevada. If the Company is determined to be "doing business" in Nevada (a term that is 49 not defined in the statute), and has more than 100 Nevada residents that are stockholders, it will become subject to the statute. The statute prohibits an acquiror from voting shares of a target corporation's stock after exceeding certain threshold ownership percentages, until the acquiror provides certain information to the corporation and a majority of the disinterested stockholders vote to restore the voting rights of the acquiror's shares at a meeting called at the request and expense of the acquiror. If the voting rights of such shares are restored, stockholders voting against such restoration may demand payment for the "fair value" of their shares (which is generally equal to the highest price paid in the transaction subjecting the stockholder to the statute). If the stockholders fail to restore the voting rights of the acquiror's shares or if the acquiror fails to timely deliver the required information, then the corporation may call such shares for redemption by the corporation, if so provided in the corporation's articles of incorporation or bylaws. The Company's articles of incorporation and bylaws do not currently permit it to call an acquiror's shares for redemption. WASHINGTON ANTI-TAKEOVER STATUTE. Washington's "Significant Business Transactions Statute" (Chapter 23B.19 of the Washington Business Corporation Act) applies to foreign corporations, such as the Company, (i) that have a class of voting shares registered pursuant to Section 12 or 15 of the Exchange Act; (ii) that have their principal executive offices in the state; (iii) more than 10% of whose shares are owned of record by residents of the state; (iv) a majority of whose employees reside in the state; and (v) a majority of whose tangible assets are located in the state. The statute prohibits, subject to certain exceptions, a corporation from entering into any "significant business transactions" with an "Acquiring Person" (defined generally as a person who or an affiliated group that beneficially owns 10% or more of the outstanding voting securities of a corporation) for a period of five years after such person or affiliated group becomes an Acquiring Person unless the transaction or share acquisition made by the Acquiring Person is approved prior to the share acquisition by a majority of the target corporation's directors. In addition, this statute prohibits a corporation subject thereto from entering into a significant business transaction with an Acquiring Person unless the consideration to be received by the corporation's shareholders in connection with the proposed transaction satisfies the "fair price" provisions set forth in the statute. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's securities is Interwest Transfer Co., Inc. 50 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding 9,728,309 shares of Common Stock, assuming no exercise of the Overallotment Option, the Warrants, the Representatives' Warrants or any other options or warrants. The following shares will be freely tradeable without restriction under Securities Act: the 2,250,000 shares of Common Stock which are included in the Units and sold in this Offering (plus up to 337,500 shares that may be sold in the Units as a result of exercise of the Overallotment Option); the 2,250,000 shares of Common Stock issuable upon exercise of the Warrants (plus up to 337,500 shares issuable upon the exercise of Warrants subject to the Overallotment Option); the 125,000 shares of Common Stock issued in the Company's 1986 public offering; and, commencing approximately 12 months after the date of this Prospectus, up to 450,000 shares of Common Stock that are issuable upon exercise of the Representatives' Warrants (including exercise of the Warrants included therein). The 300,000 shares of Common Stock underlying the warrant held by the Selling Shareholder are subject to a lock-up agreement, and will first become eligible for sale in the public market 180 days after the date of this Prospectus. However, any shares purchased by an "affiliate" of the Company (as that term is defined in Rule 144 under the Securities Act), subject to certain conditions, will be subject to the resale limitations of Rule 144. The 2,408,170 shares of Common Stock issued by the Company in connection with two Regulation S offerings to Swiss investors in July 1995 and November 1995, to the extent not previously resold into the United States, are available for resale into the United States without restriction at such time as an exemption from registration under the Securities Act is or becomes available. The 490,000 shares of Common Stock issued by the Company in connection with a Regulation S offering in May 1996 are subject to a lock-up agreement until December 16, 1996, and will be available for resale into the United States after that date without restriction at such time as an exemption from registration is or becomes available. The remaining 4,446,058 shares of Common Stock are "restricted" shares subject to the restrictions upon resale under Rule 144 under the Securities Act (the "Restricted Shares"). Of this number, the 62,500 shares issued to the Company's original shareholders are eligible for immediate resale in the public market pursuant to Rule 144(k), described below. An aggregate of 3,176,175 shares issued by the Company to the security holders of Original PCTH and others in connection with the Verazzana merger will become eligible for sale under Rule 144 on February 17, 1997. See "Acquisition History." Another 295,300 shares of Restricted Shares issued in July 1995 in connection with the Company's first Regulation S offering, will become eligible for sale under Rule 144 in July 1997. An aggregate of 587,083 shares of the Restricted Shares issued in connection with the Company's acquisitions of Ceramic Devices, Seismic and Morel and 37,500 shares issuable upon the exercise of a warrant held by Robert L. Smith, a director of the Company, are subject to certain registration rights which may subsequently permit such shares to be registered under the Securities Act. In the absence of such registration, such shares would become eligible for sale under Rule 144 as follows: 133,333 shares on April 27, 1997; 128,750 on November 30, 1997; 325,000 on December 1, 1997; and 37,500 on a date two years after exercise of Mr. Smith's warrant. All of the holders of these registration rights have waived their right to participate in this Offering. However, if such registration rights are exercised subsequently, those shares would become eligible for resale upon the effectiveness of a future registration statement covering such shares. Another 325,000 shares of the Restricted Shares which were issued in the Company's acquisition of Morel, but which are not subject to registration rights, will become eligible for sale under Rule 144 on December 1, 1997. In general, under Rule 144, as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 97,283 shares immediately after this Offering) or (ii) the average weekly trading volume of the Company's Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the 51 Securities and Exchange Commission. Sales pursuant to Rule 144 also are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person who is not deemed to have been an affiliate of the Company at any time during the three months immediately preceding the sale and whose Restricted Shares have been fully paid for three years since the later of the date on which they were acquired from the Company or from an affiliate of the Company may sell such Restricted Shares under Rule 144(k) without regard to the limitations and requirements described above. Shortly after this Offering, the Company intends to file a registration statement under the Securities Act covering shares of Common Stock reserved for issuance under the Company's 1995 Stock Incentive Plan and Independent Director Stock Plan, and under warrants issued to Mr. Wright, Mr. Gerde and an employee of Pacific Coast in connection with their employment. Based on the number of shares reserved for issuance under such stock plans, warrants and options, the registration statement would cover approximately 1,260,000 shares. Such registration statement will automatically become effective upon filing. Of the shares held by officers issuable under such stock plans and warrants, 270,283 shares are subject to a six-month lock-up period following the date of this Prospectus, and 845,000 shares of Common Stock issuable upon exercise of an option which the Company has agreed to issue under the Plan to Mr. Wright upon the effective date of this Prospectus are subject to a contractual restriction on sale, expiring one year after the date of this Prospectus. See "Description of Securities -- Stock Options" and "Management -- Benefit Plans." Prior to this Offering, there has been only a limited public market for the Common Stock and no public market for the Warrants. No prediction can be made of the effect, if any, that future market sales of shares that are subject to Rule 144 or that were sold pursuant to Regulation S, or the availability of such shares for sale, will have on the market price of the Common Stock or the Warrants prevailing from time to time after this Offering. The Company is unable to estimate the number of such shares that may be sold in the public market, because such amount will depend on the trading volume in, and the market price for, the Common Stock, the Warrants and other factors. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, following this Offering could adversely affect the prevailing market price of the Common Stock and the Warrants. 52 UNDERWRITING The Underwriters named below, acting through Paulson Investment Company, Inc. and Cohig & Associates, Inc., as Representatives, have agreed, severally and not jointly, subject to the terms and conditions contained in an Underwriting Agreement dated the date hereof, to purchase the Units offered hereby from the Company in the amounts set forth below:
UNDERWRITER NUMBER OF UNITS - - ----------------------------------------------------------------------------- --------------- Paulson Investment Company, Inc. ............................................ Cohig & Associates, Inc. .................................................... Total.................................................................... 2,250,000 --------------- ---------------
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the Units offered hereby, if any are purchased. The Company has been advised by the Representatives that the Underwriters propose to offer the Units to the public initially at the offering price set forth on the cover page of this Prospectus, and to selected dealers, including Underwriters, at that price less a concession in an amount to be determined by the Representatives. After the initial public offering of the Units, the public offering price and other offering terms may vary. The Underwriting Agreement provides that the Underwriters will purchase the Units (including the Units subject to the Overallotment Option) offered hereby for $ per Unit, representing a discount of nine percent from the Unit Offering Price. The Company has granted the Underwriters an Overallotment Option, exercisable during the 45-day period after the date of this Prospectus, to purchase up to a maximum of an additional 337,500 Units on the same terms as the Units being purchased by the Underwriters from the Company. The Underwriters may exercise the Overallotment Option only to cover overallotments made in connection with this Offering. The Company has agreed to sell and issue to the Representatives warrants (the "Representatives' Warrants") to purchase up to 225,000 Units. The Representatives' Warrants are exercisable for a period of four years beginning one year from the date of this Prospectus. The Representatives' Warrants are exercisable at a price of $ per Unit (120% of the Unit Offering Price). The Representatives' Warrants are nontransferable except to one of the Underwriters or to any individual who is either a partner or an officer of an Underwriter, or by will or the laws of descent and distribution. The holders of the Representatives' Warrants will have, in that capacity, no voting, dividend, or other shareholder rights. Any profit realized by the Representatives on the sale of the securities issuable upon exercise of the Representatives' Warrants may be deemed to be additional underwriting compensation. 53 The Representatives will also receive at closing a nonaccountable expense allowance equal to three percent of the aggregate Unit Offering Price of the Units sold in this Offering, reduced by $35,000 previously paid by the Company as an advance against this allowance. The securities underlying the Representatives' Warrants are being registered on the Registration Statement of which this Prospectus is a part. The Company has agreed to maintain an effective registration statement at its expense to permit the sale of the securities underlying the Representatives' Warrants at any time during the period in which the Representatives' Warrants are exercisable. By virtue of holding the Representatives' Warrants, the Representatives have the opportunity to profit, at a nominal cost, from an increase in the market price of the Company's securities. Furthermore, the exercise of the Representatives' Warrants could dilute the interests of the holders of Common Stock and the existence of the Representatives' Warrants may make it more difficult for the Company to raise additional equity capital. Although the Company will obtain additional equity capital upon exercise of the Representatives' Warrants, it is likely that the Company could then raise additional capital on more favorable terms than those of the Representatives' Warrants. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act and to contribute in certain events to any liabilities incurred by the Underwriters in connection with the sale of the Units. The Company and its executive officers and directors and certain other holders have agreed with the Representatives that, without its written consent, neither the Company nor such persons will sell shares of Common Stock for a period of six months from the date hereof. LEGAL MATTERS The validity of the issuance of the securities offered hereby will be passed upon for the Company by Lionel Sawyer & Collins of Reno, Nevada. Certain legal matters related to this Offering will be passed upon for the Company by Stoel Rives LLP of Seattle, Washington. Certain legal matters related to this Offering will be passed upon for the Underwriters by Weiss, Jensen, Ellis & Howard of Portland, Oregon. EXPERTS The consolidated financial statements of the Company as of May 31, 1996 and 1995, and for the years then ended, have been audited by Moss Adams LLP, independent public accountants. The consolidated financial statements as of May 31, 1996 and 1995 appear in this Prospectus and the Registration Statement. The auditor's reports with respect to the consolidated financial statements of the Company as of May 31, 1996 and 1995 and for the years then ended are included in reliance upon the authority of said firm as experts in auditing and accounting in giving said reports. The financial statements of Morel included in this Prospectus and in the Registration Statement have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") in Washington, D.C. a Registration Statement on Form SB-2 (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus, filed as part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and to the 54 exhibits and schedules thereto, which may be inspected at the Commission's offices without charge, or copies of which may be obtained from the Commission upon payment of the prescribed fees. Statements made in this Prospectus as to the contents of any contract, agreement, or document referred to are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, and each such statement is qualified in its entirety by such reference. The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith, files reports and other information with the Commission via electronic filing. Reports, proxy statements, and other information filed by the Company with the Commission pursuant to the information requirements of the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D. C. 20549 and the regional offices of the Commission located at 75 Park Place, 14th Floor, New York, New York 10007 and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such material may be obtained at prescribed rates from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549 or from the Commission's Web site at "http://www.sec.gov". 55 INDEX TO FINANCIAL STATEMENTS
PAGE --------- PCT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report.............................................................................. F-2 Consolidated Balance Sheet as of May 31, 1996 and 1995.................................................... F-3 Consolidated Statement of Operations for the years ended May 31, 1996 and 1995............................ F-4 Consolidated Statement of Changes in Stockholders' Equity for the years ended May 31, 1996 and 1995....... F-5 Consolidated Statement of Cash Flows for the years ended May 31, 1996 and 1995............................ F-6 Notes to Consolidated Financial Statements................................................................ F-8 PCT HOLDINGS, INC. AND SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENT Pro Forma Combined Financial Statement -- Notes and Management's Statement................................ F-22 Pro Forma Combined Statement of Operations for the year ended May 31, 1996................................ F-23 MOREL INDUSTRIES, INC. FINANCIAL STATEMENTS Report of Independent Certified Public Accountants........................................................ F-24 Balance Sheets as of June 30, 1995 and 1994............................................................... F-25 Statements of Income for the years ended June 30, 1995 and 1994........................................... F-26 Statements of Stockholders' Equity for the years ended June 30, 1995 and 1994............................. F-27 Statements of Cash Flow for the years ended June 30, 1995 and 1994........................................ F-28 Summary of Accounting Policies and Notes to Financial Statements.......................................... F-29 MOREL INDUSTRIES, INC. INTERIM FINANCIAL STATEMENTS (UNAUDITED) Balance Sheet as of September 30, 1995.................................................................... F-34 Statements of Operations for the three months ended September 30, 1995 and 1994........................... F-35 Statements of Cash Flow for the three months ended September 30, 1995 and 1994............................ F-36 Notes to Interim Financial Statements..................................................................... F-37
F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors PCT Holdings, Inc. and Subsidiaries The Company's ability to meet certain of its debt obligations is in doubt, as is its ability to continue as a going concern. Payment of certain of these obligations is expected from proceeds of the Company's Registration Statement No. 333-5011 for the proposed sale of 2,250,000 Units, consisting of one share of common stock and one warrant to purchase a share of common stock. Upon execution of the underwriting agreement referred to in Note 15 to the financial statements, our opinion will read as follows: "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." MOSS ADAMS LLP Everett, Washington June 15, 1996 F-2 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. F-3 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. F-4 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. F-5 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. F-6 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. F-7 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 AND 1995 NOTE 1 -- FORMATION AND ACQUISITIONS During the year ended May 31, 1995, the original PCT Holdings, Inc., a Washington corporation (Original PCTH), merged with PCT Merger Corporation, a Washington corporation and wholly owned subsidiary of an inactive public company, Verazzana Ventures, Ltd. (Verazzana). Subsequent to the merger Verazzana changed its name to PCT Holdings, Inc., a Nevada corporation (the Company) and PCT Merger Corporation changed its name to PCT Holdings, Inc., a Washington corporation (PCTH Washington). As consideration for the merger, 2,963,675 shares of the Company's authorized, but previously unissued, common stock were issued to the shareholders of Original PCTH. A finders and consulting fee related to the merger of $50,000 cash and 212,500 shares of the Company's common stock was paid to a consultant. Included in merger, acquisition and capital costs during the year ended May 31, 1995 is $155,000 related to the cash payment and the fair market value of the stock issued. The merger was accounted for as if a pooling of interests. These consolidated financial statements report results of operations as if the business combination occurred as of the beginning of the year ended May 31, 1995. Effective for accounting purposes as of February 28, 1995, the Company acquired and took control of Ceramic Devices, Inc., a California corporation. The acquisition was accomplished through the merger of the California corporation into Ceramic Devices, Inc., a newly formed Washington corporation and wholly owned subsidiary of the Company (Ceramic Devices), that closed in April 1995. As consideration for the merger, the Company paid the California corporation's shareholders $1.24 million, consisting of 133,333 shares of the Company's common stock valued at $4.80 per share, or $640,000, and notes payable totaling $600,000 (Note 8). The merger resulted in costs in excess of net book value of Ceramic Devices of $471,000. In November 1995, Seismic Safety Products, Inc. (Seismic), a newly formed Washington corporation wholly owned by PCTH Washington, acquired all of the assets of Seismic Safety Products, Inc., a Florida corporation. The asset purchase price consisted of $70,000 in cash and 128,750 shares of the Company's common stock valued at $3.75 per share, or $483,000, for a total of $553,000. In connection with the transaction, Seismic acquired from related parties of the Florida corporation certain patents for a total consideration of $520,000 (Note 9). Costs in excess of net book value of $535,000 were recorded as a result of this acquisition. During the year ended May 31, 1996, the Company acquired Morel Industries, Inc. (Morel) through the merger of Morel Acquisition Corporation, a newly formed Washington corporation wholly owned by the Company, into Morel. The transaction was effective for accounting purposes as of November 30, 1995 and the Company issued 650,000 shares of common stock, after certain post-closing adjustments, valued at $4.00 per share for a total purchase price of approximately $2.6 million. Costs in excess of net book value of $939,000 were recorded as a result of this merger. The Seismic acquisition and the Ceramic Devices and Morel mergers described above were accounted for by the purchase method. Accordingly, assets and liabilities have been reflected at fair value. The operating results of these acquired companies are included in the consolidated statements of operations from their respective acquisition dates. Any costs in excess of net book value as a result of these transactions are being amortized over 15 years. In May 1996, PCTH Washington transferred its sole assets, the stock of Pacific Coast Technologies, Inc. (Pacific Coast), Cashmere Manufacturing Co., Inc. (Cashmere) and Seismic to the Company, and was dissolved. There was no effect on these consolidated financial statements and there were no federal income tax consequences as a result of the dissolution. F-8 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 1 -- FORMATION AND ACQUISITIONS (CONTINUED) The following summary, prepared on a pro forma basis, combines the consolidated condensed results of operations as if Ceramic Devices, Morel and Seismic had been acquired as of the beginning of the year ended May 31, 1995. There are no material adjustments which impact the summary.
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. NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated. (b) INVENTORY Inventory is generally stated at the lower of cost (first-in, first-out method) or market. (c) DEPRECIATION Property and equipment is depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. For federal income tax purposes, accelerated methods are used over statutory lives. (d) PATENTS Purchased patents are recorded at cost. Developed patents are recorded at the value of related compensation awarded. Patents are amortized on the straight-line basis over the estimated useful lives of the patents of 11 to 17 years. F-9 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) EXCESS PURCHASE PRICE Costs in excess of the net book value of acquired subsidiaries is amortized over 15 years. The Company assesses the recoverability of this intangible asset on a regular basis by determining whether the amortization of the balance over its remaining life can be recovered through projected undiscounted future cash flows. (f) STOCK ISSUANCE COSTS During 1996, the Company incurred $318,000 of costs related to the issuance of common stock in a proposed public offering. These costs were deferred as of May 31, 1996 and are included in other assets. These costs will be charged against the proceeds of the stock offering. (g) FEDERAL INCOME TAX Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The Company and its subsidiaries file a consolidated federal income tax return. (h) PER SHARE INFORMATION Loss per share of common stock is based upon the weighted average number of shares of common stock outstanding during the period, retroactively adjusted for stock splits. The weighted average number of shares outstanding was 6,209,000 and 3,469,000 during the years ended May 31, 1996 and 1995, respectively. Stock options which have been granted are not included in the weighted average number of shares outstanding as their effect would be anti-dilutive. (i) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The carrying amounts of cash, accounts receivable, other noncurrent assets, accounts payable, accrued expenses and notes payable are a reasonable estimate of their fair value. The carrying value of long-term debt differs from the estimated fair value as follows:
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. F-10 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 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:
ESTIMATED MAY 31, USEFUL LIFE ----------------------------- IN YEARS 1996 1995 ----------- -------------- ------------- 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 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 $282,000, and the remainder of that note was canceled in exchange for the land and buildings based on a negotiated fair market value of $673,000. The stockholder agreed to assume the remaining note payable collateralized by the land and building. The terms of the note receivable mirror the terms of the note payable, with interest at a designee's prime rate (8.25% at May 31, 1996) plus 1%, due in installments of $5,900 to the maturity date of the note payable in March 1999 (Note 9). F-11 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 7 -- BANK LINE OF CREDIT The Company is negotiating to renew a bank line of credit arrangement which expired May 26, 1996. The interest on the outstanding balance owing at May 31, 1996 is being paid monthly at the bank's prime rate (8.25% at May 31, 1996) plus 2%. The bank has issued a standby letter of credit which provides collateral for borrowings from Chelan County, State of Washington (Note 9). The Company has established a $1.0 million certificate of deposit at the bank as security for the letter of credit which expires September 18, 1996. The security for obligations under the expired loan agreement is all of the assets of the Company, Pacific Coast, Cashmere and Ceramic Devices. NOTE 8 -- NOTES PAYABLE
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. F-12 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MAY 31, 1996 AND 1995 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 million letter of credit and personal guarantees of certain stockholders (Note 7)................ $ 2,000,000 $ 2,000,000 Bank Industrial revenue bond payable in monthly installments of $19,200, including interest at 8.12% through November 2009. Collateralized by land, building and equipment of Morel, personal guarantees of certain stockholders and the guarantee of the Company.................................................................... 1,367,000 City of Entiat Note payable in monthly installments of $7,300, including interest at 8% through May 2001 at which time the balance of $200,100 will be due. Collateralized by accounts receivable, inventory, equipment and real property of Morel and the guarantee of the Company. Subordinated to the bank industrial revenue bond debt.............................................................................. 600,000 Individual Note payable in monthly installments of $8,300, including interest at 10.25% until February 1998 at which time the balance of $179,000 will be due. Collateralized by patents and accounts receivable of Pacific Coast.................................. 303,000 368,000 Bank Note payable in monthly installments of $5,900, including interest at a designee's prime rate plus 1% through March 1999, at which time the balance of $82,000 is due. Collateralized by real property of Cashmere and personal guarantee of a certain stockholder (Note 6)...................................................... 235,000 279,000 Bank Note payable in monthly installments of $7,800, plus interest at the bank's prime rate plus 1.75% through September 1998. Cross collateralized and cross-defaulted with bank loan agreement (Note 7)................................................. 219,000 Corporation Note payable in quarterly installments of $12,200, including interest at 8% through March 2001. Collateralized by various patents............................. 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
F-13 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 9 -- LONG-TERM DEBT (CONTINUED)
MAY 31, ---------------------------- 1996 1995 ------------- ------------- Quest for Economic Development Note payable in monthly installments of $1,700 including interest at 10.5% through April 2000 at which time the balance of $58,000 will be due. Collateralized by the personal residences and guarantees of certain stockholders........................ 92,000 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 ------------- ------------- ------------- -------------
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. F-14 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 10 -- LEASING ARRANGEMENTS AND COMMITMENTS (CONTINUED) Minimum lease payments under the capital leases and the present value of the minimum lease payments are as follows:
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. In February 1995, the Company agreed to cancel the existing lease on the Cashmere facility with a shareholder upon completion of the new facilities to be leased from the Port of Chelan County. A lease cancellation fee of $108,000 was paid and charged to operations in the year ended May 31, 1995. In April 1996, the Company moved the manufacturing facilities of Ceramic Devices to Wenatchee. The Company remains obligated under two leases which housed Ceramic Devices' manufacturing facilities in San Diego through April 1997. Monthly payments on the leases are $6,775. While the Company is attempting to sublease the space, there is no assurance that the Company will be successful. The Company has recorded a loss of $73,000 in the year ended May 31, 1996 for the remaining lease payments under the leases. The Company has several vehicle and equipment leases with minimum monthly lease payments in the aggregate of approximately $2,700. The lease terms range from three to six years. Total rental expense was $516,000 and $421,000 for the years ended May 31, 1996 and 1995, respectively. F-15 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 10 -- LEASING ARRANGEMENTS AND COMMITMENTS (CONTINUED) Minimum lease payments under these leases are as follows:
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 $7,848,000, 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 $5,657,000, Ceramic Devices $306,000, Morel $934,000, Seismic $88,000, and Cashmere $737,000. 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................................................... $ 85,000 $ 185,000 Net operating loss carryforward............................. 2,668,000 2,130,000 Other....................................................... 131,000 55,000 Valuation allowances........................................ (1,986,000) (2,015,000) -------------- -------------- 898,000 355,000 Deferred tax liabilities Depreciation................................................ 1,490,000 355,000 -------------- -------------- Net deferred tax liability.................................... $ 592,000 $ -- -------------- -------------- -------------- --------------
F-16 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 11 -- FEDERAL INCOME TAX (CONTINUED) SFAS No. 109 requires the Company to record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." Management believes that some or all 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 used to fully offset depreciation differences. NOTE 12 -- COMPENSATION PLANS AND COMMITMENTS LONG-TERM INVESTMENT AND INCENTIVE PLAN. The Company has a long-term stock investment and incentive plan (the Option Plan) under which directors, officers, key employees and other key individuals may be awarded stock options, stock appreciation rights, stock bonuses and cash bonuses. Under the plan, the option exercise price is generally no less than fair market value at the date of grant. Options expire no later than ten years from the grant date. The Company has evaluated the effect of the recent accounting pronouncement, SFAS No. 123 "Accounting for Stock-Based Compensation." The Company intends to continue to apply APB Opinion No. 25 in accounting for stock-based compensation for purposes of determining net income and to adopt the pro forma disclosure requirements of SFAS No. 123 in the year ending May 31, 1997. During the year ended May 31, 1996, the Company granted options to purchase 145,283 shares of the Company's common stock under the Option Plan, with a weighted average exercise price of $5.08 per share. The exercise price of the options granted equaled the fair market value of the Company's common stock on the dates of grant. No options granted were exercised or canceled during the year ended May 31, 1996. Of the options outstanding, 23,333 are currently exercisable. The remaining 121,950 outstanding options vest, if at all, in increments of 24,390 shares on each of June 1, 1996, 1997, 1998, 1999 and 2000. All outstanding options will expire in November 2005. There were no options under the Option Plan granted prior to the year ended May 31, 1996, and therefore there were no outstanding options under the Option Plan at May 31, 1995. In May 1996, the Company agreed to grant an officer an option to purchase 845,000 shares of the Company's common stock under the Option Plan, upon the effective date of the public offering. The exercise price is contingent upon the price of the public offering, but in no event will it be less than $3.75 per share. The option will expire ten years after the date of grant. INDEPENDENT DIRECTOR STOCK PLAN -- During the year ended May 31, 1996, the Company adopted an Independent Director Stock Plan (the Director Plan) under which non-employee directors (Independent Directors) of the Company are awarded stock. The Director Plan provides for an initial award of 500 shares of the Company's common stock to each of the Independent Directors serving upon adoption of the Director Plan, and an initial award of 500 shares of the Company's common stock to each new Independent Director. In addition, the Director Plan provides for an annual award to each Independent Director equivalent to the result of $5,000 divided by the fair market value of the Company's common stock on the award date. The initial award is fully vested upon the date of the award. The annual award vests in full on the first anniversary following the date of the annual award if the Independent Director has attended at least 75% of the regularly scheduled meetings of the Board during the year. If an Independent Director does not attend 75% of the regularly scheduled meetings of the board between the date of award of an annual award and the first anniversary thereof, the F-17 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 12 -- COMPENSATION PLANS AND COMMITMENTS (CONTINUED) shares shall be forfeited. In November 1995, 9,000 shares of the Company's common stock were issued to the Independent Directors. Included in the year ended May 31, 1996 is $24,000 of compensation expense resulting from the shares issued. EMPLOYMENT AGREEMENTS. The Company has employment agreements with certain officers and key employees. The agreements are generally for three year terms and are cancelable for cause. Compensation under the agreements includes base compensation plus incentives including up to 136,666 stock options, under the Option Plan, with exercise prices ranging from $2.00 to $8.00 per share. The incentives are awarded at the discretion of the Board of Directors on an annual basis. The stock options are not considered granted until awarded by the Board of Directors. OTHER AGREEMENTS. The Company, from time to time, enters into other agreements with employees. Effective as of February 15, 1995, the Company converted warrants issued by Original PCTH into warrants for the purchase of an aggregate of 125,000 shares of the Company's common stock to certain management employees, exercisable at $2.00 per share, the fair value on the date of grant. The warrants expire in December 2004 and February 2005, respectively. The warrants were outstanding at May 31, 1996 and 1995. On January 31, 1995, the Company granted warrants for the purchase of up to 35,000 shares of common stock at $2.00 per share, the fair value on the date of the agreement, to a certain employee. The exercise of the warrants was contingent upon the issuance of a patent and Pacific Coast achieving certain sales goals for calendar years 1996 and 1997. On July 18, 1995, the measurement date, the patent was issued and 15,000 of the warrants vested and became exercisable. The fair market value of the Company's common stock was $5.80 per share at the date the warrants vested. The Company has capitalized patent costs of $57,000 related to the excess of the fair market value of the common stock over the exercise price of the warrants at the measurement date. RETIREMENT PLAN. The Company maintains a 401(k) plan covering all eligible employees who meet service requirements as provided in the plan. Company contributions to the profit sharing plan are determined annually by the Board of Directors. No contributions were made by the Company to the plan during the years ended May 31, 1996 and 1995. NOTE 13 -- COMMON STOCK On July 18, 1994, the Original PCTH Board of Directors approved a one-for-three reverse split of Original PCTH's common stock. This split resulted in a decrease of 10,309,834 shares of common stock outstanding. On January 26, 1995, the Original PCTH Board of Directors approved a one-for-two reverse split of Original PCTH's common stock. This split resulted in a decrease of 2,963,675 shares of common stock outstanding. All share and per share amounts have been restated to retroactively reflect these stock splits. During the year ended May 31, 1995, just prior to the Verazzana merger (Note 1) the Original PCTH Board of Directors gave all option and warrant holders the choice of exercising options and warrants at one-half the original exercise price, or exercising the options at no price and receiving one share of common stock for every four shares issuable upon exercise of options or warrants held. Options and warrants to purchase a total of 94,444 shares and 292,965 shares, respectively, were exercised with resulting proceeds of $30,000 and $54,995, respectively. The holders of the options and warrants received 48,610 and 111,433 shares of Original PCTH common stock, respectively. The fair F-18 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 13 -- COMMON STOCK (CONTINUED) market value of the common stock at the date of exercise was $1.98 per share. Included in merger, acquisition and capital costs during the year ended May 31, 1995 is $231,888 related to the repricing of the options and warrants. No options or warrants were exercised during the year ended May 31, 1996. The Company entered into funding agreements with a Swiss company to find suitable and qualified investors to purchase shares of the Company's common stock in an offering exempt from registration under Regulation S of the Securities Act of 1933, as amended (Regulation S). The Swiss company facilitated the sale of 1,429,470 shares of the Company's common stock with net proceeds of $4,908,000, or an average of $3.43 per share, during the year ended May 31, 1996 and 699,000 shares of the Company's common stock with net proceeds of $3,596,000, or an average of $5.14 per share, during the year ended May 31, 1995. The Swiss company received a commission of $375,000 and a designee of the Swiss company received 65,000 shares of the Company's common stock during the year ended May 31, 1996. The Swiss company received $478,000 and designees of the Swiss company received 1,000,000 shares of the Company's common stock during the year ended May 31, 1995. At May 31, 1996, the Company had stock subscriptions receivable of $1,030,000 after deduction of commissions related to the sales of 390,000 shares of common stock at $2.54 and $3.00 per share sold under a Regulation S offering in May 1996. The Company received the stock subscription funds in June 1996. The following table summarizes option and warrant activity:
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. F-19 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 15 -- SUBSEQUENT EVENTS On May 31, 1996, the Company filed a Registration Statement under the Securities Act of 1933, as amended. At the effective date of the Registration Statement, the Company will enter into a firm commitment underwriting agreement to sell units composed of one share of the Company's common stock and a warrant to purchase one share of the Company's common stock. The Company intends to use a portion of the proceeds to repay approximately $3,557,000 of notes payable and long-term debt. Repayment of these amounts is dependent upon the completion of the underwriting of these securities. 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. NOTE 16 -- OTHER RELATED PARTY TRANSACTIONS On October 9, 1995, a director of the Company loaned Morel $100,000 pursuant to the terms of a promissory note for working capital until consummation of the Morel merger. In December 1995, Morel paid the principal balance of the note, plus $5,000 as consideration for making this loan. In February 1995, a director of the Company from February 1995 to April 1996 and of Original PCTH and its successor from May 1994 to April 1996, exchanged his rights in a consulting contract with Original PCTH for shares of common stock of Original PCTH, which were subsequently converted to 17,361 shares of the Company's common stock. NOTE 17 -- BUSINESS SEGMENT INFORMATION The Company operates through five subsidiaries and operates in two general business segments, "Electronic and Safety Products" and "Machined and Cast Metal Products." In the first segment, Pacific Coast and Ceramic Devices develop, manufacture, market and sell electronic packaging, connectors, and filter devices, and Seismic designs and sells natural gas shut-off valves. In the second segment, Cashmere and Morel manufacture machined and cast metal products. There is vertical integration at various levels and segment transfers are accounted for on an arm's length pricing basis. In computing income (loss) from continuing operations for each segment, all costs have been allocated to segments except merger, acquisition and capital costs. F-20 PCT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 31, 1996 AND 1995 NOTE 17 -- BUSINESS SEGMENT INFORMATION (CONTINUED) Identifiable assets are those assets used in the Company's operations in each business segment, and the identifiable assets do not include advances or loans between the business segments. There are no identifiable corporate assets, and no allocations were necessary for assets used jointly by the business segments.
YEAR ENDED MAY 31, ------------------------------ 1996 1995 -------------- -------------- Net sales Electronic and safety products....................................... $ 8,533,000 $ 4,280,000 Machined and cast metal products..................................... 12,192,000 6,755,000 -------------- -------------- $ 20,725,000 $ 11,035,000 -------------- -------------- -------------- -------------- Loss from continuing operations Electronic and safety products....................................... $ (376,000) $ (847,000) Machined and cast metal products..................................... (586,000) (267,000) -------------- -------------- Loss................................................................... (962,000) (1,114,000) Corporate expenses, adjustments and other............................ (104,000) (538,000) -------------- -------------- $ (1,066,000) $ (1,652,000) -------------- -------------- -------------- -------------- Identifiable assets Electronic and safety products....................................... $ 1,383,000 $ 1,287,000 Machined and cast metal products..................................... 9,273,000 2,397,000 -------------- -------------- $ 10,656,000 $ 3,684,000 -------------- -------------- -------------- -------------- Capital expenditures Electronic and safety products....................................... $ 469,000 $ 876,000 Machined and cast metal products..................................... 1,424,000 209,000 -------------- -------------- $ 1,893,000 $ 1,085,000 -------------- -------------- -------------- -------------- Depreciation and amortization Electronic and safety products....................................... $ 270,000 $ 209,000 Machined and cast metal products..................................... 426,000 162,000 -------------- -------------- $ 696,000 $ 371,000 -------------- -------------- -------------- --------------
F-21 PCT HOLDINGS, INC. AND SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENT YEAR ENDED MAY 31, 1996 (UNAUDITED) NOTES AND MANAGEMENT'S STATEMENT The Company entered into an agreement and plan of merger with Morel, which owns and operates an aluminum foundry located in Entiat, Washington, approximately 15 miles north of the Company's operations in Wenatchee, Washington. Under terms of the agreement, Morel and a wholly owned subsidiary of the Company merged with Morel as the surviving entity, and the Morel shareholders received 650,000 shares of common stock of the Company, after certain post-closing adjustments. The merger was closed on December 1, 1995, and was effective November 30, 1995 for accounting purposes under the purchase method of accounting. The pro forma combined unaudited statement of operations for the year ended May 31, 1996 was prepared as if the purchase transaction had occurred at the beginning of the year. In the opinion of the Company's management, all adjustments necessary to present fairly the pro forma combined unaudited statement of operations have been made based upon the terms and conditions of the Morel agreement and plan of merger. The pro forma combined unaudited statement of operations is not necessarily indicative of what actual results would have been had the transactions occurred at the beginning of the year nor does it purport to indicate the results of future operations of the Company. This pro forma combined unaudited statement of operations should be read in conjunction with the audited financial statements and notes thereto of the Company at and for the years ended May 31, 1996 and 1995 included elsewhere in this Prospectus and the audited financial statements and notes thereto of Morel at and for the years ended June 30, 1995 and 1994 included elsewhere in this Prospectus. F-22 PCT HOLDINGS, INC. AND SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 1996 (UNAUDITED)
PCT HOLDINGS, MOREL INDUSTRIES, PRO FORMA PRO FORMA INC. INC. ADJUSTMENTS COMBINED -------------- -------------------- ----------- -------------- NET SALES.................................... $ 20,725,000 $ 4,492,000 $ 25,217,000 COST OF SALES................................ 16,439,000 3,853,000 20,292,000 -------------- ----------- -------------- GROSS PROFIT................................. 4,286,000 639,000 4,925,000 OPERATING EXPENSES........................... 4,765,000 1,118,000 $ 3,000 5,886,000 -------------- ----------- ----------- -------------- LOSS FROM OPERATIONS......................... (479,000) (479,000) (3,000) (961,000) -------------- ----------- ----------- -------------- OTHER INCOME AND EXPENSE Interest income............................ 37,000 2,000 39,000 Interest expense........................... (535,000) (171,000) (706,000) Other...................................... (89,000) (54,000) (143,000) -------------- ----------- -------------- (587,000) (223,000) (810,000) -------------- ----------- ----------- -------------- LOSS BEFORE FEDERAL INCOME TAX............... (1,066,000) (702,000) (3,000) (1,771,000) FEDERAL INCOME TAX........................... 67,000 67,000 -------------- ----------- ----------- -------------- NET LOSS FOR THE YEAR........................ $ (999,000) $ (702,000) $ (3,000) $ (1,704,000) -------------- ----------- ----------- -------------- -------------- ----------- ----------- -------------- LOSS PER SHARE OF COMMON STOCK............... $ (0.16) $ (0.11) $ (0.27) -------------- ----------- --------------
The accompanying notes are an integral part of the pro forma combined financial statements. F-23 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Morel Industries, Inc. Entiat, Washington We have audited the accompanying balance sheets of Morel Industries, Inc. as of June 30, 1995 and 1994, and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Morel Industries, Inc. at June 30, 1995 and 1994, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP November 8, 1995, except as to Notes 4 and 9 which date is December 1, 1995 Seattle, Washington F-24 MOREL INDUSTRIES, INC. BALANCE SHEETS ASSETS
JUNE 30, ---------------------------- 1995 1994 ------------- ------------- CURRENT ASSETS Cash.............................................................................. $ 152,000 $ 636,000 Accounts receivable (Note 3)...................................................... 1,395,000 1,416,000 Project receivable (Note 8)....................................................... 126,000 897,000 Inventories (Notes 1 and 3)....................................................... 936,000 821,000 Prepaid expenses and other........................................................ 113,000 29,000 ------------- ------------- Total current assets.......................................................... 2,722,000 3,799,000 PROPERTY AND EQUIPMENT, less accumulated depreciation (Notes 2 and 3)............... 6,667,000 2,626,000 RECEIVABLE FROM STOCKHOLDERS........................................................ 111,000 DEFERRED BOND COSTS................................................................. 25,000 ------------- ------------- $ 9,414,000 $ 6,536,000 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line-of-credit (Note 3)........................................................... $ 969,000 $ 890,000 Accounts payable.................................................................. 1,106,000 937,000 Accrued expenses.................................................................. 541,000 454,000 Current maturities of long-term debt (Note 4)..................................... 1,001,000 103,000 Pre-billed moving expenditures (Note 8)........................................... 768,000 ------------- ------------- Total current liabilities..................................................... 3,617,000 3,152,000 DEFERRED SALES TAX.................................................................. 145,000 LONG-TERM DEBT, net of current maturities (Note 4).................................. 2,148,000 DEFERRED INCOME TAXES (Note 6)...................................................... 728,000 682,000 ------------- ------------- Total liabilities............................................................. 6,638,000 3,834,000 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (Note 9) Common stock, $100 par value; 2,500 shares authorized; 416 shares issued and outstanding...................................................................... 42,000 42,000 Common stock, non-voting, $2,000 par value; 2,500 shares authorized; 87.5 shares issued and outstanding........................................................... 175,000 175,000 Additional paid-in capital........................................................ 825,000 825,000 Retained earnings................................................................. 1,734,000 1,660,000 ------------- ------------- Total stockholders' equity.................................................... 2,776,000 2,702,000 ------------- ------------- $ 9,414,000 $ 6,536,000 ------------- ------------- ------------- -------------
See accompanying summary of acounting policies and notes to financial statements. F-25 MOREL INDUSTRIES, INC. STATEMENTS OF INCOME
YEARS ENDED JUNE 30, ----------------------------- 1995 1994 -------------- ------------- SALES.............................................................................. $ 10,708,000 $ 9,895,000 COST OF SALES...................................................................... 9,623,000 8,327,000 -------------- ------------- GROSS PROFIT....................................................................... 1,085,000 1,568,000 OPERATING EXPENSES................................................................. 1,189,000 1,240,000 -------------- ------------- INCOME (LOSS) FROM OPERATIONS...................................................... (104,000) 328,000 -------------- ------------- OTHER INCOME (EXPENSE) Interest income.................................................................. 31,000 18,000 Interest expense................................................................. (268,000) (131,000) Realized recovery (loss) on investment........................................... 29,000 (77,000) Other expense.................................................................... (14,000) (40,000) -------------- ------------- Total other income (expense)................................................... (222,000) (230,000) -------------- ------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................................ (326,000) 98,000 EXTRAORDINARY ITEM, gain on sale of foundry less applicable income taxes of $152,000 and $988,000 (Note 8).................................................... 295,000 1,918,000 -------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES.................................................. (31,000) 2,016,000 DEFERRED INCOME TAX (PROVISION) BENEFIT (Note 6)................................... 105,000 (39,000) -------------- ------------- NET INCOME......................................................................... $ 74,000 $ 1,977,000 -------------- ------------- -------------- -------------
See accompanying summary of accounting policies and note to financial statements. F-26 MOREL INDUSTRIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL NON-VOTING PAID-IN RETAINED EARNINGS COMMON STOCK COMMON STOCK CAPITAL (DEFICIT) TOTAL -------------- -------------- -------------- ----------------- ------------- BALANCE, July 1, 1993.......... $ 42,000 $ 175,000 $ 825,000 $ (317,000) $ 725,000 Net income..................... 1,977,000 1,977,000 -------------- -------------- -------------- ----------------- ------------- BALANCE, June 30, 1994......... 42,000 175,000 825,000 1,660,000 2,702,000 Net income..................... 74,000 74,000 -------------- -------------- -------------- ----------------- ------------- BALANCE, June 30, 1995......... $ 42,000 $ 175,000 $ 825,000 $ 1,734,000 $ 2,776,000 -------------- -------------- -------------- ----------------- ------------- -------------- -------------- -------------- ----------------- -------------
See accompanying summary of accounting policies and note to financial statements. F-27 MOREL INDUSTRIES, INC. STATEMENTS OF CASH FLOW
YEARS ENDED JUNE 30, ----------------------------- 1995 1994 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 74,000 $ 1,977,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on sale of foundry........................................................ (295,000) (1,918,000) Depreciation and amortization.................................................. 356,000 112,000 Deferred income taxes.......................................................... (105,000) 39,000 Settlement of stockholder receivable as a bonus................................ 111,000 Changes in operating assets and liabilities: Decrease (increase) in assets: Accounts receivable 21,000 (195,000) Inventories................................................................ (115,000) (119,000) Prepaid expenses and other................................................. (84,000) (17,000) Increase (decrease) in liabilities: Accounts payable........................................................... 169,000 (262,000) Accrued expenses........................................................... 86,000 248,000 ------------- -------------- Net cash provided by (used in) operating activities.......................... 218,000 (135,000) ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale and relocation of foundry..................................... 2,509,000 3,336,000 Acquisition of property and equipment............................................ (4,492,000) (1,937,000) Payment of relocation costs...................................................... (1,964,000) (513,000) Increase in deferred sales tax................................................... 145,000 Increase in receivable from stockholder.......................................... (111,000) ------------- -------------- Net cash provided by (used in) investing activities.......................... (3,802,000) 775,000 ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in line-of-credit............................................ 79,000 90,000 Proceeds from long-term borrowings............................................... 3,439,000 Principal payments on long-term debt............................................. (393,000) (436,000) Increase in deferred bond costs.................................................. (25,000) ------------- -------------- Net cash provided by (used in) financing activities.......................... 3,100,000 (346,000) ------------- -------------- NET INCREASE (DECREASE) IN CASH.................................................... (484,000) 294,000 CASH, beginning of period.......................................................... 636,000 342,000 ------------- -------------- CASH, end of period................................................................ $ 152,000 $ 636,000 ------------- -------------- ------------- -------------- SUPPLEMENTAL CASH FLOWS DISCLOSURE: Cash paid for interest........................................................... $ 261,000 $ 131,000 ------------- -------------- ------------- --------------
See accompanying summary of accounting policies and note to financial statements. F-28 MOREL INDUSTRIES, INC. SUMMARY OF ACCOUNTING POLICIES NATURE OF BUSINESS AND SIGNIFICANT CUSTOMER -- Morel Industries, Inc. (Morel) is a manufacturer of aluminum castings located in Entiat, Washington. During 1994, Morel changed its name from Morel Foundry Corporation to emphasize Morel's expanding capabilities in machining and powder coat painting. In 1995 and 1994 sales to a major customer in the Class 8 truck industry were 75% and 78% of total sales. INVENTORIES -- Inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-process is valued at the lower of estimated cost or market. Estimated cost is derived through an analysis of historical gross profit margins. PROPERTY AND EQUIPMENT -- Property and equipment is recorded at cost and is depreciated using the straight-line method over estimated useful lives as follows: Office equipment....................................... 3-7 years Foundry equipment...................................... 7-10 years Building............................................... 15-40 years
Expenditures for repairs and maintenance which do not extend the useful life of the related asset are expensed as incurred. INCOME TAXES -- Deferred taxes are provided for temporary differences in the basis of assets and liabilities for book and income tax reporting purposes. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. F-29 MOREL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 AND 1994 NOTE 1 -- INVENTORIES Inventories consisted of the following:
JUNE 30, ------------------------ 1995 1994 ----------- ----------- Work-in-process..................................................... $ 695,000 $ 593,000 Raw materials....................................................... 113,000 101,000 Foundry supplies.................................................... 128,000 127,000 ----------- ----------- $ 936,000 $ 821,000 ----------- ----------- ----------- -----------
NOTE 2 -- PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
JUNE 30, ----------------------------- 1995 1994 ------------- -------------- Machinery, equipment and furniture............................. $ 3,769,000 $ 2,874,000 Land and building.............................................. 3,684,000 824,000 Accumulated depreciation....................................... (786,000) (1,072,000) ------------- -------------- Net property and equipment..................................... $ 6,667,000 $ 2,626,000 ------------- -------------- ------------- --------------
NOTE 3 -- LINE-OF-CREDIT Morel has a line-of-credit with a bank with interest at the bank's prime rate (9% at June 30, 1995) plus 2%. The agreement allows Morel to borrow up to the lesser of $1.0 million or 80% of eligible accounts receivable as defined by the bank. At June 30, 1995, $968,000 was outstanding and $31,000 was available for borrowing. The line-of-credit is secured by accounts receivable, inventories and equipment and is personally guaranteed by the stockholders, see Notes 4 and 9. F-30 MOREL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1995 AND 1994 NOTE 4 -- LONG-TERM DEBT
JUNE 30, -------------------------- 1995 1994 ------------- ----------- Industrial revenue bond payable to a bank with monthly payments of $19,000, including interest at 8.12% through November 2009, secured by land, building and equipment, and personally guaranteed by the stockholders............................................ $ 1,953,000 Note payable to a supplier with quarterly interest payments of 12% on the outstanding balance; principal due February 1996 and 1997, secured by property and equipment..... 277,000 Note payable to an organization with monthly payments of $2,000, including interest at 10.5% through September 2000, secured by personal residences and guarantee of the stockholders......................................................................... 100,000 Note payable to an individual, interest only at 14% through September 30, 1995, when interest increases to 15%. Due in full in March 1996. Secured by substantially all assets of Morel and subordinated to the industrial revenue bond...................... 500,000 Notes payable to suppliers with monthly payments of $1,000 to $45,000, including interest at 10%. Unsecured with maturities through February 1996..................... 318,000 Note payable to a supplier in quarterly installments of $25,000, plus interest at 12% through May 1995, unsecured.......................................................... 100,000 Other................................................................................. 1,000 3,000 ------------- ----------- 3,149,000 103,000 Less current maturities............................................................... 1,001,000 103,000 ------------- ----------- Total long-term debt.................................................................. $ 2,148,000 $ -- ------------- ----------- ------------- -----------
Scheduled maturities of long-term debt as of June 30, 1995, are as follows:
YEAR ENDED JUNE 30, AMOUNT - - ------------------------------------------------------------------------------- ------------- 1996........................................................................... $ 1,002,000 1997........................................................................... 270,000 1998........................................................................... 100,000 1999........................................................................... 109,000 2000........................................................................... 119,000 Thereafter..................................................................... 1,549,000 ------------- $ 3,149,000 ------------- -------------
Morel's line-of-credit and industrial revenue bond agreements require, among other matters, that Morel maintain minimum working capital, tangible net worth and debt to tangible net worth ratios. Morel was not in compliance with the covenants at June 30, 1995. In conjunction with the merger of Morel on December 1, 1995, the bank provided a waiver of the covenants through November 30, 1995, and restructured the covenants through the expiration of the agreements, see Note 9. Management believes Morel will be in compliance with the covenants through June 30, 1996. F-31 MOREL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1995 AND 1994 NOTE 5 -- COMMITMENTS AND CONTINGENCIES Morel leases equipment and vehicles under noncancelable operating leases. Future minimum lease payments are as follows:
YEAR ENDED JUNE 30, AMOUNT - - ----------------------------------------------------------------------------------- --------- 1996............................................................................... $ 32,000 1997............................................................................... 22,000 1998............................................................................... 5,000 1999............................................................................... 2,000 2000............................................................................... 1,000 --------- $ 62,000 --------- ---------
Rent expense for the years ended June 30, 1995 and 1994 was $57,000 and $67,000. During the normal course of business, matters arise which may ultimately subject Morel to claims and litigation. Management believes that the resolution of these matters will not have a material adverse effect on Morel's financial condition. NOTE 6 -- INCOME TAXES Deferred tax liabilities are comprised of the following:
JUNE 30, ------------------------------ 1995 1994 -------------- -------------- Property and equipment.................................................. $ (1,226,000) $ (1,065,000) Officers' bonus......................................................... 93,000 48,000 Other................................................................... 58,000 39,000 Net operating loss carryforward......................................... 347,000 296,000 -------------- -------------- $ (728,000) $ (682,000) -------------- -------------- -------------- --------------
Morel has net operating loss carryforwards of approximately $1.0 million with expiration dates through fiscal year 2010. The difference between Morel's effective income tax rate and the statutory rate of 34% consists of the following:
JUNE 30, ----------------------- 1995 1994 ----------- ---------- Income tax (provision) benefit at the statutory rate........................... $ 111,000 $ (33,000) Amortization of goodwill....................................................... (3,000) Meals and entertainment........................................................ (3,000) (1,000) Officer's life insurance....................................................... (2,000) (2,000) ----------- ---------- $ 106,000 $ (39,000) ----------- ---------- ----------- ----------
F-32 MOREL INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 AND 1994 NOTE 7 -- EMPLOYEE BENEFIT PLANS Morel participates in a multi-employer pension plan pursuant to an agreement between Morel and its employee bargaining unit. Although the plan is a defined benefit plan, the specific benefit levels are not negotiated with or known by Morel. Contributions expense related to the plan was $36,000 and $29,000 for the years ended June 30, 1995 and 1994. Subsequent to year end, Morel's collective bargaining agreement expired and was not renewed. Accordingly, Morel no longer participates in the multi-employer plan. Morel has a 401(k) employee benefit plan for those employees who meet the eligibility requirements set forth in the plan. Eligible employees may contribute up to 15% of their compensation. Morel's annual contribution to the plan is determined by the board of directors. Morel made no contributions during the years ended June 30, 1995 and 1994. NOTE 8 -- SALE OF FOUNDRY PROPERTY In 1994, Morel was required to sell its facility in Seattle, Washington, to the Port of Seattle (the Port). Under terms of the sale Morel received $2,533,000 for the facility and $3,626,000 for relocation costs. In March 1994, Morel purchased a facility in Entiat, Washington, and began operations in Entiat during August 1994. For financial statement purposes, Morel recognized an extraordinary gain of $295,000 and $1,918,000 for the years ended June 30, 1995 and 1994. For tax reporting purposes, Morel retained its original basis in the assets sold and, accordingly, did not recognize a taxable gain. At June 30, 1995 and 1994, Morel was due $126,000 and $898,000 from the Port for relocation costs. During the year ended June 30, 1994, Morel billed the Port $769,000 for relocation costs which had not yet been incurred, and which are recorded in the accompanying balance sheet as a liability. NOTE 9 -- SUBSEQUENT EVENTS On December 1, 1995, Morel entered into an agreement to merge with PCT Holdings, Inc. (PCTH), in a transaction expected to be accounted for as a pooling of interests. PCTH serves as a holding company for subsidiaries providing sealed connectors and components, ceramic capacitors and filters and machined aluminum parts for the medical, energy, aerospace, communications and electronics industries. Morel has reported a loss before extraordinary item of $326,000 in 1995 and as of June 30, 1995, has a working capital deficit of $895,000. Additionally, at June 30, 1995, Morel was in violation of certain debt covenants on the line-of-credit and industrial revenue bond agreements. Subsequent to the merger, PCTH provided Morel with $1 million of working capital. The proceeds of the loan were used primarily to repay $500,000 of the industrial revenue bond. The balance was used to fund $260,000 of accounts payable, prepayment penalties of $140,000 and provide working capital for Morel. In conjunction with the repayment of the industrial revenue bond, the bank provided Morel with a waiver of its debt covenants through November 30, 1995, and restructured the covenants through the expiration of the agreements. Morel's 1996 operating plan has been developed to improve operating efficiency and continue to broaden Morel's revenue base. Additionally, PCTH has committed to provide Morel with sufficient working capital until profitable operations are restored. Although Morel believes that its operating plan and working capital available from PCTH will be adequate to meet its 1996 working capital needs and maintain compliance with the restructured debt covenants, there can be no assurance that Morel may not experience liquidity problems because of adverse market conditions or other unfavorable events. F-33 MOREL INDUSTRIES, INC. BALANCE SHEET SEPTEMBER 30, 1995 (UNAUDITED) ASSETS CURRENT ASSETS Cash......................................................................... $ 89,000 Receivables.................................................................. 1,556,000 Inventory.................................................................... 839,000 Prepaid expense.............................................................. 46,000 ---------- Total current assets....................................................... 2,530,000 NET PROPERTY AND EQUIPMENT..................................................... 6,594,000 OTHER.......................................................................... 24,000 ---------- Total assets............................................................... $9,148,000 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank line-of-credit.......................................................... $ 964,000 Accounts payable............................................................. 1,373,000 Accrued liabilities.......................................................... 502,000 Current portion -- long-term debt............................................ 799,000 ---------- Total current liabilities.................................................. 3,638,000 Long-term debt, net............................................................ 2,129,000 Deferred sales tax............................................................. 145,000 Deferred rent/taxes............................................................ 637,000 ---------- Total liabilities.......................................................... 6,549,000 ---------- STOCKHOLDERS' EQUITY Common stock................................................................. 42,000 Common stock, non-voting..................................................... 175,000 Additional paid-in capital................................................... 825,000 Accumulated deficit.......................................................... 1,557,000 ---------- Total stockholders' equity............................................... 2,599,000 ---------- Total liabilities and stockholders' equity............................... $9,148,000 ---------- ----------
See accompanying notes to unaudited interim financial statements. F-34 MOREL INDUSTRIES, INC. STATEMENTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
1995 1994 ------------- ------------- NET SALES........................................................................... $ 2,785,000 $ 2,454,000 COST OF SALES....................................................................... 2,669,000 2,386,000 ------------- ------------- GROSS PROFIT........................................................................ 116,000 68,000 OPERATING EXPENSES.................................................................. 245,000 225,000 ------------- ------------- LOSS FROM OPERATIONS................................................................ (129,000) (157,000) OTHER INCOME AND EXPENSE Interest income................................................................... 1,000 28,000 Interest expense.................................................................. (103,000) (26,000) Gain on the sale of property...................................................... (29,000) Other............................................................................. (36,000) (7,000) ------------- ------------- (138,000) (34,000) ------------- ------------- NET LOSS BEFORE FEDERAL INCOME TAX.................................................. (267,000) (191,000) FEDERAL INCOME TAX -- DEFERRED...................................................... 90,000 62,000 ------------- ------------- NET LOSS FOR THE PERIOD............................................................. $ (177,000) $ (129,000) ------------- ------------- ------------- ------------- LOSS PER SHARE...................................................................... $ (0.27) $ (0.20) ------------- ------------- ------------- -------------
See accompanying notes to unaudited interim financial statements. F-35 MOREL INDUSTRIES, INC. STATEMENTS OF CASH FLOW THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED)
1995 1994 ------------ -------------- CASH FLOW FROM OPERATING ACTIVITIES Net cash provided by operating activities......................................... $ 54,000 $ 316,000 ------------ -------------- CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment................................................ (17,000) (1,634,000) Proceeds from sale and relocation of foundry...................................... 126,000 89,000 ------------ -------------- Net cash provided by (used in) investing activities............................. 109,000 (1,545,000) ------------ -------------- CASH FLOW FROM FINANCING ACTIVITIES Payments of debt and capital leases............................................... (222,000) (27,000) Proceeds from financing debt...................................................... 661,000 Other changes, net................................................................ (4,000) ------------ -------------- Net cash provided by (used in) financing activities............................. (226,000) 634,000 ------------ -------------- NET DECREASE IN CASH................................................................ (63,000) (595,000) CASH, beginning of period........................................................... 152,000 636,000 ------------ -------------- CASH, end of period................................................................. $ 89,000 $ 41,000 ------------ -------------- ------------ --------------
See accompanying notes to unaudited interim financial statements. F-36 MOREL INDUSTRIES, INC. NOTES TO INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) The accompanying unaudited interim financial statements have been prepared in accordance with Regulation S-B Item 310 instructions and, in the opinion of management, contain all adjustments (consisting of only normal accruals) necessary to present fairly Morel Industries, Inc.'s (Morel) financial position at September 30, 1995, and the results of operations and cash flows for the three month periods ended September 30, 1995 and 1994. These results have been determined on the basis of generally accepted accounting principles and practices applied consistently with those used in the preparation of Morel's annual audited financial statements. Certain information and footnote disclosures normally included in audited financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with Morel's audited financial statements and notes thereto at and for the years ended June 30, 1995 and 1994, included elsewhere in this Prospectus. The results of operations for the three month periods ended September 30, 1995 and 1994 are not necessarily indicative of the results to be expected for the full year. SUBSEQUENT EVENT Subsequent to September 30, 1995, Morel entered into an agreement and plan of merger with PCT Holdings, Inc. Under terms of the agreement, Morel merged with a wholly owned subsidiary of PCT Holdings, Inc., with Morel as the surviving entity, and the shareholders of Morel received 650,000 shares of common stock of PCT Holdings, Inc., after certain post-closing adjustments. The merger was closed on December 1, 1995, and was effective for accounting purposes on November 30, 1995. The merger was accounted for using the purchase method of accounting. See "Certain Transactions" for additional information on this event. F-37 - - ------------------------------------------- ------------------------------------------- - - ------------------------------------------- ------------------------------------------- NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN AS CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 3 Risk Factors................................... 6 Acquisition History............................ 12 Use of Proceeds................................ 13 Price Range of Common Stock and Dividend Policy........................................ 14 Capitalization................................. 15 Dilution....................................... 16 Selected Financial Information................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 18 Business....................................... 22 Management..................................... 30 Principal Shareholders......................... 38 Selling Shareholder............................ 40 Certain Transactions........................... 41 Description of Securities...................... 43 Shares Eligible for Future Sale................ 51 Underwriting................................... 53 Legal Matters.................................. 54 Experts........................................ 54 Additional Information......................... 54 Index to Financial Statements.................. F-1
2,250,000 UNITS [LOGO] EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK PURCHASE WARRANT --------------------- PROSPECTUS --------------------- PAULSON INVESTMENT COMPANY, INC. COHIG & ASSOCIATES, INC. , 1996 - - ------------------------------------------- ------------------------------------------- - - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article XI of the Company's Amended and Restated Bylaws requires indemnification of any person serving as a director or officer of the Company, as well as any person who, while serving as a director or officer of the Company, was serving at the request of the Company as a director, officer, employee or agent of another entity, against expenses incurred because such person was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, if such person acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Indemnification may not be provided for any claim, issue or matter in an action or suit by or in the right of the Company to procure a judgment in its favor as to which such director or officer has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the Company or for amounts paid in settlement to the Company, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. Any indemnification as described above must be made by the Company only as authorized in the specific case upon a determination that indemnification is proper in the circumstances. The determination must be made (i) by the stockholders; (ii) by the board of directors by majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding; (iii) if a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion; or (iv) if a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion. Article XI also provides that the expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the Company as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the Company. Article XI of the Company's Amended and Restated Bylaws and Section 78.751 of the Nevada Revised Statutes authorize the Company to grant indemnification to directors and officers on terms sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended. The Company has agreed to indemnify the Underwriters, and the Underwriters have agreed to indemnify the Company, against certain liabilities under the Securities Act. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses incurred in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All of the amounts shown are estimated except the Securities and Exchange Commission registration fee and the NASD filing fee.
SEC registration fee............................................. $ 10,784 NASD filing fee.................................................. 3,628 NASDAQ-NMS Listing Fee........................................... 41,996 Representative's nonaccountable expense allowance................ 349,313 Transfer agent fee............................................... 5,000 Printing expenses................................................ 75,000 Legal fees and expenses.......................................... 275,000 Accounting fees and expenses..................................... 200,000 Blue sky fees and expenses, including legal fees................. 20,000 Miscellaneous.................................................... 4,309 --------- TOTAL........................................................ $ 985,000 --------- ---------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Since May 31, 1993, the Company has sold securities as described in the following paragraphs, none of which have been registered under the Act: 1. An aggregate of 2,963,675 shares of Common Stock were issued in February 1995 to the shareholders of Original PCTH, in consideration of the Verazzana merger. In connection with that merger, warrants held by Donald A. Wright, Nick A. Gerde and another employee of the Company to purchase common stock of Original PCTH were converted into warrants to purchase 100,000, 25,000, and 35,000 shares, respectively, of Common Stock. An aggregate of 212,500 shares of Common Stock were issued to Jeff Jensen and an affiliate, as a finder's fee in connection with the merger. 2. An aggregate of 800,000 shares of Common Stock were issued to Swiss investors in July 1995, in exchange for aggregate cash consideration of $4,598,400. In connection with that offering, in July 1995, (i) an aggregate of 739,700 shares of Common Stock were issued to several designees of Lysys, and $478,400 in cash was paid to Lysys as commissions, and (ii) an aggregate of 295,300 shares of Common Stock were issued to SMD Ltd., LLC, as a finder's fee in connection with the offering. 3. An aggregate of 838,470 shares of Common Stock were issued to Swiss investors in November 1995, in exchange for aggregate cash consideration of $3,353,880. An aggregate of 30,000 shares of Common Stock were issued in January 1996 to a designee of Lysys, and $234,772 cash was paid to Lysys as commissions in connection with the offering. 4. An aggregate of 133,333 shares of Common Stock were issued on April 11, 1995, and promissory notes in aggregate principal amount of $600,000 were issued on May 10, 1995, to the shareholders of Ceramic Devices, Inc., a California corporation, as consideration for the merger of that entity with a wholly owned subsidiary of the Company. 5. An aggregate of 128,750 shares of Common Stock were issued on November 30, 1995, to Seismic Safety Products, Inc., a Florida corporation, as partial consideration for the purchase of substantially all of the assets of that entity by a wholly owned subsidiary of the Company. II-2 6. An aggregate of 650,000 shares of Common Stock, after post-closing adjustments, were issued on December 1, 1995, to Stephen L. Morel and Mark Morel as consideration for the merger of Morel Industries, Inc. with a wholly owned subsidiary of the Company. 7. As of May 31, 1996, options to purchase an aggregate of 145,283 shares of Common Stock were issued to employees and directors of the Company and its subsidiaries under the Company's 1995 Employee Incentive Plan, and 9,000 shares of Common Stock were issued to independent directors of the Company under the Independent Director Stock Plan. Also, the Company has agreed to issue an option to purchase 845,000 shares of Common Stock to Mr. Wright on the effective date of this Prospectus. 8. In May 1996, the Company issued promissory notes aggregating $1,350,000 in principal amount, and warrants to purchase an aggregate of 337,500 shares of Common Stock, in exchange for $1,350,000 in funds advanced to the Company in March and May 1996, by Robert L. Smith, a director of the Company, and UTCO Associates, Ltd., the selling shareholder named in the registration statement. 9. An aggregate of 490,000 shares of Common Stock were issued to Swiss investors in May 1996, in exchange for aggregate cash consideration of $1,456,125. In connection with the offering, $116,490 was paid to Lysys as commissions. The sales described in paragraphs 2 (other than subsection (ii)), 3 and 9 above were made outside the United States to non-U.S. persons in transactions not required to be registered under United States securities laws pursuant to Regulation S of the Securities Act. The sales described in paragraph 7 were made in reliance upon the exception set forth in Section 3(b) of the Securities Act and Rule 701 promulgated thereunder. The sales described in paragraphs 1, 2(ii), 4, 5, 6 and 8 were exempt from registration under the Securities Act by virtue of Section 4(2) thereof, or in reliance on Regulation D promulgated thereunder, and the purchasers represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate legends about the restricted nature of such securities were affixed to the stock certificates issued in such transactions. All purchasers either received adequate information about the Company or had adequate access, through employment or other relationships, to such information. ITEM 27. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - - ----------- -------------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement.(1) 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.(1) 4.1 Form of specimen certificate for Common Stock.(2) 4.2 Form of Warrant for purchase of Common Stock.(9) 4.3 Form of Warrant Agreement.(1) 4.4 Form of Purchase Warrant to the Representative for the purchase of Units.(1) 4.5 Registration Rights Agreement, dated December 1, 1995, between PCT Holdings, Inc., a Nevada corporation, and Stephen L. Morel and Mark Morel.(4) 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.(4) 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.(5)
II-3
EXHIBIT NUMBER DESCRIPTION - - ----------- -------------------------------------------------------------------------------------------------------- 4.8 Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO Associates, Ltd. dated May 22, 1996.(1) 5.1 Opinion of Lionel Sawyer & Collins.(10) 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.(6) 10.2 Employment Agreement, dated as of January 1, 1995, between PCT Holdings, Inc. and Donald A. Wright.(6) 10.3 Amendment to Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(1) 10.4 Employment Agreement, dated as of June 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(1) 10.5 Common Stock Purchase Warrant from PCT Holdings, Inc. to Donald A. Wright dated as of February 17, 1995.(1) 10.6 Common Stock Purchase Warrant from PCT Holdings, Inc. to Nick A. Gerde dated as of February 17, 1995.(1) 10.7 1995 Stock Incentive Plan.(1) 10.8 Independent Director Stock Plan.(1) 10.9 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(1) 10.10 Amended and Restated Promissory Note from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(1) 10.11 Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd. dated as of May 22, 1996.(1) 10.12 Security Agreement between PCT Holdings, Inc. and UTCO Associates, Ltd. dated as of May 22, 1996. 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.(7) 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.(7) 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.(7) 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.(4) 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.(6) 10.18 Exchange Agreement, dated May 31, 1994, between PCT Holdings, Inc. and its shareholders.(6) 10.19 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc. and Lysys Ltd.(6) 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.(6)
II-4
EXHIBIT NUMBER DESCRIPTION - - ----------- -------------------------------------------------------------------------------------------------------- 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.(6) 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.(6) 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.(6) 10.24 Intellectual Property Acquisition and License Agreement, dated June 1, 1994, between Pacific Coast Technologies, Inc. and James C. Kyle.(6) 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.(6) 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.(6) 10.27 Lease Agreement, dated February 1, 1993, between the Port of Chelan County and Pacific Coast Technologies, Inc.(6) 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.(6) 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.(6) 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.(6) 10.31 Employment and Non-Competition Agreement, dated May 31, 1994, between PCT Holdings, Inc. and Herman L. "Jack" Jones.(6) 10.32 Employment Agreement, dated January 1, 1995, between PCT Holdings, Inc. and Nick A. Gerde.(6) 10.33 Amended Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Nick A. Gerde.(1) 10.34 Employment Agreement, dated December 1, 1995, between Morel Industries, Inc. and Stephen L. Morel.(7) 10.35 Revised and Restated Promissory Note, dated May 17, 1996, from Morel Industries, Inc. to Richard and Jacquelyn Doane.(9) 10.36 Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(1) 10.37 Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(1) 10.38 Promissory Note, dated March 15, 1996, from Cashmere Manufacturing Co., Inc. to Cashmere Valley Bank, Inc.(9) 10.39 Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones to Cashmere Valley Bank.(9) 10.40 Amended and Restated Agreement, dated May 30, 1996, between Herman L. "Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(10) 10.41 Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings, Inc. dated March 15, 1996.(10) 10.42 Lease Agreement between the Port of Chelan County and Cashmere Manufacturing Co., Inc. dated November 4, 1994.(9) 10.43 Building Construction Agreement between the Port of Chelan County and Cashmere Manufacturing Co., Inc. dated November 4, 1994.(9)
II-5
EXHIBIT NUMBER DESCRIPTION - - ----------- -------------------------------------------------------------------------------------------------------- 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.(9) 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)(9) 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)(9) 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)(9) 10.48 Special Business Provisions No. PLR-950A between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 5, 1990.(8)(9) 10.49 Administrative Agreement No. L-435579-8180N between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group effective as of August 11, 1994.(9) 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)(9) 10.51 General Terms Agreement No. BCA-65311-0044 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(9) 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.(9) 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.(10) 10.54 Loan Modification Agreement, dated April 23, 1996, between Silicon Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere Manufacturing Co., Inc. and Pacific Coast Technologies, Inc.(9) 16.1 Letter from accountant regarding a change of accountants.(3) 21.1 List of Subsidiaries.(1) 23.1 Consent of Moss Adams LLP.(9) 23.2 Consent of BDO Seidman, LLP.(9) 23.3 Consent of Lionel Sawyer & Collins (to be included in Exhibit 5.1).(10) 23.4 Consent of Stoel Rives LLP.(9) 24.1 Power of Attorney (included on signature page of Form SB-2).(1)
- - ------------------------ (1)Submitted with initial filing on May 31, 1996. (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 Current Report on Form 8-K filed on December 18, 1995. (5)Incorporated by reference to the Company's Current Report on Form 8-K filed on March 1, 1995. (6)Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on August 29, 1995. (7)Incorporated by reference to the Company's Current Report on Form 10-QSB for the quarterly period ended November 30, 1995. (8) Confidential treatment requested. (9) Submitted with this Amendment. (10) To be filed by amendment. II-6 ITEM 28. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 24, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: 1. To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) include any prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. 2. That, for determining liability under the Securities Act, it will treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. 3. To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. 4. That, for determining any liability under the Securities Act, it will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective. 5. That, for determining any liability under the Securities Act, it will treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered therein, and the offering of the securities at that time as the initial bona fide offering thereof. II-7 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, PCT HOLDINGS, INC. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Seattle, Washington on June 18, 1996. PCT HOLDINGS, INC. By /s/ Donald A. Wright ----------------------------------- Donald A. Wright, President In accordance with the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed by the following persons in the capacities indicated on June 18, 1996. SIGNATURE TITLE - - ------------------------------------------------ -------------------------------------- /s/ Donald A. Wright Chief Executive Officer, President, -------------------------------------- and Director (Principal Executive Donald A. Wright Officer) /s/ Herman L. "Jack" Jones* -------------------------------------- Executive Vice President and Director Herman L. "Jack" Jones /s/ Nick A. Gerde* Vice President Finance and Chief -------------------------------------- Financial Officer (Principal Nick A. Gerde Financial and Accounting Officer) /s/ Roger P. Vallo* -------------------------------------- Secretary and Director Roger P. Vallo /s/ Robert L. Smith* -------------------------------------- Treasurer and Director Robert L. Smith /s/ Donald B. Cotton* -------------------------------------- Director Donald B. Cotton /s/ Allen W. Dahl, M.D.* -------------------------------------- Director Allen W. Dahl, M.D. /s/ Paul Schmidhauser* -------------------------------------- Director Paul Schmidhauser *By /s/ Donald A. Wright ---------------------------------- Donald A. Wright (Attorney-in-Fact)
II-8 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - - ----------- ------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement.(1) 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.(1) 4.1 Form of specimen certificate for Common Stock.(2) 4.2 Form of Warrant for purchase of Common Stock.(9) 4.3 Form of Warrant Agreement.(1) 4.4 Form of Purchase Warrant to the Representative for the purchase of Units.(1) 4.5 Registration Rights Agreement, dated December 1, 1995, between PCT Holdings, Inc., a Nevada corporation, and Stephen L. Morel and Mark Morel.(4) 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.(4) 4.7 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.(5) 4.8 Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO Associates, Ltd. dated May 22, 1996.(1) 5.1 Opinion of Lionel Sawyer & Collins.(10) 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.(6) 10.2 Employment Agreement, dated as of January 1, 1995, between PCT Holdings, Inc. and Donald A. Wright.(6) 10.3 Amendment to Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(1) 10.4 Employment Agreement, dated as of June 1, 1996, between PCT Holdings, Inc. and Donald A. Wright.(1) 10.5 Common Stock Purchase Warrant from PCT Holdings, Inc. to Donald A. Wright dated as of February 17, 1995.(1) 10.6 Common Stock Purchase Warrant from PCT Holdings, Inc. to Nick A. Gerde dated as of February 17, 1995.(1) 10.7 1995 Stock Incentive Plan.(1) 10.8 Independent Director Stock Plan.(1) 10.9 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(1) 10.10 Amended and Restated Promissory Note from PCT Holdings, Inc. to Robert L. Smith dated as of May 22, 1996.(1) 10.11 Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd. dated as of May 22, 1996.(1) 10.12 Security Agreement between PCT Holdings, Inc. and UTCO Associates, Ltd. dated as of May 22, 1996. 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.(7)
EXHIBIT NUMBER DESCRIPTION - - ----------- ------------------------------------------------------------------------------------------------- 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.(7) 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.(7) 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.(4) 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.(6) 10.18 Exchange Agreement, dated May 31, 1994, between PCT Holdings, Inc. and its shareholders.(6) 10.19 Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc. and Lysys Ltd.(6) 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(6) 10.21 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.(6) 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.(6) 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.(6) 10.24 Intellectual Property Acquisition and License Agreement, dated June 1, 1994, by and between Pacific Coast Technologies, Inc. and James C. Kyle.(6) 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.(6) 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.(6) 10.27 Lease Agreement, dated February 1, 1993, between the Port of Chelan County and Pacific Coast Technologies, Inc.(6) 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.(6) 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.(6) 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.(6) 10.31 Employment and Non-Competition Agreement, dated May 31, 1994, between PCT Holdings, Inc. and Herman L. "Jack" Jones.(6) 10.32 Employment Agreement, dated January 1, 1995, between PCT Holdings, Inc. and Nick A. Gerde.(6) 10.33 Amended Employment Agreement, dated March 1, 1996, between PCT Holdings, Inc. and Nick A. Gerde.(1) 10.34 Employment Agreement, dated December 1, 1995, between Morel Industries, Inc. and Stephen L. Morel.(7)
EXHIBIT NUMBER DESCRIPTION - - ----------- ------------------------------------------------------------------------------------------------- 10.35 Revised and Restated Promissory Note, dated May 17, 1996, from Morel Industries, Inc. to Richard and Jacquelyn Doane. 10.36 Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(1) 10.37 Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc. to Richard and Jacquelyn Doane.(1) 10.38 Promissory Note, dated March 15, 1996, from Cashmere Manufacturing Co., Inc. to Cashmere Valley Bank, Inc.(9) 10.39 Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones to Cashmere Valley Bank.(9) 10.40 Amended and Restated Agreement, dated May 30, 1996, between Herman L. "Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(10) 10.41 Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings, Inc. dated March 15, 1996.(10) 10.42 Lease Agreement between the Port of Chelan County and Cashmere Manufacturing, Inc. dated November 4, 1994.(9) 10.43 Building Construction Agreement between the Port of Chelan County and Cashmere Manufacturing Co., Inc. dated November 4, 1994.(9) 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.(9) 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)(9) 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)(9) 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)(9) 10.48 Special Business Provisions No. PLR-950A between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 5, 1990.(8)(9) 10.49 Administrative Agreement No. L-435579-8180N between Cashmere Manufacturing Co., Inc. and Boeing Commercial Airplane Group effective as of August 11, 1994.(9) 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)(9) 10.51 General Terms Agreement No. BCA-65311-0044 between The Boeing Company and Cashmere Manufacturing Co., Inc. effective as of February 26, 1996.(9) 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.(9) 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.(10) 10.54 Loan Modification Agreement, dated April 23, 1996, between Silicon Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere Manufacturing Co., Inc. and Pacific Coast Technologies, Inc.(9) 16.1 Letter from accountant regarding a change of accountants.(3) 21.1 List of Subsidiaries.(1) 23.1 Consent of Moss Adams LLP. 23.2 Consent of BDO Seidman, LLP. 23.3 Consent of Lionel Sawyer & Collins (to be included in Exhibit 5.1).(10) 23.4 Consent of Stoel Rives LLP.(9) 24.1 Power of Attorney (included on signature page of Form SB-2).(1)
- - ------------------------ (1) Submitted with initial filing on May 31, 1996. (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 Current Report on Form 8-K filed on December 18, 1995. (5) Incorporated by reference to the Company's Current Report on Form 8-K filed on March 1, 1995. (6) Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on August 29, 1995. (7) Incorporated by reference to the Company's Current Report on Form 10-QSB for the quarterly period ended November 30, 1995. (8) Confidential treatment requested. (9) Submitted with this Amendment. (10) To be filed by amendment. (THIS PAGE INTENTIONALLY LEFT BLANK) EX-4.2 2 WARRANT FOR PURCHASE OF COMMON STOCK EXHIBIT 4.2 VOID AFTER 5 P.M. PACIFIC TIME ON ____________________, 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 corporation incorporated under the laws of the State of Nevada ("Company"), subject to the terms and conditions set forth hereinafter and in the Warrant Agreement hereinafter more fully described (the "Warrant Agreement") referred to, one fully paid and non-assessable share of Common Stock, $0.001 par value, of the Company ("Common Stock") upon presentation and surrender of this Warrant Certificate with the instructions for the registration and delivery of Common Stock filled in, at any time prior to 5:20 P.M., Pacific time, on __________, 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 _________________________, of ________________________________, Warrant Agent of the Company ("Warrant Agent"), or of its successor warrant agent or, if there be no successor warrant agent, at the corporate offices of the Company, and upon payment of the Exercise Price (as defined in the Warrant Agreement) and any applicable taxes paid either in cash, or by certified or official bank check, payable in lawful money of the United States of America to the order of the Company. Each Warrant initially entitles the holder to purchase one share of Common Stock for $__________. 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. The Company may redeem any or all outstanding and unexercised Warrants at any time if the Daily Price has exceeded $__________ for 20 consecutive trading days immediately preceding the date of notice of such redemption, upon 30 days notice, at a price equal to $0.25 per Warrant. 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. All Warrants not theretofore exercised or redeemed will expire on ____________, 2001. This Warrant Certificate is subject to all of the terms, provisions and conditions of the Warrant Agreement, dated as of __________, 1996 ("Warrant Agreement"), between the Company and the Warrant Agent, to all of which terms, provisions and conditions the registered holder of this Warrant Certificate consents by acceptance hereof. 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 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, 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, 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 Certificates, upon 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 Certificates evidencing in the aggregate the same number of Warrants as the Warrant Certificate or 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 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, nor shall anything contained in the Warrant Agreement or herein be construed to confer upon the holder of this Warrant Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof or give or withhold consent to any corporate action (whether upon any matter submitted to stockholders at any meeting thereof, or give or withhold 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 to receive notice of meetings or other actions affecting stockholders (except as provided in the Warrant Agreement) or to receive dividends or subscription rights or otherwise 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 shall be 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 make delivery of certificates for shares 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 registry 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 signatures of the proper officers of the Company and its corporate seal. Dated: ____________________, 1996. PCT HOLDINGS, INC. By: ________________________________ President Attest: ____________________________ Secretary Countersigned ___________________________________ By: _______________________________ Authorized Officer EX-10.12 3 SECURITY AGREEMENT BETWEEN PCT AND UTCO Exhibit 10.12 SECURITY AGREEMENT THIS SECURITY AGREEMENT is made and entered into May 22, 1996, by and between UTCO Associates, Ltd., a Utah limited partnership, (hereafter "Secured Party") and PCT Holdings, Inc., a Nevada corporation ("PCT"), and its wholly owned subsidiaries, Pacific Coast Technologies, Inc., a Washington corporation, Cashmere Manufacturing Co., Inc., a Washington corporation, Seismic Safety Products, Inc., a Washington corporation, and Morel Industries, Inc., a Washington corporation, (collectively, the "Subsidiaries") (PCT and the Subsidiaries are sometimes hereafter collectively referred to as "Debtor"). 1. Debtor hereby grants to Secured Party a security interest in all of Debtor's assets, whether now owned or hereafter acquired, and wherever located, specifically including but not limited to Debtor's interest in the types of property described below (the "Collateral") to secure payment to Secured Party of all promissory notes and other obligations of Debtor executed and delivered concurrently herewith (the "Obligations"), including those referred to in that certain Promissory Note (the "Note") dated May 22, 1996 in the original principal amount of $1,200,000.00 between and among Debtor and Secured Party: a. All furniture, leasehold improvements, motor vehicles, appliances, fixtures, furnishings, tools, machinery and equipment and other goods of Debtor, now owned or hereafter acquired, and all additions and accessions thereto and replacements therefor; b. All inventory, supplies and materials of Debtor now owned or hereafter acquired, together with all additions and accessions thereto and replacements therefor; -1- c. All accounts, accounts receivable, negotiable documents, notes, drafts, acceptances, claims, lease rights (to the extent they are assignable without consent of the lessor), securities, instruments, choses in action, whether in contract or in tort, proceeds of lawsuits, and general intangibles of Debtor (including, but not limited to goodwill, permits, licenses, trademarks, trade names and trade secrets), and all other rights of Debtor to the payment of money, now existing or hereafter arising; d. All deposit accounts of Debtor maintained with any bank or other financial institution; e. All records, papers and books of account or other documents or papers relating to, affecting or describing any of the foregoing Collateral, in whatever form, including without limitation all computerized records, diskettes, programs, etc. relating thereto; f. All of Debtor's contract rights and proceeds of insurance policies; g. All of Debtor's patents and patents pending; h. All of PCT's stock in and to the Subsidiaries; and i. All proceeds of the foregoing Collateral. For purposes of this Security Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds is sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. 2. Debtor has full power and authority to execute this Security Agreement, to perform Debtor's obligations hereunder, and to subject the Collateral to the security interest created hereby. -2- 3. Debtor has acquired title to and will at all times keep the Collateral free of all liens and encumbrances, except the security interest created hereby and any security interest created prior to the date hereof, each of which is described on Exhibit "A" attached hereto, except as provided in subpart d below. Debtor further promises: a. To make all payments due under the Obligations to Secured Party and perform all the obligations to Secured Party in a timely manner; b. So long as any amounts are outstanding under the Note, to furnish Secured Party with such information concerning Debtor and the Collateral as Secured Party may from time to time reasonably request, including, but not limited to, current financial statements and filings with the Securities and Exchange Commission, provided, however, that Secured Party agrees to execute a Confidentiality Agreement, in a form reasonably acceptable to the Debtor with regard to any such non-public documents; c. To maintain the Collateral in good condition and not use the Collateral for any unlawful purpose or in any way that would void an effective insurance policy; and d. That part of the Collateral which consists of inventory and accounts receivable of Morel Industries, Inc. ("Morel") now is and shall remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for the following ("Permitted Liens"): (i) liens for taxes not yet payable; (ii) additional security interests and liens consented to in writing by Secured Party in its sole discretion; (iii) the Liens set forth on Exhibit "A" that relate to Morel Industries, Inc.; and (iv) security interests being terminated substantially concurrently with this Security Agreement. Secured Party shall have the right to require, as a condition to its consent under subparagraph (ii) above, that the holder of the -3- additional security interest or lien sign an intercreditor agreement on terms satisfactory to Secured Party in its sole discretion, acknowledge that the holder's security interest is subordinate to the security interest in favor of Secured Party, and that Debtor agrees that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Security Agreement. Secured Party now has, and shall continue to have, a first priority, perfected and enforceable security interest in all of the Collateral which consists of inventory and accounts receivable of Morel. The Collateral which consists of inventory and accounts receivable of Morel shall not be subject to any other liens or security interests of any type except for the Permitted Liens. Debtor shall at all times defend Secured Party and the Collateral against all claims of others. 4. Unless Debtor is in default hereunder, Debtor may sell the Collateral in the normal course of its business. 5. Debtor will pay promptly when due all taxes and assessments upon the Collateral or for its use or operation or upon this Security Agreement or upon the Note or any other documents evidencing the Obligations, if any. Further, Debtor will promptly pay all obligations regarding or relating to the Collateral necessary to maintain and preserve Debtor's rights and interests therein. 6. Debtor will not use or permit use of the Collateral in violation of any statute, ordinance, or state or federal regulation. 7. With respect to the Items of Collateral listed on Exhibit "B" to this Agreement (the "Patents"), Debtor represents and warrants as follows: -4- a. Debtor does not own any patents registered in, or the subject of pending applications in, the United States Patent and Trademark Office or any similar offices or agencies in any other country or any political subdivision thereof, other than those described in Exhibit "B" hereto; b. Debtor has the sole, full and uncumbered right, title and interest in and to each of the Patents shown on Exhibit "B" and the registrations thereof are valid and enforceable and in full force and effect, and none of the Patents has been abandoned or dedicated; c. There is no claim by any third party that any Patents are invalid and unenforceable or do or may violate the rights of any third person; d. Debtor has obtained from each employee who may be considered the inventor of patentable inventions (invented within the scope of such employee's employment) an assignment to Debtor of all rights to such inventions, including, without limitation, patents. 8. With respect to the Patents, Debtor covenants and agrees as follows: a. Except to the extent that Secured Party shall give its prior written consent, Debtor will not do any act, or omit to do any act, except as may be reasonable, in its prudent business judgment, whereby the Patents may become abandoned or dedicated or the remedies available against potential infringers weakened and shall notify Secured Party immediately if Debtor knows or becomes aware of any reason or has reason to know that any Patent may become abandoned or dedicated; b. In the event that any security interest as to which any of the Patents is or may be subject as of the date hereof shall lapse, terminate or be cancelled or rescinded, whether -5- by voluntary action of Debtor or any third person secured party in whose favor such presently attached and perfected security interests were created, Debtor will perform all acts and execute all documents, including, without limitation, notices of security interest or assignments for each relevant type of intellectual property in forms suitable for filing with the United States Patent and Trademark Office that may be necessary or desirable to record, maintain, preserve, protect and perfect Secured Party's interest in the Patents and the priority of such lien; c. Other than with respect to any presently attached and perfected security interest as of the date hereof, and other than as described in Section ___, Debtor will not assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or lien upon, encumber, grant an exclusive or non-exclusive license, or otherwise dispose of any of the Patents, and nothing in this Security Agreement shall be deemed a consent by Secured Party to any such action except as expressly permitted herein; d. Except as required by Debtor's senior lender, Debtor will not, either itself or through any agent, employee, licensee or designee, (i) file an application for the registration of any Patent with the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, or (ii) file any assignment of any Patent which Debtor may acquire from a third party with the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, unless Debtor shall, on or prior to the date of such filing, notify Secured Party thereof, and, upon the request of Secured Party and subject to Secured Party's right to so request pursuant to Section 8(b), execute and deliver any and all assignments, agreements, instruments, documents and papers as Secured Party may request to evidence Secured Party's interest, if any under this Security Agreement, -6- in such Patent (and the goodwill and general intangibles of Debtor relating thereto or represented thereby); e. Debtor will take all reasonable steps, in its prudent business judgment, in any proceeding before the Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, to diligently prosecute or maintain, as applicable, each application and registration of the Patents, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings (except to the extent that dedication, abandonment or invalidation is permitted hereunder); f. So long as any part or portion of the Obligations remains unpaid, Debtor shall make application to the Patent and Trademark Office (and assign to the extent provided herein such application to Secured Party as security) to register any unpatented but patentable inventions developed by Debtor or its employees (within the scope of their employment), unless Debtor, in the exercise of its prudent business judgment, deems any such Patent not to have any significant commercial value or determines that its rights thereunder are better preserved as a trade secret; g. Debtor shall use proper statutory notice in connection with its use of the Patents; and h. Debtor shall at all times keep at least one complete set of its records concerning the Patents at its chief executive office and shall make such records available for inspection by Secured Party at such times as Secured Party may reasonably request. -7- 9. In the event that any prior security interest as to which any of PCT's stock in the Subsidiaries is or may be subject as of the date hereof shall lapse, terminate or be cancelled or rescinded, whether by voluntary action of Debtor or any court or third person secured party in whose favor such presently attached and perfected security interests were created, Debtor will perform all acts, including, without limitation, delivering physical possession of the certificates representing such stock of the Subsidiaries and executing such notices or documents as shall be necessary or desirable for Secured Party to maintain, preserve, protect and perfect Secured Party's security interest in such stock and the priority of such lien. 10. With respect to that part of the Collateral which consists of accounts receivable of Morel, whether now existing or hereafter arising and the proceeds thereof (the "Morel Receivables"), the parties agree as follows: a. Until Debtor is in default, beyond any applicable cure period, under the Note or this Security Agreement, and contrary notice is given by Secured Party, the Debtor is specifically authorized to (i) enforce and collect the Morel Receivables, at Debtor's expense, (ii) utilize the proceeds thereof for Debtor's general business purposes in the ordinary course of business, and (iii) as shall be commercially reasonable, to accept the return of goods and to reclaim, withhold or repossess goods as an unpaid seller. In collecting, holding or remitting the proceeds of such collections, the Debtor shall have no right to utilize the collections in any way other than pursuant to the terms and conditions of the Security Agreement. b. Debtor agrees to collect the Morel Receivables, at Debtor's expense, with due diligence until such time as Debtor's authority to collect is terminated pursuant to this Security Agreement and to account to the Secured Party, at such intervals as Secured Party may -8- direct, for the proceeds of these collections and, if Debtor is in default, beyond any applicable cure period under the Note or the Security Agreement and if Secured Party shall so request, by depositing such proceeds in kind in a control collateral account at a bank designated by Secured Party (over which account the Debtor shall have no control). c. Upon Debtor's default beyond any applicable cure period under the Note or this Security Agreement, and notification by the Secured Party to the Debtor to cease collecting on the Morel Receivables, Secured Party will proceed to collect said Morel Receivables in a commercially reasonable manner and may deduct from the proceeds its reasonable expenses of collection; Secured Party is authorized to receive in full satisfaction of account debtor's obligation a sum less than the face amount thereof. d. Any payment made by Debtor to Secured Party or any sum received by the Secured Party through the realization and collection of the Morel Receivables shall be applied to the Obligations, whether matured or not matured, as set forth in Section 3(c) of the Note. e. Debtor agrees to hold Secured Party harmless from all claims for loss or damage caused by any failure to collect Morel Receivables or enforce any contract or by any act or omission on the part of the Secured Party, its agents and employees, except intentional misconduct. f. Debtor agrees to maintain full and accurate books of account covering the Morel Receivables and to deliver to Secured Party such of the books as relate to the Morel Receivables so requested by Secured Party after or in connection with the termination of Debtor's authority to collect as herein provided. -9- g. Debtor agrees to deliver to Secured Party on demand, or upon the termination of the Debtor's authority to collect by Secured Party, all of the papers in Debtor's possession relating to the Morel Receivables which will facilitate collection or enforcement thereof by Secured Party, including but not limited to, correspondence, invoices, shipping documents, and records, sales slips, orders and order acknowledgments, contracts and all other instruments relating thereto. h. Secured Party or its authorized agent shall at all reasonable times during regular business hours have the right to inspect Debtor's ledgers, books of account and other written records evidencing the Morel Receivables, and, upon termination of Debtor's authority to collect the Morel Receivable, such agent or agents shall at all reasonable times during regular business hours have the right to be present at Debtor's place of business to receive all communications and remittances relating to said collateral. 11. The following shall constitute events of default ("Events of Default") under this Security Agreement: a. The Debtor's failure to make any payment to Secured Party when due, or to perform any other obligations in a timely manner; b. The Debtor's material breach of this Security Agreement, or any present or future rider or supplement to this Security Agreement, or any other agreement between Debtor and Secured Party evidencing the Obligations or securing them; c. That any warranty, representation, or statement, made by or on behalf of Debtor in or with respect to this Security Agreement, is materially false at the time when made; -10- d. Any of the documents executed and delivered in connection herewith shall for any reason cease to be in full force and effect, except through the act of the Secured Party; e. An assignment by Debtor for the benefit of its creditors; f. Filing by Debtor of a voluntary petition in bankruptcy or a voluntary petition seeking reorganization, adjustment, readjustment of debts or any other relief under the Bankruptcy Code as amended or any insolvency act or law, state or federal, now or hereafter existing; g. Filing of an involuntary petition against Debtor in bankruptcy or seeking reorganization, arrangement, readjustment of debts or any other relief under the Bankruptcy Code as amended or under any other insolvency act or law, state or federal, now or hereafter existing, and the continuance thereof for 30 days undismissed, unbonded, or undischarged; h. All or any substantial part of the property of Debtor shall be condemned, seized or otherwise appropriated or custody or control of such property shall be assumed by any governmental agency or any court of competent jurisdiction and shall be retained for a period of 30 days; and i. There is a material default in any term, condition or covenant contained in any document representing an obligation in favor of any third party which is secured by the Collateral or any other default as a result of which said third party declares a default and exercised any remedies affecting the Collateral, except as disclosed on Exhibit "C" hereto. 12. Upon the occurrence of an Event of Default Secured Party, at its option, may: a. Declare the Obligations immediately due and payable without demand, presentment, protest or notice to Debtor, all of which Debtor expressly waives; -11- b. Exercise all rights and remedies available to a secured creditor after default, including but not limited to the rights and remedies of secured creditors under the Uniform Commercial Code; c. Perform any of Debtor's obligations under this Security Agreement for Debtor's account. Any money expended or obligations incurred in doing so, including reasonable attorneys' fees and interest at the highest rate permitted by law, will be charged to Debtor and added to the Obligations secured by this Agreement; and/or d. Secured Party may take possession of the Collateral and may demand payment of, institute, and maintain suits for or compromise any and all sums due or to become due as proceeds of the Collateral in its own name or in the name of Debtor, and otherwise avail itself of any action it deems necessary. 13. Debtor agrees to execute all financing statements and other necessary documents to perfect Secured Party's interest in the Collateral as set forth herein. Borrower shall not be required to execute and deliver any other documents that are in the possession of or pledged to the Debtor's senior lenders as of the date of this Security Agreement. 14. No delay or failure by Secured Party in the exercise of any right or remedy shall constitute a waiver thereof, and no single or partial exercise by Secured Party of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. Secured Party shall not be deemed to have waived any of Secured Party's rights hereunder or under any other writing signed by Debtor unless such waiver be in writing and signed by Secured Party. No consent or waiver, express or implied, by any party to, or of any breach or default by any other party in, the performance of its obligations hereunder shall be -12- deemed or construed to be a consent to or waiver of any other breach or default in the performance by such other party of the same or any other obligations hereunder. Failure on the part of a party to complain of any act of the other party or to declare a party in default, irrespective of how long such failure continues, shall not constitute a waiver of such party of its rights hereunder. All Secured Party's rights and remedies, whether evidenced hereby or by any other writings, statutes or case law, shall be cumulative and may be exercised singularly or concurrently. Any demand upon or notice to Debtor that Secured Party may elect to give shall be effective when deposited in the mails or delivered to Debtor. If at any time or times by assignment or otherwise Secured Party transfers any obligations and collateral therefor, such transfer shall carry with it Secured Party's powers and rights under this Agreement with respect to the obligations and collateral transferred and the transferee shall become vested with said powers and rights, whether or not they are specifically referred to in the transfer. 15. Except for any notice required under applicable law to be given in another manner, any notice or other communication required or permitted to be given hereunder and any approval by any party shall be in writing and shall be personally delivered or delivered by overnight courier in each case with receipt acknowledged, or deposited in an official depository of the United States Postal Service, first-class postage prepaid, by registered or certified mail, return receipt requested, to the other party or parties at the addresses listed below. All notices and other communications shall be deemed to have been duly given on (a) the date of receipt thereof (including all required copies thereof as set forth below) if delivered personally or by overnight courier or (b) five (5) business days after the date of mailing thereof (including all required copies thereof as set forth below) if transmitted by mail. Each party change its address -13- for receipt of notices by a notice given to the other parties in accordance with this provision. Notices shall be addressed as follows: To the Debtor: PCT Holdings, Inc. 434 Olds Station Road Wenatchee, Washington 98801 Attn: Donald A. Wright, President With a copy to: Stoel Rives LLP 600 University Street, Suite 3600 Seattle, WA 98101-3197 Attn: Sheryl A. Symonds To the Secured Party: UTCO ASSOCIATES, LTD. P.O. Box 11838 Salt Lake City, UT 84147 Attn: Robert D. Kent With a copy to: Jeffrey M. Jones, Esq. Durham, Evans, Jones & Pinegar, P.C. 50 South Main, Suite 850 Salt Lake City, UT 84144 16. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law but, if any provision of this Agreement shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 17. This Agreement, together with the agreements and warranties herein contained, shall inure to the benefit of Secured Party and its successors and assigns and shall be binding upon Debtor and his respective heirs, successors and assigns. 18. This Agreement inures to the benefit of the Secured Party, its successors and assigns, and shall bind (as may be applicable) the respective heirs, personal representatives, -14- successors and assigns of Debtor, and if more than one party shall sign this Agreement, the term "Debtor" shall mean all such parties, and each of them, and all such parties shall be jointly and severally obligated hereunder. Words used herein shall take the singular or plural number, and such gender, as the number and gender of parties Debtor herein shall require. 19. Debtor agrees to pay upon demand all of Secured Party's costs and expenses, including reasonable attorneys' fees and legal expenses, incurred in connection with the enforcement of this Security Agreement. Secured Party may engage a third party as its agent to help enforce this Security Agreement, and Debtor shall pay the costs and expense of such enforcement. Costs and expenses include Secured Party's reasonable attorneys' fees and legal expenses whether or not performed by a salaried employee of Secured Party and whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), all appearances in bankruptcy or insolvency proceedings, fees and expenses incurred in connection with the appointment of a receiver, appeals, and any anticipated post-judgment collection services. Debtor also shall pay all court costs and such additional fees as may be directed by the court. 20. This Security Agreement may be executed in one or more counterparts, any one of which, if originally executed, shall be binding upon each of the parties signing thereon, and all of which taken together shall constitute one and the same instrument. One or more photostatic copies of this Security Agreement may be originally executed by the parties hereto, and such photostatic copies shall be deemed originals and shall be valid, binding and enforceable in accordance with their terms. -15- 21. The parties hereto represent and warrant that they have full power, authority and legal right to execute and deliver, and to perform and observe the provisions of, this Security Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance by the parties of this Security Agreement have been duly authorized by all necessary legal action and the parties have obtained any necessary consent, approval of, notice to, or any action by, any person, firm, corporation or governmental entity or agency necessary or appropriate to consummate the transaction contemplated hereby. 22. Each party agrees and covenants that it will at any time and from time to time, upon the request of the other execute, acknowledge, deliver or perform all such further acts, deeds, assignments, transfers, conveyances and assurances as may be required to carry out the terms and provisions of this Security Agreement. 23. The rights and remedies of the parties hereunder shall not be mutually exclusive, and the exercise by any party of any right to which he or it is entitled shall not preclude the exercise of any other right he or it may have. 24. GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Secured Party and Debtor shall be governed by, and construed in accordance with, the laws of the State of Utah. Any undefined terms used in this Agreement that is defined in the Utah Uniform Commercial Code shall have the meaning assigned to that term in the Utah Uniform Commercial Code. As a material part of the consideration to Secured Party to enter into this Agreement, Debtor (i) agrees that all actions and proceedings relating directly or indirectly hereto shall at Secured Party's option, be litigated in courts located within Utah, and that the exclusive venue therefor shall be, at Secured -16- Party's option, Salt Lake County or the county in which Debtor's chief executive office is located; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Debtor may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 25. ENTIRE AGREEMENT IN WRITING. This Security Agreement, and any other documents executed in connection herewith, are the final expression of the agreement and understanding of Debtor and Secured Party with respect to the general subject matter hereof and supersede any previous understandings, negotiations or discussions, whether written or oral. This written agreement, and any other documents executed in connection herewith, may not be contradicted by evidence of any alleged oral agreement. IN WITNESS WHEREOF, this Agreement has been executed on the day and date first above written. "SECURED PARTY" UTCO ASSOCIATES, LTD., a Utah limited partnership By: /s/ ___________________________ Its: ___________________________ "DEBTOR" PCT HOLDINGS, INC., a Nevada corporation By: /s/ Donald A. Wright ___________________________ Its: President ___________________________ -17- PACIFIC COAST TECHNOLOGIES, INC., a Washington corporation By: /s/ Donald A. Wright ________________________________ Its: Executive Vice President CASHMERE MANUFACTURING CO., INC., a Washington corporation By: /s/ Donald A. Wright ________________________________ Its: Executive Vice President SEISMIC SAFETY PRODUCTS, INC., a Washington corporation By: /s/ Donald A. Wright ________________________________ Its: Executive Vice President MOREL INDUSTRIES, INC., a Washington corporation By: /s/ Donald A. Wright ________________________________ Its: Executive Vice President -18- EXHIBIT A Except for the security interest created by the Security Agreement executed by Debtor in favor of Borrower, the following constitute the only other security interests in and to the Collateral created prior to the date hereof: PCT HOLDINGS, INC. SECURED PARTY FILING DATE FILE NO. Silicon Valley Bank 7/1/94 95-198-0581 PACIFIC COAST TECHNOLOGIES, INC. SECURED PARTY FILING DATE FILE NO. Heritage Financial Services 7/1/94 94-182-0483 D.J.R. Enterprise's, Inc. 8/22/94 94-234-0289 Bankers Leasing Assoc., Inc. 9/6/94 94-249-0974 D.J.R. Enterprise's, Inc. 10/24/94 94-297-0686 OBL Financial Services Incorporated 11/14/94 94-318-1140 JWI Leasing 1/9/95 95-009-0561 Mazak Corporation 3/13/95 95-072-0390 Quest for Economic Development 4/21/95 95-111-0347 Perine Machine Tool Corp. 6/30/95 95-181-0723 Silicon Valley Bank 7/17/95 95-198-0580 James C. and Carol A. Kyle ___________ __________ CASHMERE MANUFACTURING CO., INC. SECURED PARTY FILING DATE FILING NO. U.S. Bancorp Leasing 6/13/94 94-164-1234 Ellison Machinery Co. 5/3/95 95-123-0365 -19- Ellison Machinery Co. 6/1/95 95-152-0359 Perine Machine Tool Corp. 6/30/95 95-181-0722 Silicon Valley Bank 7/25/95 95-206-0221 NEC America, Inc. 8/14/95 95-226-0088 NEC America, Inc. 11/6/95 95-310-0950 Hyster Sales Company 11/13/95 95-317-0083 Ellison Machinery Company 11/17/95 95-321-0280 Industrial Finance Company 3/20/96 96-080-0393 Ellison Machinery Company 4/5/96 96-096-0178 Ellison Machinery Company 1/22/96 96-022-0457 SEISMIC SAFETY PRODUCTS, INC. SECURED PARTY FILING DATE FILING NO. George H. Baldwin 12/5/95 95-339-0001 MOREL INDUSTRIES, INC. SECURED PARTY FILING DATE FILING NO. Security Pacific Bank 2/14/89 89-045-0264 Security Pacific Bank 2/1/91 91-032-0368 Security Pacific Bank 11/9/93 93-313-0665 Seattle First National Bank 12/1/94 94-335-0264 Seattle First National Bank 8/21/92 92-234-0068 Seattle First National Bank 12/1/94 94-335-0265 Seattle First National Bank 7/19/93 93-200-0525 Seattle First National Bank 11/29/93 93-333-1599 Seattle First National Bank 12/1/94 94-335-0268 Seattle First National Bank 12/1/94 94-335-0267 -20- Hyster Sales Company 7/29/94 94-210-0543 Industrial Finance Company 12/12/94 94-346-0289 The CIT Group 8/23/94 94-235-0239 Seattle First National Bank 12/1/94 94-335-0263 Copyco Leasing, Inc. 3/13/95 95-072-0981 Richard & Jaquelyn Doane 3/27/95 95-086-0095 C&H Machine Work, Inc. 3/18/96 96-078-0118 Washington State Department of Community Trade and Economic Development __________ ___________ -21- EXHIBIT B PCT HOLDINGS, INC. PATENT PORTFOLIO
Date of Reassignment Date to Pacific Coast Reassignment Patent # Country Invention Title Patent Issue Date Expiration Date Technologies, Inc. Recorded -------- ------- --------------- ----------------- --------------- ------------------ ------------ PATENTS HELD BY PACIFIC COAST TECHNOLOGIES,INC, A WHOLLY OWNED SUBSIDIARY OF PCT HOLDINGS, INC. 1. 4,220,813 U.S. Terminal for Medical Instrument September 2, 1980 September 2, 1997 June 1, 1994 June 27, 1994 2. 4,220,814 U.S. Terminal for Medical Instrument & September 2, 1980 September 2, 1997 June 1, 1994 June 27, 1994 Assembly 3. 4,352,951 U.S. Ceramic Seal October 5, 1982 October 5, 1999 June 1, 1994 June 27, 1994 4. 4,371,588 U.S. Ceramic Seal February 1, 1983 February 1, 2000 June 1, 1994 June 27, 1994 5. 4,401,766 U.S. Ceramic Seal August 30, 1983 August 30, 2000 June 1, 1994 June 27, 1994 6. 4,411,680 U.S. Ceramic Seal October 25, 1983 October 25, 2000 June 1, 1994 June 27, 1994 7. 4,421,947 U.S. Polycrystalline Insulating December 20, 1983 December 20, 2000 June 1, 1994 June 27, 1994 Material 8. 4,424,090 U.S. Insulating Material & Method January 3, 1984 January 3, 2001 June 1, 1994 June 27, 1994 of Making 9. 4,425,476 U.S. Progressively Fused Ceramic Seal January 10, 1984 January 10, 2001 June 1, 1994 June 27, 1994 10. 4,436,955 U.S. Terminal Assembly March 13, 1984 March 13, 2001 June 1, 1994 June 27, 1994 11. 4,456,786 U.S. Terminal Assembly for June 26, 1984 June 26, 2001 June 1, 1994 June 27, 1994 Heart Pacemaker 12. 4,461,926 U.S. Hermetically Sealed Insulating July 24, 1984 July 24, 2001 June 1, 1994 June 27, 1994 Assembly 13. 4,493,378 U.S. Terminal Assembly January 15, 1985 January 15, 2002 June 1, 1994 June 27, 1994
-22-
Date of Reassignment Date to Pacific Coast Reassignment Patent # Country Invention Title Patent Issue Date Expiration Date Technologies, Inc. Recorded -------- ------- --------------- ----------------- --------------- ------------------ ------------ 14. 4,507,522 U.S. Terminal Assembly March 26, 1985 March 26, 2002 June 1, 1994 June 27, 1994 15. 4,514,207 U.S. Method for Making Terminal April 30, 1985 April 30, 2002 June 1, 1994 June 27, 1994 Assembly 16. 4,514,590 U.S. Electrical Terminal Assembly April 30, 1985 April 30, 2002 June 1, 1994 June 27, 1994 17. 4,512,791 U.S. Hermetically Sealed Insulating April 23, 1985 April 23, 2002 June 1, 1994 June 27, 1994 Assembly 18. 4,518,820 U.S. Terminal Assembly for Pacemakers May 21, 1985 May 21, 2002 June 1, 1994 June 27, 1994 19. 4,593,758 U.S. Hermetically Sealed Insulating June 10, 1986 June 10, 2003 June 1, 1994 June 27, 1994 Assembly 20. 4,654,752 U.S. Terminal Assembly & Method of March 31, 1987 March 31, 2004 June 1, 1994 June 27, 1994 Making 21. 4,657,337 U.S. Electrical Connector & April 14, 1987 April 14, 2004 June 1, 1994 June 27, 1994 Production Method 22. 4,935,583 U.S. Insulated Conductor/Ceramic June 16, 1990 June 16, 2007 June 1, 1994 June 27, 1994 Connected Elements 23. 4,690,480 U.S. Tubular Bi-Metal Connector September 1, 1987 September 1, 2004 May 16, 1995 May 22, 1995 24. 5,041,019 U.S. Transition Joint for Microwave August 20, 1991 August 20, 2008 November 30, 1995* December 2, 1995 Package 25. 5,109,594 U.S. Method of Making a Sealed May 5, 1992 May 5, 2009 November 30, 1995* December 4, 1995 Transition Joint 26. 5,298,683 U.S. Dissimilar Metal Connectors March 29, 1994 March 29, 2011 Original Assignee Inapplicable
-23-
Date of Reassignment Date to Pacific Coast Reassignment Patent # Country Invention Title Patent Issue Date Expiration Date Technologies, Inc. Recorded -------- ------- --------------- ----------------- --------------- ------------------ ------------ 27. 5,433,260 U.S. Sealable Electronics Packages July 18, 1995 July 18, 2012 Original Assignee Inapplicable and Method of Producing and Sealing Such Packages 28. 5,110,307 U.S. Laser Weldable Hermetic May 5, 1992 May 5, 2009 December 22, 1995 Not recorded Connector 29. 5,405,272 U.S. Laser Weldable Hermetic April 11, 1995 April 11, 2012 December 22, 1995 Not recorded Connector 30. 08/618,62 U.S. Laser Weldable Waveguide Window Pending March 19, 2016 Original Assignee Inapplicable 3 Assembly PATENTS HELD BY SEISMIC SAFETY PRODUCTS, INC.-WASHINGTON, A WHOLLY OWNED SUBSIDIARY OF PCT HOLDINGS, INC. 22. 4,903,720 U.S. Safety Shut Off Device February 27, 1990 February 27, 2007 November 30, 1995 December 12, 1995 23. 5,119,841 U.S. Safety Shut Off Apparatus June 9, 1992 June 9, 2009 November 30, 1995 December 12, 1995 24. 5,409,031 U.S. Safety Shut Off Valve April 25, 1995 April 25, 2012 November 30, 1995 Not recorded 25. 08/403,09 U.S. Automatic and Manually Operable Pending None established November 30, 1995 Not recorded 8 Safety Shutoff Valve 26. PCT/US95 Internat Automatic and Manually Operable Pending None established November 30, 1995 Not recorded /04830 ional Safety Shutoff Valve
*Assignment to Pacific Coast Technologies, Inc. was from Dynamic Materials, the new name for Explosive Fabricators, Inc. (effective November 30, 1995). The change of name documents were simultaneously recorded with the assignment. -24- EXHIBIT C TO SECURITY AGREEMENT SECTION 11(I) - EXISTING DEFAULTS: 1. SILICON VALLEY BANK LINE OF CREDIT. The Silicon Valley Bank line of credit expired on April 24, 1996, and renewal is currently being negotiated. There existed one covenant default at the time of expiration. In addition, the closing of the loan evidenced by the Note will cause a default under the Silicon Valley Bank line of credit until the approval listed on Exhibit A to the Note under Section 6(d), item 1, is obtained, at which time such default will be cured. 2. PROMISSORY NOTES TO CERAMIC DEVICES' SELLING SHAREHOLDERS. The closing of the loan evidenced by the Note will cause a default under these promissory notes until the approval listed on Exhibit A to the Note under Section 6(d), item 2 above, is obtained, at which time such default will be cured. 3. WASHINGTON STATE DEPARTMENT OF COMMUNITY TRADE AND ECONOMIC DEVELOPMENT ("CTEC") LOAN. The CTEC loan is secured in part by an unperfected security interest in Morel's personal property that has been junior to the security interests of Seattle-First National Bank and Richard and Jacquelyn Doane since the CTEC loan was closed. The CTEC loan documents, however, allow only Seattle- First National Bank to hold a senior security interest in such collateral. The Borrowers shall make a good faith effort to obtain CTEC's approval of the Doanes' and the Lender's prior perfected security interests promptly after closing of the loan evidenced by the Note. -25- EX-10.35 4 REVISED AND RESTATED PROMISSORY NOTE Exhibit 10.35 REVISED AND RESTATED PROMISSORY NOTE THIS REVISED AND RESTATED PROMISSORY NOTE (the "Revised Note") is made and entered into as of the 17th day of May, 1996, by and between MOREL INDUSTRIES, INC., a Washington corporation, STEPHEN MOREL and MARK MOREL, individually and for their marital communities (collectively, the "Borrowers"), and RICHARD L. DOANE and JACQUELYNE DOANE (collectively "Lender") (Borrowers and Lender may be collectively referred to herein as the Parties"). RECITALS A. The Borrowers executed and delivered to the Lender a promissory note dated on or about March 17, 1995, in the principal amount of FIVE HUNDRED THOUSAND and NO/100 DOLLARS ($500,000.00) (herein the "Original Note") pursuant to the terms of a Loan Agreement and Additional Escrow Instructions, of unspecified date, between the Borrowers and the Lender (the "Loan Agreement"). B. In order to secure the payment of the Original Note and performance by Borrowers under the Loan Agreement, Morel Industries Inc. granted and delivered to Lender that Second Deed of Trust, dated on or about March 15, 1995, recorded by the Chelan County Auditor under recording number 9503240112 (the "Deed of Trust"), encumbering certain real property located in Chelan County, Washington, more particularly described as follows: Lots C1 and C2 of the Entiat Industrial Park, as recorded in volume 23 of Plats, pages 57, 58 and 59, records of Chelan County, Washington and as filed under Chelan County Auditor's No. 9403310001; securing payment of the sums and obligations contained in the Original Note. C. In order to further secure the payment of the Original Note and performance by Borrowers under the Loan Agreement, Morel Industries Inc. granted and delivered to Lender a security interest in the personal property, intangibles, and other rights and interests of Borrowers from time to time or arising out of the Borrowers' business operations on the property encumbered by the Deed of Trust, as evidenced by financing statements, including without limitation the financing statement recorded with the Chelan County Auditor at book 1040, page 82, under Document No. 9503270004, and filed with the Washington State Department of Licensing under Document No. 950860095 (the "Financing Statements"); D. The parties entered into that Lender's Escrow Instructions dated on or about March 17, 1995; -1- E. The parties entered into that Loan Modification Agreement (the "Loan Modification Agreement") on or about the 1st day of December, 1995, modifying the Original Note (the Original Note, the Loan Modification Agreement, the Lender's Escrow Instructions may be collectively referred to herein as the "Prior Loan Documents"); F. The parties now wish to modify the Prior Loan Documents on the terms and conditions set forth in this Revised Note. AGREEMENT NOW, THEREFORE, for good and valuable consideration, including the terms and conditions hereof, including modifying the Prior Loan Documents upon terms requested by the Borrowers, the receipt and sufficiency of which consideration is acknowledged, the parties agree as follows: 1. PRINCIPAL BALANCE. Borrowers hereby reconfirm, as of March 1, 1996 (herein the "Effective Date"), their obligation to pay, in accordance with the terms hereof, the unpaid principal balance of the obligation represented hereby, not including the Loan Fee described and defined in section 2 herein, in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00) ("Principal Balance"). 2. LOAN FEE. Borrowers shall pay to Lender the sum of Fifty Thousand and No/100 Dollars ($50,000.00) (the "Loan Fee"), on or before September 1, 1996, as additional consideration and as a fee for the extension of the terms of the Original Note and for the accommodation of Borrower's requested extension and revision of the Prior Loan Documents described herein, pursuant to the terms hereof. Payment of said sum shall not reduce or affect the Principal Balance, nor shall it be considered payment of any interest or any other fee, but payment thereof is also secured by the Deed of Trust and the Financing Statements. 3. REIMBURSEMENT FOR ATTORNEYS' FEES. Borrowers shall pay to Lender the sum of Seven Thousand and No/100 Dollars ($7,000.00) (the "Drafting Fee"), on or before May 23, 1996, as additional consideration and as a fee for the attorneys' fees for the preparation of the documents as part of this transaction. 4. INTEREST. a. The unpaid Principal Balance shall accrue interest at the rate of fifteen percent (15%) per annum from and after the Effective Date. b. During any period of default of any provision hereof, the then-Principal Balance and any unpaid portion of the Loan Fee and the Drafting Fee, shall bear interest at the rate of eighteen percent (18%) per annum, or, in the event that this rate is in excess of the then maximum rate allowed by law, then at the highest rate then allowable by law. -2- 5. MODIFICATION OF LOAN DOCUMENTS; CONFIRMATION OF SECURITY; GUARANTY. a. The terms of the Prior Loan Documents are modified and restated in their entirety by the terms and conditions contained herein. It is acknowledged and agreed that this Revised Note is a complete restatement, modification and continuation of the Prior Loan Documents, and not a substitution thereof. b. This Revised Note shall continue to be secured by the Deed of Trust and the Financing Statements, as of the effective dates thereof. The Deed of Trust and the Financing Statements are hereby deemed modified such that they specifically secure the payment of the entire Principal Balance, the Loan Fee, and accruing interest, and penalties, fees, and provisions contained herein, and further extensions of credit or further advance of funds. c. The Original Note and the Loan Agreement were guaranteed by that Guaranty agreement from PCT Holdings, Inc., a Nevada corporation, and this Revised Note continues to be guaranteed by that Guaranty agreement, and that Confirmation of Guaranty agreement of even date herewith, also executed by PCT Holdings, Inc. 6. TERMS OF PAYMENT. a. All of the then-accrued interest on the Principal Balance shall be paid monthly, on or before the fifteenth (15th) day of each consecutive month during the term hereof. The first payment, however, shall include the interest due for the months of March and April of 1996, and shall therefore be in the combined amount of Six Thousand Two Hundred Fifty and No/100 Dollars ($6,250.00), and shall be due on May 20, 1996. b. Borrower shall also pay to Lender monthly payments (in addition to the interest payments required by section 5.a. hereof) to be applied to the declining Principal Balance in the amount of Twenty Thousand and No/100 Dollars ($20,000.00), commencing on May 15, 1996, and continuing in that same amount on the 15th day of each consecutive month thereafter during the term hereof. The entire then-Principal Balance, and all then-accrued interest and then-due costs and fees and sums due pursuant hereto, shall be due and payable on September 1, 1996. 7. EARLY REQUIRED PAYMENT. Notwithstanding any other term hereof apparently to the contrary, in the event of the occurrence of certain events, the Principal Balance, and all thenaccrued interest and/or costs and fees due pursuant to the terms hereof, shall be immediately due and payable, without the necessity of notice from Lender. Those events are: a. The sale, agreement to sell, conveyance of, or additional encumbrance of, or other alienation of rights of Borrowers in, the real property securing the obligations hereof as reflected in the Deed of Trust, whether by operation of law or otherwise, or a substantial portion of the personal property securing the obligations hereof, whether by operation of law or otherwise; -3- b. The refinancing of the encumbrance in favor of SeaFirst Bank on the real property encumbered by the Deed of Trust, through other than an additional extension of time to pay or granting of additional credit under that existing encumbrance, or other assignment of SeaFirst's secured position to another lender; c. Obtaining, or executing documents representing, any loan and/or other indebtedness under which Morel Industries, Inc., is a borrower or guarantor, in a single transaction or in the amount collectively for more than one transaction on or after the date hereof, in excess of One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00); d. The sale of, or commitment to sell or otherwise convey, any of the currently outstanding shares of stock or any additional shares of stock, warrants, or any other equity representations, whether publicly or privately, of Morel Industries, Inc. 8. CONSENT AND SUBORDINATION. Notwithstanding the provisions of section 7(c) above, Lender hereby consents to Morel Industries, Inc.'s execution of loan documents for a One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00) loan (the "Bridge Loan") obtained for the purpose of refinancing the line of credit from SeaFirst Bank to Morel Industries, Inc. (the "SeaFirst Line of Credit"). In addition, Lender agrees that its security interest in Morel Industries, Inc.'s accounts and inventory, as evidenced by the Financing Statements, hereby is and shall be subordinate to any security interest in Morel Industries, Inc.'s accounts and inventory granted by Morel Industries, Inc. to the lender of the Bridge Loan, and not more than the amount due and owing under the Bridge Loan, and agrees to execute any financing statements reasonably necessary to evidence such subordination. It is understood that the Lender is not subordinating its interest in any of the collateral, other than Morel Industries, Inc.'s accounts and inventory, set forth in the Financing Statements. 9. BORROWER'S REPRESENTATIONS AND WARRANTIES. The Borrowers' Representations and Warranties contained in section 2 (including sections 2.1 through 2.5) of the Loan Agreement are hereby incorporated as though fully set forth herein. 10. DEFAULT. If default be made in the payment of any installment, or any sum due pursuant hereto, when due and not cured within ten (10) days of the date the installment or sum was due, or in the event of any default pursuant to the terms hereof or pursuant to the terms of the Deed of Trust or the Financing Statements, or in the event of any default that may occur or exist subsequent to the date hereof on the encumbrance senior to the Deed of Trust on the real property secured by the Deed of Trust in favor of SeaFirst Bank such that SeaFirst Bank delivers notice of default to Borrowers or any of them, then, at the option of the Holder of this Note and upon notice to Borrowers, the entire indebtedness described herein shall become immediately due and payable. -4- 11. GENERAL. a. RECITALS. The recitals, sections A through F above, are hereby incorporated as though fully set forth herein. b. PREPAYMENT. Borrowers may prepay the principal amount outstanding in whole or in part at any time without penalty. Any partial prepayment shall be applied first against any accrued interest, fees or costs, and then against the then-Principal Balance outstanding and shall not reduce the amount of or postpone the due date of any subsequent payment required hereunder. c. LATE CHARGE. In addition to the default interest agreed to above, Borrower further agrees to pay a late charge of five percent (5%) of any payment or other sum due pursuant to the terms hereof which is not delivered to Lender within ten (10) days of its due date. Such late charge shall be as of the due date of the next installment falling due. In the event such charge applies to any final payment due pursuant to the terms of this Revised Note, such charge shall be due and payable immediately. d. LIABILITY. This Revised Note shall be the joint and several obligation of all makers, sureties, and endorsers, and shall be binding on each of them, their successors and, and assigns. Each maker of this Note executes the same as principal and not as surety. e. WAIVER OF RIGHTS. Any forbearance or failure to enforce any provisions of this Revised Note shall not be deemed a waiver of the rights of Lender to enforce any provision of this Revised Note at any subsequent time. f. SECURITY. The indebtedness evidenced by this Revised Note is secured by a Deed of Trust and Financing Statements as referenced herein. g. NOTICES. All notices, demands, or documents which are required or permitted to be given or served hereunder shall be in writing and sent by registered or certified mail, return receipt requested, or personally delivered, to the following addresses: To Borrowers: MOREL INDUSTRIES, INC. 14351 Shamel Street Entiat, WA 98822 With copy to: PCT Holdings, Inc. 434 Old Station Road Wenatchee, WA 98801 Attn.: Donald A. Wright, President -5- And a copy to: Eugenie D. Mansfield Stoel Rives LLP 600 University Street Suite 3600 Seattle, WA 98101 To Lender: RICHARD L. DOANE AND JACQUELYNE DOANE 4238 - 95th Ave. N.E. Bellevue, WA 98004 With copy to: Ross D. Jacobson Ogden Murphy Wallace, P.L.L.C. 1601 Fifth Ave., Suite 2100 Seattle, WA 98101-1686 Notice addressed as above shall be effective on the earlier of the third day following deposit in the U.S. Mail, or the date of actual delivery. h. ATTORNEYS' FEE; COSTS. If suit is brought on this Revised Note, or if it is placed in the hands of an attorney for collection, the Borrowers promise and agree to pay all costs of collection, including actual attorneys' fees and court costs, and all costs of appeal, or attorneys' fees or costs incurred in any bankruptcy or insolvency proceeding. i. VENUE; JURISDICTION; CHOICE OF LAW. This Note shall be interpreted according to the laws of the State of Washington, and venue and jurisdiction shall be laid in King County, Washington. / / / / / / / / / / / / / / / / / / / / / / / / -6- ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. BORROWER LENDER MOREL INDUSTRIES, INC., a Washington corporation, /s/ Richard L. Doane By: /s/ D.A. Wright ------------------------------ -------------------------- RICHARD L. DOANE Its: Executive Vice President /s/ Jacquelyne A. Doane -------------------------- ------------------------------ JACQUELYNE A. DOANE /s/ Stephen Morel - - ------------------------------ STEPHEN MOREL /s/ Mark Morel - - ------------------------------ MARK MOREL STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Donald A. Wright is the person who appeared before me, and said person acknowledged that he was authorized to execute the instrument and acknowledged it as Executive Vice President of MOREL INDUSTRIES, INC., to be the free and voluntary act and deed of such party for the uses and purposes mentioned in this instrument. DATED: May 17, 1996 ------------------ /s/ Marishka T. Omundsen-Marten ---------------------------------------- Notary Public for the State of Washington, residing at Seattle ---------------- Print Name: Marishka T. Omundsen-Marten ----------------------------- My appointment expires 8-28-97 ----------------- -7- State of Washington ) ) ss. County of Chelan ) I certify that I know or have satisfactory evidence that MARK MOREL is the person who appeared before me, and said person acknowledged that he signed this instrument and acknowledged it to be his free and voluntary act for the uses and purposes mentioned in the instrument. Dated: May 18, 1996 ----------------- /s/ Charles D. Zimmerman -------------------------------------- Notary Public of the State of Washington, residing at Wenatchee -------------- Print Name: Charles D. Zimmerman -------------------------- My appointment expires January 29, 1997 --------------- State of Illinois ) ) ss. County of ________ ) I certify that I know or have satisfactory evidence that STEPHEN MOREL is the person who appeared before me, and said person acknowledged that he signed this instrument and acknowledged it to be his free and voluntary act for the uses and purposes mentioned in the instrument. Dated: May 20, 1996 ---------------- /s/ Ezra L. Kotzin -------------------------------------- Notary Public of the State of Washington, residing at 3826 Lake Ave. -------------- Wilmette, IL 60091 -------------------------------------- Print Name: EZRA KOTZIN -------------------------- My appointment expires August 7, 1997 --------------- State of Washington ) ) ss. County of King ) I certify that I know or have satisfactory evidence that RICHARD L. DOANE is the person who appeared before me, and said person acknowledged that he signed this instrument -8- and acknowledged it to be his free and voluntary act for the uses and purposes mentioned in the instrument. Dated: 5-21-96 -------------------------- /s/ Lidia Rosioru ----------------------------------- Notary Public of the State of Washington, residing at Kirkland ----------- Print Name: Lidia Rosioru ----------------------- My appointment expires 1-1-99 ------------ State of Washington ) ) ss. County of King ) I certify that I know or have satisfactory evidence that JACQUELYNE DOANE is the person who appeared before me, and said person acknowledged that she signed this instrument and acknowledged it to be her free and voluntary act for the uses and purposes mentioned in the instrument. Dated: 5-21-96 -------------------------- /s/ Lidia Rosioru ----------------------------------- Notary Public of the State of Washington, residing at Kirkland ----------- Print Name: Lidia Rosioru ----------------------- My appointment expires 1-1-99 ------------ -9- EX-10.38 5 PROMISSORY NOTE FROM CASHMERE MANUFACTURING Exhibit 10.38 PROMISSORY NOTE
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $239,370.73 03-15-1996 03-15-1999 123966 D12 002 JM References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: Cashmere Manufacturing Co., Inc. Lender: Cashmere Valley Bank 910785809 Cashmere Office 432 Olds Station Road 117 North Division Street Wenatchee, WA 98801 P.O. Box G Cashmere, WA 98815 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Principal Amount: $239,370.73 Interest Rate: 9.250% Date of Note: March 15, 1996
PROMISE TO PAY. Cashmere Manufacturing Co., Inc. ("Borrower") promises to pay to CASHMERE VALLEY BANK ("Lender"), or order, in lawful money of the United States of America, the principal amount of Two Hundred Thirty-Nine Thousand Three Hundred Seventy Dollars and 73/100 ($239,370.73), together with interest at the rate of 9.2500% per annum on the unpaid principal balance from March 15, 1996, until paid in full. PAYMENT. Subject to any payment changes resulting form changes in the Index, Borrower will pay this loan in 35 regular payments of $5,774.29 each and one irregular last payment estimated at $83,104.91. Borrower's first payment is due April 5, 1996, and all subsequent payments are due on the same day of each month after that. Borrower's final payment due March 15, 1999, will be for all principal and all accrued interest not yet paid. Payments include principal and interest. Interest on this Note is computed on a 365/365 simple interest basis; that is, by applying the ratio of the annual interest rate over the number of days in a year, times the outstanding principal balance, times the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and late charges, then to unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Wall Street Journal Prime Rate (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each year, 30 days prior to the anniversary of the origination date of the loan. The Index currently is 8.250% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.00 percentage point over the Index, resulting in an initial rate of 9.250% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (a) increase Borrower's payments to ensure Borrower's loan will pay off by the original final maturity date, (b) increase Borrower's payments to cover accruing interest, (c) increase the number of Borrower's -1- payments, and (d) continue Borrower's payments at the same amount and increase Borrower's final payment. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $10.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payment will not, unless agreed to by Lender in writing, relieve Borrower or Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower's making fewer payments. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $100.00, whichever is less. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to perform promptly at the time and strictly in the manner provided in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any of the events described in this default section occurs with respect to any guarantor of this Note. (g) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the interest rate on this Note to 12.000% per annum. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of Washington. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of CHELAN County, the State of Washington. This Note shall be governed by and construed in accordance with the laws of the State of Washington. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. -2- RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interests in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. COLLATERAL. This Note is secured by DEED OF TRUST DATED FEBRUARY 28, 1990. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as marker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice of anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: Cashmere Manufacturing Co., Inc. By: /s/ Herman L. Jones ----------------------------------- Herman L. Jones, President /s/ Herman L. Jones - - ----------------------------------- Herman L. Jones, Cosigner -3- EX-10.39 6 COMMERCIAL GUARANTY FROM HERMAN L. JONES Exhibit 10.39 COMMERCIAL GUARANTY - - ------------------------------------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials 12 2 Hal - - ------------------------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - - ------------------------------------------------------------------------------------------------------------------------------------
Borrower: Cashmere Manufacturing Co., Inc. 91-07858091 P.O. Box A Cashmere, WA 98815 Guarantor: Herman I. Jones 6961 Nahahum Canyon Cashmere, WA 98815 TIN: Lender: Cashmere Valley Bank Cashmere Office 117 North Division Street P.O. Box G Cashmere, WA 98815 AMOUNT OF GUARANTY. The amount of this Guaranty is Three Hundred Seventy Thousand Four Hundred Twenty Two & 68/100 Dollars ($370,422.68). GUARANTY. For good and valuable consideration, Herman I. Jones ("Guarantor") absolutely and unconditionally guarantees and promises to pay CASHMERE VALLEY BANK ("Lender") or its order, in legal tender of the United States of America, the Indebtedness (as that is defined below) of Cashmere Manufacturing Co., Inc. ("Borrower") to Lender on the terms and conditions set forth in this Guaranty. DEFINITIONS. The following words shall have the following meanings when used in this Guaranty. Borrower. The word "Borrower" means Cashmere Manufacturing Co., Inc. Guarantor. The word "Guarantor" means Herman I. Jones. Guaranty. The word "Guaranty" means this Guaranty between Guarantor and Lender dated March 3, 1993. Indebtedness. The word "Indebtedness" means the Note, including (a) all principal, (b) all interest, (c) all late charges, (d) all loans fees, loan charges, and (e) all collection costs and expenses relating to the Note or to any collateral for the Note. Collection costs and expenses -1- include without limitation all of Lender's attorneys' fees and Lender's legal expenses, whether or not suit is instituted, and attorneys' fees and expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Lender. The word "Lender" means CASHMERE VALLEY BANK, its successors and assigns. Note. The word "Note" means the promissory note or credit agreement dated March 3, 1993, in the original principal amount of $370,422.68 from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions to any promissory note or agreement. MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall not exceed at any one time $370,422.68 plus all costs expenses of (a) enforcement of this Guaranty and (b) collection and sale of any collateral securing this Guaranty. The above limitation on liability is not a restriction on the amount of the Indebtedness of Borrower to Lender either in the aggregate or at any one time. If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, the rights of Lender under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. The liability of Guarantor will be the aggregate liability of Guarantor under the terms of this Guaranty and any such other unterminated guaranties. NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performance and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of all Indebtedness within the limits set forth in the preceding section of this Guaranty. Any married person signs this Guaranty as the Guarantor hereby expressly agrees that recourse under this agreement may be had against both his or her separate property and community property, whether now owned or hereafter acquired. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness shall have been fully and finally paid and satisfied and all other obligations of Guarantor under this Guaranty shall have been performed in full. Release of any other guarantor or termination of any other guaranty the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation received by Lender from any one or more Guarantors not affect the liability of any remaining Guarantors under this Guaranty. GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes lender, without notice or demand and without lessening guaranty liability under this Guaranty, from time to time: (a) to make one or more additional secured or unsecured loans to Borrower, to lend equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (b) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be for longer than original loan term; (c) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, decide not to perfect, and release any such security, with or without the substitution -2- of new collateral; (d) to release, substitute, agree not to sue or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (e) to determine how, when and what application of payments and credits shall be made on the Indebtedness; (f) to apply such security direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (g) to sell, transfer, assign, or grant participations in all or any part of the Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (a) no representations or agreement of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (b) this Guaranty is executed at Borrower's request and not at the request of Lender; (c) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assess, encumber, hypothecate, transfer or otherwise dispose of all or substantially all of Guarantor's asserts, or any interest therein; (d) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; (e) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information provided to Lender is true and correct in all material respects and fairly presents the financial condition of Guarantor as of the dates thereof, and no material adverse change has occurred in the financial condition of Guarantor since the date of the financial statements; and (f) Guarantor has established adequate means of obtaining from Borrower on a continuous basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GRANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender (a) to continue lending money or to extend other credit to Borrower; (b) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of Indebtedness or any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations; (c) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (d) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (e) to pursue any other remedy within Lender's power; or (f) commit any act or omission of any kind, or at any time, with respect to any matter whatsoever. If now or hereafter (a) Borrower shall be or become insolvent, and (b) the Indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor of Lender and Borrower, and their respective successors, any claim of right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws. Guarantor also waives any and all rights or defenses arising by reason of (a) any "one action" or "anti-deficiency" law or any other law which would prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or -3- completion of any foreclosure action either judicially or by exercise of a power of sale; (b) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor's subrogation rights or any law limiting, qualifying, or discharging the Indebtedness; (c) any disability or other defense of Borrower or any other guarantor, or of any other person, or by reason of the cessation of Borrower's liability from any cause whatsoever, other than payment in legal tender, of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any collateral for the Indebtedness; (e) any statute of limitations. If at any time any action or suit brought by Lender against Guarantor is commenced there is outstanding on the Indebtedness of Borrower to Lender which is not barred by any applicable statute of limitations; or (f) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness if payment is made by Guarantor which __________________ third party, on the Indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower's trustee in bankruptcy similar person under any federal or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of enforcement of this Guaranty. Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not against public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective or extent permitted by law or public policy. LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff against the moneys, securities or other property of Guarantor or Lender by law, Lender shall have, with respect to Guarantor's obligations to Lender under this Guaranty and to the extent permitted by law, a contractual possessory security interest in and a right of setoff against, and Guarantor hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's right, title and interest in and to, all deposits, moneys, securities and other property of Guarantor now or hereafter in its possession of or on deposit with Lender, whether held in a general or special account or deposit, whether held jointly with someone else, or held for safekeeping or otherwise, excluding however all IRA, Keogh, and trust accounts. Every such security interest and right of setoff shall be exercised without demand upon or notice to Guarantor. No security interest or right of setoff shall be deemed to have been waived by any conduct on the part of Lender or by any neglect to exercise such right of setoff or security interest is specifically waived or released by an instrument in writing executed by Lender. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be prior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid -4- to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided, however, that such assignment shall be effective only for the purpose of assuring to Lender full payment to Lender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower or Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary to appropriate to perfect, preserve, and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. This following miscellaneous provisions are a part of this Guaranty: AMENDMENTS. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by Lender in the State of Washington. If there is a lawsuit, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of CHELAN County, State of Washington. This Guaranty shall be governed by and construed in accordance with the laws of the State of Washington. ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may pay someone else to help enforce this Guaranty and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses, whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), applies, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court. NOTICES. All notices required to be given by either party to the other under this Guaranty shall be in writing and shall be effective when actually delivered or when deposited in the United States mail, first class postage prepaid, addressed to the party to whom the notice is to be given at the address shown above or to such other addresses as either party may designate to the other in writing. If there is more than one Guarantor, notice to any Guarantor will constitute notice to all Guarantors. For notice purposes, Guarantor agrees to keep Lender informed at all times of the Guarantor's current address. INTERPRETATION. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singulars shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all any one or more of them. The words "Guarantor," -5- "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. If a court of competent jurisdiction finds any provision of this Guaranty to be invalid or unenforceable as to any person or circumstances, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances, and all provisions of this Guarantee shall in all other respects remain valid and enforceable. If any one or more of Borrower or Guarantor are corporations or partnerships, it is necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, or agents acting or purporting to act on their behalf, and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty. WAIVER. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED MARCH 3, 1993. GUARANTOR: /s/ Herman L. Jones - - ------------------------------ HERMAN L. JONES -6- EX-10.42 7 LEASE AGREEMENT Exhibit 10.42 LEASE AGREEMENT CASHMERE MANUFACTURING, INC. 1994 THIS LEASE ("Lease") is entered into this date, between PORT OF CHELAN COUNTY, a Washington municipal corporation, hereafter referred to as "Landlord," and CASHMERE MANUFACTURING, INC., a Washington corporation, hereafter referred to as "Tenant. 1. PREMISES. 1.1 Landlord hereby leases to Tenant, and Tenant leases from Landlord, upon the terms and conditions included in this Lease, the following described Property consisting of approximately 4.5 acres of land together with Facilities to be placed on the Property pursuant to the Cashmere Manufacturing, Inc. Building Construction Agreement of even date between the parties ("Construction Agreement"), as "Facilities" is defined in that Construction Agreement: See attached Exhibit "A" 1.2 The above-described property along with all the buildings and other improvements now or hereafter placed on it are hereafter called the "Property", "Leased Premises" or "Premises." 2. TERM OF LEASE. 2.1 This Lease shall be for a term commencing on September 1, 1995, and ending on August 31, 2005. 2.2 If the Landlord does not deliver substantial possession (such that the Tenant can move in and prepare for initial operations) of the Leased Premises at the commencement of the term of this Lease, rent shall be abated, or pro rated if only part of the premises are delivered, until substantial possession is tendered by the Landlord. This Lease shall remain in full force and effect in all other respects and the lease term shall be extended thereby. 2.3 If Landlord completes construction of the Facilities prior to September 1, 1995, Tenant shall accept possession a reasonable time thereafter and the lease term shall commence upon tenant taking possession but not later than twenty (20) days after Acceptance of the -1- Facilities as provided in the Construction Agreement, at which time the term shall commence, notwithstanding the commencement date set out above. 3. OPTION TO RENEW. 3.1 Tenant shall have the option to renew this Lease for two additional five (5) year periods, each term to commence immediately upon the expiration of the preceding term. The option to renew shall be exercised in writing and delivered to Landlord not less than one hundred eighty (180) days prior to the expiration of the then-current lease term. Such renewal term shall be on the same terms and conditions applicable to the original lease term, except for the rent which shall be adjusted as provided for in Paragraph 4.6. 3.2 Landlord shall not be obligated to renew this Lease, if at the time of the exercise of the option, or if at the time the renewal term is to begin, Tenant is in default under this Lease, which default is not cured within a reasonable time, not exceeding the time for cure set out in Paragraph 26, or if, during the Lease Tenant has been in default on five (5) or more occasions when Landlord has given written notice of such default to Tenant, which default has not been cured within a reasonable time, not to exceed the time for cure set out in Paragraph 26. Landlord shall annually provide a written report to Tenant of the number of Tenant's defaults not cured within the time allowed, if any. If Tenant disputes the number designated in the Landlord's notice it shall so advise the Landlord in writing within ten (10) days of receipt of the annual report. Final determination of whether or not such default actually occurred without timely cure shall be made by arbitration as set out in Paragraph 31, if it becomes an issue at the time of exercise of the option. 4. RENT. 4.1 During the Lease's initial term and any renewal term, Tenant shall pay Landlord monthly rental based on the amount determined as set out below in Paragraph 4.2 ("Base Rent"), adjusted as set forth in Paragraphs 4.3 and 4.6 below for the first and subsequent years, payable in lawful money of the United States. Rent shall be paid in equal installments in advance on the first day of each month of the lease term and any renewals thereon. 4.2 The actual Base Rent amount will be determined when the cost of construction, as defined in the Construction Agreement, is fixed, as follows: 4.2.1 The monthly payment amount necessary to amortize the cost of construction of the Facilities, excluding sales taxes, over thirty (30) years with interest at seven percent (7%) per annum shall be determined. 4.2.2 The monthly payment amount necessary to amortize the amount of sales taxes payable for the construction of the Facilities over ten (10) years with interest at seven percent (7%) per annum shall be determined. -2- 4.2.3 The sum of the two monthly payment amounts determined pursuant to Subparagraphs 4.2.1 and 4.2.2 above shall be the Base Rent; provided that if the payment of sales taxes for the construction of the Facilities is deferred or waived, the determination of Base Rent shall, during any period of deferral or during the entire Lease if the sales tax is waived, exclude the amount necessary to amortize the sales tax from the calculation so that during any period of deferral or during the entire Lease if the sales tax is waived, Base Rent shall be the amount set out in Subparagraph 4.2.1 above, subject to adjustment as hereafter set forth. 4.2.4 If the projected Base Rent plus leasehold tax exceeds 43 cents per square foot per month, based on the lowest responsible bid as determined after bids for the Facilities are opened but before a contract is let, the Landlord shall reject all bids. The parties agree to then work together to change the plans and specifications, as the parties have agreed to do in the Construction Agreement, and, to prepare new plans and specifications for the Facilities and to invite new bids. Provided; however, if Tenant agrees in writing to pay rent equal to the full amount of the rent calculated according to the formula in Paragraph 4.2.1 and 4.2.2, within five (5) days after bids are opened, this Lease shall be amended to so state, and the lowest responsible bid shall be accepted. 4.3 Landlord agrees to defer a portion of the Base Rent plus leasehold tax on the deferred amount for the first year of the Lease so that during the first year Tenant shall pay only Nine Thousand Dollars ($9,000) per month of the full amount due for rent and leasehold tax. The balance of the rent and leasehold tax due for the first year shall accrue interest at 7 percent (7 %) per annum from the date due, and shall be paid in equal monthly installments over the second, third, fourth, and fifth years of the Lease, so the full amount of the deferred rent plus accruing interest shall be amortized over and paid in forty- eight (48) equal monthly payments, including interest, beginning with the first month of the second year of the lease term. 4.4 In addition to Rent, Tenant shall pay to the Landlord such sums as may be required by law for payment of leasehold or other tenant tax as required by the State of Washington or other tax entity, as such laws now exist or as they hereafter be amended (such leasehold tax currently being 12.84 %). If leasehold tax is increased or decreased, the total amount payable for Rent plus leasehold tax shall increase or decrease, but the amount of Rent shall not be changed. 4.5 4.5.1 In the event the lease term commences or terminates on a date that is not the first or last day of the month, respectively, Tenant shall pay a pro-rated monthly installment, in advance, on the first day of the lease term or the first day of the last month of the lease term, respectively, at the then current rate, based on the number of days of actual occupancy during the first or last calendar month of the lease term. 4.5.2 In the event some but not all of the premises are delivered by Landlord for occupancy, rent shall be adjusted to reflect a pro-rata amount for the portion delivered. -3- 4.6 4.6.1 Beginning with September, 1999, and again on September 1, of each year thereafter, including each year of a renewal term, if the Lease is renewed (the "adjustment years"), the Base Rent shall be adjusted in accordance with the Consumer Price Index to the amount determined as hereafter set out. 4.6.2 The Base Rent shall be adjusted to an amount equal to the product obtained by multiplying the full Base Rent calculated as set out in Paragraph 4.2, by a fraction, the denominator of which is the semi-annual data for the half year ending June, 1995, from the "Consumer Price Indexes Pacific Cities and U.S. City Average" for "All Items Indexes" for "All Urban Consumers (1982-84 = 100)", published by the Bureau of Labor Statistics of the United States Department of Labor, as adjusted semi-annually for the Seattle area ("CPI-U"), and the numerator of which is the CPI-U for the half year period ending the June closest to and before the first month of the period for which the adjustment is then being made; provided however, that in the event the period designated above shall not be listed in the Index, the closest period-, or month if the reporting data is monthly, preceding June shall be used; and provided that rent shall not fall below the amount calculated in Paragraph 4.2 above. 4.6.3 By way of example, the CPI adjustment for the monthly rent shall be calculated as follows: Semi-annual CPI-U for the June ending closest to and before the first month of the Monthly rent period for which The Base beginning the adjustment is Rent as with the being made, for calculated in first month Seattle X Paragraph 4.2 = of the app- __________________ licable ad- justment yr. Semi-annual CPI-U ending 6-95 for Seattle 4.6.4 Notwithstanding the foregoing, the maximum increase in Rent in any one year shall be the greater of 4 per-cent per year or 2/3 of the amount of the annual increase calculated according to the formula set forth in Paragraph 4.6.2 (e.g. If the percent increase for a one year period is four percent (4%) or less, rent will increase by the full percentage amount. If the one year percentage increase exceeds four percent (4 %), the rent increase will be four percent (4 %) until the annual increase exceeds six percent (6%), and above six percent (6%) the annual increase will be 2/3 of the actual increase.) -4- 4.6.5 If the U.S. Department of Labor, Bureau of Labor Statistics, shall discontinue publication of the Consumer Price Index, then another index generally recognized as authoritative shall be substituted by agreement, and if the parties should not agree, such substituted index shall be selected by the then presiding Judge of the Chelan County Superior Court upon the application of either party. 4.7 4.7.1 Tenant shall pay, before the same become delinquent, all taxes assessed against Tenant's personal property, furniture, fixtures, equipment, inventory and other property on the Leased Premises. 4.7.2 Any tax related to the value of the property that may be assessed against Landlord or Tenant during the term of this Lease will be paid by Tenant, upon demand by Landlord. 4.8 Landlord shall have no obligation relative to the property for such things as repair, upkeep, snow removal, standby water, fire protection costs, utilities, taxes, assessments, inspections (e.g. fire alarm and sprinkler systems) and the pro-rata share of irrigation water and fire protection, etc., unless set out herein, and Tenant shall pay and be responsible for all expenses associated with the property. 4.9 4.9.1 Tenant shall deposit with Landlord a security deposit in the amount of $150,000, in the form of a bond or other deposit acceptable to Landlord, to be held by Landlord as security for the full and faithful performance by Tenant of each and every term, covenant and condition of the Lease. 4.9.2 If Tenant breaches any of the lease terms, including the obligation to pay Rent, Landlord may, at Landlord's option, make demand upon such security and apply the proceeds thereof to cure the breach. 4.10 4.10.1 In the event any rental amount called for herein, including the leasehold tax, is not paid within ten (10) days from the date it is due Tenant shall pay to Landlord a late charge of five percent (5 %) of the rental amount per month for each unpaid Lease payment until such payment is paid. 4.10.2 The late charge is due immediately and is in addition to all of Landlord's other rights in this Lease. -5- 4.10.3 In the event Landlord gives written notice of Tenant's default, delinquency or other Lease violations, Tenant agrees to pay Landlord's actual costs and attorneys' fees reasonably incurred in providing such notice, in addition to the late charge and all other payments and obligations called for herein. 5. CONSTRUCTION COMMENCEMENT. The Leased Premises currentlyconsist of vacant land. Landlord agrees to construct a multi-purpose building consistent with plans and specifications prepared, after consulting with the Tenant, by the Landlord's engineer (the "Facility"). The terms of the agreement between Landlord and Tenant regarding construction of the building are set out in a "Cashmere Manufacturing, Inc. Building Construction Agreement" of this date ("Construction Agreement") which is incorporated herein this reference. The building shall be generally as depicted on the attached Drawing, labeled Exhibit "B". 6. PLANS AND SPECIFICATIONS. Upon Landlord's and Tenant's acceptance of the plans and specifications, those plans shall be incorporated herein by reference. The plans and specifications are subject to amendment by agreement of the parties. 7. POSSESSION. Possession of the Facility shall be delivered upon substantial completion of the Facility in accordance with the plans and specifications for the Facility. For purposes of this paragraph, the Facility shall be substantially completed when the Facility may be occupied by the Tenant for purposes of operating its business, understanding that Tenant's business operations may encounter inconvenience until final completion. 8. ACCEPTANCE OF FACILITIES. 8.1 Landlord shall give notice to Tenant of its intent to finally accept the building from the contractor prior to actual acceptance as provided in the Construction Agreement. 8.2 No representation, statement or warranty, expressed or implied, is or shall be made by or on behalf of the Landlord as to the building's condition, or as to the use that may be made of such building unless specifically set forth in writing. Tenant releases Landlord from any responsibility for any representation that may have been made to the Tenant about the property that is not specifically set out in this Lease Agreement. 9. USE OF LEASED PREMISES. The Leased Premises shall be used by Tenant for the purpose of manufacturing, warehousing and distributing hermetic connectors, semiconductors and hybrid microelectronic packages and other electronic packaging products and for the general manufacture of high technology products in the Leased Premises and for no other purpose unless agreed to in advance by Landlord. Further, the Tenant agrees that: 9.1 Tenant shall not allow the use of the Leased Premises in a manner which would increase Landlord's insurance premiums unless Tenant agrees to reimburse Landlord for such increase, or for any illegal purpose. -6- 9.2 Tenant shall comply with all laws and shall observe all applicable ordinances, including the Protective Covenants for Olds Station Industrial Park, and any amendments thereto ("Protective Covenants") a copy of which has been received and reviewed by Tenant and which Protective Covenants are incorporated herein by this reference, related to the use of the Leased Premises. Landlord shall not be responsible to Tenant for the non-performance by any other Tenant or occupant of the Olds Station Industrial Park of any said rules and regulations. Tenant understands and agrees that Landlord may amend the Protective Covenants, and that such amendments shall be binding upon Tenant; as provided in the Protective Covenants, from the time Tenant receives notice of such amendment. 10. OTHER AGREEMENTS. Tenant is the parent of Pacific Coast Technologies,and Cashmere Manufacturing, Inc., both of which now or in the future may or will be occupying portions of the Leased Premises. Other leases or agreements which have been or may the future be entered into between the Landlord and Tenant or between Landlord and one or of Tenant's subsidiaries, including Pacific Coast Technologies, Inc. and Cashmere Manufacturing, Inc., are incorporated herein by this reference including, but not limited to the "Lease Agreement--Pacific Coast Technologies, Inc., 1993 ", between Landlord and Pacific Coast Technologies, Inc., dated February 1, 1993. A default in any one of the leases or agreements referred to in this paragraph shall be deemed a default in any of the others and entitle Landlord to exercise remedies set out in favor of Landlord in any and all of such agreements. 11. SERVICES AND UTILITIES. 11.1 Tenant shall make all arrangements for and pay all utilities, including, but not limited to: gas, electricity, water, waste treatment, garbage, telephone and all other utilities furnished to the Leased Premises. 11.2 Landlord does not warrant that any utilities and services will be free from interruption. The Landlord shall not be liable to Tenant for any loss or damage caused by or resulting from any variation, interruption, or failure of heat or any utility services due to any cause, other than Landlord's negligent or willful acts. No temporary interruption or failure of services due to the making of repairs, alterations, or improvements, or due to accident, strike or conditions or events beyond Landlord's control shall be deemed an eviction of Tenant or relieve Tenant from any of Tenant's obligations under this Lease. 12. ALTERATIONS AND IMPROVEMENTS. 12.1 Landlord acknowledges that the tenant may need to make alterations within portions of the Leased Premises. Tenant shall make no changes, improvements or alterations, to the Leased Premises without the Landlord's prior written consent. 12.2 Landlord agrees not to unreasonably deny approval for changes, improvements or alterations; provided design plans are submitted to Landlord for review and approval. Approval for structural changes must be approved in advance by Landlord's engineer. Tenant shall bear -7- Landlord's reasonable costs of investigation for requested changes, including engineer's and other expert's fees. 12.3 All such approved changes, shall be at the Tenant's sole cost and expense; and Tenant shall use a licensed and bonded contractor or contractors for such alterations. Tenant agrees that any alterations or improvements made shall not abate the rent. In the performance of such work, Tenant agrees to comply with all laws and ordinances and to hold Landlord harmless from any damage, loss or expense caused by work performed by Tenant. 12.4 Any alterations of the Leased Premises shall become at once a part of the realty and belong to the Landlord, except trade fixtures supplied and paid for by the Tenant subject to the Tenant's duty to remove as set out in this Agreement. 12.5 At Landlord's request, within thirty (30) days prior to the Lease's termination, Tenant shall restore the Leased Premises to the condition that existed at the commencement of the Lease, except for normal wear and tear. 12.6 Tenant shall keep the Leased Premises free from any liens, and shall indemnify and hold Landlord harmless and defend it from any liens or encumbrances, damage, loss or expense arising out of any work performed or materials furnished by or at the direction of Tenant, or otherwise, to the Leased Premises. 13. TRADE FIXTURES. Tenant may install on the Leased Premises such equipment as is customarily used in the type of business conducted by Tenant. At the termination of this Lease, at the direction of the Landlord, Tenant shall, or at Tenant's option Tenant may, remove from the Leased Premises all such equipment and all other property of Tenant provided that Tenant repairs the damage caused by the removal or restores, at the Tenant's sole cost and expense, the Leased Premises, consistent with Paragraph 12.5. Any equipment or fixtures not removed by the expiration or sooner termination of this Lease or any renewal period, shall at the option of the Landlord become the property of the Landlord. 14. REPAIR AND MAINTENANCE. 14.1 Unless otherwise agreed, Tenant shall, at its own expense, make all necessary repairs and replacement to the Leased Premises. Tenant shall be responsible for all maintenance and repair, including, but not limited to: the piping, heating system, window glass, fixtures, electrical and mechanical systems, and all other appliances and equipment used in connection with the Leased Premises. Such repairs and replacements, interior and exterior, structural and non-structural, shall be made promptly as and when necessary. All repairs and replacements shall be approved in advance by Landlord and must be of quality and class at least equal to the original work as reasonably determined by Landlord. -8- 14.2 On default of the Tenant in making such repairs or replacements, the Landlord may, but shall not be required to, make such repairs and replacements for the Tenant's account, and the expense thereof shall constitute and be collectible as additional rent. 14.3 Notwithstanding the foregoing, Landlord shall be responsible for the repairand maintenance of the roof and structural damage to the Premises, made as a Capital Expense defined below, to the extent not necessitated or caused by Tenant's negligence or conduct; provided that Tenant shall be responsible for removal of snow or other accumulations on the roof, including ice and water, and shall be responsible and pay for any damage occurring because of such accumulations. It is the intention of this Agreement that except for Landlord's share of Capital Expense set out below which include roof and structural repair stated above, Landlord shall have no obligation for expenses associated with the building beyond its own debt payments, except as otherwise provided herein. 14.4 Capital improvements, replacements or repairs ("Capital Expense") not necessitated or caused by Tenant's neglect or conduct, shall be made by Landlord. "Capital Expense" means a repair or replacement not normally occurring during the ordinary useful life of the item being repaired or replaced, and which repair or replacement has a useful life extending beyond the then existing lease term. For example, replacement of a toilet seat, fan belt on a motor, light ballast or carpeting, repair of a gouge in the floor or wall, minor repair of exterior walls, or repainting are not "Capital Expenses". Repair of major damage to the building's exterior is a "Capital Expense". Cost of the Capital Expense shall be amortized over the reasonably expected useful life of the Capital item, as determined in consulting with its engineer. Tenant shall pay, as additional rent, a pro-rated amount of the Capital Expense each month, equal to the total Capital Expense divided by the number of months of useful life of the Capital Expense. Notwithstanding the foregoing, rent shall not be adjusted for the amount of a Capital Expense paid by insurance, or by a third party, at no cost to Landlord. 14.5 Landlord shall not be obligated to repair or replace any fixtures or equipment installed by Tenant and Landlord shall not be obligated to make any repair or replacement occasioned by any act or omission of Tenant, its employees, agents, invitees or licensees. 15. RIGHT OF ENTRY. 15.1 Landlord may enter the Leased Premises at all times for emergencies, and at reasonable times, after reasonable notice, during or after business hours, for the purpose of inspecting, cleaning, repairing, altering, improving or exhibiting the Leased Premises, but nothing in this Lease shall be construed as imposing any obligation on the Landlord to perform any such work. 15.2 Landlord may place "FOR RENT" or "FOR SALE" signs on the exterior of the Leased Premises and after reasonable notice may enter the Leased Premises for purposes of showing the Leased Premises to prospective tenants, purchasers and lenders. -9- 16. DAMAGE OR DESTRUCTION. 16.1 All damage or injury done to the Leased Premises by Tenant or by any persons who may be in or upon the Leased Premises shall be paid for by Tenant. 16.2 If the Property or the Leased Premises are destroyed or damaged by fire or any other casualty to the extent that a substantial part of the Property or the Leased Premises is rendered untenantable, or if the uninsured portion of the cost of repairing the damage to the Property or Leased Premises exceeds $50,000, either Landlord or Tenant may terminate this Lease by notice in writing to the other within sixty (60) days after the destruction or damage, unless Landlord agrees in writing within 30 days after the destruction to pay the uninsured portion of the cost of repair, in which case the Lease shall not terminate. The notice shall be effective thirty (30) days after receipt. 16.3 16.3.1 If the Leased Premises shall be partially destroyed or rendered partially untenantable and if the Lease is not terminated by Landlord, Landlord shall restore the Leased Premises to its previous condition, and in the meantime the monthly rent shall be abated in the same proportion as the untenantable portion of the Leased Premises bears to the whole of the Leased Premises. 16.3.2 Notwithstanding the foregoing, Landlord shall have no obligation to repair, reconstruct, or restore the Leased Premises when the damage or destruction occurs during the last twelve (12) months of either the initial or a renewal lease term, if Tenant has not exercised a renewal option, or, within 12 months of the last renewal lease term. 16.4 Landlord's liability shall be limited to its contractual obligation in this Lease, its negligent or otherwise wrongful conduct. 17. INDEMNITY. 17.1 The Tenant shall indemnify the Landlord from and against any and all claims, demands, cause of actions, suits or judgments (including fees, costs and expenses [including attorney fees] incurred in connection therewith and in enforcing the indemnity) for deaths or injuries to persons or for loss of or damage to property arising out of or in connection with the condition, use or occupancy of the Leased Premises or any improvements thereon; or by Tenant's non-observance or nonperformance of any law, ordinance or regulation applicable to the Leased Premises; or incurred in obtaining possession of the Leased Premises after a default by the Tenant, or after the Tenant's default in surrendering possession upon expiration or earlier termination of the term of the Lease, or enforcing any of the Tenant's covenants in this Lease. This includes, without limitation, any liability or injury to the person or property of Tenant, its agents, officers, employees, or invitee. The tenant specifically waives any immunity provided -10- by Washington's Industrial Insurance Act. This indemnification covers claims by Tenant's own employees. 17.2 In the event of any such claims made or suits filed, Landlord shall give Tenant prompt written notice thereof and Tenant shall have the right to defend or settle the same to the extent of its interests thereunder. 17.3 Tenant, as a material part of the consideration to be rendered to Landlord, waives all claims against Landlord for damages to goods, wares, merchandise and loss of business in, upon or about the Leased Premises and for injury to Tenant, its agents, employees, invitee or their persons in or about the Leased Premises from any cause arising at any time, including Landlord's breach of this Lease. 18. INSURANCE. 18.1 Tenant shall provide its own property damage insurance. 18.2 From and after the commencement date of the term of this Lease, Tenant shall insure the Premises, at its sole cost and expense, against claim for personal injury and property damage under a policy of general liability insurance, with limits of $1,000,000.00 single limit or its equivalent for bodily injury, and $500,000.00 for property damage. Such policy shall name Landlord and Tenant as insureds. Before taking possession of the Leased Premises, the Tenant shall furnish the Landlord with a certificate evidencing the aforesaid insurance coverage. The limits of liability may be raised at the time of any lease renewal, by the percent increase in rent to become effective at the first month of the renewal term, calculated pursuant to Paragraph 4.6 of this Lease, upon the written request of Landlord. 18.3 The aforementioned minimum limits of policies shall in no event limit the liability of Tenant hereunder. No policy of Tenant's insurance shall be cancelable or subject to reduction of cover-age or other modification except after thirty (30) days prior written notice to Landlord by the insurer. Tenant shall, at least thirty (30) days prior to the expiration of the policies, furnish Landlord with renewals or binders. 18.4 Tenant shall insure the Leased Premises to the full replacement value with an "all risk" or equivalent policy of property insurance, naming Landlord as insured. Landlord may provide Tenant the option of insuring the building through Landlord's carrier, and reimbursing Landlord for the cost of such insurance. 18.5 The insurance shall be issued by carriers acceptable to the Landlord, and Landlord's approval shall not be unreasonably withheld. 18.6 The Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure such insurance on Tenant's behalf and -11- charge Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. 19. MUTUAL RELEASE. 19.1 In addition to, and not by way of limitation of, the tenant's obligation to indemnify Landlord, Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage, and other property insurance policies existing for the benefit of the respective parties. Each party shall obtain any special endorsements, if required, by their insurer to evidence compliance with the waiver. 19.2 Each insurance policy obtained by the Landlord and Tenant shall provide that the insurance company waives all rights of recovery by way of subrogation against either party in connection with any damage covered by the policy. Neither party shall be liable to the other for any damage caused by fire or any other risk insured against under any property insurance policy carried under the terms of this Lease to the extent of such insurance. 19.3 If an additional premium is required to be paid to obtain a waiver of subrogation, the application shall, within ten (1) days after notice to it of the required premium, give written notice of the additional premium to the one to whom the waiver would apply, and the one to whom the waiver would apply shall either pay the additional premium or this mutual release shall not be applicable to damages covered by that insurance policy. (e.g. If Landlord's insurance carrier requires an additional premium, Tenant would be required to pay the additional premium or this paragraph would not release Tenant. Tenant would then be subject to suit and Liable for damages caused by Tenant, whether or not Landlord's loss was covered by insurance.) 20. ASSIGNMENT AND SUBLETTING. 20.1 The Tenant may assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest therein, and may sublet the Leased Premises or any part thereof, upon receiving prior written consent from Landlord. If Tenant intends to mortgage, pledge, encumber or hypothecate this Lease or the Leased Premises or any interest therein, Landlord shall not unreasonably withhold consent, provided such action in no way restricts Landlord in executing its rights, or purports to grant to any third party rights in excess of those rights of Tenant under this Lease Agreement. If Tenant intends to transfer, assign or sublet the Leased Premises or any interest therein to another tenant, Landlord will not unreasonably withhold its consent. Any attempt to assign or sublet without such consent shall be null and void and shall constitute a breach of this Lease. if the Landlord does give written consent to an assignment or sublet, Tenant shall still be liable for full performance of all the Tenant's obligations in this Lease. 20.2 In the event Landlord is desirous of leasing the Leased Premises to a third party on terms and conditions acceptable to the Landlord (which include the terms and conditions of -12- this Lease) during a time when Tenant has vacated or abandoned the premises, Tenant agrees to terminate this Lease effective the date the new tenant takes possession of the Leased Premises if Landlord so requests. Upon such termination, Landlord and Tenant agree that all rights and responsibilities of this Lease shall end as though the Lease had ended according to its terms effective that date. Landlord agrees to give Tenant at least thirty (30) days notice of a potential subtenant or replacement tenant. In the event Tenant determines it desires to retain full possession and control of the Leased Premises in order to continue its business operations on the Leased Premises after a period of time not to exceed nine (9) months from the date of vacation or abandonment, then Tenant shall provide written notice, within fifteen (15) days following receipt of notice from Landlord of the prospective subtenant or replacement tenant, that the Tenant desires to continue in sole possession and control of the Leased Premises and to reject the subtenant or replacement tenant and will agree to reoccupy and reuse the Premises for its manufacturing and assembling operation, or such other operations as may be agreed to between Landlord and Tenant, within a period of time not to exceed nine (9) months from the date of vacation or abandonment. Failure of the Tenant to commence such reuse of the Premises within the nine (9) month period is a default by Tenant and a breach of the Lease. 20.3 An assignment or sublet includes the following: (1) any action which causes a change in control of the Tenant corporation at any time during the Term; (2) if all or substantially all of the assets of Tenant shall be sold, assigned or transferred with or without a specific assignment of the Lease; or (3) if Tenant shall merge or consolidate with any firm or corporation. 20.4 Landlord, at its option, may, by giving sixty (60) days prior written notice to Tenant after discovery of the action, declare such change to be an assignment or subletting in violation of this Lease, subject to the remedies provided for in event of breach of this Lease. 21. QUIET ENJOYMENT. Landlord covenants that Tenant, upon performance of Tenant's obligations under this Lease, shall lawfully and quietly hold, occupy and enjoy the Premises during the term of this Lease without disturbance by the Landlord or from any person claiming through the Landlord. 22. SIGNS. 22.1 ALL signs must comply with sign ordinances and be placed in accordance with the required permits and be consistent with the Olds Station Protective Covenants. 22.2 The Landlord may demand the removal of any signs which do not receive its prior written approval. Tenant's failure to comply with Landlord's demand to remove within forty-eight (48) hours of such demand shall constitute a breach of this paragraph and shall entitle the Landlord to cause the sign to be removed and the building repaired at the Tenant's sole expense. -13- 22.3 At the termination of this Lease, Tenant shall remove all signs placed by it upon the Leased Premises, and shall repair any damage caused by such removal. 23. VACATING UPON TERMINATION. Tenant covenants and agrees that upon expiration of the Lease or renewal term, or upon the termination of the Lease for any cause, shall at once peacefully surrender and deliver the whole of the above-described Leased Premises together with all improvements, except trade fixtures, thereon to the Landlord, Landlord's agents or assigns unless Tenant shall have expressly acquired the right to remain another written extension of this Lease. 24. PRESENCE AND USE OF HAZARDOUS SUBSTANCES. Tenant shall not, without Landlord's prior written consent, keep on or around the Leased Premises, for use, treatment, generation, storage or sale, any substances designated as, or containing designated as hazardous, dangerous, toxic or harmful (collectively referred to as "Hazardous Substances"), and/or which are subject to regulation by any federal, state or local law, regulation, statute or ordinance. 24.1 With respect to any Hazardous Substance, Tenant shall: 24.1.1 Comply promptly, timely, and completely with all governmental requirements for reporting, keeping and submitting manifests, and obtaining and keeping current identification numbers; 24.1.2 Submit to Landlord true and correct copies of all reports, manifests and identification numbers at the same time as they are required to be submitted to the appropriate governmental authorities; 24.1.3 Within five (5) days of Landlord's request, submit written reports to Landlord regarding Tenant's use, storage, treatment, transportation, generation, disposal or sale of Hazardous Substances and provide evidence satisfactory to Landlord of Tenant's compliance with the applicable governmental regulation; 24.1.4 Allow Landlord or Landlord's agents or representatives to come on the Leased Premises at all times, after reasonable notice, to check Tenant's compliance with all applicable governmental regulations regarding Hazardous Substances; 24.1.5 Comply with minimum levels, standards or other performance standards or requirements which may be set forth or established for certain Hazardous Substances (if minimum standards or levels are applicable to Hazardous Substances present on the Leased Premises, these levels or standards shall be established by an on-site inspection by the appropriate governmental authorities and shall be set forth in an addendum to this Lease); -14- 24.1.6 Comply with all governmental rules, regulations and requirements regarding the proper and lawful use, sale, transportation, generation, treatment and disposal of Hazardous Substances; and 24.1.7 Landlord shall have the right, at reasonable times and upon reasonable notice to Tenant, to inspect the Leased Premises to monitor Tenant's compliance with this section. Landlord shall pay and responsible for the costs of its own inspection. Notwithstanding the foregoing, if an inspection reveals the use or presence of Hazardous Substances requiring clean- up or other action, then Tenant shall pay, as part of the clean-up cost incorporated in Paragraph 24.2 below, Landlord's actual costs, including reasonable attorney's fees and costs, incurred in making or providing for such inspection and any follow-up inspections. 24.2 24.2.1 Tenant shall be fully and completely liable to Landlord for any and all clean-up costs and any and all charges, fees, penalties (civil and criminal) imposed by any governmental authority with respect to Tenant's use, disposal, transportation, generation and/or sale of Hazardous Substances, in or about the Leased Premises. 24.2.2 Tenant shall indemnify, defend and hold Landlord harmless from any and all costs, fees, penalties and charges assessed against or imposed upon Landlord including reasonable Landlord's attorneys' fees and costs as a result of Tenant's use, disposal, transportation, generation and/or sale of Hazardous Substances. 24.2.3 Upon Tenant's default under this article, in addition to the rights and remedies set forth elsewhere in this Lease, Landlord shall be entitled to the following rights and remedies. 24.2.3.1 At Landlord's option, to terminate this Lease immediately; and 24.2.3.2 To recover any and all damage associated with the default, including, but not limited to clean-up costs and charges, civil and criminal penalties and fees, loss of business and sales by Landlord and any and all damages and claims asserted by third parties together with reasonable attorneys' fees and costs. 25. LICENSES AND PERMITS. Tenant, at its sole expense, shall obtain all licenses or permits which may be required for conducting its business within the terms of this , or for the making of repairs, alterations, improvements or additions, and the Landlord, necessary, will join with the Tenant in applying for all such permits and licenses. 26. DEFAULT AND RE-ENTRY. -15- 26.1 If Tenant defaults in any rent payment due under the terms of this Lease, and such default is not cured within ten (10) calendar days after written notice from Landlord or within thirty (30) calendar days after written notice from Landlord if the default is other than the payment of rent, Landlord may terminate this Lease and re-enter the Leased Premises; or Landlord may, without terminating this Lease, re-enter said Leased Premises, and relet the whole or any part upon as favorable terms and conditions as the market will allow for the balance of the lease term. 26.2 Notwithstanding any re-entry, the liability of the Tenant for the full amounts payable by the Tenant under this Lease shall not be extinguished for the balance of the Lease or renewal term. Tenant shall make a reletting of the Leased Premises at a lesser rental or on different economic terms plus the reasonable costs and expenses of re-letting the Leased Premises including, but not limited, to commissions, advertising, attorney's fees, and the costs of renovating or altering the Leased Premises. 26.3 At Landlord's sole option, the deficiency between the amount to be received by the relet and the amount to be received if Tenant had fulfilled the Lease may be reduced to present cash value based on a six percent (6%) yield, and be declared due and owing, at any time after the property is relet. Tenant shall pay such amount upon demand. If Landlord elects this remedy, Landlord shall have no other remedy against Tenant for rent. Alternatively Tenant shall pay any deficiency caused by Tenant's default each month. The ability of Landlord to re-enter and relet shall not impose upon Landlord the obligation to do so. 26.4 Each of the following events is a default by Tenant and a breach of this Lease: 26.4.1 Any failure by Tenant to make any payment required to be made by Tenant on or before the time the payment is due. 26.4.2 The abandonment or vacation of the Leased Premises by the Tenant. 26.4.3 A failure by Tenant to observe and perform any provision of this Lease or any other lease or agreement between Tenant or any subsidiaries of Tenant and Landlord which is to be observed or performed by the Tenant or any subsidiary of Tenant. 26.4.4 The appointment of a receiver to take possession of all or substantially all the assets of the Tenant. 26.4.5 A general assignment by Tenant for the benefit of creditors. 26.4.6 Any action taken or suffered by Tenant under any insolvency or bankruptcy act. If Tenant becomes insolvent, bankrupt, or if a receiver, assignee, or other liquidating officer is appointed for the Tenant's business, Landlord may cancel this Lease, subject to Section 365 of Bankruptcy Code, II U.S.C. 365. -16- 26.4.7 A default under this Lease may, at Landlord's discretion, be declared to be a default under any other lease or agreement between Tenant and Landlord, or between any subsidiary of Tenant and Landlord. 27. LANDLORD'S EXPENSES ON TENANT'S DEFAULT. Except as otherwise provided, if either party to this Lease fails (the "Defaulting Party") to make any payment or perform any obligations under this Lease the non-default demand upon the Defaulting Party and without waiving or releasing the Defaulting Party from any obligations under this Lease, may make any payment or perform any other obligation of the Defaulting Party, in such manner and to such extent as the non-defaulting party deems desirable. All costs and expenses paid by the non-defaulting party in connection with the performance of any such obligations, together with interest at the rate of 12% per annum, compounded annually, from the date of making such expenditure by the non-defaulting party, shall be payable to the non-defaulting party upon demand. 28. REMOVAL OF PROPERTY. 28.1 If the Landlord, after Tenant's default, lawfully re-enters the Leased Premises, Landlord shall have the right, but not the obligation, to remove all property located therein and to place such property in storage at the Tenant's expense and risk. If the Tenant does not pay the storage cost, after it has been stored for a period of thirty (30) calendar days or more and after giving Tenant ten (10) days written notice of sale, Landlord may, at its sole discretion, sell, or permit to be sold, any or all of the property at public or private sale. 28.2 Landlord, at its sole discretion, may retain any trade fixtures and other items of Tenant's property, which are not removed by the Tenant at the expiration of the lease term or any renewal period or at such earlier time as Tenant's rights under this Lease may be terminated for default. At Landlord's option, title to the fixtures and other property shall be vested in the Landlord without any duty to account or pay to Tenant for the -value of the property or for any other matter in connection for the Landlord's acquisition of the fixtures and attached property. 29. HOLDOVER. 29.1 If Tenant, with the implied or expressed consent of the Landlord, shall holdover after the expiration of the term of this Lease, Tenant, shall remain bound by all this Lease's covenants and agreements, except that the tenancy shall be from month to month, and the monthly rent shall be the rent amount due the last month of the immediately preceding term plus fifteen percent (15 %). 29.2 If Tenant should holdover beyond the expiration of this lease term, or the renewal thereof, without consent of the Landlord, Tenant shall pay as liquidated damages a sum equal to double the rent amount due the last month of the immediately preceding term. -17- This paragraph shall not affect any of the Landlord's rights to terminate this Lease and declare a forfeiture or to otherwise take possession of the Premises. 30. NON-WAIVER OF COVENANTS. The Landlord's failure to insist upon the performance of any provision of this Lease shall not be construed as depriving the Landlord of the right to insist on strict performance of such provision in the future. The subsequent acceptance of rent, whether full or partial payment, by the Landlord shall not be deemed a waiver of any preceding breach by the Tenant of any term, covenant, or condition of this Lease, other than the failure of the Tenant to pay the particular part of the rent accepted, regardless of the Landlord's knowledge of the proceeding breach at the time of the acceptance of that part of the rent. 31. ARBITRATION. 31.1 In the event that the parties cannot agree on any matter of this agreement, they shall consult together with a view of resolving the dispute. In the event they cannot agree upon a resolution to the dispute, the same shall be settled pursuant to RCW Chapter 7.04 et. seq. except as herein modified. 31.2 Such arbitration shall be before one disinterested arbitrator, if one can be agreed upon, otherwise before three disinterested arbitrators, one named by the Landlord, one by the Tenant, and one by the two thus chosen. If all arbitrators have not been appointed within fifteen (15) days after demand, for arbitration, then either side may apply to the Chelan County Superior Court, upon ten (10) days notice to the other, for appointment of the necessary arbitrators remaining to be appointed, and the judicial appointment shall be binding and final. The arbitrator or arbitrators shall determine the controversy in accordance with the laws of the State of Washington as applied to the facts found by him or them. The arbitrator or arbitrators may grant injunctions or other relief in such controversy or claims. 31.3 The decision of the arbitrator or arbitrators shall be final, conclusive and binding on the parties and a judgment may be obtained thereon in any Court having jurisdiction. Landlord and Tenant shall each pay one-half of the cost and expenses of such arbitration, and each party shall separately pay for its own attorneys' fees and expenses. 32. COST AND ATTORNEYS' FEES. In the event it is necessary for either party utilize to the services of an attorney to enforce any of the terms of this agreement, such suing party shall be entitled to compensation for its reasonable attorney's fees and costs. the event of litigation regarding any of the terms of this agreement, the substantially party shall be entitled, in addition to other relief, to such reasonable attorneys' fees and costs as determined by the court. 33. CONDEMNATION. 33.1 If all the Leased Premises are taken by any public authority under the power -18- of eminent domain, this Lease shall terminate as of the date of possession by said public authority. 33.2 A condemnation or taking by public authority shall not be grounds for terminating this Lease unless twenty five percent (25%) or more of the Property is taken. No award for any partial or entire taking shall be apportioned. However, the Tenant will not be required to give or assign the Landlord any interest in any award made to the Tenant for the taking of personal property and fixtures belonging to the Tenant or for the interruption or damage to Tenant's business or for Tenant's unamortized cost of any leasehold improvements. 33.3 In the event of a partial taking which does not result in the termination of this Lease, rent shall be proportionately abated based on the amount of Leased Premises made unusable. 34. FORCE MAJEURE. Landlord's or Tenant's failure to perform any of its litigations under this Lease shall be excused if due to causes beyond the control of Landlord or Tenant, including but not restricted to acts of God, acts of the public enemy, acts of any government, fires, floods, earthquakes, epidemics and strikes. 35. LIGHT, AIR AND VIEW. Landlord does not guarantee the continued present status of light, air or view over any premises adjoining or in the vicinity of the Industrial Building. 36. CAPTIONS AND CONSTRUCTION. The titles to sections of the Lease are not a part of this Lease and shall have no effect upon the construction and interpretation of any part of the Lease. 37. TIME. TIME IS OF THE ESSENCE IN THIS LEASE. 38. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. All the covenants, agreement terms and conditions contained in this Lease shall apply to and be binding upon Landlord and Tenant and their respective heirs, executors, administrators, successors and assigns, except as may be provided to the contrary in other sections of this Lease. 39. SAVINGS CLAUSE. Nothing in this Lease shall be construed so as to require commission of any act contrary to law, and wherever there is any conflict between any ions of this Lease and any statute, law, public regulation or ordinance, the latter shall prevail, but in such event, the provisions of this Lease affected shall be curtailed and limited to the extent necessary to bring it within legal requirements. 40. INCORPORATION. This agreement represents the entire agreement of the Parties. Unless set forth herein in writing, neither party shall be bound by any statements or representations made, and each agrees that there are no such statements or representations being relied upon in making this Lease. No alterations, changes, or amendments to this Lease -19- will be binding upon either party unless such party has executed a written statement acknowledging such alteration, change or amendment. 41. GOVERNING LAW. This Lease shall be governed by the law of the State of Washington and venue for any action arising from this Lease shall be in Chelan County, Washington. 42. REMEDIES CUMULATIVE. 42.1 The specified remedies to which the Landlord may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which the Landlord may be lawfully entitled in case of any breach or threatened breach by Tenant of any provision of this Lease. In addition to the other remedies provided in this Lease, Landlord shall be entitled to the restraint by injunction of the violation, or attempted or threatened violation, of any of the covenants, conditions, or provisions of this Lease. 42.2 The Landlord's selection of one or more remedies shall not constitute an election of remedies to the exclusion of any other remedies. 43. LEASE YEAR. As used herein, the term "lease year" shall mean a twelve month period commencing on the date the term of this Lease commences and each twelve month period commencing on each anniversary of the commencement date. 44. CONFLICT OF PROVISIONS. In case of conflict, the more specific provisions this Lease shall control. 45. STATUS OF A CORPORATION. Each individual executing this Lease on behalf of Tenant corporation represents and warrants that he is duly authorized to execute and this Lease on behalf of said corporation in accordance with a duly adopted resolution of Board of Directors or in accordance with the Bylaws of said corporation, and that this Lease binding is upon said corporation in accordance with its terms. 46. NOTICES. 46.1 Any notices shall be effective if personally served upon the other party or if mailed by registered or certified mail, return receipt requested, to the following addresses: Landlord: Port of Chelan County Post Office Box 849 Wenatchee, Washington 98807-0849 Tenant: -20- Cashmere Manufacturing, Inc. 434 Olds Station Road Wenatchee, WA 98801 46.2 Upon possession by Tenant of premises, notices shall be sent to new address of tenant in the Leased Premises. 46.3 Notices mailed shall be deemed given on the date of mailing.Landlord and Tenant shall notify each other of any change of address. 47. INTERPRETATION. 47.1 This Lease has been submitted to the scrutiny of all parties and their counsel, if desired, and it shall be given a fair and reasonable interpretation in accordance with its words, without consideration to or weight given to its being drafted by any party or its counsel. 47.2 All words used in the singular shall include the plural; the present tense shall include the future tense; and the masculine gender shall include the feminine and neuter genders. IN WITNESS WHEREOF, the parties have set their hands effective the 4th day of November, 1994, and state that they are authorized to execute this agreement. LANDLORD TENANT Port of Chelan County Cashmere Manufacturing, Inc. By: /s/ Mark Urdahl By: /s/ Jack Jones ------------------------------- ---------------------------------- MARK URDAHL JACK JONES Its Manager Its President -21- LEASE GUARANTEE The undersigned, PCT HOLDINGS, INC., the parent company of CASHMERE MANUFACTURING, INC. ("Cashmere"), and PACIFIC COAST TECHNOLOGIES, INC., sister corporation of Cashmere hereby unconditionally guarantee performance of the above Lease between the Port of Chelan County and Cashmere, including all of the terms and revisions as set out in that Lease, including without limitation the obligation to pay rent and maintain the Premises. Invalidity, irregularity, unenforceability of all or any part of the litigation shall not impair or be a defense to this Guarantee. Each of the undersigned expressly waives the right to rely on any waiver by Landlord of the performance of any of the terms and conditions of the Lease and waives the right to personally receive notice of default or any other notice called for under the Lease. Each of the undersigned specifically understands and acknowledges that a significant consideration to the Landlord for execution of the Lease is the guarantee by each of the undersigned subsidiaries of the obligations of the parent as Tenant under the Lease. Each of the undersigned expressly waive: 1. The right to notice of extension or modification of the Lease terms, even if such modification increases the duties and obligations of the Tenant, Cashmere, and thereby the guarantors under the terms of this Lease; and 2. The right to rely on any waiver by Landlord of the performance of any of the terms and conditions of the Lease; and 3. Notices of default or any other notice called for under the Lease. Each of the guarantors acknowledges that should there be an assignment, sublease, or sale Cashmere's interest in the Lease or in the stock of Cashmere, or of Cashmere's assets to a person, even though such sale may be approved by the Landlord, that each guarantor is personally obligated during the Lease, unless specifically released by Landlord's written document. This guarantee is voluntarily made by each of the undersigned and each of the undersigned acknowledges that the Landlord shall have the right to pursue each individual guarantor separately and independently for performance of the Lease or recovery of damages for breach of the Lease, without first having to proceed against Cashmere. In the event Landlord retains the services of an attorney to enforce this guarantee, the undersigned shall reimburse Landlord for its reasonable attorneys' fees and costs. In the event of litigation, the substantially prevailing party shall be entitled to recover its attorneys' fees and costs. -22- DATED this 11th day of May, 1995. PCT HOLDINGS, INC. PACIFIC COAST TECHNOLOGIES, INC. By: /s/ Don A. Wright By: /s/ Don A. Wright ------------------------------- ---------------------------------- DON A. WRIGHT DON A. WRIGHT Its: President Its: President -23- EX-10.43 8 BUILDING CONSTRUCTION AGREEMENT EXHIBIT 10.43 CASHMERE MANUFACTURING, INC. BUILDING CONSTRUCTION AGREEMENT THIS CONSTRUCTION AGREEMENT ("Agreement") is entered into this date by and between the PORT OF CHELAN COUNTY, a Washington municipal corporation ("Port"), and CASHMERE MANUFACTURING, INC., a Washington corporation ("Cashmere"). RECITALS Cashmere is subsidiary of PCT Holdings, Inc., and desires to move and enlarge its operations at the Olds Station Industrial Park in Wenatchee, Washington. Port agrees to construct a building and improvements on its property as hereafter set out and, upon completion of construction, Cashmere agrees to occupy and use the building and surrounding premises as tenant pursuant to the terms of a "Lease Agreement--Cashmere Manufacturing, Inc., 1994" between the parties dated effective as of November 4, 1994 ("1994 Lease"). TERMS In consideration of the foregoing and the following terms and conditions, the parties agrees as follows: 1. THE FACILITIES. Port agrees to construct a general purpose building and improvements (the "Facilities") on real property owned by the Port, which property is described on attached Exhibit "A" which is incorporated herein as though set forth herein (which real property and Facilities are referred to as the "Leased Premises"). The Facilities will be constructed pursuant to plans and specifications approved by both Port and Cashmere in advance of the commencement of construction. 2. PLANS, SPECIFICATIONS AND CONSTRUCTION. 2.1 Port shall prepare plans and specifications for the Facilities consistent with the general instructions of Cashmere. Upon completion of the preliminary draft of the plans and specifications, Port shall provide a copy to Cashmere and, not less than fourteen (14) days thereafter Cashmere shall indicate its approval or disapproval of the plans and specification. In the event Cashmere desires changes to those plans and Specifications, it shall consult directly with Port and Port's engineer to make such changes as may be agreed upon. In the event the plans are not approved within fourteen (14) days after submittal to Cashmere, either party may terminate this Agreement, which shall also terminate the 1994 Lease. In the event of such -1- termination, Cashmere agrees to pay one-half of the Port's costs and fees, including accountant, attorney and engineering fees, in preparing the transactional documents and the plans and specifications. 2.2 Upon acceptance of the plans and specifications by Port and Cashmere, those plans shall be deemed incorporated herein by reference. The plans and specifications are subject to amendment by agreement of the parties. The facilities to be constructed pursuant to those plans and specifications shall be constructed consistent with applicable codes and with the protective covenants for the Olds Station Industrial Park (dated October 17, 1979 and as amended December 20, 1983, hereafter referred to as "Protective Covenants") . 2.3 The Facilities shall be of prefabricated metal construction or of other mutually acceptable material and contain approximately 41,250 square feet essentially as depicted on Exhibit "B." Port shall construct and pay for the Basic Building, as described on the plans and specifications. Other items of the construction package shall be the responsibility of and be paid by Cashmere. 2.4 The plans and specifications as ultimately approved shall be incorporatedwithin a bid proposal package and submitted for public bid as required by law. The plans, and specifications and bid documents may contain alternatives to the construction. Cashmere shall have a period of fourteen (14) days after receipt of the bid proposals to elect which, if any, alternatives it wishes to have incorporated within the final construction contract. 3. CASHMERE COSTS. Cashmere shall be responsible and pay for all of the costs of construction or improvements associated with preparing the Facilities for occupancy not included within the Basic Building ("Cashmere's Costs"). 3.1 To the extent any matters for which Cashmere is responsible should be included in plans and specifications submitted for bid, they shall be separately identified as between Port and Cashmere as the sole Responsibility of Cashmere and Cashmere shall make arrangements, in advance of the submission of the bids for the payment of the costs of such additional work. 3.2 The final amount of Cashmere's costs shall be calculated as follows: 3.2.1 Changes in, additions to, or extras in the Basic Building requested by Cashmere which have the net effect of increasing the cost of construction of the Basic Building or otherwise adding cost or expense to the Facilities shall be itemized and the total dollar amount of all such increases determined. 3.2.2 Changes in or deletions to the Basic Building requested by Cashmere which have the net effect of reducing the cost of construction of the Basic Building shall be itemized and the total dollar amount of all such decreases determined. -2- 3.2.3 The total decreases as calculated in Paragraph 3.2.2 above shall be deducted from the total increases as calculated in Paragraph 3.2.1 above. If the difference increases the cost of construction so that the Base Rent, as determined in Article 4 of the 1994 Lease, exceeds 43 cents per square foot, the amount of the difference causing the Base Rent to exceed 43 cents per square foot is Cashmere's Cost. 3.2.4 Notwithstanding the foregoing, to the extent changes in, or deletions to the Basic Building requested by Cashmere add to the cost of construction and are for items which are peculiar to the needs of Cashmere and are not reasonably likely to be useable by any other user of the Facilities, Cashmere shall pay for such added cost for those changes or deletions outright to the contractor. 4. REBID. 4.1 The parties intend that the Facilities be constructed for the lowest reasonable cost under the circumstances. The parties have set a rent cap in the Lease of 43 cents per square foot per month, based on calculations using the engineer's estimate of cost of construction. The parties agree to confer and work together during the preparation of the plans and specifications with the goal of keeping the cost of construction at or below an amount which will result in a rent payment, as calculated in the Lease, of 43 cents per square foot per month or less. 4.2 If the projected cost of construction of the Facilities based on the bids received for that construction is such that rent is projected to be increased above 43 cents per square foot per month according to the formula to establish rent set out in the Lease, all bias shall be rejected by the Port. The parties shall then immediately confer and work together with the Port's engineer and other professionals to revise the plans and specifications to lower the cost of construction so that rent will be reduced to or below 43 cents per square foot per month. The parties agree to make such revisions to the plans and specifications for the Facilities as may be required to prepare them for new invitations for bid within twenty (20) days. 4.3 Notwithstanding the foregoing, however, Cashmere may give written notice to the Port within five (5) days after opening of the bids for construction of the Facilities, when the bids are of such an amount that the projected cost of construction will result in a rental amount greater than 43 cents per square foot per month, that Cashmere elects to pay increased rent for the Leased Premises in an amount sufficient to amortize the cost of construction over thirty (30) years with interest at the rate of 7 percent per anum and requests the Port to accept the lowest responsible bid at the time. In such case the parties agree to amend the Lease to fix the new Basic Rent (as defined in the Lease) at the increased amount established by the formula in the Lease for establishing rent, and the Port shall accept the lowest responsible bid consistent with the statute, assuming the bid otherwise qualifies for acceptance. 5. CONSTRUCTION. All work provided and called for by the plans and specifications shall be done in a good and workmanlike manner and in compliance with all applicable laws, ordinances, -3- regulations or requirements of governmental authority, Port's Protective Covenants, and the reasonable requirements of the insurers of the Facilities. 6. POSSESSION. Upon substantial completion of the Facilities, Cashmere shall assume possession of the Leased Premises pursuant to the 1994 Lease, which is incorporated herein by this reference. 7. DETERMINATION OF RENT. 7.1 The 1994 Lease Agreement as executed at the date of this Agreement does not contain the specific monthly rental payments, although the formula is identified. Port and Cashmere agree to execute a supplemental agreement reflecting the dollar amount of the Basic Rent after construction is complete. 7.2 For purposes of this Agreement and the 1994 Lease, "costs of construction" include the value of the land at Ninety Thousand Dollars ($90,000), all actual costs for constructing the Facilities and improving the Leased Premises consistent with the plans and specifications as approved, other than Cashmere's costs and, in addition, include engineering, accounting, legal expenses, including bond counsel, costs of financing, including underwriters fees, and miscellaneous expenses that may be incurred as part of the construction process. 8. COMMENCEMENT OF CONSTRUCTION. Port agrees to commence construction as soon as reasonably possible after acceptance of the bid. 9. COMPLETION OF CONSTRUCTION. The parties anticipate that construction shall be complete so that Cashmere can occupy the premises as tenant under the Lease beginning September 1, 1995. In the event of a rebid pursuant to Paragraph 4 above, when such rebid is reasonably likely to extend the date of substantial completion, the parties agree to amend the Lease to extend the date for the commencement of the term of the Lease by the period of delay caused because of the need to rebid, as set out above. 10. OBLIGATION OF EACH PARTY. 10.1 Port's sole obligation is to build a multi-purpose building consistent with the plans and specifications suitable for modification by Cashmere for Cashmere's specific purposes. 10.2 To the extent Port approves additional improvements to those assumed by it as set forth above, or a different construction scheme than initially determined by the Port, as a result of a request by Cashmere, which approval the Port is not require to give, and except as may be otherwise provided in this Agreement or in the Lease, Cashmere shall pay, upon demand, for any difference in costs incurred by deviating from the approved plans and specifications, to the extent Base Rent exceeds 43 cents per square foot because of such deviation, calculated as set out above in Paragraph 3. Once construction commences, Port agrees to diligently pursue construction. -4- 11. ACCEPTANCE OF FACILITIES. 11.1 Port shall give written notice to Cashmere of Port's intent to finally accept the Facilities as complete from the contractor prior to actual acceptance. Cashmere shall have fifteen (15) working days following receipt of the notice to give a written list to Port of any defects, deficiencies or problems with the Facilities which need to be remedied prior to Cashmere accepting the condition of the Facilities (the "Punch List"). Cashmere shall make such inspection as it deems reasonable prior to giving Port its Punch List. 11.2 Once the items on the Punch List have been cured to Cashmere's reasonable satisfaction, or if none exist, Cashmere shall accept the Facilities in the then present condition, subject only to defects, deficiencies or problems which are the responsibility of the contractor of the Facilities or the Port and which were not reasonably discoverable by Cashmere's inspection prior to making out its Punch List. 11.3 No representation statement or warranty expressed or implied is or shall be made by or on behalf of the Port as to the Facilities condition, or as to the use that may be made of such Facilities, unless specifically set forth in writing executed by the Port. Port represents the Facilities will be sufficient for Cashmere's intended use, consistent with its present business operations and those it contemplates, as expressed by Cashmere to Port's engineer for the building. Cashmere releases the Port from any and all responsibility for any representation that may have been made to Cashmere about the property which is not specifically set out in this Agreement. 12. ARBITRATION. 12.1 In the event of a dispute on any of the matters relative to the construction or related to the interpretation of this Agreement, the parties shall consult together with a view to resolving the dispute. In the event they cannot agree upon a resolution, the dispute shall be settled pursuant to RCW Chapter 7.04, except as herein modified. 12.2 Such arbitration shall be before one disinterested arbitrator, if one can be agreed upon, otherwise before three disinterested arbitrators, one named by the Port, one by Cashmere, and one by the two thus chosen. If all arbitrators have not been appointed within fifteen (15) days after demand for arbitration, then either side may apply to the Chelan County Superior Court, upon ten (10) days notice to the other, for appointment of the necessary arbitrators remaining to be appointed, and the judicial appointment shall be binding and final. The arbitrator or arbitrators shall determine the controversy in accordance with the laws of the State of Washington as applied to the facts found by him or them. The arbitrator or arbitrators may grant injunctions or other relief in such controversy or claims. 12.3 The decision of the arbitrator or arbitrators shall be final, conclusive and binding on the parties and a judgment may be obtained thereon in any Court having jurisdiction. Port -5- and Cashmere shall each pay one-half of the cost and expenses of such arbitration, and each party shall separately pay for its own attorneys' fees and expenses. 13. CAPTIONS AND CONSTRUCTION. The titles to sections of the Agreement are not a part of this Agreement and shall have no effect upon the construction and interpretation of any part of the Agreement. 14. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. All the covenants, agreement terms and conditions contained in this Agreement shall apply to and be binding upon Port and Cashmere and their respective heirs, executors, administrators, successors and assigns, except as may be provided in other sections of this Agreement. 15. SAVINGS CLAUSE. Nothing in this Agreement shall be construed so as to require the commission of any act contrary to law, and wherever there is any conflict between any provision of this Agreement and any statute, law, public regulation or ordinance, the latter shall prevail, but in such event, the provisions of this Agreement affected shall be curtailed and limited only to the extent necessary to bring it within legal requirements. 16. INCORPORATION. This Agreement represents the entire agreement of the parties. Unless set forth herein in writing, neither party shall be bound by any statements or representations made, and each agrees that there are no such statements or representations being relied upon in making this Agreement. No alterations, changes, or amendments to this Agreement will be binding upon either party unless such party has executed a written statement acknowledging such alteration, change or amendment. 17. GOVERNING LAW. This Agreement shall be governed by the law of the State of Washington and venue for any action arising from this Agreement shall be in Chelan County, Washington. 18. NOTICES. Any notices shall be effective is personally served upon the other party or if mailed by registered or certified mail, return receipt required, to the following addresses: Port: Port of Chelan County Post Office Box 849 Wenatchee, WA 98807-0849 Cashmere: CASHMERE MANUFACTURING, INC. 434 Olds Station Road Wenatchee, WA 98801 Notices mailed shall be deemed given on the date of mailing. Port and Cashmere shall notify each other of any change of address. -6- 19. COST AND ATTORNEY'S FEES. In the event it is necessary for either party to utilize the services of an attorney to enforce any of the provisions of this Agreement, such enforcing party shall be entitled to compensation for its reasonable attorneys' fees and costs. In the event of litigation regarding any of the terms of this Agreement, the substantially prevailing party shall be entitled, in addition to other relief, to such reasonable attorneys' fees and costs as determined by the court. 20. INTERPRETATION. 20.1 This Agreement has been submitted to the scrutiny of all parties and their counsel, if desired, and it shall be given a fair and reasonable interpretation in accordance with its words, without consideration to or weight given to its being drafted by any party or its counsel. 20.2 All words used in the singular shall include the plural; the present tense shall include the future tense; and the masculine gender shall include the feminine and neuter genders. IN WITNESS WHEREOF, the parties have set their hands and seals as of the 4th day of November, 1994, and state that they are authorized to execute this instrument. PORT OF CHELAN COUNTY CASHMERE MANUFACTURING, INC. By: /s/ Mark Urdahl By: /s/ Jack Jones ------------------------------- ----------------------------------- Mark Urdahl Jack Jones Its Manager Its President -7- EX-10.44 9 GENERAL TERMS AGREEMENT EFFECTIVE FEB. 5, 1990 Exhibit 10.44 GENERAL TERMS AGREEMENT between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY NUMBER-PLR-950 -1- GENERAL TERMS AGREEMENT TABLE OF CONTENTS CLAUSE TITLE PAGE - - ------ ----- ---- 1.0 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.0 ISSUANCE OF PURCHASE ORDERS AND APPLICABLE TERMS . . . . . . . . . . . . . . . . . . . . . 10 2.1 Issuance of Purchase Orders. . . . . . . . . . . . . . . . . . 10 2.2 Acceptance of Purchase Orders. . . . . . . . . . . . . . . . . 10 2.3 Written Authorization to Proceed . . . . . . . . . . . . . . . 10 2.4 Formation of Contract. . . . . . . . . . . . . . . . . . . . . 11 2.5 Rejection of Purchase orders . . . . . . . . . . . . . . . . . 11 3.0 TITLE AND RISK OF LOSS . . . . . . . . . . . . . . . . . . . . 11 4.0 DELIVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.2 Delay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES. . . . . . . . . . . . . . . . . . . . . . . . 11 5.1 Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 Resident Representatives . . . . . . . . . . . . . . . . . . . 12 6.0 INVOICE AND PAYMENT. . . . . . . . . . . . . . . . . . . . . . 12 7.0 PACKING AND SHIPPING . . . . . . . . . . . . . . . . . . . . . 12 8.0 QUALITY CONTROL, INSPECTION REJECTION AND ACCEPTANCE . . . . . . . . . . . . . . . . . . . 13 8.1 Controlling Document . . . . . . . . . . . . . . . . . . . . . 13 -2- 8.2 Inspection and Rejection . . . . . . . . . . . . . . . . . . . 13 8.3 Right of Entry . . . . . . . . . . . . . . . . . . . . . . . . 14 8.4 Certification. . . . . . . . . . . . . . . . . . . . . . . . . 14 8.5 Federal Aviation Administration or Equivalent Government Agency Inspection. . . . . . . . . . . . 14 8.6 Retention of Records . . . . . . . . . . . . . . . . . . . . . 14 8.7 Source Inspection. . . . . . . . . . . . . . . . . . . . . . . 14 9.0 EXAMINATION OF RECORDS . . . . . . . . . . . . . . . . . . . . 14 10.0 CHANGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10.2 Obsolescence . . . . . . . . . . . . . . . . . . . . . . . . . 15 10.3 Model Mix. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.0 PRODUCT ASSURANCE. . . . . . . . . . . . . . . . . . . . . . . 16 12.0 TERMINATION/CANCELLATION . . . . . . . . . . . . . . . . . . . 16 12.1 Termination-Convenience. . . . . . . . . . . . . . . . . . . . 16 12.2 Cancellation-Default . . . . . . . . . . . . . . . . . . . . . 16 12.3 Excusable Delay. . . . . . . . . . . . . . . . . . . . . . . . 17 12.4 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 13.0 RESPONSIBILITY FOR PROPERTY. . . . . . . . . . . . . . . . . . 17 14.0 LIMITATION OF SELLER'S RIGHT TO ENCUMBER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . 17 15.0 PROPRIETARY INFORMATION AND ITEMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 16.0 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . 19 -3- 17.0 INFRINGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 19 18.0 BUYER'S RIGHTS IN SELLER'S INVENTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 20 19.0 BUYER'S RIGHTS IN SELLER'S WORK PRODUCT . . . . . . . . . . . . . . . . . . . . . . . . . 20 20.0 BUYER'S RIGHTS IN SELLER'S, PATENTS COPYRIGHTS, TRADE SECRETS AND TOOLING. . . . . . . . . . . . . 20 21.0 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 21.1 Addresses. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 21.2 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 22 21.3 Approval or Consent. . . . . . . . . . . . . . . . . . . . . . 22 22.0 PUBLICITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 23.0 FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 22 24.0 SUBCONTRACTING . . . . . . . . . . . . . . . . . . . . . . . . 23 25.0 NOTICE OF LABOR DISPUTES . . . . . . . . . . . . . . . . . . . 23 26.0 ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 23 27.0 RELIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 28.0 NON-WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . 24 29.0 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 30.0 PARTIAL INVALIDITY . . . . . . . . . . . . . . . . . . . . . . 24 31.0 APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . 24 32.0 AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 33.0 LIMITATION . . . . . . . . . . . . . . . . . . . . . . . . . . 25 34.0 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 -4- 34.1 Inclusion of Taxes in Price. . . . . . . . . . . . . . . . . . 25 34.2 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 25 34.3 Rebates. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 35.0 FOREIGN PROCUREMENT OFFSET . . . . . . . . . . . . . . . . . . 25 36.0 ENTIRE AGREEMENT/ORDER OF PRECEDENCE. . . . . . . . . . . . . . . . . . . . . . . . . 26 36.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 26 36.2 Incorporated By Reference. . . . . . . . . . . . . . . . . . . 26 36.3 Order of Precedence. . . . . . . . . . . . . . . . . . . . . . 26 36.4 Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . 26 -5- REVISION REV SYM DESCRIPTION DATE APPROVAL --- ----------- ---- -------- 1 INCORPORATE NEW CONTRACT LANGUAGE L-71 (03-13- 08-22-91 91) TO SHEET METAL OFF-LOAD CONTRACTS 2 A. UNDER SECTION 1.0 THE DEFINITION FOR CUSTOMER 08-11-94 AND GOODS HAS BEEN ADDED. B. UNDER 2.1 THE REFERENCE TO REV 4/83 HAS BEEN DELETED. C. UNDER 6.0 LANGUAGE HAS BEEN ADDED FOR PAY FROM RECEIPT. D. FORMER SECTION 8.3 "SALE TO THIRD PARTIES" HAS BEEN REMOVED AND THE PARAGRAPHS RENUMBERED. E. UNDER 16.0 LANGUAGE HAS BEEN AMENDED TO SPECIFICALLY ADDRESS ENVIRONMENTAL LEGISLATION. F. 17.0 HAS BEEN MODIFIED AS FOLLOWS: "...PATENTS KNOWN TO SELLER AT THE TIME OF SUCH INFRINGEMENT AND THOSE EXCEEDING ACTUAL DAMAGES AND/OR INCLUDING ATTORNEYS' FEES..." A COMPLETE REPRINT OF THE DOCUMENT WAS ACCOMPLISHED WITH THIS AMENDMENT. THE FOOTER ON THE CONTRACT WAS CHANGED TO REFLECT THE LATEST REVISION OF THE PRO FORMA (02-05-93). -6- GENERAL TERMS AGREEMENT RELATING TO BOEING MODEL AIRCRAFT THIS GENERAL TERMS AGREEMENT ("Agreement") is entered into as of February 5, 1990, by Cashmere Manufacturing Company, a Washington corporation, with its principal office in Cashmere, Washington, ("Seller"), and Boeing Commercial Airplane Group, a Division of The Boeing Company, a Delaware corporation with its principal office in Seattle, Washington ("Buyer"). RECITALS A. Buyer is currently producing commercial aircraft. B. Seller manufactures and sells certain goods and services for use in the production and support of commercial aircraft. C. Seller desires to sell and Buyer desires to purchase certain of Seller's goods and services for the production and support of commercial aircraft. D. Seller and Buyer desire to enter into an agreement for the sale by Seller and purchase by Buyer of Products as defined herein. Now therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: -7- AGREEMENTS 1.0 DEFINITIONS The definitions set forth below shall apply to the following terms as they are used in any order issued pursuant to this General Terms Agreement. (a) The term "Product" shall mean (a) goods purchased and described on any purchase order except for Rotating Use Tools and (b) services purchased and described on any purchase order. (b) The term "FAR" shall mean the Federal Acquisition Regulations in effect on the date of this Agreement. (c) The term "FAA" shall mean the United States Federal Aviation Administration or any successor agency of the Federal Aviation Administration. (d) The term "Computer-Aided design" (CAD) shall mean (1) any computer system or program that supports the design process or, (2) the use of computers to assist engineering design in developing, producing, and evaluating design, data, and drawings. (e) The term "Computer-Aided Manufacturing" (CAM) shall mean the use of computers and computer data in the development of a Product, including fabrication, assembly, and installation. (f) The term "Computer-Aided Design/Computer-Aided Manufacturing" (CAD/CAM) shall mean engineering/Manufacturing applications released as datasets in a digital format and provided by the Buyer to the Seller to be utilized in the Manufacturing process. (g) The term "Dataset" means any compilation of data or information (including, without limitation, numerical data, geometric definitions, program instructions or coded information) which may be used directly in, integrated with or applied to, a computer program for further processing. A Dataset may be a composite of two or more other Datasets or an extract of a larger Dataset. (h) The term "Drawing" shall mean an automated or manual depiction of graphics or technical information representing a Product including parts list and specifications relating thereto. (i) Words importing the singular number shall also include the plural number and vice versa. -8- (j) The term "Tooling" shall mean all tooling, as defined in Boeing Document M31-24, "Boeing Suppliers Tooling Manual," described on any purchase order, including but not limited to Boeing-Use Tooling, Supplier-Use Tooling and Common-Use Tooling as defined in Boeing Document D6-49004, "Operations General Requirements for Suppliers," and Rotating-Use Tooling as defined in Boeing Document M31-13, "Accountability of Inplant/Outplant Special (Contract) Tools." For purposes of this Agreement, in the documents named in this subparagraph, the term "Supplier Use Tooling" shall be changed to Seller Use Tooling and the term "Boeing Use Tooling" shall be changed to Buyer Use Tooling. (k) The term "Shipset" shall mean the total quantity of a given part number necessary for installation on one airplane. (l) The term "Derivative" shall mean any model airplane developed from the existing Model airplane which has a new model designation and which satisfies all of the following criteria: (1) has the same number of engines as the existing Model airplane; (2) utilizes essentially the same aerodynamic and propulsion design, major assembly components, and systems and the existing Model airplane and (3) achieves other payload/range combinations by changes in body length, engine thrust, or variations in certified gross weight. (m) The term "End Item Assembly" shall mean any Product which is described by a single part number and which is comprised of more than one component part. (n) The term "Spare" shall mean any Product, regardless of whether the product is an End Item Assembly or a Purchased on Assembly Production Detail part, which is to be used other than the initial production of the airplane. (o) The term "Purchased on Assembly Production Detail Part (POA)" shall mean a component part of an End Item Assembly. (p) "Materiel Representative" shall mean the employee and his/her management designated as such by Buyer from time to time, or in the absence of such designation, Buyer's employee and his/her management primarily responsible for dealing with Seller in connection with administration of an applicable Order. (q) The term "Customer" shall mean any customer of Buyer, any subsequent owner, operator or user of the Products or Goods, and any other individual, partnership, corporation or person or entity which has or acquires any interest in the Goods or Products from, through or under Buyer. -9- (r) The term "Goods" shall mean Products, services, documents, data, software and other information or items furnished or to be furnished to Buyer under any purchase order. 2.0 ISSUANCE OF PURCHASE ORDERS AND APPLICABLE TERMS 2.1 ISSUANCE OF PURCHASE ORDERS Buyer may issue purchase orders to Seller from time to time. Each purchase order shall contain a description of the Products ordered, a reference to the applicable specifications and drawings, the quantities and prices, the delivery schedule, the terms and place of delivery, any special conditions and the following notation: "This order is subject to and incorporates by this reference the General Terms Agreement PLR-950 between The Boeing Company and Cashmere Manufacturing Company dated February 5, 1990." Each purchase order bearing such notation shall be governed by and be deemed to include the provisions of this Agreement. Purchase Order Terms and Conditions, Form Dl-4100-4045, as revised from time to time, does not apply to such purchase orders. 2.2 ACCEPTANCE OF PURCHASE ORDERS Each purchase order is Buyer's offer to Seller and acceptance is strictly limited to its terms. Buyer will not be bound by and specifically objects to any term or condition which is different from or in addition to the provisions of the purchase order, whether or not such term or condition will materially alter the purchase order. Seller's commencement of performance or acceptance of the purchase order in any manner shall conclusively evidence Seller's acceptance of the purchase order as written. Buyer may revoke any purchase order prior to Buyer's receipt of Seller's written acceptance or Seller's commencement of performance. 2.3 WRITTEN AUTHORIZATION TO PROCEED Buyer may give written authorization to Seller to commence performance before Buyer issues a purchase order. If Buyer in its written authorization specifies that a purchase order will be issued, Buyer and Seller shall proceed as if a purchase order had been issued. This Agreement, the applicable Special Business Provisions and the terms stated in the written authorization shall be deemed to be a part of Buyer's offer and the parties shall promptly agree on any open purchase order terms. If Buyer does not specify in its written authorization that a purchase order shall be issued, Buyer's obligation is strictly limited to the terms of the written authorization. -10- If Seller commences performance (a) before a purchase order is issued or (b) without receiving Buyer's prior written authorization to proceed, such performance shall be at Seller's expense. 2.4 FORMATION OF CONTRACT Each purchase order accepted by Seller is a contract between Buyer and Seller and shall be referred to herein as an "Order." 2.5 REJECTION OF PURCHASE ORDER Any rejection by Seller of a purchase order shall specify the reasons for rejection and any changes or additions that would make the purchase order acceptable to Seller; provided, however, that Seller may not reject any purchase order for reasons inconsistent with the provisions of this Agreement or the applicable Special Business Provisions. 3.0 TITLE AND RISK OF LOSS Title to and risk of any loss of or damage to the Products shall pass from Seller to Buyer at the F.O.B. point specified in the applicable Order, except for loss or damage thereto resulting from Seller's fault or negligence. Passage of title on delivery does not constitute Buyer's acceptance of Products. 4.0 DELIVERY 4.1 REQUIREMENTS Deliveries shall be strictly in accordance with the quantities, the schedule and other requirements specified in the applicable Order. Seller may not make early deliveries without Buyer's prior written authorization. 4.2 DELAY Seller shall notify Buyer immediately, of any circumstances that may cause a delay in delivery, stating the estimated period of delay and the reasons therefore. If requested by Buyer, Seller shall use additional effort, including premium effort, and shall ship via air or other expedited routing to avoid or minimize delay to the maximum extent possible. All additional costs resulting from such premium effort or premium transportation shall be borne by Seller. Nothing herein may be construed to prejudice any of the rights or remedies provided to Buyer in the applicable Order or by law. 5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES 5.1 REVIEW At Buyer's request, Seller shall provide at Buyer's facility, or at a place designated by Buyer, a review explaining the status of the Order, actions taken or planned to be taken relating to the order and any other relevant information. Nothing herein may -11- be construed as a waiver of Buyer's rights to proceed against Seller because of any delinquency. 5.2 RESIDENT REPRESENTATIVES Buyer may in its discretion and for such periods as it deems necessary assign resident personnel at Seller's facilities in addition to the resident Quality Control personnel provided for in Section 8.4, "Right of Entry." The resident team will function under the guidance of Buyer's manager who will provide program coordination within the scope of the work authorized by the Order. The resident team will provide communication and coordination to ensure timely performance of the order. Buyer's resident team shall be allowed access to all work areas, Order status reports and management review necessary to assure timely coordination and conformance with the requirements of each Order. Seller, however, remains fully responsible for performing in accordance with each Order. 6.0 INVOICE AND PAYMENT Unless otherwise provided in the applicable Order, invoicing shall be in accordance with Document D6-55772 Pay From Receipt, which is incorporated herein and made a hereof by this reference. Payment shall be in accordance with the Section identified as "Payment," of the Special Business Provisions. 7.0 PACKING AND SHIPPING Seller shall (a) prepare for shipment and suitably pack all Products to prevent damage or deterioration, (b) secure lowest transportation rates, (c) comply with the appropriate carrier tariff for the mode of transportation specified by Buyer and (d) comply with any special instructions stated in the applicable order. Buyer shall pay no charges for preparation, packing, crating or cartage unless stated in the applicable Order. All shipments forwarded on one day via one route must be consolidated. Each container must be consecutively numbered and marked with the applicable Order and part numbers. Container and order numbers must be indicated on the applicable Bill of Lading. Two copies of the packing sheets, showing the applicable Order numbers, must be attached to the No. 1 container of each shipment. Products sold F.O.B. place of shipment must be forwarded collect. Seller may not make any declaration concerning the value of the Products shipped, except on Products where the tariff rating or rate depends on the released or declared value, and in such event the value shall be released or declared at the maximum value for the lowest tariff rating or rate. -12- 8.0 QUALITY CONTROL, INSPECTION, REJECTION, & ACCEPTANCE 8.1 CONTROLLING DOCUMENT The controlling Quality Control Document for orders under this Agreement shall be identified on the individual purchase orders. Said orders shall identify the document in accordance with one of the following: 8.1.1 All work performed under this order shall be in accordance with Document Dl-8000A, "Quality Control Requirements for Boeing Suppliers," Revision F as said Document may be amended from time to time; or 8.1.2 All work performed under this order shall be in accordance with Document Dl-9000, "Advance Quality System for Boeing Suppliers," as said Document may be amended from time to time. NOTE: In the event that Buyer fails to identify the controlling document on the individual order then Section 8.1.2, as outlined above, shall govern the order. 8.2 INSPECTION AND REJECTION Products shall be subject to final inspection and acceptance by Buyer at destination, notwithstanding any payment or prior inspection. Buyer may reject any or all of the Products which do not strictly conform to the requirements of the applicable Order. Buyer shall by notice, rejection tag or other communication notify Seller of such rejection. At Seller's risk and expense, all such Products will be returned to Seller for immediate repair, replacement or other correction and redelivery to Buyer; provided, however, that with respect to any or all of such Products and at Buyer's election and at Seller's risk and expense, Buyer may: (a) hold, retain or return such Products without permitting any repair, replacement or other correction by Seller; (b) hold or retain such Products for repair by Seller or, at Buyer's election, for repair by Buyer with such assistance from Seller as Buyer may require; (c) hold such Products until Seller has delivered conforming replacements for such Products; (d) hold such Products until conforming replacements are obtained from a third party; or (e) return such Products with instructions to Seller as to whether the Products shall be repaired or replaced and as to the manner of redelivery. All repair, replacement and other corrections and redelivery shall be completed within such time as Buyer may require. All costs and expenses, loss of value and any other damages incurred as a result of or in connection with nonconformance and repair, replacement or other correction may be recovered from Seller by an equitable price reduction, set-off or credit against any amounts that may be owed to Seller under the applicable Order or otherwise. Buyer may revoke its acceptance of any Products and have the same rights with regard to the Products involved as if it had originally rejected them. -13- 8.3 RIGHT OF ENTRY Buyer's authorized representatives may enter Seller's plant at all reasonable times to conduct preliminary inspections and tests of the Products and work-in-process. Seller shall include in its subcontracts issued in connection with an Order a like provision giving Buyer the right to enter the plants of Seller's subcontractors. Buyer may assign representatives at Seller's plant on a full-time basis. Seller shall furnish, free of charge, all office space, secretarial service and other facilities and assistance reasonably required by Buyer's representatives at Seller's plant. 8.4 CERTIFICATION A certification that materials and/or finished Products have been controlled and tested in accordance with and will meet specified Order requirements and applicable specifications and that records are on file subject to Buyer's examination shall be included on or with the packing sheet accompanying shipments. In the case of Spares, the drawing or specification revision level will be noted on the packing sheet. The packing sheet shall note if Buyer has provided materials. Copies of manufacturing planning, test and inspection results or certifications shall be furnished to Buyer on its request. 8.5 FEDERAL AVIATION ADMINISTRATION OR EQUIVALENT GOVERNMENT AGENCY INSPECTION Representatives of Boeing or the FAA may inspect and evaluate Seller's plant including, but not limited to, Seller's facilities, systems, data, equipment, personnel, testing, and all work-in-process and completed Products manufactured for installation on Boeing commercial Airplanes. The Seller's costs for such inspection and evaluation are included in the Order price. 8.6 RETENTION OF RECORDS Quality Control records shall be maintained on file and available to Buyer's authorized representatives. Seller shall retain such records for a period of not less than seven years from the date of final payment under the applicable Order. Prior to disposal of any such records, Buyer shall be notified and Seller shall transfer such records as Buyer may direct. 8.7 SOURCE INSPECTION If an Order contains a notation that "100% Source Inspection" is required, the Products shall not be packed for shipment until they have been submitted to Buyer's quality Control representative for inspection. Both the packing list and Seller's invoice must reflect evidence of this inspection. 9.0 EXAMINATION OF RECORDS Seller shall maintain complete and accurate records showing the sales volume of all Products. Such records shall support all services performed, allowances claimed and costs incurred by Seller in the performance of each Order, including but not limited to -14- those factors which comprise or affect direct labor hours, direct labor rates, material costs, burden rates and subcontracts. Such records and other data shall be capable of verification through audit and analysis by Buyer and be available to Buyer at Seller's facility for Buyer's examination and audit at all reasonable times from the date of the applicable Order until three (3) years after final payment under such Order. Seller shall provide assistance to interpret such data if required by Buyer. Such examination shall provide Buyer with complete information regarding Seller's performance for use in price negotiations with Seller relating to existing or future orders for Products (including but not limited to negotiation of equitable adjustments for changes and termination/obsolescence claims pursuant to Section 10.0, "Changes." Buyer shall treat such information as confidential. 10.0 CHANGES 10.1 GENERAL Buyer's Materiel Representative may at any time by written change order make changes within the general scope of an Order in any one or more of the following: (a) drawings, designs, or specifications; (b) shipping or packing; (c) place of inspection, delivery or acceptance; (d) adjustments in quantities and delivery schedules, or both; and (e) the amount of Buyer- Furnished Material. Seller shall proceed immediately to perform the Order as changed. If any such change causes an increase or decrease in the cost of or the time required for the performance of any part of the work, whether changed or not changed by the change order, an equitable adjustment shall be made in the price of or the delivery schedule for those Products affected, and the applicable Order shall be modified in writing accordingly. Any claim by Seller for adjustment under this Section 10.0 must be received by Buyer in writing within one hundred eighty (180) days from the date of receipt by Seller of the written change order or engineering drawing requirement, whichever is later, or within such further time as the parties may agree in writing or such claim shall be deemed waived. Nothing in this Section shall excuse Seller from proceeding with an Order as changed, including failure of the parties to agree on any adjustment to be made under this Section. If Seller considers that the conduct of any of Buyer's employees has constituted a change hereunder, Seller shall immediately notify Buyer in writing as to the nature of such conduct and its effect on Seller's performance. Pending direction from Buyer's Materiel Representative, Seller shall take no action to implement any such change. 10.2 OBSOLESCENCE Claims for obsolete or surplus material and work-in-process created by change orders issued pursuant to this Section shall be subject to the procedures set forth in Section 12.1, "Termination-Convenience," except that Seller may not submit a claim for obsolete or surplus material resulting from an individual change order that has a total claim value of Two Thousand Five Hundred Dollars ($2,500) or less. Payment for -15- obsolete or surplus materials shall be made by check deposited as first class mail in the United States Postal Service to the address designated by Seller in Section 21.1, "Addresses." Payment will be made on the tenth (10th) day of the month following the month of the obsolescence claim settlement. 10.3 MODEL MIX In the event any Derivative aircraft(s) is introduced by Buyer, Buyer may (but is not obligated to) direct Seller within the scope of the applicable Order and in accordance with the provisions of Section 10.0, "Changes," to supply Buyer's requirements for Products for such Derivative aircraft(s) which correspond to those Products being produced under the applicable order. 11.0 PRODUCT ASSURANCE Buyer's acceptance of any Product does not alter or affect the obligations of Seller or the rights of Buyer and its customers under the document referenced in the Section identified as "Product Assurance," in the Special Business Provisions or as provided by law. 12.0 TERMINATION/CANCELLATION 12.1 TERMINATION-CONVENIENCE Buyer may terminate an Order in whole or in part for convenience in accordance with the provisions of FAR 52.249-2, and such clause is incorporated herein by this reference subject to the following modifications. In FAR 52.249-2 "Government" and "Contracting Officer" shall mean Buyer, "Contractor" shall mean Seller and "this Contract and "the Contract" shall mean such Order. All references to one year in paragraph (d) of such clause are changed to six (6) months, and all references to a "Disputes" clause are deleted. Any termination settlement proposal submitted by Seller shall be limited to work covered by such Order. 12.2 CANCELLATION-DEFAULT Buyer may cancel the whole or any part of an Order for default in accordance with the provisions of FAR 52.249-8, which is incorporated herein by this reference subject to the following modifications. In FAR 52.249-8 "Government" and "Contracting Officer," except in paragraph (c), shall mean Buyer, "Contractor" shall mean Seller, "this Contract" and "the Contract" shall mean such Order, and all references to a "Disputes" clause are deleted. If the parties fail to agree pursuant to paragraph (f) of FAR 52.249-8 on the amount to be paid for manufacturing materials referred to in paragraph (e) of FAR 52-249-8, the amount shall be the reasonable value thereof, but not to exceed that portion of the order price which is reasonably allocable to such materials. -16- 12.3 EXCUSABLE DELAY If delivery of any Product cannot be made within one (1) month after the delivery date stated in the applicable order due to a delay for which Seller would not be liable for excess costs under FAR 52.249-8 (c) (an "excusable delay"), Buyer may, at anytime after Buyer becomes aware of such delay, cancel such Order with respect to any or all Products in accordance with FAR 52.249-8 as modified in Section 12.2 above, but without any liability on Buyer's part except to pay the Order price for delivered and accepted Products. 12.4 OTHER Buyer may give written notice to Seller to cancel the whole or any part of an Order in the event of: (a) the suspension of Seller's business; (b) the insolvency of Seller; (c) the institution of reorganization, arrangement or liquidation proceedings by or against Seller; (d) the appointment of a trustee or receiver for Seller's property or business; (e) an assignment for the benefit or creditors of Seller, or (f) Seller's trustee in bankruptcy or Seller as debtor in possession not assuming such Order pursuant to a Federal Bankruptcy Court's approval within sixty (60) days after the bankruptcy petition was filed. Such cancellation shall be for default and the rights and obligations of the parties shall be determined as provided in Section 12.2, "Cancellation -- Default." 13.0 RESPONSIBILITY FOR PROPERTY On delivery to Seller or manufacture or acquisition by it of any materials, parts, tooling or other property, title to any of which is in Buyer, Seller shall assume the risk of and shall be responsible for any loss thereof or damage thereto. In accordance with the provisions of an Order, but in any event on completion thereof, Seller shall return such property to Buyer in the condition in which it was received except for reasonable wear and tear and except to the extent that such property has been incorporated in Products delivered under such Order or has been consumed in the normal performance of work under such Order. 14.0 LIMITATION OF SELLER'S RIGHT TO ENCUMBER ASSETS Seller warrants to Buyer that it has good title to all inventory, work-in- process, tooling and materials to be supplied by Seller in the performance of its obligations under any Order ("Inventory"), and that pursuant to the provisions of such Order, it will transfer to Buyer title to such Inventory, whether transferred separately or as part of any Product delivered under the Order, free of any liens, charges, encumbrances or rights of others. Seller further agrees that it shall not sell, assign, lease, transfer possession of, grant a security interest in, allow to be attached or seized on execution or otherwise, allow a financing statement describing the Inventory to be filed in favor of anyone other than Buyer, or in any other way dispose of or encumber any item of Inventory or any part thereof without the prior written approval of Buyer. -17- 15.0 PROPRIETARY INFORMATION AND ITEMS Each party hereto agrees to keep confidential and not disclose to any other person, corporation, or business organization all confidential, proprietary, and/or trade secret information received from the other party in connection with any Order (hereinafter Proprietary Information). Each party hereto further agrees to use Proprietary Information only for purposes necessary to the performance of an Order, provided that Buyer shall also have the right to use and disclose Proprietary Information for any purpose necessary to the testing, certification, use, sale, or support of any item delivered under an Order or any airplane including such an item, and provided further that any such disclosure by Buyer shall, whenever appropriate, include a restrictive legend suitable to the particular circumstances. For purposes of this Section, Proprietary Information shall: (a) not include information already in the public domain, or known to (as evidence by written records) and under the unrestricted control of the receiving party, when first received from the other party; (b) lose its status as Proprietary Information if, and as of the date when, it becomes part of the public domain through no wrongful or negligent act of the receiving party, is received by the receiving party without restriction from another who had the right to so disclose it, or is developed by the receiving party entirely independently of any disclosure from the other party; and (c) include only (i) information disclosed in written or other physically tangible form with an appropriate restrictive legend and (ii) information disclosed orally where the receiving party is notified of the proprietary nature of the information prior to such disclosure and the proprietary status of the orally disclosed information is confirmed to the receiving party by the other party within ten (10) working days of such disclosure in a writing which identified the person(s) making the disclosure and the place and date thereof, lists the names of the receiving party's employee(s) receiving such disclosure, and describes the information so disclosed. All documents and other tangible media (excluding Products) containing or conveying Proprietary Information and transferred in connection with an Order, together with any copies thereof, are and remain the property of the transmitting party and shall, except to the extent that they are needed by Buyer for the purpose of testing, certifying, using, selling, or supporting an item delivered under an Order or an airplane containing such an item, be promptly returned, or at the option of the transmitting party destroyed, upon the written request of the transmitting party. Neither the existence of this Agreement nor the disclosure of Proprietary Information or any other information hereunder shall be construed as granting expressly, by implication, by estoppel, or otherwise a license under any invention or patent now or -18- hereafter owned or controlled by the transmitting party. No disclosure or receipt of Proprietary Information or any other information by either party under this Agreement will constitute or be construed as a representation, warranty, assurance, guarantee or inducement by either party to the other with respect to any infringement of the patent rights of another. The obligations of each of the parties hereto with respect to Proprietary Information disclosed hereunder prior to the completion, termination, or cancellation of this Agreement shall not, except as expressly set forth herein, be affected by such completion, termination, or cancellation. Notwithstanding the restrictions on disclosure set forth hereinabove, either party to this Agreement may disclose Proprietary Information to its lower tier subcontractors as necessary in connection with Orders, provided that each such subcontractor first assumes by written agreement all of the obligations imposed on a receiving party under this Agreement relative to such Proprietary Information. 16.0 COMPLIANCE WITH LAWS Seller shall be responsible for complying with all laws, including, but not limited to, any statute, rule, regulation, judgment, decree, order, or permit applicable to its performance under this Agreement. Seller further agrees (1) to notify Buyer of any obligation under this Agreement which is prohibited under applicable environmental law, at the earliest opportunity but in all events sufficiently in advance of Seller's performance of such obligation so as to enable the identification of alternative methods of performance, and (2) to notify Buyer at the earliest possible opportunity of any aspect of its performance which becomes subject to additional environmental regulation or which Seller reasonably believes will become subject to additional regulation during the performance of this Agreement. 17.0 INFRINGEMENT Seller shall indemnify, defend, and save Buyer and Customers harmless from all claims, suits, actions, awards (including but not limited to awards based on intentional infringement of patents known to Seller at the time of such infringement and those exceeding actual damages and/or including attorneys' fees), liabilities, damages, costs and attorneys' fees related to the actual or alleged infringement of any United States or foreign intellectual property right (including but not limited to any right in a patent, copyright, industrial design or semiconductor mask work, or based on misappropriation or wrongful use of information or documents) and arising out of the manufacture, sale or use of Goods by Buyer or Customers. Buyer and/or Customers shall duly notify Seller of any such claim, suit or action; and Seller shall, at its own expense, fully defend such claim, suit or action on behalf of Buyer and/or Customers. Seller shall have no obligation under this section with regard to any infringement arising from: (i) Seller's compliance with formal specifications issued by Buyer where infringement could not be avoided in complying with such specifications or (ii) -19- use or sale of Goods in combination with other items when such infringement would not have occurred from the use or sale of those Products solely for the purpose for which they were designed or sold by Seller. For purposes of this section only, the term Customer shall not include the United States Government; and the term Buyer shall include The Boeing Company (Boeing) and all Boeing subsidiaries and all officers, agents, and employees of Boeing or any Boeing subsidiary. 18.0 BUYER'S RIGHTS IN SELLER'S INVENTIONS As a part of this order and without any additional compensation to Seller, Buyer shall own all right, title, and interest in and to all inventions, discoveries, and improvements (hereinafter "Inventions"), whether or not patentable, which are conceived, developed, or first reduced to practice by Seller's agents, employees, or independent contractors (hereinafter "Personnel") on behalf of Seller, either alone or with others, provided such Inventions relate directly to the subject matter with which Seller's work for Buyer hereunder is concerned and are made while Seller's Personnel are assigned to perform services under this Order, and irrespective of whether or not such Inventions are conceived, developed, or first reduced to practice during working hours. Seller and Seller's Personnel shall (1) disclose such Inventions to Buyer promptly and in written detail, (2) assist Buyer in obtaining patent protection for all such Inventions in the United States and any foreign countries specified by Buyer, (3) assign all patent rights in such Inventions to Buyer or its designee forthwith and without charge, and (4) execute all instruments and render all such assistance as may reasonably be required in order to protect the rights of Buyer or its designee in such Inventions. Seller shall also require its Personnel who are to perform services under this Order to execute appropriate agreements which obligate such Seller Personnel to Buyer with respect to such Inventions to the same extent that Seller is obligated to Buyer under this paragraph, and copies of such agreements shall be furnished to Buyer upon request. 19.0 BUYER'S RIGHTS IN SELLER'S WORK PRODUCT As a part of this Order and without any additional compensation to Seller, Buyer shall own all right, title and interest in and to all work product generated by Seller in the performance of this Order including, without limitation, all designs, drawings, data, models, prototypes, reports, specifications, and computer programs. Copies of such work product shall be made available to Buyer upon request at any time, and all tangible embodiments of such work product shall, at the option of Buyer, be delivered to Buyer upon the completion or termination of this Order. 20.0 BUYER'S RIGHTS IN SELLER'S PATENTS, COPYRIGHTS, TRADE SECRETS AND TOOLING Seller hereby grants to Buyer an irrevocable, nonexclusive, free, paid-up license to practice and/or use, and license others to practice and/or use on Buyer's behalf, all of Seller's patents, copyrights, trade secrets (including, without limitation, designs, processes, drawings, technical data and tooling), and tooling (hereinafter "Licensed -20- Property") related to the development, production, maintenance or repair of Products. Buyer hereafter retains all its rights to use Licensed Property, but Buyer hereby covenants not to exercise such rights except in connection with the making, having made, using and selling of Products or products of the same kind, and then only in the event of any of the following: a. Seller discontinues or suspends business operations or the production of any or all of the Products; b. Seller is acquired by or transfers any or all of its rights to manufacture any Product to any third party, whether or not related; c. Buyer cancels this Agreement or any Order for cause; d. Seller breaches this Agreement or any Order; e. Seller fails to deliver Products in accordance with this Agreement or any Order; f. In Buyers judgement it becomes necessary, in order for Seller to comply with the terms of this Agreement or any Order, for Buyer to provide support to Seller (in the form of design, manufacturing, or on-site personnel assistance) substantially in excess of that which Buyer normally provides to its suppliers; g. five (5) years shall have elapsed from date of the first order by Buyer; h. Seller's trustee in bankruptcy (or Seller as debtor in possession) fails to assume this Agreement and all Orders by formal entry of an order in the bankruptcy court within sixty (60) days after entry of an order for relief in a bankruptcy case of the Seller, and/or Buyer elects to retain its rights to Licensed Property pursuant to section 365(n)(1)(B) of the United States Bankruptcy Code (the "Bankruptcy Code"), 11 U.S.C. 101-1330; i. Seller is at any time insolvent (whether measured under a balance sheet test or by the failure to pay debts as they come due) or the subject of any insolvency or debt assignment proceeding under state or nonbankruptcy law; or j. Seller voluntarily becomes a debtor in any case under the Bankruptcy Code or, in the event an involuntary bankruptcy petition is filed against Seller, such petition is not dismissed within thirty (30) days. As a part of the license granted under this section, Seller shall, at the written request of Buyer and at no additional cost to Buyer, promptly deliver to Buyer any and all -21- Licensed Property considered by Buyer to be necessary to satisfy Buyer's production requirements for Products and products of the same kind. 21.0 NOTICES 21.1 ADDRESSES Notices and other communications shall be given in writing by personal delivery, United States mail, telex, Teletype, telegram, facsimile, or cable addressed to the respective party as follows: To Buyer: BOEING COMMERCIAL AIRPLANE GROUP MATERIEL DIVISION P.O. Box 3707 Seattle, Washington 98124-2207 Attention: Buyer: Mail Stop: To Seller:Cashmere Manufacturing Company 102 Maple Street Cashmere, WA 98815 Attention: Contracts 21.2 EFFECTIVE DATE The date on which any such communication is received by the addressee is the effective date of such communication. 21.3 APPROVAL OR CONSENT With respect to all matters subject to the approval or consent of either party, such approval or consent shall be requested in writing and is not effective until given in writing. With respect to Buyer, authority to grant approval or consent is limited to Buyer's Materiel Representative. 22.0 PUBLICITY Seller may not, and shall require that its subcontractors and suppliers of any tier may not, cause or permit to be released any publicity, advertisement, news release, public announcement, or denial or confirmation of the same, in whatever form, regarding any aspect of any Order without Buyer's prior written approval. 23.0 FACILITIES Seller shall bear all risks of providing adequate facilities and equipment to perform each Order in accordance with the terms thereof. If any contemplated use of government or other facilities or equipment is not permitted by the government or is not available for any other reason, Seller shall be responsible for arranging for equivalent facilities and equipment at no cost to Buyer. Any failure to do so does not -22- excuse any deficiencies in Seller's performance or affect Buyer's right to cancel under Section 12.2, "Cancellation-Default," or under any provision of law. 24.0 SUBCONTRACTING Seller may not procure any Product, as defined in the applicable order, from a third party in a completed or a substantially completed form without Buyer's prior written consent. No raw material may be incorporated in a Product (a) unless procured from a Buyer approved source or (b) unless Buyer has surveyed and qualified Seller's receiving inspection personnel and laboratories to test the specified raw materials. Seller may request in writing, that Buyer survey and qualify additional sources of raw materials. No waiver of survey and qualification requirements will be effective unless granted by Buyer's Engineering and Quality Control Departments. Utilization of a Buyer- approved raw material source does not constitute a waiver of Seller's responsibility to meet all specification requirements. 25.0 NOTICE OF LABOR DISPUTES Seller shall immediately notify Buyer of any actual or potential labor dispute that may disrupt the timely performance of an Order. Seller shall include the substance of this Section, including this sentence, in any subcontract relating to an Order if a labor dispute involving the subcontractor would have the potential to delay the timely performance of such Order. Each subcontractor, however, shall only be required to give the necessary notice and information to its next higher-tier subcontractor. 26.0 ASSIGNMENT Each Order shall inure to the benefit of and be binding on each of the parties hereto and their respective successors and assigns, provided however, that no assignment of any rights or delegation of any duties under such Order is binding on Buyer unless Buyer's written consent has first been obtained. Notwithstanding the above, Seller may assign claims for monies due or to become due under any Order provided that Buyer may recoup or setoff any amounts covered by any such assignment against any indebtedness of Seller to Buyer, whether arising before or after the date of the assignment or the date of this Agreement, and whether arising out of any such Order or any other agreement between the parties. Buyer may settle all claims arising out of any Order, including termination claims, directly with Seller. Buyer may unilaterally assign any rights or title to property under the Order to any wholly-owned subsidiary of The Boeing Company. 27.0 RELIANCE Seller acknowledges that Seller is an expert in all phases of the work involved in producing and supporting the Products, including but not limited to the designing, testing, developing, manufacturing, improving, overhauling and servicing of the -23- Products. Seller agrees that Buyer and Buyer's customers may rely on Seller as an expert, and Seller will not deny any responsibility or obligation hereunder to Buyer or Buyer's customers on the grounds that Buyer or Buyer's customers provided recommendations or assistance in any phase of the work involved in producing or supporting the Products, including but not limited to Buyer's acceptance of specifications, test data or the Products. 28.0 NON-WAIVER Buyer's failure at any time to enforce any provision of an Order does not constitute a waiver of such provision or prejudice Buyer's right to enforce such provision at any subsequent time. 29.0 HEADINGS Article and Section headings used in this Agreement are for convenient reference only and do not affect the interpretation of the Agreement. 30.0 PARTIAL INVALIDITY If any provision of any Order is or becomes void or unenforceable by force or operation of law, the other provisions shall remain valid and enforceable. 31.0 APPLICABLE LAW; JURISDICTION Each Order, including all matters of construction, validity and performance, shall in all respects be governed by, and construed and enforced in accordance with, the law of the State of Washington as applicable to contracts entered into and to be performed wholly within such State between citizens of such State, without reference to any rules governing conflicts of law. Seller hereby irrevocably consents to and submits itself to the jurisdiction of the Superior Court for King County, State of Washington and to the jurisdiction of the United States District Court for the Western District of Washington for the purpose of any suit, action or other judicial proceeding arising out of or connected with any order or the performance or subject matter thereof. Seller hereby waives and agrees not to assert by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that (a) Seller is not personally subject to the jurisdiction of the above-named courts, (b) the suit, action or proceeding is brought in an inconvenient forum or (c) the venue of the suit, action or proceeding is improper. 32.0 AMENDMENT Oral statements and understandings are not valid or binding. Except for the provisions of Section 10.0, "Changes," of this Agreement and Section 5.0, "Changes," of the Special Business Provisions, any Order may not be changed or modified except by a writing signed by both parties. -24- 33.0 LIMITATION Seller may not (except to provide an inventory of Products to support delivery acceleration and to satisfy reasonable replacement and Spares requirements) manufacture or fabricate Products or procure any goods in advance of the reasonable flow time required to comply with the delivery schedule in the applicable order. Notwithstanding any other provision of an Order, Seller is not entitled to any equitable adjustment or other modification of such Order for any manufacture, fabrication, or procurement of Products not in conformity with the requirements of the Order, unless Buyer's written consent has first been obtained. Nothing in this Section shall be construed as relieving Seller of any of its obligations under the Order. 34.0 TAXES 34.1 INCLUSION OF TAXES IN PRICE All taxes, including but not limited to federal, state and local income taxes, value added taxes, gross receipt taxes, property taxes, and custom duties taxes are deemed to be included in the Order price, except applicable sales or use taxes on sales to Buyer ("Sales Taxes") for which Buyer has not supplied a valid exemption certificate. 34.2 LITIGATION In the event that any state or local taxing authority has claimed or does claim payment for Sales Taxes, Seller shall promptly notify Buyer, and Seller shall take such action as Buyer may direct to pay or protest such taxes or to defend against such claim. The actual and direct expenses, without the addition of profit and overhead, of such defense and the amount, of such taxes as ultimately determined as due and payable shall be paid directly by Buyer or reimbursed to Seller. If Seller or Buyer is successful in defending such claim, the amount of such taxes recovered by Seller, which had previously been paid by Seller and reimbursed by Buyer or paid directly by Buyer, shall be immediately refunded to Buyer. 34.3 REBATES If any taxes paid by Buyer are subject to rebate or reimbursement, Seller shall take the necessary actions to secure such rebates or reimbursement and shall promptly refund to Buyer any amount recovered. 35.0 FOREIGN PROCUREMENT OFFSET With respect to work covered by the Order, Seller shall use its best efforts to cooperate with Buyer in the fulfillment of any foreign offset program obligation that Buyer may have accepted as a condition of the sale of Buyer's product. In the event that Seller solicits bids and/or proposals for, or procures or offers to procure any goods or services relating to the work covered by an Order form any source outside of the United States, Buyer shall be entitled, to the exclusion of all others, to all industrial benefits and other "offset" credits which may result from such solicitations, -25- procurements or offers to procure. Seller agrees to take any actions that may be required on its part to assure that Buyer receives such credits. Seller further agrees to report to Buyer any such foreign procurement activity if and when required by the Section identified as "Foreign Procurement Report," of the Special Business Provisions, as revised from time to time by Buyer. 36.0 ENTIRE AGREEMENT/ORDER OF PRECEDENCE 36.1 ENTIRE AGREEMENT The Order sets forth the entire agreement, and supersedes any and all other agreements, understandings and communications between Buyer and Seller related to the subject matter of an Order. 36.2 INCORPORATED BY REFERENCE In addition to the documents previously incorporated herein by reference, the documents listed below are by this reference made a part of this Agreement: A. Engineering Drawing by Part Number and Related Outside Production Specification Plan (SPCO). B. Any other exhibits or documents agreed to by the parties to be a part of this Agreement. 36.3 ORDER OF PRECEDENCE In the event of a conflict or inconsistency between any of the terms of the following documents, the following order of precedence shall control: A. Special Business Provisions (Excluding E below) B. General Terms Agreement (Excluding the documents listed in D and F below) C. Order (Excluding references to A and B above) D. Engineering Drawing by Part Number and Related outside Production Specification Plan (SPCO). E. Administrative Agreement (If Required) F. Any other exhibits or documents the parties agree shall be part of the Agreement. 36.4 DISCLAIMER Unless otherwise specified on the face of the applicable Order, any CATIA Dataset or translation thereof (each or collectively "Data") furnished by The Boeing Company is -26- furnished as an accommodation to Seller. It is the Seller's responsibility to compare such Data to the comparable two dimensional computer aided design drawing to confirm the accuracy of the Data. BUYER HEREBY DISCLAIMS, AND SELLER HEREBY WAIVES, ALL WARRANTIES AND LIABILITIES OF BUYER AND ALL CLAIMS AND REMEDIES OF SELLER, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY DEFECT IN ANY CATIA DATASET OR TRANSLATION THEREOF, INCLUDING, WITHOUT LIMITATION, ANY (A) IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A PARTICULAR PURPOSE, (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF DEALING OR PERFORMANCE OR USAGE OF TRADE, (C) RECOVERY BASED UPON TORT, WHETHER OR NOT ARISING FROM BUYER'S NEGLIGENCE, AND (D) ANY RECOVERY BASED UPON DAMAGED PROPERTY, OR OTHERWISE BASED UPON DAMAGED PROPERTY, OR OTHERWISE BASED UPON LOSS OF USE OR PROFIT OR OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES. EXECUTED in duplicate as of the date and year first written above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING by and through its division COMPANY Boeing Commercial Airplane Group Name: /s/ Nancy V. Rosser Name: /s/ John Eder ------------------- ------------------ Title: Buyer Title: General Manager Date: 8-15-94 Date: 8-15-94 -27- EX-10.45 10 SPECIAL BUSINESS PROVISIONS EFFECTIVE 12/18/92 EXHIBIT 10.45 MATERIAL OMITTED PURSUANT TO CONFIDENTIAL TREATMENT APPLICATION SPECIAL BUSINESS PROVISIONS between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY Number L-890821-814ON -1- SPECIAL BUSINESS PROVISIONS THESE SPECIAL BUSINESS PROVISIONS ("SBP") are entered into as of December 18, 1992 by Cashmere Manufacturing Company, a Washington corporation with its principal office in Cashmere, Washington ("Seller"), and Boeing Commercial Airplane Group, a division of The Boeing Company, a Delaware corporation with its principal office in Seattle, Washington ("Buyer"). RECITALS A. Buyer and Seller entered into a General Terms Agreement (the "Agreement") dated February 5, 1990 for the sale by Seller and purchase by Buyer of Products. B. Buyer and Seller desire to enter into another agreement to include these Special Business Provisions relating to the sale by Seller and purchase by Buyer of the Products. Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: -2- SPECIAL BUSINESS PROVISIONS 1. DEFINITIONS The definitions used herein shall be the same as used in the Agreement. In addition, the term "Rate Tool Capacity" shall mean the quantity of tooling required to support a production rate not to exceed 21 shipsets on the 737, 10 shipsets on the 747, 10 shipsets on the 757, and 10 shipsets on the 767, and the term "Initial Order" shall mean the order as it first exists, prior to Amendment or Change. 2. PURCHASE ORDER NOTE The following note shall be contained in any Order to which these Special Business Provisions are applicable: This Order is subject to and incorporates by this reference the Special Business Provisions L-890821814ON between The Boeing Company and Cashmere Mfg. Company dated December 18, 1992. Each order bearing such note shall be governed by and be deemed to include the provisions of these Special Business Provisions. 3. PRICES 3.1 FIRM FIXED PRICES The prices of Products to be delivered on or before December 31, 1996 are listed in Attachment "l" which by this reference are incorporated herein and are firm fixed prices in United States dollars, F.O.B. Cashmere, Washington. 3.2 MANUFACTURING CONFIGURATION BASELINE Unit pricing for each part number shown in Attachment "l" reflects the latest revisions of the Engineering Drawings and Outside Production Specification Plans (OPSP's) at the time of the signing of these Special Business Provisions. 3.3 PACKAGING The prices shown in Attachment "l" do include packaging costs. Packaging shall be furnished by the Seller. If necessary, Seller may repair or furnish additional packaging upon approval by Buyer of Seller's price proposal for such -3- repair or additional packaging. Separate purchase orders shall be released by Buyer to cover such expense (if applicable). 4. PURCHASE ORDER ISSUANCE Buyer and Seller agree that, in addition to other provisions of the Order and in consideration of the prices set forth under Section 3.1, "Firm Fixed Prices," Buyer shall issue purchase orders for the Products listed in Attachment "1" from time to time to Seller for Buyer's requirements WITH THE EXCEPTION OF THOSE REQUIREMENTS FOR PRODUCTS, AS IDENTIFIED IN ATTACHMENT "1", WHICH MAY BE SUBJECT TO COMMITMENTS TO AN OFFSET SUPPLIER. Said Products are to be shipped at any scheduled rate of delivery, as determined by Buyer, but not to exceed the Rate Tool Capacity, and Seller shall sell to Buyer Buyer's requirements of such products, provided that, without limitation on Buyer's right to determine its requirements, Buyer shall not be obligated to issue any purchase orders for any given Product if: A. Any of Buyer's customers specify an alternate product; B. Such Product is, in Buyer's reasonable judgment, not technologically competitive at any time. "Technologically competitive" shall be defined as significant changes to Product design, including materials, specifications or manufacturing processes which result in a reduced price or weight. C. Buyer gives reasonable notice to Seller of a change in any of Buyer's aircraft which will result in Buyer's no longer requiring such Product for such aircraft; D. Seller has materially defaulted in any of its obligations under any order, whether or not Buyer has issued a notice of default to Seller pursuant to Section 12.2, "Cancellation - Default," of the Agreement; or E. Buyer reasonably determines that Seller cannot support Buyer's requirements for Products in the amounts and within the delivery schedules Buyer requires. 5. CHANGES 5.1 CHANGES AT NO COST -4- Notwithstanding the provision for an equitable adjustment in Section 10.0, "Changes," of the Agreement, Buyer may make the changes set forth in subsections 5.1.1, 5.1.2, and 5.1.3 without cost or change in the unit price stated in the applicable Order. 5.1.1 Changes in the delivery schedule, including firing order and rate changes, if (a) the delivery date of the Product under such Order is on or before December 31, 1996 and (b) Buyer provides Seller with written notice of the changes. A. At least four (4) months prior to the first day of the month in which any acceleration in the delivery schedule is to take effect; and/or B. At least four (4) months prior to the first day of the month in which any deceleration in the delivery schedule is to take effect. 5.1.2 Changes in the Tooling required to support delivery schedule adjustments, including but not limited to production rate changes, that are in accordance with the Rate Tool Capacity. 5.1.3 Engineering changes to incorporate Seller initiated production facility requirements to facilitate or improve Seller's manufacturing processes. 5.1.4 A. Seller shall incorporate without adjustment to the non-recurring costs (either debit or credit) any and all changes up to a value equal to two (2) percent of the total non-recurring costs identified herein. Any and all changes with an adjustment claim greater than the two (2) percent threshold will be in accordance with Section 5.3 and 5.4 below. B. Seller shall incorporate without adjustment to the recurring unit price (either debit or credit) any and all changes up to a value equal to two (2) percent of the unit price for each Product identified herein. Any and all changes with an adjustment claim greater than the two (2) percent threshold will be in accordance with Section 5.3 and 5.4 below. 5.2 CHANGES SUBJECT TO AN EQUITABLE ADJUSTMENT -5- An equitable adjustment in the price of any Product shall be made in accordance with Section 10. 0, "Changes," of the Agreement if Buyer makes a change in the delivery schedule of such product under an Order and: A. Such Product, although originally scheduled for delivery before January 1, 1997 under such order, is delivered after December 31, 1996 in accordance with such order as changed; or B. Such products monthly rate exceeds the Rate Tool Capacity as stated in Section 1.0; or C. Such change does not meet the notice requirements of Section 5.1.1 above; and, Seller submits to Buyer a written request for an equitable adjustment within 180 days of receipt of the written change notice. The amount of the price adjustment for each product shall be determined by multiplying the original unit price plus any negotiated changes which are incorporated into the individual product price, excluding items such as amortization of tooling, amortization of schedule slides, amortization of set-up charges, etc., by three tenths of one percent (.3 of 1%) then multiplying that factor by the cumulative balance of the number of products previously scheduled in each successive month that falls outside the changes at no cost periods set forth in Section 5.1.1 above. No price adjustment shall be made for that portion of any delivery schedule change which falls inside the changes at no cost periods set for in Section 5.1.1. 5.3 CHANGES TO THE STATEMENT OF WORK Buyer may direct Seller within the scope of the applicable Order and in accordance with the provisions of Section 10.0, "Changes," of the Agreement to increase or decrease the work to be performed by the Seller in the manufacture of any Product. The equitable adjustment, if any, to be paid by Buyer to Seller for such change shall be computed in accordance with the provisions of Section 5.4. 5.4 COMPUTATION OF EQUITABLE ADJUSTMENT The Rates and Factors set forth in Attachment "4," which by this reference is incorporated herein, shall be used to determine the equitable adjustment, if any (including equitable adjustments, if any, in the prices of Products to be -6- incorporated in Derivative Aircraft), to be paid by Buyer pursuant to Section 10.0, "Changes," of the Agreement. 5.5 PLANNING SCHEDULE The planning schedule, attached hereto as Attachment "2" and by this reference incorporated herein, is a schedule to be used for planning production following the initial purchase order release. Such planning schedule shall not constitute a limitation on Buyer's right to issue purchase orders to Seller for greater or lesser quantities or to specify different delivery dates as necessary to meet Buyer's requirements for the products listed on Attachment "1." Such planning schedule shall be subject to adjustment from time to time. Any such adjustment shall not be deemed to be a change under Section 10.0, "Changes," of the Agreement. 6. TERMINATION LIABILITY When required by Buyer, Seller shall submit a time-phased Termination Liability Curve per Attachment "5" attached hereto and by this reference incorporated herein. Notwithstanding any other provisions of this Agreement, Buyer's termination liability pursuant to Section 12 of the Agreement shall not exceed the amount established by the Termination Liability Curve for the date of termination, reduced by the amount of all payments made by Buyer for delivered Products, tooling or other goods or services furnished by the Seller pursuant to the Order or made by Buyer in settlement of any other claim made by Seller or any other party in connection with the performance of the Order. At any point in time, whether or not Buyer requires Seller to submit a Termination Liability Curve, Buyer's termination liability shall be limited to the maximum value of scheduled production deliveries for twelve (12) months. 7. EXPENDITURE AUTHORIZATION When requested by Buyer, Seller shall submit a Lot Release Schedule Plan for approval. Seller's Lot Release Schedule Plan is included as Attachment "6" hereto and is by this reference incorporated herein. Buyer's written authorization must be obtained prior to release of any lots. Expenditures incurred by Seller exceeding those authorized by the Lot Release Schedule shall be at Seller's risk and expense. 8. PAYMENT 8.1 RECURRING COSTS -7- Payment shall be net thirty (30) days. Unless otherwise provided under the applicable order, payment due dates, including discount periods, shall be computed from (a) the date of receipt of the Product, (b) the date of receipt of a correct invoice or (c) the scheduled delivery date of such Product, whichever is last, up to and including the date Buyer's check is mailed. Unless freight and other charges are itemized, any discount shall be taken on the full amount of the invoice. All payments are subject to adjustment for shortages, credits and rejections. 8.2 NON-RECURRING COSTS Unless otherwise provided in the applicable order, the total non- recurring price shall be paid by Buyer within the term discount period or thirty (30) calendar days (whichever is later) after receipt of both acceptable Products by Buyer and receipt of an acceptable invoice accompanied by a properly prepared Certified Tool List as specified in the M31-24 Document, "Boeing Supplier Tooling Manual." Invoices received with incorrect, improperly prepared or incomplete certified tool lists will be returned for correction prior to payment. Invoices shall be dated concurrent with, or subsequent to, shipment of the Products. 9. PRODUCT ASSURANCE 9.1 GOVERNING DOCUMENT Seller acknowledges that Buyer and the owner or operator of each aircraft manufactured by Buyer incorporating the Products must be able to rely on each Product performing as specified and that Seller will provide the required support services. Accordingly, the provisions of the Boeing Document M6-1124-3, Rev. A "Boeing Designed, Sub-Contracted Products Manufacturers Warranty" are incorporated herein and by this reference are made a part hereof. 10. COST PERFORMANCE VISIBILITY Seller's Program Manager shall be responsible to provide all necessary cost support data, source documents for direct and indirect costs, and assistance at the Seller's facility for cost performance reviews performed by Buyers pursuant to any Order referencing these Special Business Provisions. Copies of such data are to be made available within 72 hours of any request by Buyer. This data is required in addition to the cost data provided pursuant to Section 9.0 of the Agreement. All such information so obtained shall be treated as confidential in accordance with Section 15.0 of the Agreement. -8- 11. GRANT OF LICENSE 11.1 LICENSED PROPERTY For purposes of this Section, "Licensed Property" shall be deemed to mean all patents (including divisions, continuations or substitutions thereof), designs, specifications processes, tooling drawings, technical data and other information used in the development or production of Products. 11.2 CONSIDERATION In consideration for Buyer's agreement to pay certain nonrecurring tooling, design, development and certification costs for the Products, Seller hereby grants to Buyer a present, royalty-free, non-exclusive license to use Licensed Property to make, have made, use and sell Products. Buyer shall have the right to exercise said license at no additional cost to Buyer: (a) upon termination of this order for any reason; or (b) at any time after five years from the date of this order. 11.3 TITLE TRANSFER At any time following the exercise of the license granted herein, Buyer shall have the right to require Seller at no additional cost to Buyer to transfer to Buyer the title to and possession of all tooling, fixtures, die and jigs used by Seller or Seller's subcontractors in the development or production of Products. 12. SPARES PRICING Except as set forth in subsections 12.1 and 12.2 below, the price for Spare(s) shall be the same as the production price for the Products as listed on Attachment "1" in effect at the time the Spare(s) are ordered. POA parts shall be priced so that the sum of the prices for all POA parts of an End Item Assembly equals the applicable recurring portion of the price of the End Item Assembly. 12.1 AIRCRAFT ON GROUND (AOG) SPARES The AOG is the highest priority category utilized by Buyer for spare parts procurements. This classification will be assigned part requirements for actual grounded aircraft. The Seller is required to support this effort on a twenty-four (24) hour day basis, seven (7) day week and with maximum use of overtime. Premium transportation is authorized. Seller will provide delivery commitments within one (1) hour after receipt of requirement. The price for Aircraft On -9- Ground (AOG) spares shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.07. 12.2 CRITICAL SPARES The critical priority classification is assigned spares requirements which are urgently needed by a customer or Buyer although no actual AOG condition exists, an AOG condition is imminent or a work stoppage may result from this Critical condition. All Critical priority spare parts requirements will have an expedited demand date. Every effort shall be made by the Seller to support this date, including parts manufactured based on a twenty- four (24) hour day, seven (7) day week, maximum use of overtime and premium transportation. Seller will provide delivery commitments within one (1) working day after receipt of requirement. The price for Critical Spares shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.05. 12.3 SPECIAL HANDLING The price for all effort associated with the production handling and delivery of Spare(s) is deemed to be included in the price for such Spare(s). When Buyer directs delivery of Spare Parts to an F.O.B. point other than Seller's plant, however, Buyer shall reimburse Seller for shipping charges, including insurance, paid by Seller from the plant to the designated F.O.B. point. Such charges shall be shown separately on all invoices. 13. BUYER FURNISHED MATERIAL (WHERE APPLICABLE) It is the responsibility of the Seller to provide notice to the Buyer of required on-dock dates for all raw material to ensure production continuity. Seller's notice shall provide Buyer with sufficient time to allow Buyer to competitively bid the raw material if so desired. Material furnished to Supplier shall be administered per the Bonded Stores Agreement between the parties. Updates on the status of all Buyer furnished raw material shall be submitted quarterly by the Seller to Buyer 14. FOREIGN PROCUREMENT REPORT -10- The Foreign Procurement Report to Buyer required by Section 35.0, "Foreign Procurement Offset," of the Agreement is to be provided on the Foreign Procurement Report form, Attachment "3" hereto, in accordance with instructions provided therein. Such document is by this reference made a part hereof. The semi-annual reporting periods shall be January 1 to June 30 and July 1 to December 31. The reports shall be submitted on the 1st of August and the lst of February respectively. 15. STATUS REPORTS Seller shall update and submit, as a minimum, monthly status reports using a method mutually agreed upon by the Buyer and Seller. Seller shall also submit monthly status reports using Boeing's Vendor Follow-Up Report. For all first run programs, Seller shall provide to Buyer a milestone chart identifying the following: A. Raw material schedule, including; (i) purchase order number and date, (ii) order quantity and delivery schedule B. Planning and Programming start and completion; C. Tooling manufacture start and completion; D. Machining start and completion by operation; E. Outside processing by operation and subcontractor; F. First article completion date; and, G. Production lot release plan. EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING COMPANY By and Through its Division Boeing Commercial Airplane Group -11- Name: /s/ Name: /s/ Jack Jones ------------------------------------- ----------------------- Title: Buyer Title: President Date: 12/21/92 Date: 12/21/92 -12- ATTACHMENT "1" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) WORK STATEMENT AND PRICING The price for Products to be delivered on or before December 31, 1996 shall be as follows: NOTE: ALL PRODUCTS AND CORRESPONDING PRICING TO BE PURCHASED BY UNDER THIS CONTRACT ARE IDENTIFIED AND MAINTAINED IN A PRICING CATALOG IDENTIFIED AS CASHMERE MFG CO ATTACHMENT "1" TO SBP L-890821-814ON WHICH IS HEREBY INCORPORATED AND MADE A PART HEREOF BY THIS REFERENCE. SAID CATALOG SHALL BE AMENDED AS DEEMED NECESSARY BY THE PARTIES BUT NO LESS THAN SEMI-ANNUALLY. ALL PRICING IN THE AFOREMENTIONED CATALOG IS FIRM FIXED PRICE FOR DELIVERIES THROUGH THE DECEMBER 31, 1996, EXCEPT AS NOTED HEREIN IN SECTION 3.0 "PRICES." *** CONFIDENTIAL TREATMENT REQUESTED FOR PRICING CATALOG *** EX-10.46 11 SPECIAL BUSINESS PROVISIONS EFFECTIVE 12/31/91 EXHIBIT 10.46 MATERIAL OMITTED PURSUANT TO CONFIDENTIAL TREATMENT APPLICATION Special Business Provisions (Requirements) SPECIAL BUSINESS PROVISIONS between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY Number L-500660-8134N i Special Business Provisions (Requirements) SPECIAL BUSINESS PROVISIONS TABLE OF CONTENTS Section Item Page - - ------- ---- ---- 1.0 DEFINITIONS 2 2.0 PURCHASE ORDER NOTE 2 3.0 PRICES 2 3.1 Firm Fixed Prices 2 3.2 Manufacturing Configuration Baseline 2 3.3 Packaging 2 4.0 PURCHASE ORDER ISSUANCE 3 5.0 CHANGES 3 5.1 Changes At No Cost 3 5.2 Changes Subject to An Equitable Adjustment 4 5.3 Changes to the Statement of Work 4 5.4 Computation of Equitable Adjustment 4 5.5 Planning Schedule 5 5.6 Change Absorption 5 6.0 TERMINATION LIABILITY 6 7.0 EXPENDITURE AUTHORIZATION 7 8.0 PAYMENT 7 8.1 Recurring 7 8.2 Non-Recurring 7 9.0 PRODUCT ASSURANCE 7 9.1 Governing Document 7 10.0 COST PERFORMANCE VISIBILITY 8 11.0 GRANT OF LICENSE 8 11.1 Licensed Property 8 11.2 Consideration 8 11.3 Title Transfer 8 12.0 SPARES PRICING 9 12.1 Aircraft on Ground (AOG) Spares 9 12.2 Critical Spares 9 12.3 Special Handling 9 13.0 BUYER FURNISHED MATERIAL 10 14.0 FOREIGN PROCUREMENT REPORT 10 15.0 STATUS REPORTS 10 Attachment 1 Work Statement and Pricing 12 Attachment 2 Planning Schedule 13 Attachment 3 Foreign Procurement Report 14 Attachment 4 Rates and Factors 15 ii Attachment 5 Termination Liability Curve 16 Attachment 6 Incremental Lot Release Schedule Plan 17 Attachment 7 Change Absorption Example 19 iii REVISIONS REV. SYM DESCRIPTION DATE APPROVAL 1. A. Under Section 3.3 Packaging 2-11-94 documents added. B. Under Section 5.1 and 5.2, 4 month decel clause removed and slide factor of .3 of 1% removed. C. Section 5.6, change absorption added. D. Section 7.1, pay from receipt language added. E. Section 10.0, addition of financial data to clause. F. Redefined Spare, AOG, Critical and Expedited Spares. Added provision for short flow production expedite. G. Changed Attachment 1, "Statement of Work" to reflect part number change from 65C35015-4 to 65C35015-6. H. Changed Section 6.0 from 12 months liability to 12 months for raw material and 6 months for work-in-process and finished parts. Complete reprint of document. Footer designation changed to show latest pro forma (02-05-93). iv Special Business Provisions (Requirements) SPECIAL BUSINESS PROVISIONS THESE SPECIAL BUSINESS PROVISIONS ("SBP") are entered into as of December 31, 1991 by Cashmere Manufacturing Company, a Washington corporation with its principle office in Cashmere, Washington ("Seller"), and Boeing Commercial Airplane Group, a division of The Boeing Company, a Delaware corporation with its principle office in Seattle, Washington ("Buyer"). RECITALS A. Buyer and Seller entered into a General Terms Agreement (the "Agreement") GTA PLR-950 dated February 5, 1990 for the sale by Seller and purchase by Buyer of Products. B. Buyer and Seller desire to enter into another agreement to include these Special Business Provisions relating to the sale by Seller and purchase by Buyer of the Products. Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: -1- Special Business Provisions (Requirements) SPECIAL BUSINESS PROVISIONS 1.0 DEFINITIONS The definitions used herein shall be the same as used in the Agreement. In addition, the term "Rate Tool Capacity" shall mean the quantity of tooling required to support a production rate not to exceed 21 shipsets per month on the 737, 10 shipsets per month on the 747, 14 shipsets per month on the 757, 10 shipsets per month on the 767 and 7 shipsets per month on the 777 and the term "Initial order" shall mean the order as it first exists, prior to Amendment or Change. 2.0 PURCHASE ORDER NOTE The following note shall be contained in any order to which these Special Business Provisions are applicable: This Order is subject to and incorporates by this reference the Special Business Provisions L-5006608134N between The Boeing Company and Cashmere Manufacturing Company dated December 13, 1991. Each order bearing such note shall be governed by and be deemed to include the provisions of these Special Business Provisions. 3.0 PRICES 3.1 FIRM FIXED PRICES The prices of Products to be delivered on or before December 31, 1996, except as otherwise noted, are listed in Attachment "1" which by this reference are incorporated herein and are firm fixed prices in United States dollars, F.O.B. Cashmere, Washington. 3.2 MANUFACTURING CONFIGURATION BASELINE Unit pricing for each part number shown in Attachment "1" reflects the latest revisions of the Engineering Drawings and outside Production Specification Plans (OPSP's) at the time of the signing of these Special Business Provisions. -2- Special Business Provisions (Requirements) 3.3 PACKAGING The prices shown in Attachment "1" do include packaging costs. For purposes of this Section, packaging costs shall include materials and labor required to package Products identified in Attachment "1" and material and labor required to package any and all Tooling and/or Licensed Property, as defined in Section 11.0 herein, relating to the Products identified in Attachment "1" upon order/contract expiration. Packaging shall be furnished by the Seller in accordance with Document M6-1025, Volume II, "Supplier Part Protection Guide" for production Products and A.T.A. Specification 300 "Specification for Packaging of Airline Supplies" for spares Products. If necessary, Seller may repair or furnish additional packaging upon approval by Buyer of Seller's price proposal for such repair or additional packaging. Separate purchase orders shall be released by Buyer to cover such expense (if applicable). 4.0 PURCHASE ORDER ISSUANCE Buyer and Seller agree that, in addition to other provisions of the Order and in consideration of the prices set forth under Section 3.1, "Firm Fixed Prices," Buyer shall issue purchase orders for the Products listed in Attachment "1" from time to time to Seller for Buyer's requirements, to be shipped at any scheduled rate of delivery, as determined by Buyer, but not to exceed the Rate Tool Capacity, and Seller shall sell to Buyer Buyer's requirements of such products, provided that, without limitation on Buyer's right to determine its requirements, Buyer shall not be obligated to issue any purchase orders for any given Product if: A. Any of Buyer's customers specify an alternate product; B. Such Product is, in Buyer's reasonable judgment, not technologically competitive at any time. "Technologically competitive" shall be defined as significant changes to Product design, including materials, specifications or manufacturing processes which result in a reduced price or weight. C. Buyer gives reasonable notice to Seller of a change in any of Buyer's aircraft which will result in Buyer's no longer requiring such Product for such aircraft; D. Seller has materially defaulted in any of its obligations under any order, whether or not Buyer has issued a notice of default to Seller pursuant to Section 12.2, "Cancellation - Default," of the Agreement; or -3- Special Business Provisions (Requirements) E. Buyer reasonably determines that Seller cannot support Buyer's requirements for Products in the amounts and within the delivery schedules Buyer requires. 5.0 CHANGES 5.1 CHANGES AT NO COST Not withstanding the provision for an equitable adjustment in Section 10.0, "Changes," of the Agreement, Buyer may make the changes set forth in subsections 5.1.1, 5.1.2, and 5.1.3 without cost or change in the unit price stated in the applicable order. 5.1.1 Changes in the delivery schedule, either acceleration or deceleration, including firing order and rate changes, if (a) the delivery date of the Product under such Order is on or before December 31, 1996 and (b) Buyer provides Seller with written notice of the changes. Buyer agrees, whenever possible, to work with Seller to identify and implement a delivery schedule acceptable to both parties, however, Buyer shall retain final decision making authority with respect to all schedules. 5.1.2 Changes in the Tooling required to support delivery schedule adjustments, including but not limited to production rate changes, that are in accordance with the Rate Tool Capacity. 5.1.3 Engineering changes to incorporate Seller initiated production facility requirements to facilitate or improve Seller's manufacturing processes. 5.2 CHANGES SUBJECT TO AN EQUITABLE ADJUSTMENT An equitable adjustment in the price of any Product shall be made in accordance with Section 10.0, "Changes," of the Agreement if Buyer makes a change in the delivery schedule of such product under an Order and: A. Such Product, although originally scheduled for delivery before January 1, 1997 under such Order, is delivered after December 31, 1996 in accordance with such Order as changed; or B. Such products monthly rate exceeds the Rate Tool capacity as stated in Section 1.0; and, Seller submits to Buyer a written request for an equitable adjustment within 180 days of receipt of the written change notice. -4- Special Business Provisions (Requirements) 5.3 CHANGES TO THE STATEMENT OF WORK Buyer may direct Seller within the scope of the applicable Order and in accordance with the provisions of Section 10.0, "Changes," of the Agreement to increase or decrease the work to be performed by the Seller in the manufacture of any Product. The equitable adjustment, if any, to be paid by Buyer to Seller for such change shall be computed in accordance with the provisions of Section 5.4. 5.4 COMPUTATION OF EQUITABLE ADJUSTMENT The Rates and Factors set forth in Attachment "4," which by this reference is incorporated herein, shall be used to determine the equitable adjustment, if any, (including equitable adjustments, if any, in the prices of Products to be incorporated in Derivative Aircraft), to be paid by Buyer pursuant to Section 10.0, "Changes," of the Agreement. 5.5 PLANNING SCHEDULE The planning schedule, attached hereto as Attachment "2" and by this reference incorporated herein, is a schedule to be used for planning production following the initial purchase order release. Such planning schedule shall not constitute a limitation on Buyers right to issue purchase orders to Seller for greater or lesser quantities or to specify different delivery dates as necessary to meet Buyers requirements for the products listed on Attachment "1." Such planning schedule shall be subject to adjustment from time to time. Any such adjustment shall not be deemed to be a change under Section 10.0, "Changes," of the Agreement. 5.6 CHANGE ABSORPTION 5.6.1 Adjustments to the price of Products made pursuant to Article 10.0, "Changes," of the Agreement except as provided in Section 5.2, "Changes Subject to an Equitable Adjustment," shall be negotiated on the merits of each individual change using the performance levels assumed when establishing the initial price and in accordance with Section 5.4, "Computation of Equitable Adjustment." Changes to the Statement of Work will be subject to the Change Absorption provisions set forth in Section 5.6.2. 5.6.2 A. Notwithstanding any other provisions of Article 10.0, except for Seller's obligation to proceed with the Order as changed, Seller shall comply with any Buyer basic engineering release or change order issued between the date of this Agreement and one hundred percent (100%) completion of basic -5- Special Business Provisions (Requirements) engineering release. For the purpose of this Section, the one hundred percent (100%) engineering drawing release date is defined as the date four (4) months prior to the scheduled delivery of the first production articles. Changes in design concepts released prior to engineering drawing releases that do not affect (i) form, fit, or function, (ii) material type, or (iii) process specifications, shall be considered in scope and will be incorporated into the Order at no change in price. In addition, individual changes released prior to 100% engineering drawing release that affect (i), (ii), or (iii) above but do not increase or decrease the Unit Price by the cumulative net effect of more than ten percent (10%) shall be incorporated into the order and Agreement at no change in price. Individual Changes that affect (i), (ii), and (iii) above and that increase or decrease the Unit Price by more than the cumulative net effect of ten percent (10%) shall be incorporated in the recurring or nonrecurring price in accordance with Section 5.4. The ten percent (10%) cumulative net effect of changes will be separately applied to the nonrecurring price, and to the recurring price. For purposes of recurring price calculation, the Unit Price is defined as the then current recurring Unit price identified in Attachment "1." B. Seller shall not make any assertions for changes considered out-of-scope until such time as the engineering drawings released by Boeing for each Product are one hundred percent (100%) complete. Assertions for such changes will be submitted not later than sixty (60) days following the calendar quarter in which drawings are one hundred percent (100%) complete. The price impact for such changes shall be negotiated and documented by the end of the next succeeding calendar quarter following receipt of the change assertion. The price shall be adjusted only in the event the value of each individual change exceeds the limit as specified in Section 5.6.2.A. The Seller will continue to make quarterly claim assertions and negotiations shall be conducted one quarter later with appropriate price adjustments to be finalized once each quarter. C. Calculations of change pricing adjustments pursuant to Section 5.6.2.A above, shall be calculated in accordance with the example contained in Attachment "7." 5.6.3 A. Notwithstanding any of the provisions of Article 10.0, except for Seller's obligation to proceed with the order as changed, Seller agrees to incorporate, on a no-charge basis, any change required by Boeing subsequent to one hundred percent (100%) completion of basic engineering release which has an -6- Special Business Provisions (Requirements) incorporation cost per individual change, either debit or credit, of less than two percent (2%) of the Unit price, current at incorporation. B. The provision of Section 5.6.3.A above, shall not be used as a deduction from changes which exceed the limit per change. Changes shall not be arbitrarily segregated by Boeing to fall below the limit nor shall the changes be arbitrarily combined by Seller to exceed the limit. C. Calculations of change pricing adjustments pursuant to Section 5.6.3.A and 5.6.3.B above, shall be calculated in accordance with the example contained in Attachment "7." 6.0 TERMINATION LIABILITY When required by Buyer, Seller shall submit a time-phased Termination Liability Curve per Attachment "5" attached hereto and by this reference incorporated herein. Notwithstanding any other provisions of this Agreement, Buyer's termination liability pursuant to Section 12 of the Agreement shall not exceed the amount established by the Termination Liability Curve for the date of termination, reduced by the amount of all payments made by Buyer for delivered Products, tooling or other goods or services furnished by the Seller pursuant to the Order or made by Buyer in settlement of any other claim made by Seller or any other party in connection with the performance of the Order. At any point in time, whether or not Buyer requires Seller to submit a Termination Liability Curve, Buyer's termination liability shall be limited to the maximum value of scheduled production deliveries for twelve (12) months for raw material and six (6) months for work-in-process and finished parts. 7.0 EXPENDITURE AUTHORIZATION When requested by Buyer, Seller shall submit a Lot Release Schedule Plan for approval. Seller's Lot Release Schedule Plan is included as Attachment "6" hereto and is by this reference incorporated herein. Buyer's written authorization must be obtained prior to release of any lots. Expenditures incurred by Seller exceeding those authorized by the Lot Release Schedule shall be at Seller's risk and expense. -7- Special Business Provisions (Requirements) 8.0 PAYMENT 8.1 RECURRING COST/SPECIAL CHARGE ITEMS Unless otherwise provided in the applicable order, payment shall be made in accordance with Document D6-55772 "Pay From Receipt". Payment terms shall be net thirty (30) days except as otherwise agreed to by the parties. All payments are subject to adjustment for shortages, credits and rejections. 8.2 NON-RECURRING COSTS Unless otherwise provided in the applicable Order, the total non-recurring price shall be paid by Buyer within the term discount period or thirty (30) calendar days (whichever is later) after receipt of both acceptable Products by Buyer and receipt of an acceptable invoice accompanied by a properly prepared Certified Tool List as specified in the M31-24 Document, "Boeing Supplier Tooling Manual." Invoices received with incorrect, improperly prepared or incomplete certified tool lists will be returned for correction prior to payment. Invoices shall be dated concurrent with, or subsequent to, shipment of the Products. 9.0 PRODUCT ASSURANCE 9.1 GOVERNING DOCUMENT Seller acknowledges that Buyer and the owner or operator of each aircraft manufactured by Buyer incorporating the Products must be able to rely on each Product performing as specified and that Seller will provide the required support services. Accordingly, the provisions of the Boeing Document M6-1124-3, Rev. A "Boeing Designed, Sub-Contracted Products Manufacturers Warranty" are incorporated herein and by this reference are made a part hereof. 10.0 COST AND FINANCIAL PERFORMANCE VISIBILITY Seller's Program Manager shall be responsible to provide all necessary cost support data, source documents for direct and indirect costs, and assistance at the Seller's facility for cost performance reviews performed by Buyer pursuant to any Order referencing these Special Business Provisions. Seller shall be responsible to provide financial data, on a quarterly basis, or as requested, to Buyer's Credit Office for credit and financial condition reviews. Said data shall include but not be limited to balance sheets, schedule of accounts payable and receivable, major lines of credit, -8- Special Business Provisions (Requirements) creditors, income statements (profit and loss), cash flow statements, firm backlog, and headcounts. Copies of such data are to be made available within 72 hours of any written request by Buyer. This data is required in addition to the cost data provided pursuant to Section 9.0 of the Agreement. All such information so obtained shall be treated as confidential per Section 15.0 of the Agreement. 11.0 GRANT OF LICENSE 11.1 LICENSED PROPERTY For this Section, "Licensed Property" shall be deemed to mean all patents (including divisions, continuations or substitutions thereof), designs, spec. processes, tool drawings, technical data and other information used in the development or production of Products. 11.2 CONSIDERATION In consideration for Buyer's agreement to pay certain nonrecurring tooling, design, development and certification costs for the Products, Seller hereby grants to Buyer a present, royalty-free, non-exclusive license to use Licensed Property to make, have made, use and sell Products. Buyer shall have the right to exercise said license at no additional cost to Buyer: (a) upon termination of this order for any reason; or (b) at any time after five years from the date of this order. 11.3 TITLE TRANSFER At any time following the exercise of the license granted herein, Buyer shall have the right to require Seller at no additional cost to Buyer to transfer to Buyer the title to and possession of all tooling, fixtures, die and jigs used by Seller or Seller's subcontractors in the development or production of Products. 12.0 SPARES AND SHORTFLOW PRODUCTION PRICING Except as set forth in subsections 12.1 and 12.2 below, the price for Spare(s) shall be the same as the production price for the Products as listed on Attachment "1" in effect at the time the Spare(s) are ordered. POA parts shall be priced so that the sum of the prices for all POA parts of an End Item Assembly equals the applicable recurring portion of the price of the End Item Assembly. -9- Special Business Provisions (Requirements) 12.1 AIRCRAFT ON GROUND (AOG)/CRITICAL SPARES, SHORT FLOW PRODUCTION RECRUITMENTS LESS THAN 60% OF SELLER'S RE-ORDER LEAD TIME (ROLT) The AOG is the highest priority category utilized by Buyer for spare parts procurements. This classification will be assigned part requirements for actual grounded aircraft. The Seller will provide delivery commitments within one (1) hour after receipt of the requirements. The Critical priority classification is assigned spares requirements which are urgently needed by a customer or Buyer although no actual AOG condition exists, an AOG condition is imminent or a work stoppage may result from this Critical condition. The Seller will provide delivery commitments within one (1) working day after receipt of the requirements. The Seller is required to support AOG/Critical Spares on a twenty-four (24) hour day basis, seven (7) day week and with maximum use of overtime. Premium transportation is authorized. The price for Aircraft On Ground (AOG)/Critical Spares and short flow production requirements as defined herein shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.07. 12.2 EXPEDITE SPARE (CLASS 1) AND SHORT FLOW PRODUCTION RECRUITMENTS LESS THAN 100% BUT GREATER THAN OR EQUAL TO 60% OF SELLER'S RE-ORDER LEAD TIME (ROLT) The Expedite Spare classification is used to identify spares requirements that require delivery in less than Seller's normal re-order lead time (ROLT). Manufacturing efforts will be based on a two (2) shift day basis, six (6) day week. The price for Expedite Spares and short flow production requirement, as defined herein, shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.05. Expedite action will be taken only if necessary to meet Buyer's required date. 12.3 SPECIAL HANDLING The price for all effort associated with the production handling and delivery of Spare(s) is deemed to be included in the price for such Spare(s). When Buyer directs delivery of Spare Parts to an F.O.B. point other than Seller's plant, however, Buyer shall reimburse Seller for shipping charges, including insurance, paid by Seller from the plant to the designated F.O.B. point. Such charges shall be shown separately on all invoices. -10- 13.0 BUYER FURNISHED MATERIAL (WHERE APPLICABLE) It is the responsibility of the Seller to provide notice to the Buyer of required on-dock dates for all raw material to ensure production continuity. Seller's notice shall provide Buyer with sufficient time to allow Buyer to competitively bid the raw material if so desired. Material furnished to Supplier shall be administered per the Bonded Stores Agreement between the parties. Updates on the status of all Buyer furnished raw material shall be submitted quarterly by the Seller to Buyer 14.0 FOREIGN PROCUREMENT REPORT The Foreign Procurement Report to Buyer required by Section 35.0, "Foreign Procurement Offset," of the Agreement is to be provided on the Foreign Procurement Report form, Attachment "3" hereto, in accordance with instructions provided therein. Such document is by this reference made a part hereof. The semi-annual reporting periods shall be January 1 to June 30 and July 1 to December 31. The reports shall be submitted on the 1st of August and the 1st of February respectively. 15.0 STATUS REPORTS Seller shall update and submit, as a minimum, monthly status reports using a method mutually agreed upon by the Buyer and Seller. Seller shall also submit monthly status reports using Boeing's Vendor Follow-Up Report. For all first run programs, Seller shall provide to Buyer a milestone chart identifying the following: (a) Raw material schedule, including; (i) purchase order number and date, (ii) order quantity and delivery schedule (b) Planning and Programming start and completion; (c) Tooling manufacture start and completion; (d) Machining start and completion by operation; -11- Special Business Provisions (Requirements) (e) Outside processing by operation and subcontractor; (f) First article completion date; and, (g) Production lot release plan. EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING COMPANY By and Through its Division Boeing Commercial Airplane Group Name: /s/ Kenneth H. Jong Name: /s/ John Eder ---------------------- ------------------------ Title: Buyer Title: Vice President Date: 3-16-94 Date: 3-1-94 -12- ATTACHMENT "1" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) WORK STATEMENT AND PRICING The price for Products to be delivered on or before DATE, except as otherwise noted below, shall be as follows: QTY UNIT ROLT/ PART NUMBER S/S MODEL NOMENCLATURE PRICE WEEKS - - ----------- --- ----- ------------ ----- ----- 65C35015-6 *** CONFIDENTIAL TREATMENT REQUESTED -13- ATTACHMENT "2" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) PLANNING SCHEDULE The following Airplane model mix and rate are forecasted for the years 1993-1998. MONTHLY RATE Model Mix 1993 1994 1995 1996 1997 1998 - - --------- ---- ---- ---- ---- ---- ---- 737 747 757 *** CONFIDENTIAL TREATMENT REQUESTED 767 777 -14- ATTACHMENT "3" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) FOREIGN PROCUREMENT REPORT FORM (Seller to Submit) (Reference Section 14.0) -15- ATTACHMENT "4" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) RATES AND FACTORS The following Rates and Factors, which are reflective of the proposed values identified in Attachment "1" of this document, shall contribute to the determination of equitable pricing for engineering changes, derivative aircraft, and option or follow-on pricing. Direct Labor Rate $ Manufacturing Burden % G&A (Gen. Admin. Expense) % Profit % -16- ATTACHMENT "5" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) TERMINATION LIABILITY CURVE (Seller to Submit) (Reference Section 6.0) In the event of termination or cancellation pursuant to Article 12.0 of the Agreement, Buyer shall not be obligated to pay Seller more than the Cumulative total amounts set forth below less payments previously made, for the month/quarter in which the termination notice is issued, as the amounts shall be amended from time to time. ($000 Omitted) Nonrecurring Recurring Year/Quarter Cost Cost Total - - ------------ ---- ---- ----- _____ First $ $ _____ Second _____ Third _____ Fourth _____ First $ $ _____ Second _____ Third _____ Fourth _____ First $ $ _____ Second _____ Third _____ Fourth TOTAL $__________ $__________ -17- ATTACHMENT "6" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) INCREMENTAL LOT RELEASE SCHEDULE PLAN (Seller to Submit) (Reference Section 7.0) A. AUTHORIZATION SUMMARY Non-recurring releases authorized in conjunction with the execution of the Agreement are as summarized below. The non-recurring Price represents the baseline value to be used to determine change pricing adjustment per Section 5.2 "Changes Subject to an Equitable Adjustment." To Support Production Authorization Dollar Item Rate Of Date Amount - - ---- ------- ---- ------ Contractor Use ___S/S per Execution of Tooling Month Agreement ________ Common Use Tools ________ Forging Dies ________ Other Non-Recurring Work ________ Total Non-Recurring ________ Baseline Value -18- ATTACHMENT "6" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Recurring releases authorized in conjunction with execution of this Agreement are herein summarized in shipset quantities. Material Quantity S/S - - -------- ------------ Metallic Raw Material Non-Metallic Raw Material Purchased Parts Extrusions Fabrication - - ----------- Detail Parts Assembly - - -------- B. Lead Times Lead times for material, fabrication and assembly authorizations are as tabulated below in months prior to delivery of the first Shipset affected. Material Months -------- ------ Metallic Raw Material TBD Non-Metallic Raw Material TBD Castings/Forgings TBD Purchased Parts TBD Extrusions TBD Fabrication ----------- Detail Parts TBD Assembly TBD -------- Rate Tooling ------------ (Greater than the Baseline Shipsets per Month) TBD -19- ATTACHMENT "7" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) CHANGE ABSORPTION EXAMPLE (Reference Section 5.6) Non-Recurring Recurring ------------- --------- Initial Unit Value Pre-100% Engineering Seller's Limit for Absorption of Changes Change #1 Negotiated Delta Price Updated Order, rev. 1 *** CONFIDENTIAL TREATMENT REQUESTED *** Change #2 Negotiated Delta Price Updated Order, rev. 2 Change #3 Negotiated Delta Price Updated Order, rev. 3 (1) The dollar values which are fixed at plus or minus ten percent (+/-l0%) of the initial Order values represent the Seller's maximum risk for absorption of changes. The fixed values will be added to Section 5.6.2. (2) Change #1, made prior to 100% engineering release, has a negotiated non-recurring price of *** . This price exceeds the ***. Therefore, the total non-recurring price is increased from $*** to $***. The net effect of Change #1 to the recurring portion is $*** which is less than 10% therefore no change is made. (3) The negotiated net effect of change #2, made prior to 100% engineering release, for the recurring pricing is $***. Since it exceeds the $*** limit, the recurring Total Unit Price is increased from $*** to $***. -20- (4) Change #3, made after 100% engineering release, has a negotiated credit of $***. This is less than 2% of the recurring Total Unit Price of $***, so no change is made to the Unit Value. -21- EX-10.47 12 SPECIAL BUSINESS PROVISIONS EFFECTIVE 8/11/94 SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) EXHIBIT 10.47 MATERIAL OMITTED PURSUANT TO CONFIDENTIAL TREATMENT APPLICATION SPECIAL BUSINESS PROVISIONS between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY Number L-435579-8180N --------------- -i- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) SPECIAL BUSINESS PROVISIONS TABLE OF CONTENTS Section Item Page - - ------- ---- ---- 1.0 DEFINITIONS.............................................................. 2 2.0 PURCHASE ORDER NOTE...................................................... 2 3.0 PRICES................................................................... 3 3.1 Firm Fixed Prices........................................................ 3 3.2 Manufacturing Configuration Baseline..................................... 3 3.3 Packaging................................................................ 3 4.0 PURCHASE ORDER ISSUANCE.................................................. 4 5.0 CHANGES.................................................................. 5 5.1 Changes At No Cost....................................................... 5 5.2 Changes Subject to An Equitable Adjustment............................... 6 5.3 Changes to the Statement of Work......................................... 7 5.4 Computation of Equitable Adjustment...................................... 7 5.5 Planning Schedule........................................................ 8 5.6 Change Absorption........................................................ 8 6.0 TERMINATION LIABILITY....................................................11 7.0 EXPENDITURE AUTHORIZATION................................................12 8.0 PAYMENT..................................................................12 8.1 Recurring................................................................12 8.2 Non-Recurring............................................................12 9.0 PRODUCT ASSURANCE........................................................13 9.1 Governing Document.......................................................13 10.0 COST PERFORMANCE VISIBILITY..............................................13 11.0 GRANT OF LICENSE.........................................................14 11.1 Licensed Property........................................................14 11.2 Consideration............................................................15 11.3 Title Transfer...........................................................15 12.0 SPARES PRICING...........................................................15 12.1 Aircraft on Ground (AOG) Spares..........................................16 12.2 Critical Spares..........................................................17 12.3 Special Handling.........................................................17 -ii- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) TABLE OF CONTENTS (Continued) Section Item Page - - ------- ---- ---- 13.0 BUYER FURNISHED MATERIAL................................................18 14.0 FOREIGN PROCUREMENT REPORT..............................................18 15.0 ADMINISTRATIVE AGREEMENT................................................19 16.0 OPTION..................................................................19 16.1 Exercise of Option......................................................20 17.0 ASSIGNMENT/INTEGRATION..................................................20 Attachment 1 Work Statement and Pricing.....................................23 Attachment 2 Planning Schedule..............................................24 Attachment 3 Foreign Procurement Report.....................................25 Attachment 4 Rates and Factors..............................................26 Attachment 5 Termination Liability Curve....................................27 Attachment 6 Incremental Lot Release Schedule Plan..........................28 Attachment 7 PCOS Invoice Register..........................................30 -iii- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) REVISIONS REV. SYM DESCRIPTION DATE APPROVAL -iv- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) SPECIAL BUSINESS PROVISIONS THESE SPECIAL BUSINESS PROVISIONS ("SBP") are entered into as of August 11, 1994 by Cashmere Manufacturing Company, a Washington corporation with its principle office in Cashmere, Washington ("Seller"), and Boeing Commercial Airplane Group, a division of The Boeing Company, a Delaware corporation with its principle office in Seattle, Washington ("Buyer"). RECITALS A. Buyer and Seller entered into a General Terms Agreement (the "Agreement") GTA # PLR-950 dated February 5, 1990 for the sale by Seller and purchase by Buyer of Products. B. Buyer and Seller desire to enter into another agreement to include these Special Business Provisions relating to the sale by Seller and purchase by Buyer of the Products. Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: -1- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) SPECIAL BUSINESS PROVISIONS 1.0 DEFINITIONS The definitions used herein shall be the same as used in the Agreement. In addition, the term "Rate Tool Capacity" shall mean the quantity of tooling required to support a production rate not to exceed 21 shipsets per month on the 737, the term "100% Engineering Release" shall mean the date at which all applicable engineering drawings have been completed with revision level new or greater and the term "Initial Order" shall mean the order as it first exists, prior to Amendment or Change. 2.0 PURCHASE ORDER NOTE The following note shall be contained in any order to which these Special Business Provisions are applicable: This Order is subject to and incorporates by this reference the Special Business Provisions L-435579-8180N between The Boeing Company and Cashmere Manufacturing Company dated August 11, 1994. -2- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Each Order bearing such note shall be governed by and be deemed to include the provisions of these Special Business Provisions. 3.0 PRICES 3.1 FIRM FIXED PRICES The prices of Products to be delivered on or before July 31, 1995, except as otherwise noted, are listed in Attachment "1" which by this reference are incorporated herein and are firm fixed prices in United States dollars, F.O.B. Seller's Plant. 3.2 MANUFACTURING CONFIGURATION BASELINE Unit pricing for each part number shown in Attachment "1" reflects the latest revisions of the Engineering Drawings and Outside Production Specification Plans (OPSP's) at the time of the signing of these Special Business Provisions. 3.3 PACKAGING The prices shown in Attachment "1" do not include packaging costs. Packaging shall be in accordance with Packaging Specification SC 65C35000 "Reusable Shipping Container Overwing Escape Hatch", Document M6-1025, Volume II, "Supplier Part -3- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Protection Guide" for production Products and A.T.A. Specification 300 "Specification for Packaging of Airline Supplies" for spares Products. If necessary, Seller may repair or furnish additional packaging upon approval by Buyer of Seller's price proposal for such repair or additional packaging. Separate purchase orders shall be released by Buyer to cover such expense (if applicable). 4.0 PURCHASE ORDER ISSUANCE Buyer and Seller agree that, in addition to other provisions of the order and in consideration of the prices set forth under Section 3.1, "Firm Fixed Prices," Buyer shall issue purchase orders for the Products listed in Attachment "1" from time to time to Seller for Buyer's requirements, to be shipped at any scheduled rate of delivery, as determined by Buyer, but not to exceed the Rate Tool Capacity and Seller shall sell to Buyer Buyer's requirements of such Products, provided that, without limitation on Buyer's right to determine its requirements, Buyer shall not be obligated to issue any purchase orders for any given Product if: A. Any of Buyer's customers specify an alternate product; -4- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) B. Such Product is, in Buyer's reasonable judgment, not technologically competitive at any time. "Technologically competitive" shall be defined as significant changes to Product design, including materials, specifications or manufacturing processes which result in a reduced price or weight. C. Buyer gives reasonable notice to Seller of a change in any of Buyer's aircraft which will result in Buyer's no longer requiring such Product for such aircraft; D. Seller has materially defaulted in any of its obligations under any Order, whether or not Buyer has issued a notice of default to Seller pursuant to Section 12.2, "Cancellation-Default," of the Agreement; E. Buyer reasonably determines that Seller cannot support Buyer's requirements for Products in the amounts and within the delivery schedules Buyer requires. 5.0 CHANGES 5.1 CHANGES AT NO COST -5- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Notwithstanding the provision for an equitable adjustment in Section 10.0, "Changes," of the Agreement, Buyer may make the changes set forth in subsections 5.1.1, 5.1.2, and 5.1.3 without cost or change in the unit price stated in the applicable Order unless otherwise provided herein. 5.1.1 Changes in the delivery schedule, either acceleration or deceleration, including firing order and rate changes, if (a) the delivery date of the Product under such Order is on or before July 31, 1995 and (b) Buyer provides Seller with written notice of the changes. Buyer agrees, whenever possible, to work with Seller to identify and implement a delivery schedule acceptable to both parties, however, Buyer shall retain final decision making authority with respect to all schedules. 5.1.2 Changes in the Tooling required to support delivery schedule adjustments, including but not limited to production rate changes, that are in accordance with the Rate Tool Capacity. 5.1.3 Engineering changes to incorporate Seller initiated production facility requirements to facilitate or improve Seller's manufacturing processes. 5.2 CHANGES SUBJECT TO AN EQUITABLE ADJUSTMENT -6- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) An equitable adjustment in the price of any Product shall be made in accordance with Section 10.0, "Changes," of the Agreement if Buyer makes a change in the delivery schedule of such product under an order and: A. Such Product, although originally scheduled for delivery before August 1, 1995 under such order, is delivered after July 31, 1995 in accordance. B. Such products monthly rate exceeds the Rate Tool Capacity as stated in Section 1.0; and, Seller submits to Buyer a written request for an equitable adjustment within 30 days of receipt of the written change notice. 5.3 CHANGES TO THE STATEMENT OF WORK Buyer may direct Seller within the scope of the applicable order and in accordance with the provisions of Section 10.0, "Changes," of the Agreement to increase or decrease the work to be performed by the Seller in the manufacture of any Product. The equitable adjustment, if any, to be paid by Buyer to Seller for such change shall be computed in accordance with the provisions of Section 5.4. 5.4 COMPUTATION OF EQUITABLE ADJUSTMENT -7- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) The Rates and Factors set forth in Attachment "4", which by this reference is incorporated herein, shall be used to determine the equitable adjustment, if any, (including equitable adjustments, if any, in the prices of Products to be incorporated in Derivative Aircraft), to be paid by Buyer pursuant to Section 10.0, "Changes," of the Agreement for each applicable change. 5.5 PLANNING SCHEDULE The planning schedule, attached hereto as Attachment "2" and by this reference incorporated herein, is a schedule to be used for planning production following the initial purchase order release. Such planning schedule shall not constitute a limitation on Buyers right to issue purchase orders to Seller for greater or lesser quantities or to specify different delivery dates as necessary to meet Buyers requirements for the products listed on Attachment "1". Such planning schedule shall be subject to adjustment from time to time. Any such adjustment shall not be deemed to be a change under Section 10.0, "Changes," of the Agreement. 5.6 CHANGE ABSORPTION 5.6.1 PRIOR TO 100% ENGINEERING RELEASE 5.6.1.1 GENERALLY -8- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Notwithstanding the provisions of Section 10.0 "Changes" of the Agreement and Section 5.3 "Changes to the Statement of Work" of this SBP, no equitable adjustment in the prices or schedules of any Order ("Equitable Adjustment") shall be made for any change to technical requirements and descriptions, specifications, statement of work, drawing or designs ("Technical Change(s)") made by Buyer and communicated in writing to Seller prior to thirty days after 100% Engineering Release except that an Equitable Adjustment shall be made for the following Technical Changes: a. Any Technical Change which changes raw material type of the Product. For purposes of this Section, change to raw material type shall be defined as a change BETWEEN raw material classifications such as changing from aluminum to steel or titanium to plastic. Not included as a Technical Change for purposes of this clause are changes WITHIN a raw material classification such as changing from 7050 Aluminum to 7075 Aluminum; b. Any Technical Change which adds or deletes a process specification including but not limited to chem milling, chrome plate, anodize, paint, prime and heat treat. 5.6.1.2 CLAIMS -9- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Claims for Equitable Adjustment shall be made as follows: a. Claims for any Technical Change made prior to 100% Engineering Release shall be made within Thirty (30) days after 100% Engineering Release. 5.6.2 SUBSEQUENT TO 100% ENGINEERING RELEASE 5.6.2.1 GENERALLY Notwithstanding the provisions of Section 10.0, "Changes" of the Agreement, and Section 5.2, "Changes Subject to an Equitable Adjustment", no equitable adjustment shall be made to the recurring or nonrecurring costs subsequent to 100% Engineering Release for any change unless the value of such change (debit or credit) is greater than or equal to two percent (2%) of the then current Unit Cost for the Product (recurring) or is greater than or equal to two percent (2%) of the total then current Nonrecurring Cost as set forth in Attachment "1". For purposes of this Section, the then current Unit Cost or Total Nonrecurring Cost shall be the price identified in Attachment "1" plus any and all price adjustments agreed to previously which have not been added to Attachment "1". 5.6.2.2 CLAIMS -10- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Claims shall be made separately for each Product and for each change. Each claim shall be considered separately for application of the two percent (2%) threshold. Changes may not be combined for the purposes of exceeding the two percent (2%) threshold described in Section 5.6.2.2. 6.0 TERMINATION LIABILITY When required by Buyer, Seller shall submit a time-phased Termination Liability Curve per Attachment "5" attached hereto and by this reference incorporated herein. Notwithstanding any other provisions of this Agreement, Buyer's termination liability pursuant to Section 12.0 of the Agreement shall not exceed the amount established by the Termination Liability Curve for the date of termination, reduced by the amount of all payments made by Buyer for delivered Products, tooling or other goods or services furnished by the Seller pursuant to the Order or made by Buyer in settlement of any other claim made by Seller or any other party in connection with the performance of the Order. At any point in time, whether or not Buyer requires Seller to submit a Termination Liability Curve, Buyer's termination liability shall be limited to the maximum value of scheduled production deliveries for two (2) months. -11- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) 7.0 EXPENDITURE AUTHORIZATION When requested by Buyer, Seller shall submit a Lot Release Schedule Plan for approval. Seller's Lot Release Schedule Plan is included as Attachment "6" hereto and is by this reference incorporated herein. Buyer's written authorization must be obtained prior to release of any lots. Expenditures incurred by Seller exceeding those authorized by the Lot Release Schedule shall be at Seller's risk and expense. 8.0 PAYMENT 8.1 RECURRING COST/SPECIAL CHARGE ITEMS Unless otherwise provided in the applicable order, payment shall be made in accordance with Document D6-55772 "Pay From Receipt". Payment terms shall be net thirty (30) days except as otherwise agreed to by the parties. All payments are subject to adjustment for shortages, credits and rejections. Seller shall submit itemized charges for Products in accordance with Attachment 7 "PCOS Invoice Register" monthly, or as otherwise required by Buyer. 8.2 NON-RECURRING COSTS -12- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Unless otherwise provided in the applicable Order, the total non-recurring price shall be paid by Buyer within the term discount period or thirty (30) calendar days (whichever is later) after receipt of both acceptable Products by Buyer and receipt of an acceptable invoice accompanied by a properly prepared Certified Tool List as specified in the M31-24 Document, "Boeing Supplier Tooling Manual." Invoices received with incorrect, improperly prepared or incomplete certified tool lists will be returned for correction prior to payment. Invoices shall be dated concurrent with, or subsequent to, shipment of the Products. 9.0 PRODUCT ASSURANCE 9.1 GOVERNING DOCUMENT Seller acknowledges that Buyer and the owner or operator of each aircraft manufactured by Buyer incorporating the Products must be able to rely on each Product performing as specified and that Seller will provide the required support services. Accordingly, the provisions of the Boeing Document M6-1124-3, Rev. A "Boeing Designed, Sub- Contracted Products Manufacturers Warranty" are incorporated herein and by this reference are made a part hereof. 10.0 COST AND FINANCIAL PERFORMANCE VISIBILITY -13- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Seller's Program Manager shall be responsible to provide all necessary cost support data, source documents for direct and indirect costs, and assistance at the Seller's facility for cost performance reviews performed by Buyer pursuant to any order referencing these Special Business Provisions. Seller shall be responsible to provide financial data, on a quarterly basis, or as requested, to Buyer's Credit Office for credit and financial condition reviews. Said data shall include but not be limited to balance sheets, schedule of accounts payable and receivable, major lines of credit, creditors, income statements (profit and loss), cash flow statements, firm backlog, and headcounts. Copies of such data are to be made available within 72 hours of any written request by Buyer. This data is required in addition to the cost data provided pursuant to Section 9.0 of the Agreement. All such information so obtained shall be treated as confidential per Section 15.0 of the Agreement. 11.0 GRANT OF LICENSE 11.1 LICENSED PROPERTY For this Section, "Licensed Property" shall be deemed to mean all patents (including divisions, continuations or substitutions thereof), designs, spec. processes, tool drawings, technical data and other information used in the development or production of Products. -14- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) 11.2 CONSIDERATION In consideration for Buyer's agreement to pay certain non-recurring tooling, design, development and certification costs for the Products, Seller hereby grants to Buyer a present, royalty-free, non-exclusive license to use Licensed Property to make, have made, use and sell Products. Buyer shall have the right to exercise said license at no additional cost to Buyer: (a) upon termination of this order for any reason; or (b) at any time after five years from the date of this order. 11.3 TITLE TRANSFER At any time following the exercise of the license granted herein, Buyer shall have the right to require Seller at no additional cost to Buyer to transfer to Buyer the title to and possession of all tooling, fixtures, die and jigs used by Seller or Seller's subcontractors in the development or production of Products. 12.0 SPARES AND SHORTFLOW PRODUCTION PRICING Except as set forth in subsections 12.1 and 12.2 below, the price for Spare(s) shall be the same as the production price for the Products as listed on Attachment "1" in effect at the time the Spare(s) are ordered. POA parts shall be priced so that the sum of the -15- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) prices for all POA parts of an End Item Assembly equals the applicable recurring portion of the price of the End Item Assembly. 12.1 AIRCRAFT ON GROUND (AOG)/CRITICAL SPARES, SHORT FLOW PRODUCTION REQUIREMENTS LESS THAN 60% OF SELLER'S RE-ORDER LEAD TIME (ROLT) The AOG is the highest priority category utilized by Buyer for spare parts procurements. This classification will be assigned part requirements for actual grounded aircraft. The Seller will provide delivery commitments within one (1) hour after receipt of the requirements. The Critical priority classification is assigned spares requirements which are urgently needed by a customer or Buyer although no actual AOG condition exists, an AOG condition is imminent or a work stoppage may result from this Critical condition. The Seller will provide delivery commitments within one (1) working day after receipt of the requirements. The Seller is required to support AOG/Critical Spares on a twenty-four (24) hour day basis, seven (7) day week and with maximum use of overtime. Premium transportation is authorized. The price for Aircraft On Ground (AOG)/Critical Spares and short flow production requirements as defined herein -16- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.07. 12.2 EXPEDITE SPARE (CLASS 1) AND SHORT FLOW PRODUCTION REQUIREMENTS LESS THAN 100% BUT GREATER THAN OR EQUAL TO 60% OF SELLER'S RE-ORDER LEAD TIME (ROLT) The Expedite Spare classification is used to identify spares requirements that require delivery in less than Seller's normal re- order lead time (ROLT). Manufacturing efforts will be based on a two (2) shift day basis, six (6) day week. The price for Expedite Spares and short flow production requirement, as defined herein, shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.05. Expedite action will be taken only if necessary to meet Buyer's required date. 12.3 SPECIAL HANDLING The price for all effort associated with the production handling and delivery of Spare(s) is deemed to be included in the price for such Spare(s). When Buyer directs delivery of Spare Parts to an F.O.B. point other than Seller's plant, however, Buyer shall reimburse Seller for shipping charges, including insurance, paid by Seller from the plant to the designated F.O.B. point. Such charges shall be shown separately on all invoices. -17- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) 13.0 BUYER FURNISHED MATERIAL It is the responsibility of the Seller to provide notice to the Buyer of required on-dock dates for all material to ensure production continuity. Seller's notice shall provide Buyer with sufficient time to allow Buyer to competitively bid the material if so desired. Material furnished to Supplier shall be administered per the Bonded Stores Agreement between the parties. Updates on the status of all Buyer furnished material shall be submitted monthly by the Seller to Buyer. Seller shall perform a 100% visual inspection on all material not having "Key Characteristics" identified on the applicable engineering drawing. In addition, Seller shall perform a 100% inspection of "Key Characteristics", where applicable, on all Buyer furnished material. Said inspection shall be accomplished within Thirty (30) days of receipt of the material. Upon completion of the appropriate inspection, Seller shall either (a) submit to Buyer, via an Advance Rejection tag, all non-conforming material for Buyer disposition or (b) stamp and date and maintain in bonded store all conforming material. 14.0 FOREIGN PROCUREMENT REPORT -18- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Identification of contracts and dollars contracted with the subject companies and or countries shall be documented on the Foreign Procurement Report. The Foreign Procurement Report to Buyer required by Section 35.0, "Foreign Procurement offset," of the Agreement is to be provided on the Foreign Procurement Report form, Attachment "3" hereto. Such document is by this reference made a part hereof. The semi-annual reporting periods shall be January 1 to June 30 and July 1 to December 31. The reports shall be submitted on the 1st of August and the 1st of February respectively. 15.0 ADMINISTRATIVE AGREEMENT The Administrative Agreement states certain obligations of the parties relating to the administration of the Agreement, these Special Business Provisions and each order, and such agreement is incorporated herein by this reference. 16.0 OPTION Seller irrevocably grants to Buyer the option to purchase an additional seventeen (17) months worth of Products beginning in August 1995 through 1996 on the terms and conditions set forth in the Agreement and these Special Business Provisions at the prices set forth below on Attachment 1, increased by the equitable adjustments to the prices of -19- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) such Products, if any, for which the Seller has qualified pursuant to Sections 5.2 and 5.3 of these Special Business Provisions prior to the date of Buyer's exercise of the option. 16.1 EXERCISE OF OPTION Buyer may exercise the option contained herein by giving written notice to Seller at any time prior to the delivery to Buyer of the last shipset of the initial order quantity of Products provided however, that said option must be exercised in sufficient time to permit production continuity. Seller agrees to provide Buyer with at least sixty (60) days written notice of the date when in Seller's opinion the option must be exercised in order to assure such production continuity. Buyer may extend the option exercise date by purchasing long lead materials, or authorizing Seller to purchase such materials on terms acceptable to Boeing, if such purchase would have the effect of extending the date for assuring production continuity. Buyer reserves the right to (a) refuse the option and commence new negotiations with Seller for follow-on Products; or (b) purchase follow-on Products from third parties. The purchase of any Products from third parties shall not be deemed to abrogate any of Seller's obligations to Buyer pursuant to the Agreement. 17.0 ASSIGNMENT/INTEGRATION -20- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Notwithstanding the provisions of Article 24.0 "Assignment" of the Agreement, Buyer and Seller agree that Buyer may, at its discretion, transfer its obligation to issue Order(s) to a "Third Party" for hardware pursuant to the applicable terms and conditions as set forth in the agreement and Special Business Provisions for the hardware at the prices set forth therein. Buyer reserves the right to rescind its transfer at anytime it deems necessary. Buyer's transfer of purchasing obligation of hardware to Seller shall be limited to: a. Scheduling of Hardware; b. Issuance of order(s) for Hardware; c. Receival and Inspection of Hardware; d. Acceptance or Rejection of Hardware; and, e. Payment for accepted Hardware. Buyer shall retain all other rights and obligations as set forth in the applicable terms and conditions. In addition, Buyer shall be responsible for coordinating and mediating with and between the Seller and the Third Party on all matters relevant to the purchase of -21- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Buyer's requirements of the Products and Hardware including disputes which may arise between the Seller and Third Party. EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING By and Through its Division COMPANY Boeing Commercial Airplane Group Name: /s/ Nancy V. Rosser Name: /s/ John Eder --------------------- --------------------- Title: Buyer Title: General Manager Date: 8/15/94 Date: 8/15/94 -22- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "1" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) WORK STATEMENT AND PRICING The price for Products to be delivered on or before July 31, 1995, except as otherwise noted below, shall be as follows: KIT NUMBER SC65C35000-102 CONFIDENTIAL TREATMENT REQUESTED -23- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "2" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) PLANNING SCHEDULE The following Airplane model and rate are forecasted for the years 1994-1995. MONTHLY RATE CONFIDENTIAL TREATMENT REQUESTED -24- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "3" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) FOREIGN PROCUREMENT REPORT FORM (Seller to Submit) (Reference Section 14.0) -25- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "4" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) RATES AND FACTORS The following Rates and Factors, which are reflective of the proposed values identified in Attachment "1" of this document, shall contribute to the determination of equitable pricing for engineering changes, derivative aircraft, and option or follow-on pricing. Direct Labor Rate $ * Manufacturing Burden % * G&A (Gen. Admin. Expense) % * Profit % * *CONFIDENTIAL TREATMENT REQUESTED -26- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "5" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) TERMINATION LIABILITY CURVE (Seller to Submit) (Reference Section 6.0) In the event of termination or cancellation pursuant to Article 12.0 of the Agreement, Buyer shall not be obligated to pay Seller more than the Cumulative total amounts set forth below less payments previously made, for the month/quarter in which the termination notice is issued, as the amounts shall be amended from time to time. ($000 Omitted) Nonrecurring Recurring Year/Quarter Cost Cost Total - - ------------ ---- ---- ----- ___ First $ $ ___ Second ___ Third ___ Fourth ___ First $ $ ___ Second ___ Third ___ Fourth ___ First $ $ ___ Second ___ Third ___ Fourth TOTAL $_______ $_______ -27- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "6" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) INCREMENTAL LOT RELEASE SCHEDULE PLAN (Seller to Submit) (Reference Section 7.0) A. AUTHORIZATION SUMMARY Non-recurring releases authorized in conjunction with the execution of the Agreement are as summarized below. The nonrecurring Price represents the baseline value to be used to determine change pricing adjustment per Section 5.2 "Changes Subject to an Equitable Adjustment." To Support Production Authorization Dollar Item Rate Of Date Amount - - ---- ------- ---- ------ Contractor Use ___S/S per Execution of _____ Tooling Month Agreement Common Use Tools _____ Forging Dies _____ Other Non-Recurring Work _____ Total Non-Recurring Baseline Value _____ -28- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "6" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Recurring releases authorized in conjunction with execution of this Agreement are herein summarized in shipset quantities. Material Quantity S/S - - -------- ------------ Metallic Raw Material Non-Metallic Raw Material Purchased Parts Extrusions Fabrication - - ----------- Detail Parts Assembly - - -------- B. LEAD TIMES Lead times for material, fabrication and assembly authorizations are as tabulated below in months prior to delivery of the first Shipset affected. Material Months - - -------- ------ Metallic Raw Material TBD Non-Metallic Raw Material TBD Castings/Forgings TBD Purchased Parts TBD Extrusions TBD Fabrication - - ----------- Detail Parts TBD Assembly TBD - - -------- Rate Tooling - - ------------ (Greater than the Baseline Shipsets per Month) TBD -29- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "7" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) PCOS INVOICE REGISTER (See Section 8.1) -30- EX-10.48 13 SPECIAL BUSINESS PROVISIONS EFFECTIVE 2/5/90 SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) EXHIBIT 10.48 MATERIAL OMITTED PURSUANT TO APPLICATION FOR CONFIDENTIAL TREATEMENT SPECIAL BUSINESS PROVISIONS between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY Number PLR-950A SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) SPECIAL BUSINESS PROVISIONS TABLE OF CONTENTS SECTION ITEM PAGE - - ------- ---- ---- 1.0 DEFINITIONS..............................................................1 2.0 PURCHASE ORDER NOTE......................................................1 3.0 PRICES...................................................................2 3.1 Firm Fixed Prices........................................................2 3.2 Manufacturing Configuration Baseline.....................................2 3.3 Packaging................................................................2 4.0 PURCHASE ORDER ISSUANCE..................................................2 5.0 CHANGES..................................................................3 5.1 Changes At No Cost.......................................................3 5.2 Changes Subject to An Equitable Adjustment...............................3 5.3 Changes to the Statement of Work.........................................4 5.4 Computation of Equitable Adjustment......................................4 5.5 Planning Schedule........................................................5 6.0 TERMINATION LIABILITY....................................................5 7.0 EXPENDITURE AUTHORIZATION................................................5 8.0 PAYMENT..................................................................6 8.1 Recurring Costs..........................................................6 SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) 8.2 Non-Recurring Costs......................................................6 9.0 PRODUCT ASSURANCE........................................................6 9.1 Governing Document.......................................................6 10.0 COST PERFORMANCE VISIBILITY..............................................6 11.0 GRANT OF LICENSE.........................................................7 11.1 Licensed Property........................................................7 11.2 Consideration............................................................7 11.3 Title Transfer...........................................................7 12.0 SPARES PRICING...........................................................7 12.1 Aircraft On Ground (AOG) Spares..........................................7 12.2 Critical Spares..........................................................8 12.3 Special Handling.........................................................8 13.0 BUYER FURNISHED MATERIAL (WHERE APPLICABLE)..............................8 14.0 FOREIGN PROCUREMENT REPORT...............................................9 15.0 STATUS REPORTS...........................................................9 Attachment 1 Work Statement and Pricing.............................. Attachment 2 Planning Schedule....................................... Attachment 3 Foreign Procurement Report.............................. Attachment 4 Rates and Factors....................................... Attachment 5 Termination Liability Curve............................. Attachment 6 Incremental Lot Release Schedule Plan................... SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) REVISIONS REV. SYM DESCRIPTION DATE APPROVAL ---- ----------- ---- -------- 1 INCORPORATE NEW CONTRACT 08-22-91 LANGUAGE L-71 (03-13-91) TO SHEET METAL OFFLOAD CONTRACTS SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) SPECIAL BUSINESS PROVISIONS THESE SPECIAL BUSINESS PROVISIONS ("SBP") are entered into as of February 5, 1990 by Cashmere Manufacturing Company, a Washington corporation with its principal office in Cashmere, Washington ("Seller"), and Boeing Commercial Airplane Group, a division of The Boeing Company, a Delaware corporation with its principal office in Seattle, Washington ("Buyer"). RECITALS A. Buyer and Seller entered into a General Terms Agreement (the "Agreement") dated February 5, 1990 for the sale by Seller and purchase by Buyer of Products. B. Buyer and Seller desire to enter into another agreement to include these Special Business Provisions relating to the sale by Seller and purchase by Buyer of the Products. Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: 1.0 DEFINITIONS The definitions used herein shall be the same as used in the Agreement. In addition, the term "Rate Tool Capacity" shall mean the quantity of tooling required to support a production rate not to exceed 21 shipsets per month on the 737, 10 shipsets per month on the 747, 14 shipsets per month on the 757, 10 shipsets per month on the 767, 7 shipsets per month on the 777, and the term "Initial Order" shall mean the order as it first exists, prior to Amendment or Change. 2.0 PURCHASE ORDER NOTE The following note shall be contained in any order to which these Special Business Provisions are applicable: This order is subject to and incorporates by this reference the Special Business Provisions PLR-950A between The Boeing Company and Cashmere Manufacturing Company dated February 5, 1990. Each order bearing such note shall be governed by and be deemed to include the provisions of these Special Business Provisions. -1- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) 3.0 PRICES 3.1 FIRM FIXED PRICES The prices and period of performance of Products to be delivered under this contract are listed in Attachment "1" which by this reference are incorporated herein and are firm fixed prices in United States dollars, F.O.B. Cashmere, Washington. 3.2 MANUFACTURING CONFIGURATION BASELINE Unit pricing for each part number shown in Attachment "1"reflects the latest revisions of the Engineering Drawings and Outside Production specification Plans (OPSP's) at the time of the signing of these Special Business Provisions. 3.3 PACKAGING The prices shown in Attachment "1" do include packaging costs. Packaging shall be furnished by the Seller. If necessary, Seller may repair or furnish additional packaging upon approval by Buyer of Seller's price proposal for such repair or additional packaging. Separate purchase orders shall be released by Buyer to cover such expense (if applicable). 4.0 PURCHASE ORDER ISSUANCE Buyer and Seller agree that, in addition to other provisions of the Order and in consideration of the prices set forth under Section 3.1, "Firm Fixed Prices," Buyer shall issue purchase orders for the Products listed in Attachment "1" from time to time to Seller for Buyer's requirements, to be shipped at any scheduled rate of delivery, as determined by Buyer, but not to exceed the Rate Tool Capacity, and Seller shall sell to Buyer Buyer's requirements of such products, provided that, without limitation on Buyer's right to determine its requirements, Buyer shall not be obligated to issue any purchase orders for any given Product if: A. Any of Buyer's customers specify an alternate product; B. Such Product is, in Buyer's reasonable judgment, not technologically competitive at any time. "Technologically competitive" shall be defined as significant changes to Product design, including materials, specifications or manufacturing processes which result in a reduced price or weight. -2- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) C. Buyer gives reasonable notice to Seller of a change in any of Buyer's aircraft which will result in Buyer's no longer requiring such Product for such aircraft; D. Seller has materially defaulted in any of its obligations under any Order, whether or not Buyer has issued a notice of default to Seller pursuant to Section 12.2, "Cancellation - Default," of the Agreement; or E. Buyer reasonably determines that Seller cannot support Buyer's requirements for Products in the amounts and within the delivery schedules Buyer requires. 5.0 CHANGES 5.1 CHANGES AT NO COST Not withstanding the provision for an equitable adjustment in Section 10.0, "Changes," of the Agreement, Buyer may make the changes set forth in subsections 5.1.1, 5.1.2, and 5.1.3 without cost or change in the unit price stated in the applicable order. 5.1.1 Changes in the delivery schedule, including firing order and rate changes, if (a) the delivery date of the Product under such order is on or bef ore the last date of the applicable period of performance as identified in Attachment "1" and (b) Buyer provides Seller with written notice of the changes. A. At least four (4) months prior to the first day of the month in which any acceleration in the delivery schedule is to take effect; and/or B. At least four (4) months prior to the first day of the month in which any deceleration in the delivery schedule is to take effect. 5.1.2 Changes in the Tooling required to support delivery schedule adjustments, including but not limited to production rate changes, that are in accordance with the Rate Tool Capacity. 5.1.3 Engineering change to incorporate Seller initiated production facility requirements to facilitate or improve Seller's manufacturing processes. 5.2 CHANGES SUBJECT TO AN EQUITABLE ADJUSTMENT -3- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) An equitable adjustment in the price of any Product shall be made in accordance with Section 10.0, "Changes," of the Agreement if Buyer makes a change in the delivery schedule of such product under an order and: A. Such Product, although originally scheduled for delivery during the period of performance for the applicable package under such Order as identified in Attachment "1", is delivered after the period of performance in accordance with such order as changed; or B. Such products monthly rate exceeds the Rate Tool Capacity as stated in Section 1.0; or C. Such change does not meet the notice requirements of Section 5.1.1 above; and, Seller submits to Buyer a written request for an equitable adjustment within 180 days of receipt of the written change notice. The amount of the price adjustment for each product shall be determined by multiplying the original unit price plus any negotiated changes which are incorporated into the individual product price, excluding items such as amortization of tooling, amortization of schedule slides, amortization of set-up charges, etc., by three tenths of one percent (.3 of 1%) then multiplying that factor by the cumulative balance of the number of products previously scheduled in each successive month that falls outside the changes at no cost periods set forth in Section 5.1.1 above. No price adjustment shall be made for that portion of any delivery schedule change which falls inside the changes at no cost periods set for in Section 5.1.1. 5.3 CHANGES TO THE STATEMENT OF WORK Buyer may direct Seller within the scope of the applicable Order and in accordance with the provisions of Section 10.0, "Changes," of the Agreement to increase or decrease the work to be performed by the Seller in the manufacture of any Product. The equitable adjustment, if any, to be paid by Buyer to Seller for such change shall be computed in accordance with the provisions of Section 5.4. 5.4 COMPUTATION OF EQUITABLE ADJUSTMENT The Rates and Factors set forth in Attachment "4", which by this reference is incorporated herein, shall be used to determine the equitable adjustment, if any, (including equitable adjustments, if any, in the prices of Products to be incorporated in -4- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Derivative Aircraft), to be paid by Buyer pursuant to Section 10.0, "Changes," of the Agreement. 5.5 PLANNING SCHEDULE The planning schedule, attached hereto as Attachment "2" and by this reference incorporated herein, is a schedule to be used for planning production following the initial purchase order release. Such planning schedule shall not constitute a limitation on Buyers right to issue purchase orders to Seller for greater or lesser quantities or to specify different delivery dates as necessary to meet Buyers requirements for the products listed on Attachment "1". Such planning schedule shall be subject to adjustment from time to time. Any such adjustment shall not be deemed to be a change under Section 10.0, "Changes," of the Agreement. 6.0 TERMINATION LIABILITY When required by Buyer, Seller shall submit a time-phased Termination Liability Curve per Attachment "5" attached hereto and by this reference incorporated herein. Notwithstanding any other provisions of this Agreement, Buyer's termination liability pursuant to Section 12 of the Agreement shall not exceed the amount established by the Termination Liability Curve for the date of termination, reduced by the amount of all payments made by Buyer for delivered Products, tooling or other goods or services furnished by the Seller pursuant to the order or made by Buyer in settlement of any other claim made by Seller or any other party in connection with the performance of the Order. At any point in time, whether or not Buyer requires Seller to submit a Termination Liability Curve, Buyer's termination liability shall be limited to the maximum value of scheduled production deliveries for twelve (12) months. 7.0 EXPENDITURE AUTHORIZATION When requested by Buyer, Seller shall submit a Lot Release Schedule Plan for approval. Seller's Lot Release Schedule Plan is included as Attachment "6" hereto and is by this reference incorporated herein. Buyer's written authorization must be obtained prior to release of any lots. Expenditures incurred by Seller exceeding those authorized by the Lot Release Schedule shall be at Seller's risk and expense. -5- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) 8.0 PAYMENT 8.1 RECURRING COSTS Payment shall be net thirty (30) days. Unless otherwise provided under the applicable Order, payment due dates, including discount periods, shall be computed from (a) the date of receipt of the Product, (b) the date of receipt of a correct invoice or (c) the scheduled delivery date of such Product, whichever is last, up to and including the date Buyer's check is mailed. Unless freight and other charges are itemized, any discount shall be taken on the full amount of the invoice. All payments are subject to adjustment for shortages, credits and rejections. 8.2 NON-RECURRING COSTS Unless otherwise provided in the applicable Order, the total non-recurring price shall be paid by Buyer within the term discount period or thirty (30) calendar days (whichever is later) after receipt of both acceptable Products by Buyer and receipt of an acceptable invoice accompanied by a properly prepared Certified Tool List as specified in the M31-24 Document, "Boeing Supplier Tooling Manual." Invoices received with incorrect, improperly prepared or incomplete certified tool lists will be returned for correction prior to payment. Invoices shall be dated concurrent with, or subsequent to, shipment of the Products. 9.0 PRODUCT ASSURANCE 9.1 GOVERNING DOCUMENT Seller acknowledges that Buyer and the owner or operator of each aircraft manufactured by Buyer incorporating the Products must be able to rely on each Product performing as specified and that Seller will provide the required support services. Accordingly, the provisions of the Boeing Document M6-1124-3, "Boeing Designed, Sub-Contracted Products Manufacturers Warranty" are incorporated herein and by this reference are made a part hereof. 10.0 COST PERFORMANCE VISIBILITY Seller's Program Manager shall be responsible to provide all necessary cost support data, source documents for direct and indirect costs, and assistance at the Seller's facility for cost performance reviews performed by Buyers pursuant to any order -6- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) referencing these Special Business Provisions. Copies of such data are to be made available within 72 hours of any request by Buyer. This data is required in addition to the cost data provided pursuant to Section 9.0 of the Agreement. All such information so obtained shall be treated as confidential in accordance with Section 15.0 of the Agreement. 11.0 GRANT OF LICENSE 11.1 LICENSED PROPERTY For purposes of this Section, "Licensed Property" shall be deemed to mean all patents (including divisions, continuations or substitutions thereof), designs, specifications processes, tooling drawings, technical data and other information used in the development or production of Products. 11.2 CONSIDERATION In consideration for Buyer's agreement to pay certain nonrecurring tooling, design, development and certification costs for the Products, Seller hereby grants to Buyer a present, royalty-free, non-exclusive license to use Licensed Property to make, have made, use and sell Products. Buyer shall have the right to exercise said license at no additional cost to Buyer: (a) upon termination of this Order for any reason; or (b) at any time after five years from the date of this Order. 11.3 TITLE TRANSFER At any time following the exercise of the license granted herein, Buyer shall have the right to require Seller at no additional cost to Buyer to transfer to Buyer the title to and possession of all tooling, fixtures, die and jigs used by Seller or Seller's subcontractors in the development or production of Products. 12.0 SPARES PRICING Except as set forth in subsections 12.1 and 12.2 below, the price for Spare(s) shall be the same as the production price for the Products as listed on Attachment "1" in effect at the time the Spare(s) are ordered. POA parts shall be priced so that the sum of the prices for all POA parts of an End Item Assembly equals the applicable recurring portion of the price of the End Item Assembly. -7- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) 12.1 AIRCRAFT ON GROUND (AOG) SPARES The AOG is the highest priority category utilized by Buyer for spare parts procurements. This classification will be assigned part requirements for actual grounded aircraft. The Seller is required to support this effort on a twenty-four (24) hour day basis, seven (7) day week and with maximum use of overtime. Premium transportation is authorized. Seller will provide delivery commitments within one (1) hour after receipt of requirement. The price for Aircraft On Ground (AOG) spares shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.07. 12.2 CRITICAL SPARES The Critical priority classification is assigned spares requirements which are urgently needed by a customer or Buyer although no actual AOG condition exists, an AOG condition is imminent or a work stoppage may result from this Critical condition. All Critical priority spare parts requirements will have an expedited demand date. Every effort shall be made by the Seller to support this date, including parts manufactured based on a twenty-four (24) hour day, seven (7) day week, maximum use of overtime and premium transportation. Seller will provide delivery commitments within one (1) working day after receipt of requirement. The price for Critical Spares shall be the price for such Products listed on Attachment "1" in effect when such Spares are ordered multiplied by a factor of 1.05. 12.3 SPECIAL HANDLING The price for all effort associated with the production handling and delivery of Spare(s) is deemed to be included in the price for such Spare(s). When Buyer directs delivery of Spare Parts to an F.O.B. point other than Seller's plant, however, Buyer shall reimburse Seller for shipping charges, including insurance, paid by Seller from the plant to the designated F.O.B. point. Such charges shall be shown separately on all invoices. 13.0 BUYER FURNISHED MATERIAL (WHERE APPLICABLE) It is the responsibility of the Seller to provide notice to the Buyer of required on-dock dates for all raw material to ensure production continuity. Seller's notice shall provide -8- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) Buyer with sufficient time to allow Buyer to competitively bid the raw material if so desired. Material furnished to Supplier shall be administered per the Bonded Stores Agreement between the parties. Updates on the status of all Buyer furnished raw material shall be submitted quarterly by the Seller to Buyer 14.0 FOREIGN PROCUREMENT REPORT The Foreign Procurement Report to Buyer required by Section 35.0, "Foreign Procurement Offset," of the Agreement is to be provided on the Foreign Procurement Report form, Attachment "3" hereto, in accordance with instructions provided therein. Such document is by this reference made a part hereof. The semi-annual reporting periods shall be January 1 to June 30 and July 1 to December 31. The reports shall be submitted on the lst of August and the 1st of February respectively. 15.0 STATUS REPORTS Seller shall update and submit, as a minimum, monthly status reports using a method mutually agreed upon by the Buyer and Seller. Seller shall also submit monthly status reports using Boeing's Vendor Follow-Up Report. For all first run programs, Seller shall provide to Buyer a milestone chart identifying the following: (a) Raw material schedule, including; (i) purchase order number and date, (ii) order quantity and delivery schedule (b) Planning and Programming start and completion; (c) Tooling manufacture start and completion; (d) Machining start and completion by operation; (e) Outside processing by operation and subcontractor; -9- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) (f) First article completion date; and, (g) Production lot release plan. -10- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING By and Through its Division COMPANY Boeing Commercial Airplane Group Name: /s/ Name: /s/ John Eder ---------------------------- ---------------------------- Title: Buyer Title: Vice President, Manufacturing -11- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "1" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) WORK STATEMENT AND PRICING The price and period of performance for Products to be delivered under this contract shall be as follows: NOTE: ALL PRODUCTS, CORRESPONDING PRICING AND THE APPLICABLE PERIOD OF PERFORMANCE FOR SAID PRODUCTS, TO BE PURCHASED BY THE SHEET METAL/OFF-LOAD GROUP ARE IDENTIFIED AND MAINTAINED IN A SHEET METAL PRICING CATALOG IDENTIFIED AS CASHMERE MANUFACTURING COMPANY ATTACHMENT "1" TO SBP PLR-950A WHICH IS HEREBY INCORPORATED AND MADE A PART HEREOF BY THIS REFERENCE. SAID CATALOG SHALL BE AMENDED AS DEEMED NECESSARY BY THE PARTIES BUT NO LESS THAN SEMI-ANNUALLY. ALL PRICING IN THE AFOREMENTIONED CATALOG IS FIRM FIXED PRICE FOR DELIVERIES THROUGH THE APPLICABLE TIME FRAME, EXCEPT AS NOTED HEREIN IN SECTION 3.0 "PRICES". *** CONFIDENTIAL TREATMENT REQUESTED *** PLEASE NOTE: THE EXTENDED AMOUNTS SHOWN IN THIS ATTACHMENT ARE BASED UPON ESTIMATED USAGE RATES AND ARE USED AS A GUIDE ONLY. ANY ESTIMATE OF PRESENT OR FUTURE REQUIREMENTS PROVIDED TO SELLER BY BUYER IS NOT TO BE CONSIDERED AS A COMMITMENT OF BUYER IS ACTUAL PURCHASE REQUIREMENTS. EXTENDED AMOUNTS ARE NOT GUARANTEED TO BE ACTUALLY AWARDED, IN WHOLE OR IN PART, BY BUYER TO SELLER. -12- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "2" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) PLANNING SCHEDULE The following Airplane model mix and rate are forecasted for the year 1992-1996. Model Mix 1992 1993 1994 1995 1996 737 747 757 767 *** CONFIDENTIAL TREATMENT REQUESTED *** 777 TOTAL -13- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "3" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) FOREIGN PROCUREMENT REPORT FORM (Seller to Submit) (Reference Section 14.0) -14- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "4" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) RATES AND FACTORS The following Rates and Factors, which are reflective of the proposed values identified in Attachment "1" of this document, shall contribute to the determination of equitable pricing for engineering changes, derivative aircraft, and option or follow-on pricing. TOOL FAB PRODUCTION & REWORK EXPEDITE Direct Labor Rate Manufacturing Burden G&A (Gen. Admin. Exp.) Profit *** CONFIDENTIAL TREATMENT REQUESTED *** -15- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "5" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) TERMINATION LIABILITY CURVE (Seller to Submit) (Reference Section 6.0) In the event of termination or cancellation pursuant to Article 12.0 of the Agreement, Buyer shall not be obligated to pay Seller more than the Cumulative total amounts set forth below less payments previously made, for the month/quarter in which the termination notice is issued, as the amounts shall be amended from time to time. ($000 Omitted) Nonrecurring Cost Recurring Year/Quarter Total Cost - - ------------ ------------ --------- ____ First $ $ ____ Second ____ Third ____ Fourth ____ First $ $ ____ Second ____ Third ____ Fourth ____ First $ $ ____ Second ____ Third ____ Fourth -16- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) TOTAL $__________ $__________ -17- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) ATTACHMENT "5" TO SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) INCREMENTAL LOT RELEASE SCHEDULE PLAN (Seller to Submit) (Reference Section 9.0) A. AUTHORIZATION SUMMARY Non-recurring releases authorized in conjunction with the execution of the Contract are as summarized below. The non- recurring Price represents the baseline value to be used to determine change pricing adjustment per Section 5.2 "Changes Subject to an Equitable Adjustment." To Support Production Authorization Dollar Item Rate of Date Amount - - ---- ---------- ------------- ------ Contractor Use Tooling ___S/S per Execution of ______ Month Contract Common Use Tools ______ Forging Dies ______ Other Non-Recurring Work ______ Total Non-Recurring Baseline Value ______ Recurring releases authorized in conjunction with execution of this Contract are herein summarized in shipset quantities. Material Quantity SIS - - -------- ------------ Metallic Raw Material Non-Metallic Raw Material Purchased Parts Extrusions -18- SPECIAL BUSINESS PROVISIONS (REQUIREMENTS) FABRICATION Detail Parts ASSEMBLY B. LEAD TIMES Lead times for material, fabrication and assembly authorizations are as tabulated below in months prior to delivery of the first Shipset affected. Material Months -------- ------ Metallic Raw Material TBD Non-Metallic Raw Material TBD Castings/Forgings TBD Purchased Parts TBD Extrusions TBD Fabrication ----------- Detail Parts TBD Assembly TBD -------- Rate Tooling ------------ (Greater than the Baseline Shipsets per Month) TBD -19- EX-10.49 14 ADMINISTRATIVE AGREEMENT EFFECTIVE AUGUST 11, 1994 Exhibit 10.49 ADMINISTRATIVE AGREEMENT between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY NUMBER L-435579-818ON -i- ADMINISTRATIVE AGREEMENT TABLE OF CONTENTS Section Title Page ------- ----- ---- 1.0 INTRODUCTION 1 2.0 CONTRACTUAL COMMITMENT AUTHORIZATION 2 2.1 Buyer Designees 2 2.2 Seller Designees 3 3.0 COMMUNICATION AND CORRESPONDENCE 3 3.1 Seller to Buyer 3 3.2 Buyer to Seller 4 4.0 RESIDENT TEAM ADMINISTRATION 5 5.0 PROGRAM REQUIREMENTS 5 5.1 Fabrication/Purchase of Details 6 5.2 Delivery Requirements 6 5.3 On-site Support 7 6.0 ADMINISTRATIVE RESPONSIBILITIES 7 6.1 Program Management Documentation 7 6.2 Facilities 8 7.0 PROGRAM MANAGEMENT 8 7.1 Program Manager 8 7.2 Status Reports 8 7.3 Quarterly Reviews 10 8.0 CHANGE NOTIFICATION 10 9.0 NEGOTIATION DOCUMENTATION 11 10.0 DISPUTE RESOLUTION 12 -ii- REVISIONS Rev Sym Description Date - - --- ----------- ---- -iii- ADMINISTRATIVE AGREEMENT THIS ADMINISTRATIVE AGREEMENT is entered into as of August 11, 1994 by Cashmere Manufacturing Company, a Washington corporation with its principle office in Cashmere, Washington ("Seller"), and Boeing Commercial Airplane Group, a division of The Boeing Company, a Delaware corporation with its principal office in Seattle, Washington ("Buyer"). RECITALS A. Buyer and Seller entered into a General Terms Agreement (the "Agreement") dated February 5, 1990 and Special Business Provisions dated August 11, 1994 for the sale by Seller and purchase by Buyer of Products. B. Buyer and Seller desire to enter into another agreement to include this Administrative Agreement relating to the sale by Seller and purchase by Buyer of the Products. Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: 1.0 INTRODUCTION 1.1 This Administrative Agreement sets forth additional requirements of Seller in support of Buyer and Buyer's requirements other than those identified in General Terms Agreement -1- PLR-950 and Special Business Provisions L-435579-8180N. The objective of this Administrative Agreement is to establish the work and coordination required of Seller during the performance of this contract. 1.2 Paragraphs 2.1.1, 2.1.2, 3.1.1, 3.1.2 and 3.1.3 may be revised unilaterally by Buyer, at any time, by written notification to Seller. Paragraphs 2.2.1 and 3.2.1 may be revised unilaterally by Seller, at any time, by written notification to Buyer. The remaining paragraphs included in this document may be revised only by bilateral agreement executed by both parties. 1.3 In the event of any conflict between the requirements stated herein and the language in the General Terms Agreement (GTA) and Special Business Provisions (SBP), the requirements of the GTA and SBP shall prevail. 2.0 CONTRACTUAL COMMITMENT AUTHORIZATION 2.1 BUYER DESIGNEES 2.1.1 Only the following individuals are authorized to make contractual commitments, provide contractual direction and to coordinate operational matters with Seller on behalf of Buyer -2- with regard to the General Terms Agreement, Special Business Provisions and this Administrative Agreement: Name Title Limits ---- ----- ------- R. L. Ecker Director POP None G. M. Meredith Senior Manager POP None R. C. Sellers Procurement Manager None N. Rosser Contracts Administrator None 2.1.2 The following individuals are authorized to communicate directly with Seller concerning engineering, quality control, production, schedule and delivery status and cost performance problems on behalf of Buyer: Name Title Responsibility ---- ----- --------------- Quality Rep. M. Marsh Technical Support M. Lea Technical Support 2.2 SELLER DESIGNEES 2.2.1 Only the following individuals are authorized to make contractual commitments on behalf of the Seller with regard to the General Terms Agreement, Special Business Provisions and this Administrative Agreement: Name Title Responsibility ---- ----- --------------- -3- 3.0 COMMUNICATION AND CORRESPONDENCE 3.1 SELLER TO BUYER 3.1.1 All correspondence to Buyer concerning the General Terms Agreement, Special Business Provisions or this Administrative Agreement is to be addressed as follows: MAIL THE BOEING COMPANY Boeing Commercial Airplane Group Post Office Box 3707 Seattle, WA 98124-2207 Attention: N. Rosser Organization: 6-5380 Mail Stop: 39-CJ FACSIMILES Fax Number (206) 266-2221 Attention N. Rosser Organization 6-5380 Mail Stop 39-CJ Telephone (206) 266-1038 3.1.2 Contractual correspondence shall be marked for the attention of the person designated in paragraph 3.1 above. 3.1.3 Correspondence pertaining to other than contractual matters or falling within the purview of an individual other than the designated Contract Administrator, shall be marked for the attention of the individual concerned with an information copy routed to the person identified in paragraph 3.1. 3.2 BUYER TO SELLER -4- 3.2.1 All correspondence to Seller concerning the General Terms Agreement, Special Business Provisions or this Administrative Agreement is to be addressed as follows: MAIL Cashmere Manufacturing Company 102 Maple St. Cashmere, WA 98815 Attention: Contracts FACSIMILES Fax Number 509-782-2580 Attention Organization Contracts Telephone 509-782-2455 4.0 RESIDENT TEAM ADMINISTRATION In the event the parties determine that a resident team is required in support of the General Terms Agreement and Special Business Provisions, the following shall apply. 4.1 The names and titles of the personnel assigned as members of a resident team of one party at the other parties' facility shall be identified in writing prior to the resident team members arrival at the facility. A description of any changes in personnel, once the team is assigned, will also be provided in writing. 4.2 A resident team consisting of more than one person shall have one specific person designated as team leader who shall act as administrative focal point for the resident team activities. -5- 4.3 Discipline of resident team personnel employed by one party and located at the facility of the other party shall be the responsibility of the employer of that person. Employees of each party will obey all applicable rules while at the other party's facility. 5.0 PROGRAM REQUIREMENTS Seller acknowledges and accepts the requirements of this program as outlined below. Seller also acknowledges and accepts the remedies afforded the Buyer as provided under the GTA, SPB, and at law in the event of a breach. Seller shall maintain the management and control functions necessary to insure that program requirements are met and to provide program and technical visibility to Buyer's representatives. 5.1 FABRICATION/PURCHASE OF DETAIL COMPONENTS Seller shall be responsible for the fabrication and/or purchase of all components required in the manufacture of the Product(s) except as otherwise agreed to by the parties. 5.2 DELIVERY REQUIREMENTS Seller shall support Buyer's delivery requirements in the manner necessary by Buyer to support aircraft manufacture. Buyer reserves the right to have Seller deliver in any quantity and at any delivery schedule which best facilitates Buyer's manufacture process. This may include Just-in-Time delivery, Kitting, direct delivery to point of use facility, -6- twenty-four (24) hour turn around of repair and engineering change requirements and delivery of specific aircraft requirements per Buyer's Firing Order. 5.3 ON-SITE SUPPORT Seller agrees to provide, as required, on-site support at Buyer's facility to support engineering changes and factory rejections within Buyer's facility. Said support shall be immediate for such a period of time as required by Buyer to support Buyer's production schedule. Seller shall provide information, as set forth in 4.0 Resident Team above, for all personnel to be used on-site by Seller. 6.0 ADMINISTRATIVE RESPONSIBILITIES Seller shall provide the equipment, material, facilities, and personnel necessary to comply with the administrative requirements set forth in this Administrative Agreement. 6.1 PROGRAM MANAGEMENT DOCUMENTATION Seller shall provide three copies of the data required herein, unless otherwise specified. 6.1.1 SELLER'S RESPONSIBILITY Seller is responsible for supporting meetings and reviews as may be necessary. This includes providing required status reports and test hardware as set forth herein as may be required. -7- 6.1.2 COORDINATION MEETINGS Seller shall initiate a telephone conference whenever failures, schedule slides or other urgent matters indicate the need. Buyer shall confirm any direction given to Seller as a result of telephone conferences in a telegram or letter within five (5) working days of the conference. 6.2 FACILITIES Seller is responsible for providing sufficient facilities to perform the requirements of this contract. 7.0 PROGRAM MANAGEMENT 7.1 PROGRAM MANAGER The Seller's Program Manager will monitor all departments involved in producing the parts listed in the Special Business Provisions, Attachment "1". The Program Manager, as set forth above, will be the primary Buyer interface for program status. 7.2 STATUS REPORTS 7.2.1 Status reports shall be submitted after contract go ahead, as requested by Buyer. Said status reports for each hardware item shall cover, but not be limited to, the following topics: (a) Discussion of any schedule slides and identification of corrective action; -8- (b) Technical discussion of the events of the past month, covering significant advancements and problem areas; (c) Identification of any changes to the key manpower or manning level; (d) An identification of the critical events expected within the next month and a discussion of any factors which may affect the outcome of these events; (e) A status report on any open action items including compliance with scheduled closure dates; (f) Purchased components and raw material status update; and, (g) Schedules on first article hardware including fabrication, subassembly and final assembly and/or delinquent parts shall be progressively detailed with major program milestones on the first sheet and detail schedule for the hardware area on subsequent sheets. Updates of the schedules shall contain clear indication of any adjustments from the previous submittal. 7.2.2 Seller will submit monthly tool design and fabrication progress reports until completion of basic tooling fabrication. -9- 7.2.3 Seller will submit a Certified Tool List for all accountable tools thirty (30) days after delivery of the first production unit to Buyer, in accordance with Section 4.0 of Document M31-24, "Boeing Supplier's Tooling Manual." Subsequent to the initial Certified Tool List, Seller will submit Certified Tool Lists for any new, reworked or re-identified tools, thirty (30) days after completion of the first affected production part. 7.3 QUARTERLY REVIEWS Quarterly Program Reviews will be held at the Seller's or Buyer's facilities. The topics of these reviews may include raw material and component part status, production status, Boeing supplied components inventory, Boeing requirements, changes, forecasts and other issues pertinent to the program. 8.0 CHANGE NOTIFICATION 8.1 Engineering changes and other modifications, revisions, additions, deletions, and/or stop work orders to the General Terms Agreement pursuant to Article 10.0 "Changes" thereof shall be accomplished by a serialized Contract Change Notice (CCN) which shall be Seller's formal authorization to proceed. CCNs shall include all the data required to insure complete and prompt understanding and compliance by Seller. The Contract Administrator identified in 2.1.1 hereof will control and assign all CCN numbers. 8.2 CCN numbers will be identified by serial numbers continuing in numerical sequence. -10- 8.3 All subsequent correspondence, including claims for adjustment pursuant to Article 10.0 "Changes," must reference the applicable CCN number. In this regard and solely as an administrative convenience, Buyer will assign a CCN number upon the written request for any effort judged by Seller as beyond the scope of the subject agreement. Such assignments, when made, shall not be construed as implying or accepting the validity of Seller's resultant claim. When claims against CCN's have been settled between Buyer and Seller, Buyer will issue a Contract Amendment incorporating the CCN's into the Contract. 8.4 Seller shall provide to Buyer once a month, a Contract Change Status Report through the end of the previous month outlining the following: The latest Contract Amendment Number and the negotiated contract prices through that Amendment. The CCNs by serial number that have been negotiated but not recognized by contract amendment together with the amounts negotiated by the CCN number. The CCNs by serial number that have been asserted but not negotiated together with asserted by the CCN number. 9.0 NEGOTIATION DOCUMENTATION -11- 9.1 Negotiations shall be commenced in a timely manner in accordance with the applicable provisions of the General Terms Agreement and Special Business Provisions by those individuals designated by the parties. 9.2 Where necessary, negotiations shall be summarized by a jointly executed and signed Memorandum of Agreement until such time as a contract amendment can be formalized. 9.3 Buyer will issue a Contract Amendment for Seller's execution within thirty (30) after the completion of negotiations. Both parties will use their best efforts to execute the Contract Amendment within thirty (30) days after the issuance. 10.0 DISPUTE RESOLUTION Buyer and Seller shall use their best reasonable efforts to resolve any and all disputes, controversies, claims or differences between the parties, arising out of or relating in any way to this Contract or its performance, including, but not limited to, any questions regarding the existence, validity or termination hereof ("Disputes"), through negotiation. If a Dispute cannot be resolved by the functional representatives of Buyer and Seller, it shall be referred to subsequent authority levels of Buyer and Seller, or their respective designees, for further negotiation. Only upon failure by Buyer and Seller to resolve the Dispute through such negotiation may either Party institute legal action. -12- EXECUTED in duplicate as of the date and year set forth below by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING By and Through its Division COMPANY Boeing Commercial Airplane Group Name: /s/ Nancy V. Rosen Name: /s/ John Eder ------------------------ ------------------------- Title: Buyer Title: General Manager Date: 8-15-94 Date: 8-15-94 -13- EX-10.50 15 SPECIAL BUSINESS PROVISIONS EFFECTIVE 2/26/96 Exhibit 10.50 MATERIAL OMITTED PURSUANT TO CONFIDENTIAL TREATMENT APPLICATION SPECIAL BUSINESS PROVISIONS between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY Number POP-65311-0047 SPECIAL BUSINESS PROVISIONS TABLE OF CONTENTS Page ---- 1. DEFINITIONS.............................................................2 2. PURCHASE ORDER NOTE.....................................................2 3. PRICES..................................................................2 3.1 Product Pricing..................................................3 3.1.1 Option Pricing............................................3 3.1.2 Exercise of Option........................................3 3.2 Manufacturing Configuration Baseline.............................4 3.3 Packaging........................................................4 4. GOVERNING QUALITY ASSURANCE REQUIREMENT.................................4 5. APPLICABLE LAW JURISDICTION.............................................5 6. PRODUCT ASSURANCE.......................................................5 6.1 Governing Document...............................................6 7. PAYMENT.................................................................6 7.1 Recurring Price..................................................6 7.2 Non-Recurring Price/Special Charges..............................6 8. ACCELERATION/DECELERATION AT NO COST....................................7 9. NOTICES.................................................................7 9.1 Addresses........................................................7 10. OBLIGATION TO PURCHASE AND SELL.........................................8 11. COST AND FINANCIAL PERFORMANCE VISIBILITY...............................9 12. CHANGES................................................................10 12.1 Changes to the Statement of Work................................10 12.2 Computation of Equitable Adjustment.............................10 12.3 Obsolescence....................................................10 12.4 Change Absorption...............................................11 -i- 12.5 Planning Schedule...............................................13 12.6 Value Engineering...............................................13 12.7 Reduction in Quantity to be Deliver.............................17 13. SPARES AND OTHER PRICING...............................................17 13.1 Spares..........................................................17 13.2 Short Flow Production Requirements..............................22 13.3 Tooling.........................................................22 13.4 Pricing of Boeing's Supporting Requirements.....................23 13.5 Pricing of Requirements for Modification or Retrofit............23 13.6 Similar Pricing.................................................24 14. STATUS REPORTS/REVIEWS.................................................24 15. PROVISIONS FOR OFFSET/BUSINESS STRATEGIES FOREIGN PROCUREMENT REPORT.............................................25 16. BOEING FURNISHED MATERIAL..............................................26 17. ASSIGNMENT.............................................................26 18. INVENTORY AT CONTRACT COMPLETION.......................................27 19. OWNERSHIP OF INTELLECTUAL PROPERTY.....................................27 19.1 Technical Work Product..........................................28 19.2 Inventions and Patents..........................................28 19.3 Works of Authorship and Copyrights..............................28 19.4 Pre-Existing Inventions and Works of Authorship.................28 20. ADMINISTRATIVE AGREEMENTS..............................................28 21. GUARANTEED WEIGHT REQUIREMENTS.........................................28 22. SUPPLIER DATA REQUIREMENTS.............................................29 23. DEFERRED PAYMENT.......................................................29 24. SOFTWARE PROPRIETARY INFORMATION RIGHTS................................29 Attachment 1 Work Statement and Pricing Attachment 2 Foreign Procurement Report Attachment 3 Rates and Factors Attachment 4 Boeing AOG Coverage Attachment 5 Boeing AOG/Critical Shipping Notification -ii- AMENDMENTS AMEND NUMBER DESCRIPTION DATE APPROVAL - - ------ ----------- ---- -------- -iii- SPECIAL BUSINESS PROVISIONS THESE SPECIAL BUSINESS PROVISIONS are entered into as of February 26, 1996 by and between Cashmere Manufacturing Company, a Washington corporation with its principal office in Wenatchee, Washington ("Seller"), and The Boeing Company, a Delaware corporation with an office in Seattle, Washington acting by and through its division the Boeing Commercial Airplane Group ("Boeing"). RECITALS A. Boeing and Seller entered into a General Terms Agreement GTA #BCA-65311-0044 dated February 26, 1996 (the "Agreement") which is incorporated herein and made a part hereof by this reference, for the sale by Seller and purchase by Boeing of Products. B. Boeing and Seller desire to include these special business provisions ("SBP") relating to the sale by Seller and purchase by Boeing of Products. C. Boeing and Seller agree that as of the date set forth above, this SBP shall replace and supersede Special Business Provision L-890821-8140N, Special Business Provision L-500660-8143N, Special Business Provision PLR-950A and Special Business Provisions L-435579-8180N. -1- Now, therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: PROVISIONS 1. DEFINITIONS The definitions used herein shall be the same as used in the Agreement. 2. PURCHASE ORDER NOTE The following note shall be contained in any Order to which these SBP are applicable: This Order is subject to and incorporates by this reference SBP POP-65311-0047 between The Boeing Company and Cashmere Manufacturing Company dated February 26, 1996. Each Order bearing such note shall be governed by and be deemed to include the provisions of these SBP. 3. PRICES -2- 3.1 PRODUCT PRICING The prices and applicable period of performance of Products scheduled for delivery under this SBP are set forth in Attachment 1. Prices are in United States dollars, F.O.B. Seller's Plant. 3.1.1 OPTION PRICING Seller irrevocably grants to Boeing the option to purchase additional annual quantities of Products for the periods 1998 and 1999 on the terms and conditions set forth in this SBP at the prices set forth herein, increased or decreased by any equitable adjustments provided herein. 3.1.2 EXERCISE OF OPTION Boeing may exercise such option by written notice to Seller at any time prior to the last delivery of the Product(s) to Boeing; provided however, that such option must be exercised in sufficient time to permit Seller to support Boeing's required deliveries. Seller agrees to provide Boeing with written notice at least sixty (60) days prior to the date when, in Seller's opinion, the option must be exercised. Boeing may extend the option exercise date by purchasing long lead materials, or authorizing Seller to purchase such materials on terms acceptable to Boeing, if such purchase would have the effect of extending the date for assuring production continuity. -3- Boeing reserves the right to (a) not exercise the option and commence new negotiations with Seller for additional quantities of Products; or (b) purchase such additional quantities of Products from third parties. The purchase of such additional quantities of Products from third parties shall not abrogate any of Seller's obligations to Boeing pursuant to the Agreement. 3.2 MANUFACTURING CONFIGURATION BASELINE Unit pricing for each Product or part number shown in Attachment 1 is based on the latest revisions of the engineering drawings or specifications at the time of the signing of this SBP. 3.3 PACKAGING The prices shown in Attachment 1 include packaging costs and all materials and labor required to package Products identified in Attachment 1. Packaging shall be furnished by the Seller in accordance with Document M6-1025, Volume II, "Supplier Part Protection Guide" or Document D200-10038-2 "Supplier Packaging Requirements" as applicable. In the case of Products to be shipped directly to Customers, A.T.A. Specification 300 "Specification for Packaging of Airline Supplies" shall apply unless otherwise directed by Boeing. 4. GOVERNING QUALITY ASSURANCE REQUIREMENT -4- All work performed under this SBP shall be in accordance with the following document which is incorporated herein and made a part hereof by this reference: Document DI -9000, "Advanced Quality System for Boeing Suppliers," as amended from time to time. 5. APPLICABLE LAW JURISDICTION Each Order, including all matters of construction, validity and performance, shall in all respects be governed by, and construed and enforced in accordance only with the law of the State of Washington as applicable to contracts entered into and to be performed wholly within such State between citizens of such State, without reference to any rules governing conflicts of law. Seller hereby irrevocably consents to and submits itself exclusively to the jurisdiction of the applicable courts of the State and the federal courts therein for the purpose of any suit, action or other judicial proceeding arising out of or connected with any Order or the performance or subject matter thereof. Seller hereby waives and agrees not to assert by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that (a) Seller is not personally subject to the jurisdiction of the above-named courts, (b) the suit, action or proceeding is brought in an inconvenient forum or (c) the venue of the suit, action or proceeding is improper. 6. PRODUCT ASSURANCE -5- 6.1 GOVERNING DOCUMENT Seller acknowledges that Boeing and Customers must be able to rely on each Product performing as specified and that Seller will provide all required support. Accordingly, the following provisions and document(s) are incorporated herein and made a part hereof. "BOEING DESIGNED, SUB-CONTRACTED PRODUCTS MANUFACTURERS WARRANTY" BOEING DOCUMENT M6-1124-3 7. PAYMENT 7.1 RECURRING PRICE Unless otherwise provided in the applicable Order, payment of the recurring price shall be made in accordance with Form X-27981 "Pay From Receipt - - - Additional Terms and Conditions Regarding Invoicing and Payment". Payment terms shall be net thirty (30) days except as otherwise agreed to by the parties. All payments are subject to adjustment for shortages, credits and rejections. 7.2 NON-RECURRING PRICE/SPECIAL CHARGES. -6- Unless otherwise provided in the applicable Order, any non-recurring price payable by Boeing under Attachment 1 shall be paid within the term discount period or thirty (30) calendar days (whichever is later) after receipt by Boeing of both acceptable Products and a correct invoice. 8. ACCELERATION/DECELERATION AT NO COST Notwithstanding GTA Section 10.0, Boeing may make changes in the delivery schedule without additional cost or change to the unit price stated in the applicable Order if (a) the delivery date of the Product under such Order is on or before the last date of contract, if applicable, and (b) Boeing provides Seller with written notice of such changes. 9. NOTICES 9.1 ADDRESSES Notices and other communications shall be given in writing by personal delivery, United States mail, telex, teletype, telegram, facsimile, cable or electronic transmission addressed to the respective party as follows: To Boeing: Attention: Buyer: Randy Parks M/S 38-LH BOEING COMMERCIAL AIRPLANE GROUP -7- MATERIEL DIVISION P.O. Box 3707 Seattle, Washington 98124-2207 To Seller: Attention: Contracts Cashmere Manufacturing Company 102 Maple Street Cashmere, WA 98815 10. OBLIGATION TO PURCHASE AND SELL Boeing and Seller agree that in consideration of the prices set forth under Attachment 1, Boeing shall issue Orders for Products from time to time to Seller for Boeing's requirements. Such Products shall be shipped at any scheduled rate of delivery, as determined by Boeing, and Seller shall sell to Boeing Boeing's requirements of such Products, provided that, without limitation on Boeing's right to determine its requirements, Boeing shall not be obligated to issue any Orders for any given Product if: 10.1 Any of Boeing's customers specify an alternate product; 10.2 Such Product is, in Boeing's reasonable judgment, not technologically competitive at any time, for reasons including but not limited to the availability of significant changes -8- in technology, design, materials, specifications, or manufacturing processes which result in a reduced price or weight or improved appearance, functionality, maintainability or reliability; 10.3 Boeing gives reasonable notice to Seller of a change in any of Boeing's aircraft which will result in Boeing no longer requiring such Product for such aircraft; 10.4 Seller has materially defaulted in any of its obligations under any Order, whether or not Boeing has issued a notice of default to Seller pursuant to GTA Section 13.0; or, 10.5 Boeing reasonably determines that Seller cannot support Boeing's requirements for Products in the amounts and within the delivery schedules Boeing requires. 11. COST AND FINANCIAL PERFORMANCE VISIBILITY Seller shall provide all necessary cost support data, source documents for direct and indirect costs, and assistance at the Seller's facility for cost performance reviews performed by Boeing pursuant to any Order. Furthermore, Seller shall provide financial data, on a quarterly basis, or as requested, to Boeing's Credit Office for credit and financial condition reviews. Said data shall include but not be limited to balance sheets, schedule of accounts payable and receivable, major lines of credit, creditors, income statements (profit and loss), cash flow statements, firm backlog, -9- and headcounts. Copies of such data are to be made available within 72 hours of any written request by Boeing. This data is required in addition to the cost data provided pursuant to GTA Section 9.0. All such information shall be treated as confidential in accordance with GTA Section 20.0. 12. CHANGES 12.1 CHANGES TO THE STATEMENT OF WORK Boeing may direct Seller within the scope of the applicable Order and in accordance with the provisions of GTA Section 10.0, to increase or decrease the work to be performed by the Seller in the manufacture of any Product. 12.2 COMPUTATION OF EQUITABLE ADJUSTMENT The Rates and Factors set forth in Attachment 3, which by this reference is incorporated herein, shall be used to determine the equitable adjustment, if any, (including equitable adjustments, if any, in the prices of Products to be incorporated in Derivative Aircraft), to be paid by Boeing pursuant to SBP Section 12.1 and GTA Section 10.0 for each individual change. 12.3 OBSOLESCENCE -10- Claims for obsolete or surplus material and work-in-process created by change orders issued pursuant to this Section shall be subject to the procedures set forth in GTA Section 12.0, except that Seller may not submit a claim for obsolete or surplus material resulting from an individual change order that has a total claim value of Five Hundred Dollars ($500.00) or less. Payment for obsolete or surplus materials shall be made by check deposited as first class mail to the address designated by Seller in SBP Section 9.1. Payment will be made on the tenth (10th) day of the month following the month of the obsolescence claim settlement. 12.4 CHANGE ABSORPTION 12.4.1 PRIOR TO 100% ENGINEERING RELEASE (DRAWING REVISION LEVEL NEW) 12.4.1.1 GENERALLY Notwithstanding the provisions of GTA Section 10.0 and SBP Section 12.1, no equitable adjustment in the prices or schedules of any Order shall be made for any change initiated by Boeing made prior to the date on which all engineering drawings that change the technical requirements, descriptions, specifications, statement of work, drawing or designs ("Technical Change(s)") have been released by Boeing ("100% Engineering Release") provided, that an equitable adjustment shall be made for: -11- a. Any Technical Change which is a change BETWEEN raw material classifications such as a change from aluminum to steel or titanium to plastic. Not included as a Technical Change for purposes of this Section are changes WITHIN a raw material classification such as a change from 7050 Aluminum to 7075 Aluminum; b. Any Technical Change which adds or deletes a process specification including but not limited to chem milling, chrome plating, anodizing, painting, priming and heat treating. 12.4.1.2 CLAIMS Claims for equitable adjustment for Technical Changes shall be submitted in writing within thirty (30) days after 100% Engineering Release. 12.4.2 SUBSEQUENT TO 100% ENGINEERING RELEASE 12.4.2.1 GENERALLY Notwithstanding the provisions of GTA Section 10.0 and SBP Section 12.1, no equitable adjustment shall be made to the recurring or non-recurring prices after the date of 100% Engineering Release for any change initiated by Boeing unless the value of such change (debit or credit) is greater than or equal to two percent (2%) of the then current unit price for the Product (recurring) or is greater than or equal to two percent (2%) of the total then current -12- nonrecurring price as set forth in Attachment 1. For purposes of this Section, the then current unit price or total nonrecurring price shall be the price identified in Attachment 1 plus any and all price adjustments agreed to previously by the parties. 12.4.2.2 CLAIMS Claims shall be made individually for each Product and for each change. Each claim shall be considered separately for application of the two percent (2%) threshold. Changes may not be combined for the purposes of exceeding the two percent (2%) threshold set forth herein. 12.5 PLANNING SCHEDULE Any planning schedule or quantity estimate provided by Boeing shall be used solely for production planning. Boeing may purchase Products in different quantities and specify different delivery dates as necessary to meet Boeing's requirements. Such planning schedule and quantity estimate shall be subject to adjustment from time to time. Any such adjustment is not a change under GTA Section 10.0. 12.6 VALUE ENGINEERING Seller may from time to time submit proposals to Boeing to change drawings, designs, specifications or other requirements that: -13- a. decrease Seller's performance costs; or b. produce a net reduction in the cost to Boeing of installation, operation, maintenance or production of the Product. Provided, that such change shall not impair any essential functions or characteristics of the Products or Tooling. 12.6.1 SUBMISSION OF PROPOSAL Proposals shall be submitted to Boeing's Materiel Representative. Boeing shall not be liable for any delay in acting upon a proposal. Boeing's decision to accept or reject any proposal shall be final. If there is a delay and the net result in savings no longer justifies the investment, Seller will not be obligated to proceed with the change. Seller has the right to withdraw, in whole or in part, any proposal not accepted by Boeing within the time period specified in the proposal. Seller shall submit, as a minimum, the following information with the proposal: a. description of the difference between the existing requirement and the proposed change, and the comparative advantages and disadvantages of each; b. the specific requirements which must be changed if the proposal is adopted; c. the cost savings and Seller's implementation costs; -14- d. each proposal shall include the need dates for engineering release and the time by which a proposal must be approved so as to obtain the maximum cost reduction. 12.6.2 ACCEPTANCE AND COST SHARING Boeing may accept, in whole or in part, any proposal by issuing a change order. Until such change has been issued, Seller shall remain obligated to perform in accordance with the terms and requirements of the original Order as written. Boeing and Seller shall share the savings as follows: (50%) savings to Boeing; (50%) savings to Seller. Seller shall include with each proposal verifiable cost records and other data as required by Boeing for proposal review and analysis. Each party shall be responsible for its own implementation costs, including but not limited to non-recurring costs. 12.6.3 COST SAVINGS COMPUTATION A change order shall be issued by Boeing and the unit price shall be reduced in an amount equal to the savings portion attributable to Boeing as set forth above. The -15- applicable unit price as set forth in Attachment 1 Statement of Work shall be amended to reflect such change. EXAMPLE: Current Price: $600.00 Proposed Cost Savings: $100.00/unit Boeing's Percentage: 50.0% Seller's Percentage: 50.0% STEP BY STEP COMPUTATION: 1. $100.00 unit savings x 50.0% Boeing's percentage of savings = $50.00 Boeing savings. 2. $100.00 unit savings x 50.0% Seller's percentage of savings = $50.00 Seller savings. 3. Net affect to the unit cost = $50.00 New Unit Price For Units = $550.00 -16- 12.6.4 WEIGHT REDUCTION PROPOSALS Seller is encouraged to submit proposals to Boeing that reduce the Product's weight without impairing any essential functions or characteristics of the Product. Seller shall submit such proposals in accordance with SBP Section 12.6.1 above. The amount of any costs or savings that result from a weight reduction proposal shall be agreed by Boeing and Seller. Seller shall include with each proposal verifiable cost records and other data as required by Boeing for proposal review and analysis. Boeing may accept in whole or in part, any such proposal by issuing a change order to the applicable Order. 12.7 REDUCTION IN QUANTITY TO BE DELIVER NOT APPLICABLE 13. SPARES AND OTHER PRICING 13.1 SPARES For purposes of this Section, the following definitions shall apply: A. AIRCRAFT ON GROUND (AOG) - means the highest Spares priority. Seller will expend best efforts to provide the earliest possible delivery of any Spare -17- designated AOG by Boeing. Such effort includes but is not limited to working twenty-four (24) hours a day, seven days a week and use of premium transportation. Seller shall specify the delivery date and time of any such AOG Spare within two (2) hours of receipt of an AOG Spare request. B. CRITICAL - means an imminent AOG work stoppage. Seller will expend best efforts to provide the earliest possible delivery of any Spare designated Critical by Boeing. Such effort includes but is not limited to working two (2) shifts a day, five (5) days a week and use of premium transportation. Seller shall specify the delivery date and time of any such Critical Spare within the same working day of receipt of a Critical Spare request. C. EXPEDITE (CLASS I) - means a Spare required in less than Seller's normal lead time. Seller will expend best efforts to meet the requested delivery date. Such effort includes but is not limited to working overtime and use of premium transportation. D. ROUTINE (CLASS III) - means a Spare required in Seller's normal lead time. E. POA REQUIREMENT (POA) - means any detail component needed to replace a component on an End Item Assembly currently in Boeing's assembly line -18- process. Seller shall expend best efforts feasible to provide the earliest possible delivery of any Spare designated as POA by Boeing. Such effort includes but is not limited to working twenty-four (24) hours a day, seven days a week and use of premium transportation. Seller shall specify the delivery date and time of any such POA within two (2) hours of an AOG Spare request. F. IN-PRODUCTION - means any Spare with a designation of AOG, Critical, Expedite, Routine, POA or End Item Assembly which is in the current engineering configuration for the Product and is used on a model aircraft currently being manufactured by Boeing. G. NON-PRODUCTION REQUIREMENTS - means any Spare with a designation of AOG, Critical, Expedite and Routine requirements which is used on model aircraft no longer being manufactured by Boeing (Post Production) or is in a noncurrent engineering configuration for the Product (Out of Production). H. BOEING PROPRIETARY SPARE - means any Spare which is manufactured (i) by Boeing, or (ii) to Boeing's detailed designs with Boeing's authorization or (iii) in whole or in part using Boeing's Proprietary Materials. 13.1.1 SPARES SUPPORT -19- Seller shall provide Boeing with a written Spares support process describing Seller's plan for supporting AOG and Critical commitments and manufacturing support. The process must provide Boeing with the name and number of a twenty-four (24) hour contact for coordination of AOG and Critical requirements. Such contact shall be equivalent to the coverage provided by Boeing to its Customers as outlined in Attachment 4 "Boeing AOG Coverage" which is incorporated herein and made a part hereof by this reference. Seller shall notify Boeing as soon as possible via fax, telecon, or as otherwise agreed to by the parties of each AOG and Critical requirement shipment using the form identified in Attachment 5 "Boeing AOG and Critical Shipping Notification". Such notification shall include time and date shipped, quantity shipped, Order, pack slip, method of transportation and air bill if applicable. Seller shall also notify Boeing immediately upon the discovery of any delays in shipment of any requirement and identify the earliest revised shipment possible. 13.1.2 RECLASSIFICATION OR RE-EXERCISES Boeing may on occasion, instruct Seller to re-prioritize or reclassify an existing requirement in order to improve or otherwise change the established shipping schedule. Seller shall expend the effort required to meet the revised requirement as set forth above in the definitions of the requirements. Seller's commitment of a delivery schedule shall be given in -20- accordance with that set forth above for the applicable classification but in no case shall it exceed twenty-four (24) hours from notification by Boeing. 13.1.3 SPARE PRICING Except as set forth in subsections 13.1.3.1 and 13.1.3.2 below, the price for Spare(s) shall be the same as the production price for the Products as listed on Attachment 1, in effect at the time the Spare(s) are ordered. POA parts shall be priced so that the sum of the prices for all POA parts of an End Item Assembly equals the applicable recurring portion of the End Item Assembly. 13.1.3.1 AIRCRAFT ON GROUND (AOG). CRITICAL SPARES AND POA REQUIREMENT The price for AOG and Critical Spares and POA requirements shall be the price for such Products listed on Attachment 1 in effect when such Spares are ordered multiplied by a factor of 1.07. 13.1.3.2 EXPEDITE SPARE (CLASS 1) The price for Expedite Spares shall be the price for such Products listed on Attachment 1 in effect when such Spares are ordered multiplied by a factor of 1.05. 13.1.4 SPECIAL HANDLING The price for all effort associated with the handling and delivery of Spare(s) is deemed to be included in the price for such Spare(s). Provided, that if Boeing directs delivery of Spares to an F.O.B. point other than Seller's plant, Boeing -21- shall reimburse Seller for shipping charges, including insurance, paid by Seller from the plant to the designated F.O.B. point. Such charges shall be shown separately on all invoices. 13.2 SHORT FLOW PRODUCTION REQUIREMENTS Expedite charges, if any, to be paid for short flow production requirements shall not exceed the amount payable under SBP Section 13.1.3.1 above for that portion of the Order which is released short flow except as otherwise agreed to in writing by Boeing. In the event Boeing agrees to pay an amount in excess of that set forth in SBP Section 13.1.3.1 above, Seller shall provide data to verify expedite charges requested. For purposes of this Section, "Short Flow Production" shall be defined as any requirement released less than Seller's current Re-Order Lead time (ROLT). If Seller fails to meet the required delivery, Boeing shall not be obligated to pay the agreed upon amount. 13.3 TOOLING 13.3.1 RESPONSIBLE PARTY Where Boeing agrees to pay to Seller for Tooling to support the manufacture and delivery of applicable Product(s) identified herein, the amount shall be set forth in Attachment 1. The costs of necessary repair and maintenance to the Tooling is included in such amount. In addition to the requirements set forth in SBP Section 7.2 of this SBP, the Seller shall comply with the Terms and Conditions applicable to the Blanket Tooling Purchase Control Order established with Seller who possess or controls -22- Tooling. Furthermore, Seller must include a properly prepared certified tool list, where applicable, as specified in the M31-24 Document, "Boeing Supplier Tooling Manual." Invoices received with incorrect, improperly prepared or incomplete certified tool lists will be returned for correction prior to payment. Invoices shall be dated concurrent with, or subsequent to, shipment of the Products. 13.3.2 BOEING FURNISHED TOOLING In the event Boeing furnishes Tooling to Seller to support the delivery of Product(s), Seller shall comply with the Terms and Conditions applicable to the Blanket Tooling Purchase Control Order established with Seller who possess or controls Tooling. No repair, replacement or rework required shall be performed without Boeing's prior written consent. Boeing shall notify Seller of, what if any, action shall be required for all discrepant Tooling. 13.4 PRICING OF BOEING'S SUPPORTING REQUIREMENTS Any Products required to assist Boeing's supporting requirements, including but not limited to color and appearance samples, design studies, Product qualification, Boeing owned simulators, test requirements, factory support, flight test spares will be provided for not more than the applicable price as set forth in Attachment 1. 13.5 PRICING OF REQUIREMENTS FOR MODIFICATION OR RETROFIT -23- Any Products required by Boeing to support a modification or retrofit program shall be provided for not more than the applicable price as set forth in Attachment 1. 13.6 SIMILAR PRICING New Products ordered by Boeing that are similar to or within Product families of Products currently being manufactured by Seller shall be priced using the same methodology or basis as that used to price the existing Product(s). 13.7 STATUS REPORTS/REVIEWS When requested by Boeing, Seller shall update and submit, as a minimum, monthly status reports on data requested by Boeing using a method mutually agreed upon by Boeing and Seller. When requested by Boeing, Seller shall provide to Boeing a manufacturing milestone chart identifying the major purchasing, planning and manufacturing operations for the applicable Product(s). Upon request by Boeing, a program review may be held between the parties. The location of such review shall be mutually agreed to by the parties. The purpose of the review -24- is to improve communication and understanding between the parties to ensure program success. 15. PROVISIONS FOR OFFSET/BUSINESS STRATEGIES FOREIGN PROCUREMENT REPORT Seller agrees to cooperate with Boeing in identifying possible subcontractors for work under any Order that support Boeing's offset or business strategies. Prior to releasing any request for proposal to a subcontractor to support Boeing's offset or business strategy, Seller shall coordinate with Boeing. Seller shall document on Attachment 2 all offers to contract and executed contracts with such subcontractors including the dollars contracted. Seller shall provide to Boeing with an updated copy of Attachment 2 for the six-month periods ending June 30 and December 31 of each year. The reports shall be submitted on the 1st of August and the 1st of February respectively. Furthermore, Boeing and Seller agree that in the event it becomes necessary for Boeing to purchase Products from a third party(s) to facilitate an offset commitment or business strategy, Boeing and Seller agree to work together to develop and implement a plan for the removal of such Product or Products from this SBP. Upon settlement of this plan, Boeing shall not be obligated -25- to buy from Seller and Seller shall not be obligated to sell to Boeing the applicable Product(s) notwithstanding SBP Section 10.0. 16. BOEING FURNISHED MATERIAL Material, including but not limited to raw material, standards, detail components and assemblies, furnished to Seller by Boeing shall be administered in accordance with a bonded stores agreement between Boeing and Seller. Seller shall provide Boeing with required on-dock dates for all material. Seller's notice shall provide Boeing with sufficient time to competitively bid the material if, in its sole and absolute discretion, it desires to do so. 17. ASSIGNMENT Boeing and Seller agree that Boeing may, in its discretion, assign, in part or in whole, its purchasing obligations under the Agreement or any Order, as applicable, at the prices set forth in Attachment 1 thereof. Boeing reserves the right to rescind its assignment at anytime. Boeing's assignment of purchasing obligation includes scheduling, issuance of Order(s), receival and inspection of Products, acceptance or rejection of Products, payment for accepted Products, and ensuring conformance to the quality assurance system requirements. -26- Boeing shall retain all other rights and obligations pursuant to the applicable terms and conditions. In addition, Boeing reserves the right, where necessary, to coordinate with and mediate between Seller and any assignee regarding such assignment. 18. INVENTORY AT CONTRACT COMPLETION Subsequent to Seller's last delivery of Product(s), Products which contain, convey, embody or were manufactured in accordance with or by reference to Boeing's Proprietary Materials including but not limited to finished goods, work-in-process and detail components (hereafter "Inventory") which are in excess of Order quantity shall be made available to Boeing for purchase. In the event Boeing, in its sole discretion, elects not to purchase the Inventory, Seller may scrap the Inventory. Prior to scrapping the Inventory, Seller shall mutilate and/or render it unusable. Seller shall maintain, pursuant to their quality assurance system, records certifying destruction of the applicable Inventory. Said certification shall state the method and date of mutilation and destruction of the subject Inventory. Boeing shall have the right to review and inspect these records at any time it deems necessary. In the event Seller elects to maintain the Inventory, Seller shall not sell or provide the Inventory to any third party without prior specific written authorization from Boeing. Failure to comply with these requirements shall be a material breach and grounds for default pursuant to GTA Section 13.0. 19. OWNERSHIP OF INTELLECTUAL PROPERTY -27- 19.1 TECHNICAL WORK PRODUCT NOT APPLICABLE 19.2 INVENTIONS AND PATENTS NOT APPLICABLE 19.3 WORKS OF AUTHORSHIP AND COPYRIGHTS NOT APPLICABLE 19.4 PRE-EXISTING INVENTIONS AND WORKS OF AUTHORSHIP. NOT APPLICABLE 20. ADMINISTRATIVE AGREEMENTS NOT APPLICABLE 21. GUARANTEED WEIGHT REQUIREMENTS -28- NOT APPLICABLE 22. SUPPLIER DATA REQUIREMENTS NOT APPLICABLE 23. DEFERRED PAYMENT NOT APPLICABLE 24. SOFTWARE PROPRIETARY INFORMATION RIGHTS NOT APPLICABLE EXECUTED in duplicate as of the date and year first set forth above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING COMPANY By and Through its Division Boeing Commercial Airplane Group Name: /s/ Randolph L. Parks Name: /s/ John Eder ----------------------------- -------------------------------- Title: Buyer Title: Vice President Date: March 12, 1996 Date: March 11, 1996 -29- ATTACHMENT TO SPECIAL BUSINESS PROVISIONS WORK STATEMENT AND PRICING The price for Products to be delivered on or before December 31, 1997, except as otherwise noted below, shall be as follows: PART NUMBER MODEL NOMENCLATURE UNIT PRICE - - ----------- ----- ------------ ---------- STATEMENT OF WORK ATTACHED HERETO IN ATTACHMENT 1 TO SBP POP-65311-0047. *** CONFIDENTIAL TREATMENT REQUESTED *** -30- ATTACHMENT 2 TO SPECIAL BUSINESS PROVISIONS FOREIGN PROCUREMENT REPORT FORM (Seller to Submit) (Reference Section 15.0) COMMODITY/ BID CONTRACTED SUPPLIER NAME COUNTRY NOMENCLATURE DOLLARS DOLLARS - - ------------- ------- ------------ ------- ------- -31- ATTACHMENT 3 TO SPECIAL BUSINESS PROVISIONS RATES AND FACTORS The following Rates and Factors shall be used on all price change negotiations during the period of performance of these SBP Direct Labor Rate $ * Manufacturing Burden * G&A (Gen. Admin. Expense) * Profit * - * CONFIDENTIAL TREATMENT REQUESTED -32- ATTACHMENT 4 TO SPECIAL BUSINESS PROVISIONS BOEING AOG COVERAGE - - - NORMAL HOURS BOEING'S MATERIEL REPRESENTATIVE (MATERIEL DIVISION) Approximately 5:30 a.m. - 6:00 p.m. - Performs all functions of procurement process. - Manages formal communications with Seller. - - - SECOND SHIFT AOG PROCUREMENT SUPPORT (MATERIEL DIVISION) 3:00 p.m. - 11:00 p.m. - May place order and assist with commitment and shipping information, working with several suppliers on a priority basis. - Provides a communication link between Seller and Boeing. - - - 24 HOUR AOG SERVICE AOG CUSTOMER REPRESENTATIVE (CUSTOMER SERVICE DIVISION) 544-9000 - Support commitment information particularly with urgent orders. - Customer Service Representative needs (if available): - Part Number - Boeing Purchase Order - Airline Customer & customer purchase order number - Boeing S.I.S.# If Seller is unable to contact any of the above, please provide AOG/Critical shipping information notification via FAX using Boeing AOG/Critical shipping notification form (Attachment 5). -33- EX-10.51 16 GENERAL TERMS AGREEMENT EFFECTIVE FEB. 26, 1996 Exhibit 10.51 GENERAL TERMS AGREEMENT between THE BOEING COMPANY and CASHMERE MANUFACTURING COMPANY Number BCA-65311-0044 GENERAL TERMS AGREEMENT TABLE OF CONTENTS SECTION TITLE - - ------- ----- 1.0 DEFINITIONS 2.0 ISSUANCE OF PURCHASE ORDERS AND APPLICABLE TERMS 2.1 Issuance of Purchase Orders 2.2 Acceptance of Purchase Orders 2.3 Written Authorization to Proceed 2.4 Rejection of Purchase Orders 3.0 TITLE AND RISK OF LOSS 4.0 DELIVERY 4.1 Requirements 4.2 Delay 4.3 Notice of Labor Disputes 5.0 ON-SITE REVIEW AND RESIDENT REPRESENTATIVES 5.1 Review 5.2 Resident Representatives 6.0 INVOICE AND PAYMENT 7.0 PACKING AND SHIPPING 8.0 QUALITY ASSURANCE, INSPECTION REJECTION AND ACCEPTANCE 8.1 Controlling Document -i- 8.2 Seller's Inspection 8.3 Boeing's Inspection and Rejection 8.4 Federal Aviation Administration or Equivalent Government Agency Inspection 8.5 Retention of Records 8.6 Source Inspection 8.7 Language for Technical Information 9.0 EXAMINATION OF RECORDS 10.0 CHANGES 10.1 General 10.2 Model Mix 11.0 PRODUCT ASSURANCE 12.0 TERMINATION FOR CONVENIENCE 13.0 EVENTS OF DEFAULT AND REMEDIES 14.0 EXCUSABLE DELAY 15.0 SUSPENSION OF WORK 16.0 TERMINATION OR CANCELLATION: INDEMNITY AGAINST SUBCONTRACTOR'S CLAIMS 17.0 ASSURANCE OF PERFORMANCE 18.0 RESPONSIBILITY FOR PROPERTY 19.0 LIMITATION OF SELLER'S RIGHT TO ENCUMBER ASSETS 20.0 PROPRIETARY INFORMATION AND ITEMS 21.0 COMPLIANCE WITH LAWS -ii- 22.0 INTEGRITY IN PROCUREMENT 23.0 INFRINGEMENT 24.0 BOEING'S RIGHTS IN SELLER'S PATENTS, COPYRIGHTS, TRADE SECRETS AND TOOLING 25.0 NOTICES 25.1 Addresses 25.2 Effective Date 25.3 Approval or Consent 26.0 PUBLICITY 27.0 PROPERTY INSURANCE 27.1 Insurance 27.2 Certificate of Insurance 27.3 Notice of Damage or Loss 28.0 RESPONSIBILITY FOR PERFORMANCE 28.1 Subcontracting 28.2 Reliance 28.3 Assignment 29.0 NON-WAIVER 30.0 HEADINGS 31.0 PARTIAL INVALIDITY 32.0 APPLICABLE LAW 33.0 AMENDMENT -iii- 34.0 LIMITATION 35.0 TAXES 35.1 Inclusion of Taxes in Price 35.2 Litigation 35.3 Rebates 36.0 FOREIGN PROCUREMENT OFFSET 37.0 ENTIRE AGREEMENT/ORDER OF PRECEDENCE 37.1 Entire Agreement 37.2 Incorporated by Reference 37.3 Order of Precedence 37.4 Disclaimer -iv- AMENDMENT AMEND NUMBER DESCRIPTION DATE APPROVAL - - ------ ----------- ---- -------- -v- GENERAL TERMS AGREEMENT GENERAL TERMS AGREEMENT RELATING TO BOEING PRODUCTS THIS GENERAL TERMS AGREEMENT ("Agreement") is entered into as of February 26, 1996, by and between Cashmere Manufacturing Company, a Washington corporation, with its principal office in Wenatchee, Washington ("Seller"), and The Boeing Company, a Delaware corporation with its principal office in Seattle, Washington acting by and through its division the Boeing Commercial Airplane Group ("Boeing"). RECITALS A. Boeing produces commercial airplanes. B. Seller manufactures and sells certain goods and services for use in the production and support of such aircraft. C. Seller desires to sell and Boeing desires to purchase certain of Seller's goods and services in accordance with the terms set forth in this Agreement. D. Boeing and Seller agree that as of the date set forth above, this Agreement shall replace and supersede General Terms Agreement PLR-950. Now therefore, in consideration of the mutual covenants set forth herein, the parties agree as follows: -1- AGREEMENTS 1. DEFINITIONS The definitions set forth below shall apply to the following terms as they are used in this Agreements, any Order, or any related Special Business Provisions ("SBP"). Words importing the singular number shall also include the plural number and vice versa. a. "Customer" means any owner, operator or user of Products and any other individual, partnership, corporation or entity which has or acquires any interest in the Products from, through or under Boeing. b. "Derivative" means any new model airplane designated by Boeing as a derivative of an existing Model airplane and which: (1) has the same number of engines as the existing model airplane; (2) utilizes essentially the same aerodynamic and propulsion design, major assembly components, and systems as the existing model airplane and (3) achieves other payload/range combinations by changes in body length, engine thrust, or variations in certified gross weight. c. "Drawing" means an automated or manual depiction of graphics or technical information representing a Product or any part thereof and which includes the parts list and specifications relating thereto. d. "End Item Assembly" means any Product which is described by a single part number and which is comprised of more than one component part. e. "FAA" means the United States Federal Aviation Administration or any successor agency thereto. f. "FAR" means the Federal Acquisition Regulations in effect on the date of this Agreement. g. "Materiel Representative" means the individual designated from time to time, by Boeing as being primarily responsible for interacting with Seller regarding this Agreement and any Order. h. "Order" means each purchase order issued by Boeing and accepted by Seller under the terms of this Agreement. Each Order is a contract between Boeing and Seller. i. "Product" means goods, including components and parts thereof, services, documents, data, software, software documentation and other information or items -2- furnished or to be furnished to Boeing under any Order, including Tooling except for Rotating Use Tools. j. "Purchased on Assembly Production Detail Part (POA)" means a component part of an End Item Assembly. k. "Shipset" means the total quantity of a given part number or material necessary for production of one airplane. l. "Spare" means any Product, regardless of whether the Product is an End Item Assembly or a Purchased on Assembly Production Detail Part, which is intended for use or sale as a spare part or a production replacement. m. "Tooling" means all tooling, as defined in Boeing Document M31- 24, "Boeing Suppliers Tooling Manual," and/or described on any Order, including but not limited to Boeing-Use Tooling, Supplier-Use Tooling and Common-Use Tooling as defined in Boeing Document D6-49004, "Operations General Requirements for Suppliers," and Rotating-Use Tooling as defined in Boeing Document M31-13, "Accountability of Inplant/Outplant Special (Contract) Tools." For purposes of this Agreement, in the documents named in this subparagraph, the term "Supplier Use Tooling" shall be changed to Seller Use Tooling. 2. ISSUANCE OF ORDERS AND APPLICABLE, TERMS 2.1 ISSUANCE OF ORDERS Boeing may issue Orders to Seller from time to time. Each Order shall contain a description of the Products ordered, a reference to the applicable specifications and Drawings, the quantities and prices, the delivery schedule, the terms and place of delivery and any special conditions. Each Order which incorporates this Agreement shall be governed by and be deemed to include the provisions of this Agreement. Purchase Order Terms and Conditions, Form D1-4100-4045, Form P252T and any other purchase order terms and conditions which may conflict with this Agreement, do not apply to the Orders. 2.2 ACCEPTANCE OF ORDERS Each Order is Boeing's offer to Seller and acceptance is strictly limited to its terms. Boeing will not be bound by and specifically objects to any term or condition which is different from or in addition to the provisions of the Order, whether or not such term or condition will materially alter the Order. Seller's commencement of performance or acceptance of the Order in any manner shall conclusively evidence Seller's acceptance of the -3- Order as written. Boeing may revoke any Order prior to Boeing's receipt of Seller's written acceptance or Seller's commencement of performance. 2.3 WRITTEN AUTHORIZATION TO PROCEED Boeing's Materiel Representative may give written authorization to Seller to commence performance before Boeing issues an Order. If Boeing in its written authorization specifies that an Order will be issued, Boeing and Seller shall proceed as if an Order had been issued. This Agreement, the applicable SBP and the terms stated in the written authorization shall be deemed to be a part of Boeing's offer and the parties shall promptly agree on any open Order terms. If Boeing does not specify in its written authorization that an Order shall be issued, Boeing's obligation is strictly limited to the terms of the written authorization. For purposes of this Section 2.3 only, written authorization includes electronic transmission chosen by Boeing. If Seller commences performance before an Order is issued or without receiving Boeing's prior authorization to proceed, such performance shall be at Seller's expense. 2.4 REJECTION OF PURCHASE ORDER Any rejection by Seller of an Order shall specify the reasons for rejection and any changes or additions that would make the Order acceptable to Seller; provided, however, that Seller may not reject any Order for reasons inconsistent with the provisions of this Agreement or the applicable SBP. 3. TITLE AND RISK OF LOSS Title to and risk of any loss of or damage to the Products shall pass from Seller to Boeing at the F.O.B. point as specified in the applicable Order, except for loss or damage thereto resulting from Seller's fault or negligence. Passage of title on delivery does not constitute Boeing's acceptance of Products. 4. DELIVERY 4.1 REQUIREMENTS Deliveries shall be strictly in accordance with the quantities, the schedule and other requirements specified in the applicable Order. Seller may not make early or partial deliveries without Boeing's prior written authorization. Deliveries which fail to meet Order requirements may be returned to Seller at Seller's expense. -4- 4.2 DELAY Seller shall notify Boeing immediately, of any circumstances that may cause a delay in delivery, stating the estimated period of delay and the reasons therefor. If requested by Boeing, Seller shall use additional effort, including premium effort, and shall ship via air or other expedited routing to avoid or minimize delay to the maximum extent possible. All additional costs resulting from such premium effort or premium transportation shall be borne by Seller with the exception of such costs attributable to delays caused directly by Boeing. Nothing herein shall prejudice any of the rights or remedies provided to Boeing in the applicable Order or by law. 4.3 NOTICE OF LABOR DISPUTES Seller shall immediately notify Boeing of any actual or potential labor dispute that may disrupt the timely performance of an Order. Seller shall include the substance of this Section 4.3, including this sentence, in any subcontract relating to an Order if a labor dispute involving the subcontractor would have the potential to delay the timely performance of such Order. Each subcontractor, however, shall only be required to give the necessary notice and information to its next higher-tier subcontractor. 5. ON-SITE REVIEW AND RESIDENT REPRESENTATIVE 5.1 REVIEW At Boeing's request, Seller shall provide at Boeing's facility or at a place designated by Boeing, a review explaining the status of the Order, actions taken or planned relating to the Order and any other relevant information. Nothing herein may be construed as a waiver of Boeing's rights to proceed against Seller because of any delinquency. Boeing's authorized representatives may enter Seller's plant at all reasonable times to conduct preliminary inspections and tests of the Products and work-in-process. Seller shall include in its subcontracts issued in connection with an Order a like provision giving Boeing the right to enter the premises of Seller's subcontractors. When requested by Boeing, Seller shall accompany Boeing to Seller's subcontractors. 5.2 RESIDENT REPRESENTATIVES Boeing may in its discretion and for such periods as it deems necessary assign resident personnel at Seller's facilities. Seller shall furnish, free of charge, all office space, secretarial service and other facilities and assistance reasonably required by Boeing's representatives at Seller's plant. The resident team will function under the guidance of Boeing's manager. The resident team will provide communication and coordination to ensure timely performance of -5- the Order. Boeing's resident team shall be allowed access to all work areas, Order status reports and management review necessary to assure timely performance and conformance with the requirements of each Order. Notwithstanding such assistance, Seller remains solely responsible for performing in accordance with each Order. 6. INVOICE AND PAYMENT Unless otherwise provided in the applicable Order, invoicing and payment shall be in accordance with SBP Section 7.0. 7. PACKING AND SHIPPING Seller shall (a) prepare for shipment and suitably pack all Products to prevent damage or deterioration, (b) where Boeing has not identified a carrier, secure lowest transportation rates, (c) comply with the appropriate carrier tariff for the mode of transportation specified by Boeing and (d) comply with any special instructions stated in the applicable Order. Boeing shall pay no charges for preparation, packing, crating or cartage unless stated in the applicable Order. Unless otherwise directed by Boeing, all standard routing shipments forwarded on one day must be consolidated. Each container must be consecutively numbered and marked as set forth below. Container and Order numbers must be indicated on the applicable bill of lading. Two copies of the packing sheets must be attached to the No. 1 container of each shipment and one copy in each individual container. Each pack sheet must include as a minimum the following: a) Seller's name, address and phone number; b) Order and item number; c) ship date for the Products; d) total quantity shipped and quantity in each container, if applicable; e) legible pack slip number; f) nomenclature; g) unit of measure; h) ship to if other than Boeing; i) warranty data and certification, as applicable; j) rejection tag, if applicable; k) Seller's certification that Products comply with Order requirements; and, 1) identification of optional material used, if applicable. Products sold F.O.B. place of shipment must be forwarded collect. Seller may not make any declaration concerning the value of the Products shipped, except on Products where the tariff rating or rate depends on the released or declared value, and in such event the value shall be released or declared at the maximum value for the lowest tariff rating or rate. The following markings shall be included on each unit container: a) Seller's name; b) Seller's part number, if applicable; c) Boeing part number, if applicable; d) part nomenclature; e) Order number; f) quantity of Products in container; g) unit of measure; h) serial number, if applicable; i) date (quarter/year) identified as assembly or rubber cure date, if applicable; j) precautionary handling instructions or marking as required. In addition, the following markings/labels shall be included on each shipping container: a) Name and address of consignee; b) Name and address of consignee; c) Order number; d) -6- Part number as shown on the Order; e) Quantity of Products in container; f) Unit of measure; g) Box number; h) Total number of boxes in shipment; and, i) Precautionary handling, labeling or marking as required. 8. QUALITY ASSURANCE, INSPECTION, REJECTION AND ACCEPTANCE 8.1 CONTROLLING DOCUMENT The controlling quality assurance document for Orders shall be as set forth in the SBP Section 4.0. 8.2 SELLER'S INSPECTION Seller shall inspect or otherwise verify that all Products and components thereof, including those procured from or furnished by subcontractors or Boeing, comply with the requirements of the Order prior to shipment to Boeing or Customer. Seller shall be responsible for all tests and inspections of the Product and any component thereof during receiving, manufacture and Seller's final inspection. Seller shall include on each packing sheet a certification that the Products comply with the requirements of the Order. 8.2.1 SELLER'S DISCLOSURE Seller will immediately notify Boeing when discrepancies in Seller's processes or Product are discovered or suspected for Products Seller has delivered. 8.3 BOEING'S INSPECTION AND REJECTION Unless otherwise specified on an Order, Products shall be subject to final inspection and acceptance by Boeing at destination, notwithstanding any payment or prior inspection. Boeing may reject any Product which does not strictly conform to the requirements of the applicable Order. Boeing shall by notice, rejection tag or other communication notify Seller of such rejection. Whenever possible, Boeing may coordinate with Seller prior to disposition of the rejected Product(s), however, Boeing shall retain final disposition authority with respect to all rejections. At Seller's risk and expense, all such Products will be returned to Seller for immediate repair, replacement or other correction and redelivery to Boeing; provided, however, that with respect to any or all of such Products and at Boeing's election and at Seller's risk and expense, Boeing may: (a) hold, retain, or return such Products without permitting any repair, replacement or other correction by Seller; (b) hold or retain such Products for repair by Seller or, at Boeing's election, for repair by Boeing with such assistance from Seller as Boeing may require; (c) hold such Products until Seller has delivered conforming replacements for such Products; (d) hold such Products until conforming replacements are obtained from a third party; (e) return such Products with instructions to -7- Seller as to whether the Products shall be repaired or replaced and as to the manner of redelivery; or (f) return such Products with instructions that they be scrapped. Upon final disposition by Boeing that the non-conforming Product(s) are not subject to repair and prior to the Products being scrapped, Seller shall render the Product(s) unusable. Seller shall also maintain, pursuant to their quality assurance system, records certifying destruction of the applicable Products. Said certification shall state the method and date of mutilation and destruction of the subject Product(s). Boeing shall have the right to review and inspect these records at any time it deems necessary. Failure to comply with these requirements shall be a material breach of this Agreement and grounds for default pursuant to GTA Section 13.0. All repair, replacement and other corrections and redelivery shall be completed within such time as Boeing may require. All costs and expenses, loss of value and any other damages incurred as a result of or in connection with nonconformance and repair, replacement or other correction may be recovered from Seller by an equitable price reduction, set-off or credit against any amounts that may be owed to Seller under the applicable Order or otherwise. Boeing may revoke its acceptance of any Products and have the same rights with regard to the Products involved as if it had originally rejected them. 8.4 FEDERAL AVIATION ADMINISTRATION OR EQUIVALENT GOVERNMENT AGENCY INSPECTION Representatives of Boeing, the FAA or any equivalent government agency may inspect and evaluate Seller's plant including, but not limited to, Seller's and subcontractor's facilities, systems, data, equipment, inventory holding areas, procedures, personnel, testing, and all work-in-process and completed Products. For purposes of this Section 8.4, equivalent government agency shall mean those governmental agencies so designated by the FAA or those agencies within individual countries which maintain responsibility for assuring aircraft airworthiness. 8.5 RETENTION OF RECORDS Quality assurance records shall be maintained on file at Seller's facility and available to Boeing's authorized representatives. Seller shall retain such records for a period of not less than seven (7) years from the date of final payment under the applicable Order. 8.6 SOURCE INSPECTION If an Order contains a notation that "100% Source Inspection" is required, the Products shall not be packed for shipment until they have been submitted to Boeing's quality assurance representative for inspection. Both the packing list and Seller's invoice must reflect evidence of this inspection. -8- 8.7 LANGUAGE FOR TECHNICAL INFORMATION All reports, drawings and other technical information submitted to Boeing for review or approval shall be in English and shall employ the units of measure customarily used by Boeing in the U.S.A. 9. EXAMINATION OF RECORDS Seller shall maintain complete and accurate records showing the sales volume of all Products. Such records shall support all services performed, allowances claimed and costs incurred by Seller in the performance of each Order, including but not limited to those factors which comprise or affect direct labor hours, direct labor rates, material costs, burden rates and subcontracts. Such records and other data shall be capable of verification through audit and analysis by Boeing and be available to Boeing at Seller's facility for Boeing's examination and audit at all reasonable times from the date of the applicable Order until three (3) years after final payment under such order. Seller shall provide assistance to interpret such data if requested by Boeing. Such examination shall provide Boeing with complete information regarding Seller's performance for use in price negotiations with Seller relating to existing or future orders for Products, including but not limited to negotiation of equitable adjustments for changes and termination/obsolescence claims pursuant to GTA Section 10.0. Boeing shall treat all information disclosed under this Section as confidential. 10. CHANGES 10.1 GENERAL Boeing's Materiel Representative may at any time by written change order make changes within the general scope of an Order in any one or more of the following: drawings, designs, specifications, shipping, packing, place of inspection, place of delivery place of acceptance, adjustments in quantities, adjustments in delivery schedules, or the amount of Boeing furnished material. Seller shall proceed immediately to perform the Order as changed. If any such change causes an increase or decrease in the cost of or the time required for the performance of any part of the work, whether changed or not changed by the change order, an equitable adjustment shall be made in the price of or the delivery schedule for those Products affected, and the applicable Order shall be modified in writing accordingly. Any claim by Seller for adjustment under this Section 10.1 must be received by Boeing in writing no later than (60) days from the date of receipt by Seller of the written change order or within such further time as the parties may agree in writing or such claim shall be deemed waived. Nothing in this Section 10.1 shall excuse Seller from proceeding with an Order as changed, including failure of the parties to agree on any adjustment to be made under this Section 10.1. -9- If Seller considers that the conduct of any of Boeing's employees has constituted a change hereunder, Seller shall immediately notify Boeing's Materiel Representative in writing as to the nature of such conduct and its effect on Seller's performance. Pending direction from Boeing's Materiel Representative, Seller shall take no action to implement any such change. 10.2 MODEL MIX In the event any Derivative aircraft(s) is introduced by Boeing, Boeing may (but is not obligated to) direct Seller within the scope of the applicable Order and in accordance with the provisions of GTA Section 10.0 to supply Boeing's requirements for Products for such Derivative aircraft(s) which correspond to those Products being produced under the applicable Order. 11. PRODUCT ASSURANCE Boeing's acceptance of any Product does not alter or affect the obligations of Seller or the rights of Boeing and its customers under the document referenced in the SBP Section 6.0 or as provided by law. 12. TERMINATION FOR CONVENIENCE 12.1 BASIS FOR TERMINATION; NOTICE Boeing may, from time to time and at Boeing's sole discretion, terminate all or part of any Order issued hereunder, by written notice to Seller. Any such written notice of termination shall specify the effective date and the extent of any such termination. 12. TERMINATION INSTRUCTIONS On receipt of a written notice of termination pursuant to GTA Section 12.1, unless otherwise directed by Boeing, Seller shall: (a) Immediately stop work as specified in the notice; (b) Immediately terminate its subcontracts and purchase orders relating to work terminated; (c) Settle any termination claims made by its subcontractors or suppliers; provided, that Boeing shall have approved the amount of such termination claims prior to such settlement; -10- (d) Preserve and protect all terminated inventory and Products; (e) At Boeing's request, transfer title (to the extent not previously transferred) and deliver to Boeing or Boeing's designee all supplies and materials, work-in-process, Tooling and manufacturing drawings and data produced or acquired by Seller for the performance of this Agreement and any Order, all in accordance with the terms of such request; (f) Take all reasonable steps required to return, or at Boeing's option and with prior written approval to destroy, all Boeing Proprietary Information and Items in the possession, custody or control of Seller; (g) Take such other action as, in Boeing's reasonable opinion, may be necessary, and as Boeing shall direct in writing, to facilitate termination of this Order; and (h) Complete performance of the work not terminated. 12.3 SELLER'S CLAIM If Boeing terminates an Order in whole or in part pursuant to Section 12.1 above, Seller shall have the right to submit a written termination claim to Boeing in accordance with the terms of this Section 12.3. Such termination claim shall be submitted to Boeing not later than six (6) months after Seller's receipt of the termination notice and shall be in the form prescribed by Boeing. Such claim must contain sufficient detail to explain the amount claimed, including detailed inventory schedules and a detailed breakdown of all costs claimed separated into categories (e.g., materials, purchased parts, finished components, labor, burden, general and administrative), and to explain the basis for allocation of all other costs. Seller shall be entitled to be compensated in accordance with and to the extent allowed under the terms of FAR 52-249-2(e)- (m) excluding (i), (as published in 48 C.F.R. Section 52.249-2) which is incorporated herein by this reference except "Government" and "Contracting Officer" shall mean Boeing, "Contractor" shall mean Seller and "Contract" shall mean Order. 12.4 FAILURE TO SUBMIT A CLAIM Notwithstanding any other provision of this Section 12.0, if Seller fails to submit a termination claim within the time period set forth above, Seller shall be barred from submitting a claim and Boeing shall have no obligation for payment to Seller under this Section 12.0 except for those Products previously delivered and accepted by Boeing. 12.5 PARTIAL TERMINATION -11- Any partial termination of an Order shall not alter or affect the terms and conditions of the Order or any Order with respect to Products not terminated. 12.6 PRODUCT PRICE Termination under any of the above paragraphs shall not result in any change to unit prices for Products not terminated. 12.7 EXCLUSIONS OR DEDUCTIONS The following items shall be excluded or deducted from any claim submitted by Seller: (a) All unliquidated advances or other payments made by Boeing to Seller pursuant to a terminated Order; (b) Any claim which Boeing has against Seller; (c) The agreed price for scrap allowance; (d) Except for normal spoilage and any risk of loss assumed by Boeing, the agreed fair value of property that is lost, destroyed, stolen or damaged. 12.8 PARTIAL PAYMENT/PAYMENT Payment, if any, to be paid under this Section 12.0 shall be made thirty (30) days after settlement between the parties or as otherwise agreed to between the parties. Boeing may make partial payments and payments against costs incurred by Seller for the terminated portion of the Order, if the total of such payments does not exceed the amount to which Seller would be otherwise entitled. If the total payments exceed the final amount determined to be due, Seller shall repay the excess to Boeing upon demand. 12.9 SELLER'S ACCOUNTING PRACTICES Boeing and Seller agree that Seller's "normal accounting practices" used in developing the price of the Product(s) shall also be used in determining the allocable costs at termination. For purposes of this Section 12.9, Seller's "normal accounting practices" refers to Seller's method of charging costs as either a direct charge, overhead expense, general administrative expense, etc. 12.10 RECORDS -12- Unless otherwise provided in this Agreement or by law, Seller shall maintain all records and documents relating to the terminated portion of the Order for three (3) years after final settlement of Seller's termination claim. 13. EVENTS OF DEFAULT AND REMEDIES 13.1 EVENTS OF DEFAULT The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) Any failure by Seller to deliver, when and as required by this Agreement or any Order, any Product, except as provided in GTA Section 14.0; or (b) Any failure by Seller to provide an acceptable Assurance of Performance within the time specified in GTA Section 17.0, or otherwise in accordance with applicable law; or, (c) Any failure by Seller to perform or comply with any obligation set forth in GTA Section 20.0; or (d) Seller is or has participated in the sale, purchase or manufacture of airplane parts without the required approval of the FAA. (e) Any failure by Seller to perform or comply with any obligation (other than as described in the foregoing Sections 13.1.A, 13.1.B, 13.1.C and 13.1.D) set forth in this Agreement and such failure shall continue unremedied for a period of thirty (30) days or more following receipt by Seller of notice from Boeing specifying such failure; or (f) (a) the suspension, dissolution or winding-up of Seller's business, (b) Seller's insolvency, or its inability to pay debts, or its nonpayment of debts, as they become due, (c) the institution of reorganization, liquidation or other such proceedings by or against Seller or the appointment of a custodian, trustee, receiver or similar Person for Sellers properties or business, (d) an assignment by Seller for the benefit of its creditors, or (e) any action of Seller for the purpose of effecting or facilitating any of the foregoing. 13.2 REMEDIES If any Event of Default shall occur: -13- (a) CANCELLATION Boeing may, by giving written notice to Seller, immediately cancel this Agreement and/or any Order, in whole or in part, and Boeing shall not be required after such notice to accept the tender by Seller of any Products with respect to which Boeing has elected to cancel this Agreement. (b) COVER Boeing may manufacture, produce or provide, or may engage any other persons to manufacture, produce or provide, any Products in substitution for the Products to be delivered or provided by Seller hereunder with respect to which this Agreement or any Order has been canceled and, in addition to any other remedies or damages available to Boeing hereunder or at law or in equity, Boeing may recover from Seller the difference between the price for each such Product and the aggregate expense, including, without limitation, administrative and other indirect costs, paid or incurred by Boeing to manufacture, produce or provide, or engage other persons to manufacture, produce or provide, each such Product. (c) REWORK OR REPAIR Boeing may rework or repair any Product in accordance with GTA Section 8.3; (d) SETOFF Boeing shall, at its option, have the right to set off against and apply to the payment or performance of any obligation, sum or amount owing at any time to Boeing hereunder or under any Order, all deposits, amounts or balances held by Boeing for the account of Seller and any amounts owed by Boeing to Seller, regardless of whether any such deposit, amount, balance or other amount or payment is then due and owing. (e) TOOLING AND OTHER MATERIALS As compensation for the additional costs which Boeing will incur as a result of the actual physical transfer of production capabilities from Seller to Boeing or Boeing's designee, Seller shall upon the request of Boeing, transfer and deliver to Boeing or Boeing's designee title to any or all (i) Tooling, (ii) Boeing-furnished material, (iii) raw materials, parts, work-in-process, incomplete or completed assemblies, and all other Products or parts thereof in the possession or under the effective control of Seller or any of its subcontractors, (iv) Proprietary Information and Materials of Boeing including without limitation planning data, drawings and other Proprietary Information and Materials relating to the design, production, maintenance, repair and use of Tooling, in the possession or under the effective control of Seller or any of its subcontractors, in each case free and clear of all liens, claims or other rights of any person. -14- Seller shall be entitled to receive from Boeing reasonable compensation for any item accepted by Boeing which has been transferred to Boeing pursuant to this Section 13.2.E (except for any item the price of which shall have been paid to Seller prior to such transfer); provided, however, that such compensation shall not be paid directly to Seller, but shall be accounted for as a setoff against any damages payable by Seller to Boeing as a result of any Event of Default. (f) REMEDIES GENERALLY No failure on the part of Boeing in exercising any right or remedy hereunder, or as provided by law or in equity, shall impair, prejudice or constitute a waiver of any such right or remedy, or shall be construed as a waiver of any Event of Default or as an acquiescence therein. No single or partial exercise of any such right or remedy shall preclude any other or further exercise thereof or the exercise of any other right or remedy. No acceptance of partial payment or performance of any of Seller's obligations hereunder shall constitute a waiver of any Event of Default or a waiver or release of payment or performance in full by Seller of any such obligation. All rights and remedies of Boeing hereunder and at law and in equity shall be cumulative and not mutually exclusive and the exercise of one shall not be deemed a waiver of the right to exercise any other. Nothing contained in this Agreement shall be construed to limit any right or remedy of Boeing now or hereafter existing at law or in equity. 14. EXCUSABLE DELAY If delivery of any Product is delayed by unforeseeable circumstances beyond the control and without the fault or negligence of Seller or of its suppliers or subcontractors (any such delay being hereinafter referred to as "Excusable Delay"), the delivery of such Product shall be extended for a period to be determined by Boeing after an assessment by Boeing of alternate work methods. Excusable Delays may include, but are not limited to, acts of God, war, riots, acts of government, fires, floods, epidemics, quarantine restrictions, freight embargoes, strikes or unusually severe weather, but shall exclude Seller's noncompliance with any rule, regulation or order promulgated by any governmental agency for or with respect to environmental protection. However, the above notwithstanding, Boeing expects Seller to continue production, recover lost time and support all schedules as established under this Agreement or any Order. Therefore, it is understood and agreed that (i) delays of less than two (2) days' duration shall not be considered to be Excusable Delays unless such delays shall occur within thirty (30) days preceding the scheduled delivery date of any Product and (ii) if delay in delivery of any Product is caused by the default of any of Seller's subcontractors or suppliers, such delay shall not be considered an Excusable Delay unless the supplies or services to be provided by such subcontractor or supplier are not obtainable from other sources in sufficient time to permit Seller to meet the applicable delivery schedules. If delivery of any Product is delayed by any Excusable Delay for more than three (3) months, Boeing may, without any additional extension, cancel all or part of any Order with respect to -15- the delayed Products, and exercise any of its remedies in accordance with GTA Section 13.2 provided however, that Boeing shall not be entitled to monetary damages or specific performance to the extent Seller's breach is the result of an Excusable Delay. 15. SUSPENSION OF WORK Boeing may at any time, by written order to Seller, require Seller to stop all or any part of the work called for by this Agreement hereafter referred to as a "Stop Work Order" issued pursuant to this Section 15. On receipt of a Stop Work Order, Seller shall promptly comply with its terms and take all reasonable steps to minimize the occurrence of costs arising from the work covered by the Stop Work Order during the period of work stoppage. Within the period covered by the Stop Work Order (including any extension thereof) Boeing shall either (i) cancel the Stop Work Order or (ii) terminate or cancel the work covered by the Stop Work Order in accordance with the provisions of GTA Section 12.0 or 13.0. In the event the Stop Work Order is canceled by Boeing or the period of the Stop Work Order (including any extension thereof) expires, Seller shall promptly resume work in accordance with the terms of this Agreement or any applicable Order. 16. TERMINATION OR CANCELLATION AND INDEMNITY AGAINST SUBCONTRACTOR CLAIMS Boeing shall not be liable for any loss or damage resulting from any termination pursuant to GTA Section 12. 1, except as expressly provided in GTA Section 12.3 or any cancellation under GTA Section 13.0 except to the extent that such cancellation shall have been determined by Boeing and Seller to have been wrongful, in which case such wrongful cancellation shall be deemed a termination pursuant to GTA Section 12.1 and therefore shall be limited to the payment to Seller of the amount or amounts identified in GTA Section 12.3. As subcontractor claims are included in Seller's termination claim pursuant to GTA Section 12.3, Seller shall indemnify Boeing and hold Boeing harmless from and against (i) any and all claims, suits and proceedings against Boeing by any subcontractor or supplier of Seller in respect of any such termination and (ii) any and all costs, expenses, losses and damages incurred by Boeing in connection with any such claim, suit or proceeding. 17. ASSURANCE OF PERFORMANCE (a) SELLER TO PROVIDE ASSURANCE If Boeing determines, at any time or from time to time, that it is not sufficiently assured of Seller's full, timely and continuing performance hereunder, or if for any other reason Boeing has reasonable grounds for insecurity, Boeing may request, by notice to Seller, written assurance (hereafter an "Assurance of Performance") with respect to any specific matters affecting Seller's performance hereunder, that Seller is able to perform all of its -16- respective obligations under this Agreement when and as specified herein. Each Assurance of Performance shall be delivered by Seller to Boeing as promptly as possible, but in any event no later than 15 calendar days following Boeing's request therefore and each Assurance of Performance shall be accompanied by any information, reports or other materials, prepared by Seller, as Boeing may reasonably request. Boeing may suspend all or any part of Boeing's performance hereunder until Boeing receives an Assurance of Performance from Seller satisfactory in form and substance to Boeing. (b) MEETINGS AND INFORMATION Boeing may request one or more meetings with senior management or other employees of Seller for the purpose of discussing any request by Boeing for Assurance of Performance or any Assurance of Performance provided by Seller. Seller shall make such persons available to meet with representatives of Boeing as soon as may be practicable following a request for any such meeting by Boeing and Seller shall make available to Boeing any additional information, reports or other materials in connection therewith as Boeing may reasonably request. 18. RESPONSIBILITY FOR PROPERTY On delivery to Seller or manufacture or acquisition by it of any materials, parts, Tooling or other property, title to any of which is in Boeing, Seller shall assume the risk of and shall be responsible for any loss thereof or damage thereto. In accordance with the provisions of an Order, but in any event on completion thereof, Seller shall return such property to Boeing in the condition in which it was received except for reasonable wear and tear and except to the extent that such property has been incorporated in Products delivered under such Order or has been consumed in the normal performance of work under such Order. 19. LIMITATION OF SELLER'S RIGHT TO ENCUMBER ASSETS Seller warrants to Boeing that it has good title to all inventory, work-in- process, tooling and materials to be supplied by Seller in the performance of its obligations under any Order ("Inventory"), and that pursuant to the provisions of such Order, it will transfer to Boeing title to such Inventory, whether transferred separately or as part of any Product delivered under the Order, free of any liens, charges, encumbrances or rights of others. 20. PROPRIETARY INFORMATION AND ITEMS Boeing and Seller shall each keep confidential and protect from disclosure all (a) confidential, proprietary, and/or trade secret information; (b) tangible items containing, conveying, or embodying such information; and (c) tooling obtained from and/or belonging to the other in connection with this Agreement or any Order (collectively referred to as "Proprietary Information and Materials"). Boeing and Seller shall each use Proprietary -17- Information and Materials of the other only in the performance of and for the purpose of this Agreement and/or any Order. Provided, however, that despite any other obligations or restrictions imposed by this Section 20.0, Boeing shall have the right to use and disclose of Seller's Proprietary Information and Materials for the purposes of testing, certification, use, sale, or support of any item delivered under this Agreement, an Order, or any airplane including such an item; and any such disclosure by Boeing shall, whenever appropriate, include a restrictive legend suitable to the particular circumstances. The restrictions on disclosure or use of Proprietary Information and Materials by Seller shall apply to all materials derived by Seller or others from Boeing's Proprietary Information and Materials. Upon Boeing's request at any time, and in any event upon the completion, termination or cancellation of this Agreement, Seller shall return all of Boeing's Proprietary Information and Materials, and all materials derived from Boeing's Proprietary Information and Materials to Boeing unless specifically directed otherwise in writing by Boeing. Seller shall not, without the prior written authorization of Boeing, sell or otherwise dispose of (as scrap or otherwise) any parts or other materials containing, conveying, embodying, or made in accordance with or by reference to any Proprietary Information and Materials of Boeing. Prior to disposing of such parts or materials as scrap, Seller shall render them unusable. Boeing shall have the right to audit Seller's compliance with this Section 20.0. Seller may disclose Proprietary Information and Materials of Boeing to its subcontractors as required for the performance of an Order, provided that each such subcontractor first assumes, by written agreement, the same obligations imposed upon Seller under this Section 20.0 relating to Proprietary Information and Materials; and Seller shall be liable to Boeing for any breach of such obligation by such subcontractor. The provisions of this Section 20.0 are effective in lieu of, and will apply notwithstanding the absence of, any restrictive legends or notices applied to Proprietary Information and Materials; and the provisions of this Section 20.0 shall survive the performance, completion, termination or cancellation of this Agreement or any Order. This Section 20.0 supersedes and replaces any and all other prior agreements or understandings between the parties to the extent that such agreements or understandings relate to Boeing's obligations relative to confidential, proprietary, and/or trade secret information, or tangible items containing, conveying, or embodying such information, obtained from Seller and related to any Product, regardless of whether disclosed to the receiving party before or after the effective date of this Agreement. 21. COMPLIANCE WITH LAWS 21.1 SELLER'S OBLIGATION Seller shall be responsible for complying with all laws, including, but not limited to, any statute, rule, regulation, judgment, decree, order, or permit applicable to its performance under this Agreement. Seller further agrees (1) to notify Boeing of any obligation under this Agreement which is prohibited under applicable environmental law, at the earliest opportunity but in all events sufficiently in advance of Seller's performance of such obligation so as to -18- enable the identification of alternative methods of performance, and (2) to notify Boeing at the earliest possible opportunity of any aspect of its performance which becomes subject to additional environmental regulation or which Seller reasonably believes will become subject to additional regulation during the performance of this Agreement. 21.2 GOVERNMENT REQUIREMENTS If any of the work to be performed under this Agreement is performed in the United States, Seller shall, via invoice or other form satisfactory to Boeing, certify that the Products covered by the Order were produced in compliance with Sections 6, 7, and 12 of the Fair Labor Standards Act (29 U.S.C. 201-291), as amended, and the regulations and orders of the U. S. Department of Labor issued thereunder. In addition, the following Federal Acquisition Regulations are incorporated herein by this reference except "Contractor" shall mean "Seller": FAR 52.222-26 "Equal Opportunity" FAR 52.222-35 "Affirmative Action for Special Disabled and Vietnam Era Veterans" FAR 52.222-36 "Affirmative Action for Handicapped Workers" 22. INTEGRITY IN PROCUREMENT Boeing's policy is to maintain high standards of integrity in procurement. Boeing's employees must ensure that no favorable treatment compromises their impartiality in the procurement process. Accordingly, Boeing's employees must strictly refrain from soliciting or accepting any payment, gift, favor or thing of value which could improperly influence their judgment with respect to either issuing a Order or administering this Agreement. Consistent with this policy, Seller agrees not to provide or offer to provide any employees of Boeing any payment, gift, favor or thing of value for the purposes of improperly obtaining or rewarding favorable treatment in connection with any Order or this Agreement. Seller shall conduct its own procurement practices and shall ensure that its suppliers conduct their procurement practices consistent with these standards. If Seller has reasonable grounds to believe that this policy may have been violated, Seller shall immediately report such possible violation to the appropriate Director of Materiel or Ethics Advisor of Boeing. 23. INFRINGEMENT Seller shall indemnify, defend, and save Boeing and Customers harmless from all claims, suits, actions, awards (including but not limited to awards based on intentional infringement of patents known to Seller at the time of such infringement, exceeding actual damages, and/or including attorneys' fees and/or costs), liabilities, damages, costs and attorneys' fees related to the actual or alleged infringement of any United States or foreign intellectual property right (including but not limited to any right in a patent, copyright, -19- industrial design or semiconductor mask work, or based on misappropriation or wrongful use of information or documents) and arising out of the manufacture, sale or use of Products by Boeing or Customers. Boeing and/or Customers shall duly notify Seller of any such claim, suit or action; and Seller shall, at its own expense, fully defend such claim, suit or action on behalf of Boeing and/or Customers. Seller shall have no obligation under this Section 23 with regard to any infringement arising from: (i) Seller's compliance with formal specifications issued by Boeing where infringement could not be avoided in complying with such specifications or (ii) use or sale of Products in combination with other items when such infringement would not have occurred from the use or sale of those Products solely for the purpose for which they were designed or sold by Seller. For purposes of this Section 23 only, the term Customer shall not include the United States Government; and the term Boeing shall include The Boeing Company (Boeing) and all Boeing subsidiaries and all officers, agents, and employees of Boeing or any Boeing subsidiary. 24. BOEING'S RIGHTS IN SELLER'S PATENTS, COPYRIGHTS, TRADE SECRETS AND TOOLING Seller hereby grants to Boeing an irrevocable, non-exclusive, paid-up worldwide license to practice and/or use, and license others to practice and/or use on Boeing's behalf, all of Seller's patents, copyrights, trade secrets (including, without limitation, designs, processes, drawings, technical data and tooling), industrial designs, semiconductor mask works, and tooling (collectively hereinafter referred to as "Licensed Property") related to the development, production, maintenance or repair of Products. Boeing hereafter retains all of the aforementioned license rights in Licensed Property, but Boeing hereby covenants not to exercise such rights except in connection with the making, having made, using and selling of Products or products of the same kind, and then only in the event of any of the following: (a) Seller discontinues or suspends business operations or the production of any or all of the Products; (b) Seller is acquired by or transfers any or all of its rights to manufacture any Product to any third party, whether or not related; (c) Boeing cancels this Agreement or any Order for cause pursuant to GTA Section 13.0 herein; (d) in Boeing's judgment it becomes necessary, in order for Seller to comply with the terms of this Agreement or any Order, for Boeing to provide support to Seller (in the form of design, manufacturing, or on-site personnel assistance) substantially in excess of that which Boeing normally provides to its suppliers; -20- (e) Seller's trustee in bankruptcy (or Seller as debtor in possession) fails to assume this Agreement and all Orders by formal entry of an order in the bankruptcy court within sixty (60) days after entry of an order for relief in a bankruptcy case of the Seller, or Boeing elects to retain its rights to Licensed Property under the bankruptcy laws; (f) Seller is at any time insolvent (whether measured under a balance sheet test or by the failure to pay debts as they come due) or the subject of any insolvency or debt assignment proceeding under state or nonbankruptcy law; or (g) Seller voluntarily becomes a debtor in any case under bankruptcy law or, in the event an involuntary bankruptcy petition is filed against Seller, such petition is not dismissed within thirty (30) days. As a part of the license granted under this Section 24.0, Seller shall, at the written request of Boeing and at no additional cost to Boeing, promptly deliver to Boeing any and all Licensed Property considered by Boeing to be necessary to satisfy Boeing's requirements for Products and their substitutes. 25. NOTICES 25.1 ADDRESSES Notices and other communications shall be given in writing by personal delivery, mail, telex, teletype, telegram, facsimile, cable or other electronic transmission addressed to the respective party as set forth in the SBP Section 9.0. 25.2 EFFECTIVE DATE The date on which any such communication is received by the addressee is the effective date of such communication. 25.3 APPROVAL OR CONSENT With respect to all matters subject to the approval or consent of either party, such approval or consent shall be requested in writing and is not effective until given in writing. With respect to Boeing, authority to grant approval or consent is limited to Boeing's Materiel Representative. 26. PUBLICITY Seller will not, and will require that its subcontractors and suppliers of any tier will not, (i) cause or permit to be released any publicity, advertisement, news release, public -21- announcement, or denial or confirmation of the same, in whatever form, regarding any Order or Products, or the program to which they may pertain, or (ii) use, or cause or permit to be used, the Boeing name or any Boeing trademark in any form of promotion or publicity without Boeing's prior written approval. 27. PROPERTY INSURANCE 27.1 INSURANCE Seller shall maintain continuously in effect a property insurance policy covering loss or destruction of or damage to all property in which Boeing does or could have an insurable interest pursuant to this Agreement, including but not limited to Tooling, Boeing-furnished property, raw materials, parts, work-in process, incomplete or completed assemblies and all other products or parts thereof, and all drawings, specifications, data and other materials relating to any of the foregoing in each case to the extent in the possession or under the effective care, custody or control of Seller, in the amount of full replacement value thereof providing protection against all perils normally covered in an "all risk" property insurance policy (including without limitation fire, windstorm, explosion, riot, civil commotion, aircraft, earthquake, flood or other acts of God). Any such policy shall be in the form and with insurers acceptable to Boeing and shall (i) provide for payment of loss thereunder to Boeing, as loss payee, as its interests may appear and (ii) contain a waiver of any rights of subrogation against Boeing, its subsidiaries, and their respective directors, officers, employees and agents. 27.2 CERTIFICATE OF INSURANCE Prior to commencement of this Agreement, Seller shall provide to Boeing's Materiel Representative, for Boeing's review and approval, certificates of insurance reflecting full compliance with the requirements set forth in GTA Section 27.1. Such certificates shall be kept current and in compliance throughout the period of this Agreement and shall provide for thirty (30) days advanced written notice to Boeing's Materiel Representative in the event of cancellation, non-renewal or material change adversely affecting the interests of Boeing. 27.3 NOTICE OF DAMAGE OR LOSS Seller shall give prompt written notice to Boeing's Materiel Representative of the occurrence of any damage or loss to any property required to be insured herein. If any such property shall be damaged or destroyed, in whole or in part, by an insured peril or otherwise, and if no Event of Default shall have occurred and be continuing, then Seller may, upon written notice to Boeing, settle, adjust, or compromise any and all such loss or damage not in excess of Two Hundred Fifty Thousand Dollars ($250,000) in any one occurrence and Five Hundred Thousand Dollars ($500,000) in the aggregate. Seller may settle, adjust or -22- compromise any other claim by Seller only after Boeing has given written approval, which approval shall not be unreasonably withheld. 28. RESPONSIBILITY FOR PERFORMANCE Seller shall be responsible for the requirements of this Agreement and any Order referencing this Agreement. Seller shall bear all risks of providing adequate facilities and equipment to perform each Order in accordance with the terms thereof. Seller shall include as part of its subcontracts those elements of the Agreement which protect Boeing's rights including but not limited to right of entry provisions, proprietary information and rights provisions and quality control provisions. In addition, Seller shall provide to its subcontractors sufficient information to clearly document that the work being performed by Seller's subcontractor is to facilitate performance under this Agreement or any Order. Sufficient information may include but is not limited to Order number, GTA number or the name of Boeing's Materiel Representative. No subcontracting by Seller shall relieve Seller of its obligation under the applicable Order. 28.1 SUBCONTRACTING Seller may not procure any Product, as defined in the applicable Order, from a third party in a completed or a substantially completed form without Boeing's prior written consent. Where required by the requirements of the Order, no raw material and/or material process may be incorporated in a Product unless: (a) Seller uses an approved source or (b) Boeing has surveyed and qualified Seller's receiving inspection personnel and laboratories to test the specified raw materials an/or material process. No waiver of survey and qualification requirements will be effective unless granted by Boeing's Engineering and Quality Control Departments. Utilization of a Boeing-approved raw material source does not constitute a waiver of Seller's responsibility to meet all specification requirements. 28.2 RELIANCE Boeing's entering into this Agreement is in part based upon Boeing's reliance on Seller's ability, expertise and awareness of the intended use of the Products. Seller agrees that Boeing and Boeing's customers may rely on Seller as an expert, and Seller will not deny any responsibility or obligation hereunder to Boeing or Boeing's customers on the grounds that Boeing or Boeing's customers provided recommendations or assistance in any phase of the work involved in producing or supporting the Products, including but not limited to Boeing's acceptance of specifications, test data or the Products. 28.3 Each Order shall inure to the benefit of and be binding on each of the parties hereto and their respective successors and assigns, provided however, that no assignment of -23- any rights or delegation of any duties under such Order is binding on Boeing unless Boeing's written consent has first been obtained. Notwithstanding the above, Seller may assign claims for monies due or to become due under any Order provided that Boeing may recoup or setoff any amounts covered by any such assignment against any indebtedness of Seller to Boeing, whether arising before or after the date of the assignment or the date of this Agreement, and whether arising out of any such Order or any other agreement between the parties. Boeing may settle all claims arising out of any Order, including termination claims, directly with Seller. Boeing may unilaterally assign any rights or title to property under the Order to any wholly-owned subsidiary of The Boeing Company. 29. NON-WAIVER Boeing's failure at any time to enforce any provision of an Order does not constitute a waiver of such provision or prejudice Boeing's right to enforce such provision at any subsequent time. 30. HEADINGS Section headings used in this Agreement are for convenient reference only and do not affect the interpretation of the Agreement. 31. PARTIAL INVALIDITY If any provision of any Order is or becomes void or unenforceable by force or operation of law, the other provisions shall remain valid and enforceable. 32. APPLICABLE LAW; JURISDICTION Each Order, including all matters of construction, validity and performance, shall in all respects be governed by, and construed and enforced in accordance with, the law as set forth in SBP Section 5. 33. Oral statements and understandings are not valid or binding. Except as otherwise provided in GTA Section 10 and SBP Section 12, no Order may be changed or modified except by a writing signed by Seller and Boeing's Materiel Representative. 34. LIMITATION Seller may not (except to provide an inventory of Products to support delivery acceleration and to satisfy reasonable replacement and Spares requirements) manufacture or fabricate Products or procure any goods in advance of the reasonable flow time required to -24- comply with the delivery schedule in the applicable Order. Notwithstanding any other provision of an Order, Seller is not entitled to any equitable adjustment or other modification of such Order for any manufacture, fabrication, or procurement of Products not in conformity with the requirements of the Order, unless Boeing's written consent has first been obtained. Nothing in this Section 34 shall be construed as relieving Seller of any of its obligations under the Order. 35. TAXES 35.1 INCLUSION OF TAXES IN PRICE All taxes, including but not limited to federal, state and local income taxes, value added taxes, gross receipt taxes, property taxes, and custom duties taxes are deemed to be included in the Order price, except applicable sales or use taxes on sales to Boeing ("Sales Taxes") for which Boeing has not supplied a valid exemption certificate or unless otherwise indicated on the applicable Order. 35.2 LITIGATION In the event that any taxing authority has claimed or does claim payment for Sales Taxes, Seller shall promptly notify Boeing, and Seller shall take such action as Boeing may direct to pay or protest such taxes or to defend against such claim. The actual and direct expenses, without the addition of profit and overhead, of such defense and the amount of such taxes as ultimately determined as due and payable shall be paid directly by Boeing or reimbursed to Seller. If Seller or Boeing is successful in defending such claim, the amount of such taxes recovered by Seller, which had previously been paid by Seller and reimbursed by Boeing or paid directly by Boeing, shall be immediately refunded to Boeing. 35.3 REBATES If any taxes paid by Boeing are subject to rebate or reimbursement, Seller shall take the necessary actions to secure such rebates or reimbursement and shall promptly refund to Boeing any amount recovered. 36. FOREIGN PROCUREMENT OFFSET With respect to work covered by the Order, Seller shall use its best efforts to cooperate with Boeing in the fulfillment of any foreign offset program obligation that Boeing may have accepted as a condition of the sale of Boeing's products. In the event that Seller solicits bids or proposals for, or procures or offers to procure any goods or services relating to the work covered by an Order from any source outside of the United States, Boeing shall be entitled, to the exclusion of all others, to all industrial benefits and other "offset" -25- credits which may result from such solicitations, procurements or offers to procure. Seller agrees to take any actions that may be required on its part to assure that Boeing receives such credits. 37. ENTIRE AGREEMENT/ORDER OF PRECEDENCE 37.1 ENTIRE AGREEMENT The Order sets forth the entire agreement, and supersedes any and all other prior agreements understandings and communications between Boeing and Seller related to the subject matter of an Order. The rights and remedies afforded to Boeing or Customers pursuant to any provisions of an Order are in addition to any other rights and remedies afforded by any other provisions of this Order, by law or otherwise. 37.2 INCORPORATED BY REFERENCE In addition to the documents previously incorporated herein by reference, the documents listed below are by this reference made a part of this Agreement: (a) Engineering Drawing by Part Number and Related Outside Production Specification Plan (OPSP). (b) Any other exhibits or documents agreed to by the parties to be a part of this Agreement. 37.3 ORDER OF PRECEDENCE In the event of a conflict or inconsistency between any of the terms of the following documents, the following order of precedence shall control: (a) SBP (excluding the Administrative Agreement identified in E below) (b) This General Terms Agreement (excluding the documents identified in D and F below) (c) Order (excluding the documents identified in A and B above) (d) Engineering Drawing by Part Number and, if applicable, related Outside Production Specification Plan (OPSP) (e) Administrative Agreement (If Applicable) -26- (f) Any other exhibits or documents the parties agree shall be part of the Agreement 37.4 DISCLAIMER Unless otherwise specified on the face of the applicable Order, any CATIA Dataset or translation thereof (each or collectively "Data") furnished by Boeing is furnished as an accommodation to Seller. It is the Seller's responsibility to compare such Data to the comparable two dimensional computer aided design drawing to confirm the accuracy of the Data. BOEING HEREBY DISCLAIMS, AND SELLER HEREBY WAIVES, ALL WARRANTIES AND LIABILITIES OF BOEING AND ALL CLAIMS AND REMEDIES OF SELLER, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY DEFECT IN ANY CATIA DATASET OR TRANSLATION THEREOF, INCLUDING, WITHOUT LIMITATION, ANY (A) IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A PARTICULAR PURPOSE, (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF DEALING OR PERFORMANCE OR USAGE OF TRADE, (C) RECOVERY BASED UPON TORT, WHETHER OR NOT ARISING FROM BOEING'S NEGLIGENCE, AND (D) ANY RECOVERY BASED UPON DAMAGED PROPERTY, OR OTHERWISE BASED UPON DAMAGED PROPERTY, OR OTHERWISE BASED UPON LOSS OF USE OR PROFIT OR OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES. EXECUTED in duplicate as of the date and year first written above by the duly authorized representatives of the parties. THE BOEING COMPANY CASHMERE MANUFACTURING COMPANY by and through its division Boeing Commercial Airplane Group Name: /s/ Randolph L. Parks Name: /s/ John Eder ----------------------------- ----------------------------- Title: Buyer Title: Vice President ---------------------------- ---------------------------- Date: March 12, 1996 Date: March 11, 1996 ----------------------------- ---------------------------- -27- EX-10.52 17 EXTENSION AND MODIFICATION OF PROMISSORY NOTE Exhibit 10.52 EXTENSION AND MODIFICATION OF PROMISSORY NOTES This Extension and Modification of Promissory Notes ("Extension Agreement") is entered into as of April ____, 1996, by and between PCT HOLDINGS, INC., a Nevada corporation (hereinafter "Borrower") and WILLIAM H. PAYNE; IVAN G. SARDA; THE WALDAL FAMILY TRUST, JEFFREY H. WALDAL, TRUSTEE, AS SUCCESSOR TO ELINOR A. WALTERS, deceased; and KATRINA A. KNOWLES (hereinafter collectively "Lenders") with reference to the following facts: A. In connection with a merger between Borrower, Ceramic Devices, Inc., a Washington corporation ("CDIW"), and Ceramic Devices, Inc., a California corporation, Borrower entered into that certain Agreement and Plan of Merger Dated as of February 28, 1995 ("Merger Agreement"). In connection with the Merger Agreement, Borrower became indebted to Lenders for certain amounts and executed two promissory notes memorializing such indebtedness, as described below. B. The first such promissory note executed by Borrower in favor of Lenders was dated May 10, 1995, and was in the amount of $200,000 ("$200,000 Note"). The $200,000 Note provided for a principal payment, on February 28, 1996, in the amount of $50,000, plus accrued interest, and principal payments of $75,000 each, plus accrued interest, on February 28, 1997 and February 28, 1998, respectively. Pursuant to the terms of the $200,000 Note, default occurred if any installment of principal and interest was not paid within 30 days after the date such payment became due. Borrower did not pay the principal installment or accrued interest due on February 28, 1996, has advised Lenders that it is unable to pay such amounts within 30 days after such date, and thus is or will soon be in default under the terms of the $200,000 Note. C. The second such promissory note executed by Borrower in favor of Lenders was dated May 10, 1995, and was in the amount of $400,000 ("$400, 000 Note"). The entire balance of the principal and accrued interest on the $400,000 Note was due and payable on November 30, 1995 pursuant to an agreement entered into by and between Borrower and Lenders, the due date for the entire balance of the principal and accrued interest on the $400,000 Note was extended to March 1, 1996. Pursuant to the terms of the $400,000 Note, default occurred if any installment of principal and interest was not paid within 30 days after the date such payment became due. Borrower did not pay the principal balance or accrued interest due on the extended due date of March 1, 1996, has advised Lenders that it is unable to pay such amounts within 30 days after such date, and thus is or will soon be in default under the terms of the $400,000 Note. D. The Notes are secured by a first priority lien on the assets of CDIW, a wholly owned subsidiary of the Borrower, except for the Lenders' lien on CDIW's accounts and -1- inventory which Lenders subordinated to the lien of Silicon Valley Bank, under the terms of a Security Agreement dated April 27, 1995 ("Security Agreement"). E. Under the terms of the $200,000 Note and the $400,000 Note (collectively referred to as "Notes"), in the event of Borrower's default, the Lenders have the right to declare the entire unpaid balance, together with accrued interest, immediately due and payable without presentment, demand, protest or other notice of any kind ("Acceleration"). F. Lenders are willing to forbear their exercise of their right to Acceleration and extend the due dates of the Notes provided Borrower agrees to certain modifications of the terms of the Notes, and Borrower is willing to agree to such modifications in exchange for such forbearance and extensions. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual agreements contained herein and for valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. MODIFICATION OF PAYMENT TERMS OF $200,000 NOTE. The payment terms of the $200,000 Note, as set forth in Paragraph 3 of the $200,000 Note, are hereby amended and restated in their entirety to read as follows: "3. REPAYMENT. Borrower shall pay principal and accrued interest in full an August 31, 1996, or sooner. All payments received shall be applied first to accrued, interest, then to costs of collection, and the balance, if any, to the reduction of principal. Borrower may prepay the obligation evidenced by this Note at any time." 2. MODIFICATION OF PAYMENT TERMS OF $400,000 NOTE. The payment terms of the $400,000 Note, as set forth in Paragraph 3 of the $400,000 Note, are hereby amended and restated in their entirety to read as follows: "3. REPAYMENT. Borrower shall pay principal and accrued interest in full on August 31, 1996, or sooner. All payments received shall be applied first to accrued interest, then to costs of collection, and the balance, if any, to the reduction of principal. Borrower may prepay the obligation evidenced by this Note at any time." 3. MODIFICATION OF INTEREST RATE. The interest rate set forth in both Notes shall be amended to be ten percent (10%) per annum, commencing February 28, 1996, in the case of the $200,000 Note, and March 1, 1996, in the case of the $400,000 Note. The revised interest rate shall accrue on the entire balance of principal plus accrued interest due on each of the Notes as of such respective dates. The parties agree that the balance of principal and accrued interest on each of the Notes as of such respective dates are as follows: -2- Principal Balance Accrued Interest Promissory Note Due Due --------------- -------------------- -------------------- $200,000 $200,000 $12,877.67 $400,000 $400,000 $25,950.68 4. CONFIRMATION OF COLLATERAL. The parties hereto agree and confirm that the collateral for the Notes, as evidenced by the Security Agreement, is as act forth on Exhibit "A", attached hereto and incorporated herein by reference as if set forth in full. All references in said Exhibit "A" to "Debtor" shall be deemed to refer to CDIW, which is defined as the Debtor in the Financing Statement Form UCC-1, to which Exhibit "A" was originally attached as an exhibit, and to its successors. 5. NEGATIVE COVENANT. So long as any balance of principal and/or accrued interest remains unpaid by Borrower under the Notes, as modified herein, Borrower covenants and agrees that it will not expend any funds or incur any indebtedness, other than in the ordinary course of business (which, for purposes of this paragraph, shall be deemed to include indebtedness relating to Borrower's working capital line of credit), in an amount exceeding ten thousand dollars ($10,000), or issue any additional stock or securities, in any single transaction or any series of related transactions, without Lenders' prior written consent, which may be granted or withheld by Lenders in their sole and absolute discretion, it being agreed by Borrower that Lenders are not required to consent even if the withholding of such consent could be deemed unreasonable, unless the proceeds of such transaction result in the full and immediate payment of the outstanding balance of principal and interest due on the Notes, in which case Lenders will consent to the proposed transaction so long as they receive adequate assurances, acceptable to them in their sole and absolute discretion, that the proceeds of the proposed transaction will be so applied. By way of example only, and not in limitation of the foregoing, pursuant to the terms of this Paragraph, Borrower shall not be permitted to acquire the stock or assets of any other entities, whether by purchase, merger, stock exchange or otherwise; purchase, either for cash or on credit terms, any machinery or equipment with a cost of more than $10,000; enter into any short or long term obligations, other than those necessary for the ordinary conduct of Borrower's business, which require payments of more than $10,000 per month, it being expressly agreed by the parties that any new leases for premises, equipment, furniture, fixtures, office or operating machinery or similar items shall NOT be deemed to be in the ordinary conduct of Borrower's business and therefore shall require Lenders' consent hereunder; or retire or redeem any securities issued by Borrower or pay any principal payments on debt instruments issued by Borrower or on indebtedness owed by Borrower, in excess of the minimum amounts which Borrower is obligated to periodically pay on such obligations as of the date of execution of this Extension Agreement. 6. AFFIRMATIVE COVENANT. So long as any balance of principal and/or accrued interest remains unpaid by Borrower under the Notes, as modified herein, Borrower covenants and agrees that all proceeds it receives from any financing or securities transactions, including, but not limited to, issuance of securities, or securing of new financing or loans, but excluding -3- any funds advanced to Borrower on its working capital line of credit in the ordinary course of business, shall be immediately applied towards the indebtedness owed on the Notes, without regard to whether the principal and accrued interest on the Notes are then due. 7. COSTS. Borrower shall pay all costs incurred by Lenders or Borrower in the negotiation and drafting of this Extension Agreement and related documents, including, but not limited to, Lenders' attorneys' fees incurred in connection with discussions concerning Borrower's default under the Notes and this Extension Agreement. 8. OTHER TERMS. Except as specifically modified hereby, the terms of the Notes and the Merger Agreement shall remain in full force and effect and shall not be deemed modified, amended or revoked and, in particular, Lenders' original priority in the collateral set forth in the Security Agreement and the rights, benefits, duties, or obligations of the parties under the Notes and Security Agreement (collectively "Loan Documents") are unaffected by this Extension Agreement. Except as specifically modified hereby, Borrower hereby confirms and acknowledges that: (a) Loan Documents are in full force and effect; (b) the Borrower is liable under the Loan Documents in accordance with their terms, as modified hereby; (c) Borrower's liability under the Notes is not limited to the value of the Collateral, as set forth in Exhibit "A", but shall be for the full balance due on the Notes, together with accrued and unpaid interest and all other amounts which may be due from Borrower to Lenders under the Notes, the Security Agreement or otherwise; and (d) the Lenders have performed all of their obligations under the Loan Documents to this date. The entire principal and interest due on the Notes, as amended hereby, is and shall continue to be secured by the collateral set forth in the Security Agreement, until paid in full. 9. GENERAL PROVISIONS. 9.1 ENTIRE AGREEMENT. This Extension Agreement contains the entire agreement between the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, representations and understandings of the parties, written or oral. 9.2 GOVERNING LAW. This Extension Agreement and the obligations of the parties hereunder shall be interpreted, construed and enforced in accordance with the laws of the State of Washington. 9.3 NO WAIVER. No consent or waiver, express or implied, by any party to, or of any breach or default by any other party in, the performance of its obligations hereunder shall be deemed or construed to be a consent to or waiver of any other breach or default in the performance by such other party of the same or any other obligations hereunder. Failure on the part of a party to complain of any act of the other party or to declare a party in default, irrespective of how long such failure continues, shall not constitute a waiver of such party of its rights hereunder. -4- 9.4 SEVERABILITY. If any provision of this Extension Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable, but the extent of such invalidity or unenforceability does not destroy the basis of the bargain between the parties as contained herein, the remainder of this Extension Agreement and the application of such provision or provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 9.5 BINDING EFFECT. This Extension Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. This Extension Agreement, or any right or interest hereunder, shall not be assignable by any party hereto without the written consent of any other party hereto. 9.6 COUNTERPARTS. This Extension Agreement may be executed in one or more counterparts, any one of which, if originally executed, shall be binding upon each of the parties signing thereon, and all of which taken together shall constitute one and the same instrument. One or more photostatic copies of this Extension Agreement may be originally executed by the parties hereto, and such photostatic copies shall be deemed originals and shall be valid, binding and enforceable in accordance with their terms. 9.7 AUTHORITY. The parties hereto represent and warrant that they have full power, authority and legal right to execute and deliver, and to perform and observe the provisions of, this Extension Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance by the parties to this Extension Agreement have been duly authorized by all necessary legal action and the parties have obtained any necessary consent, approval of, notice to, or any action by, any person, firm, corporation or governmental entity or agency necessary or appropriate to consummate the transaction contemplated hereby. 9.8 FURTHER ASSURANCES. Each party agrees and covenants that it will at any time and from time to time, upon the request of the other, execute, acknowledge, deliver or perform all such further acts, deeds, assignments, transfers, conveyances and assurances as may be required to carry out the terms and provisions of this Extension Agreement. 9.9 CUMULATIVE RIGHTS AND REMEDIES. The rights and remedies of the parties hereunder shall not be mutually exclusive, and the exercise by any party of any right to which he or it is entitled shall not preclude the exercise of any other right he or it may have. 9.10 THIRD PARTY BENEFICIARIES. No person shall have any rights whatsoever under this Extension Agreement unless such person is a party to this Extension Agreement, and only in such capacities as such person is a party hereto. 9.11 ADVICE OF COUNSEL. Each party represents and warrants that in executing this Extension Agreement: (1) such party has had the opportunity to obtain independent accounting, financial, investment, legal, tax and other appropriate advice; (2) the terms of the -5- Extension Agreement have been carefully read by such party and its consequences explained to such party by his or its independent advisors; (3) such party fully understands the terms and consequences of this Extension Agreement; (4) such party has not relied on any inducements, promises or representations made by the other party (except those expressly set forth herein) or the accountants, attorneys or other agents representing or serving the other party; and (5) its execution of this Extension Agreement is free and voluntary. 9.12 ATTORNEYS' FEES. In the event of any dispute between parties to this Extension Agreement, the prevailing party shall be entitled to immediate payment of all costs incurred by such party in such dispute, including, but not limited to, court costs and reasonable attorneys' fees. 9.13 AMENDMENT AND WAIVER. No provision of this Extension Agreement or any of the documents referred to herein may be amended, modified, supplemented, changed, waived, discharged or terminated, except by a writing signed by or on behalf of each party hereto. 9.14 INTERPRETATION. This Extension Agreement shall be construed in accordance with its fair meaning as if prepared by all parties hereto, and shall not be interpreted against either party on the basis that it was prepared by one party or the other. The captions, headings, and subcaptions used in this Extension Agreement are for convenience only and do not in any way affect, limit, amplify or modify the terms and provisions thereof. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first above written. "LENDER": /S/ William H Payne --------------------------------------- WILLIAM H. PAYNE /S/ Ivan G. Sarda -------------------------------------------- IVAN G. SARDA, as Trustee U/T/A dated 6/26/87 /S/ Jeffrey H. Waldal --------------------------------------- JEFFREY H. WALDAL, Successor Trustee of the Waldal Family Trust dated March 19, 1979, as amended on April 23, 1994, as successor to ELINOR A. WALTERS, deceased -6- /S/ Katrina A. Knowles --------------------------------------- KATRINA A. KNOWLES /S/ Gregory B. Knowles --------------------------------------- GREGORY B. KNOWLES "BORROWER": PCT HOLDINGS, INC., a Nevada corporation By: /S/ Donald A. Wright ----------------------------------- DONALD A. WRIGHT President -7- EX-10.54 18 LOAN MODIFICATION AGREEMENT DATED APRIL 23, 1996 EXHIBIT 10.54 LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of April 23, 1996, by and among PCT Holdings, Inc., a Nevada corporation; Ceramic Devices, Inc., a California corporation; Cashmere Manufacturing Co., Inc., a Washington corporation; and Pacific Coast Technologies, Inc., a Washington corporation (jointly and severally the "Borrower"), 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, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be owing by Borrower to Silicon, Borrower is indebted to Silicon pursuant to, among other documents, a Loan and Security Agreement, dated April 24, 1995, together with all Schedules thereto, as amended (the "Loan Agreement"). The Loan Agreement provided for, among other things, a Secured Accounts Receivable Line of Credit in the original principal amount of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) (the "Line"). The Line has been modified pursuant to a Loan Modification Agreement dated August 24, 1995. Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Silicon shall be referred to as the "Indebtedness". 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the indebtedness is secured by the collateral as described in the Loan Agreement, and a Patent and Trademark Security Agreement and Conditional Assignment, together with all attachments thereto, and a Security Agreement in Copyrighted Works, each dated April 24, 1995. Hereinafter the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. MODIFICATION(S) TO SCHEDULE TO LOAN AGREEMENT. 1. Section 1.3 entitled "Maturity Date", is hereby amended in its entirety, to read as follows: May 26, 1996, at which time all unpaid principal and accrued by unpaid interest shall be due and payable. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. COUNTERPARTS. This [Loan Modification Agreement] may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Silicon is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Silicon's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Silicon to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Silicon and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Silicon in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. This Loan Modification Agreement is executed as of the date first written above. BORROWER: SILICON: PCT HOLDINGS, INC. SILICON VALLEY BANK By: /s/ Nick A. Gerde By: /s/ Eric Siow -------------------------------- ------------------------------------ Name: Nick A. Gerde Name: Eric Siow Title: Vice President Title: Vice President CERAMIC DEVICES, INC. By:/s/ Nick A. Gerde -------------------------------- Name: Nick A. Gerde Title: Vice President CASHMERE MANUFACTURING CO., INC. By:/s/ Nick A. Gerde -------------------------------- Name: Nick A. Gerde Title: Vice President PACIFIC COAST TECHNOLOGIES, INC. By:/s/ Nick A. Gerde -------------------------------- Name: Nick A. Gerde Title: Vice President EX-23.1 19 CONSENT OF MOSS ADAMS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 1 to the Registration Statement on Form SB-2 (File No. 333-5011) of our report dated June 15, 1996 on our audits of the consolidated financial statements of PCT Holdings, Inc. and Subsidiaries. We also consent to the reference to our firm under the caption "Experts." /S/ MOSS ADAMS LLP Everett, Washington June 18, 1996 EX-23.2 20 CONSENT OF BDO SEIDMAN LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PCT Holdings, Inc. Wenatchee, Washington We hereby consent to the inclusion in this Amendment No. 1 to the Registration Statement on Form SB-2 (File No. 333-5011) of our report dated November 8, 1995, except for Notes 4 and 9 as to which the date is December 1, 1995, relating to the consolidated financial statements of Morel Industries, Inc. We also consent to the reference to us under the caption "Experts" in the Prospectus. /S/ BDO SEIDMAN, LLP Seattle, Washington June 18, 1996 EX-23.4 21 CONSENT OF STOEL RIVES LLP EXHIBIT 23.4 CONSENT OF COUNSEL We consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement on Form SB-2 (File No. 333-5011), and the related Prospectus of PCT Holdings, Inc., for the registration of 2,2250,000 Units. /s/ STOEL RIVES LLP Seattle, Washington June 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----