SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
THERMWOOD CORPORATION
(Name Of Registrant As Specified In Its Charter)
THERMWOOD CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: Common Stock, without par value
(2) Aggregate number of securities to which transaction
applies: 997,106
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): $11 per share to be paid for an
estimated 997,106 shares for which cash is to be paid
in lieu of fractional shares.
(4) Proposed maximum aggregate value of transaction: $10,968,166
(5) Total fee paid: $2,193.63
[ ] Fee paid previously with preliminary materials
[X] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid: $2,196.63
(2) Form, Schedule or Registration Statement No.: SC 13E3
(3) Filing Party: Thermwood Corporation
(4) Date Filed: September 4, 1998
<PAGE>
[Thermwood Letterhead]
Dear Shareholder:
You are invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Thermwood Corporation, an Indiana corporation (the
"Company"), to be held on November ___, 1998, at 11:00 A.M. local time, at the
Corporate Headquarters located at One Buffaloville Road, Dale, Indiana 47523.
At this meeting you will be asked to consider and vote upon the
following:
(i) an amendment to Article V of the Company's Articles of
Incorporation (the "Amendment") which would effect a 1-for-37,000
reverse split of the Company's Common Stock, without par value (the
"Common Stock"), by reducing the number of authorized shares of Common
Stock from 20,000,000 shares to 540 shares and the number of issued
shares by a similar percentage, and which would also eliminate the
Company's class of Preferred Stock (of which no shares are
outstanding), and
(ii) a cash payment of $11.00 per share of the currently
outstanding Common Stock, in lieu of the issuance of any resulting
fractional shares of Common Stock following the reverse split.
Items (i) and (ii) will be considered one proposal and shall be
referred to herein as the "Reverse Stock Split."
The Proposed Amendment is set forth in Exhibit A to the accompanying
Proxy Statement. If the proposed Amendment is approved and the Reverse Stock
Split is effected, the Company expects to cease the filing of certain reports
with the Securities and Exchange Commission.
Goelzer & Co., Inc. ("Goelzer") has been engaged by the Company in
connection with the proposed Reverse Stock Split to provide its opinion with
respect to the fairness from a financial point of view of the $11.00 cash
payment for fractional shares to be made in the proposed Reverse Stock Split.
Goelzer has rendered an opinion to the effect that the cash consideration to be
received by shareholders in lieu of fractional shares is fair from a financial
point of view. You are urged to read the opinion of Goelzer, which is attached
to the accompanying Proxy Statement as Exhibit B. You are also urged to read
carefully the accompanying Proxy Statement in its entirety, including the
section entitled "Special Factors" for important information concerning the
proposed Reverse Stock Split.
THE BOARD OF DIRECTORS HAS FULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE PROPOSED REVERSE STOCK SPLIT AND HAS UNANIMOUSLY DETERMINED
THAT THE PROPOSED REVERSE STOCK SPLIT, TAKEN AS A WHOLE, IS FAIR TO, AND IN THE
BEST INTERESTS OF, THE CORPORATION AND ITS SHAREHOLDERS.
<PAGE>
The proposed Reverse Stock Split will not be consummated unless holders
of more shares vote in favor of the Reverse Stock Split than shares voted
against the Reverse Stock Split. The officers and directors of the Company own
approximately 33.4% of the outstanding shares of Common Stock and have indicated
that each will vote his or her shares in favor of the proposed Reverse Stock
Split. Therefore, the Reverse Stock Split is likely to receive shareholder
approval.
Promptly after consummation of the Reverse Stock Split, if approved, a
Letter of Transmittal will be mailed to all holders of Common Stock of the
Company for use in surrendering their stock certificates. Please do not send in
your stock certificates until you receive your Letter of Transmittal.
Sincerely,
Kenneth J. Susnjara,
Chairman of the Board and President
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
[Thermwood Letterhead]
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER __, 1998
October 23, 1998
To the Shareholders:
PLEASE TAKE NOTICE that a Special Meeting of Shareholders (the "Special
Meeting") of Thermwood Corporation, an Indiana corporation (the "Company"), will
be held on November __, 1998, at 11:00 a.m. local time, at the Corporate
Headquarters located at One Buffaloville Road, Dale, Indiana 47523, for the
following purposes:
1. To consider and vote upon the following:
(i) an amendment to Article V of the Company's Articles of
Incorporation (the "Amendment") which would effect a 1-for-37,000
reverse split of the Company's Common Stock, without par value (the
"Common Stock"), by reducing the number of authorized shares of Common
Stock from 20,000,000 shares to 540 shares and the number of issued
shares by a similar percentage, and which would also eliminate the
Company's class of Preferred Stock (of which no shares are
outstanding), and
(ii) a cash payment of $11.00 per share of the currently
outstanding Common Stock, in lieu of the issuance of any resulting
fractional shares of Common Stock following the reverse split.
2. To transact such other business pertaining or related to
the foregoing as may properly come before the Special Meeting.
Only holders of shares of Common Stock at the close of business on
October 15, 1998, are entitled to notice of and to vote at the meeting or any
adjournment or postponement thereof.
By authority of the Board of Directors,
Kenneth J. Susnjara,
Chairman of the Board and President
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
TABLE OF CONTENTS
SUMMARY ....................................................................-1-
The Special Meeting.................................................-1-
Purpose of the Special Meeting......................................-1-
Voting ...........................................................-2-
Reasons for the Reverse Stock Split.................................-2-
Potential Detriments of the Reverse Stock Split to Shareholders.....-3-
Effect of the Reverse Stock Split on Certain Affiliates;
Management's Conflicts of Interest in the Reverse Stock Split....-3-
Recommendation of the Board of Directors; Fairness of the
Reverse Stock Split..............................................-4-
Opinion of Goelzer..................................................-4-
Business of the Company.............................................-4-
Conduct of the Company's Business After the Reverse Stock Split.....-4-
Federal Income Tax Consequences.....................................-5-
Dissenters' Rights of Appraisal.....................................-5-
Exchange of Certificates and Payment for Fractional Shares..........-5-
Financing of the Reverse Stock Split................................-6-
Selected Historical Financial Data of the Company...................-7-
GENERAL ....................................................................-9-
Purpose of the Special Meeting......................................-9-
Voting, Vote Required...............................................-9-
Amendment of Articles of Incorporation to
Effect the Reverse Stock Split..................................-10-
SPECIAL FACTORS.............................................................-11-
Background of the Proposed Reverse Stock Split.....................-11-
Reasons for the Reverse Stock Split................................-13-
Potential Detriments of the Reverse Stock Split to Shareholders....-15-
Effect of the Reverse Stock Split on Certain Affiliates;
Management's Conflicts of Interest in the Reverse Stock Split...-16-
Recommendation of the Board of Directors; Fairness of the
Reverse Stock Split.............................................-17-
Opinion of Goelzer.................................................-20-
Business of the Company............................................-24-
Arrangements with Respect to Issuer's Common Stock, Stock
Options and Convertible Debentures..............................-27-
Conduct of the Company's Business After the Reverse Stock Split....-29-
Federal Income Tax Consequences....................................-32-
Financial Effect of the Reverse Stock Split........................-34-
Exchange of Certificates and Payment for Fractional Shares of
New Common Stock................................................-44-
-i-
<PAGE>
FINANCING OF THE REVERSE STOCK SPLIT........................................-45-
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT....................-46-
OTHER INFORMATION CONCERNING AFFILIATES.....................................-49-
DESCRIPTION OF COMMON STOCK.................................................-49-
MANAGEMENT OF THE COMPANY...................................................-50-
SELECTED HISTORICAL FINANCIAL DATA..........................................-52-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................-54-
Fiscal Years Ended July 31, 1997, 1996 and 1995....................-54-
Nine Months Ended April 30, 1998 Compared to Nine Months
Ended April 30, 1997............................................-56-
LITIGATION..................................................................-58-
MARKET FOR THE COMMON STOCK; DIVIDENDS......................................-58-
Market Information.................................................-58-
Company and Affiliate Purchases of Common Stock....................-59-
Dividends..........................................................-59-
SHAREHOLDER PROPOSALS.......................................................-59-
INDEPENDENT ACCOUNTANTS.....................................................-60-
ADDITIONAL INFORMATION......................................................-60-
COSTS ...................................................................-60-
EXHIBIT A
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION................A-1
EXHIBIT B
OPINION OF GOELZER & CO., INC.......................................B-1
-ii-
<PAGE>
EXHIBIT C
DISSENTERS' RIGHTS STATUTE..........................................C-1
-iii-
<PAGE>
Shareholders Should Read the Entire Proxy Statement
Carefully Prior to Returning Their Proxies
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS OF
THERMWOOD CORPORATION
To Be Held November ___, 1998
SUMMARY
The following is a summary of certain information contained in this
Proxy Statement. It is not intended to be a complete explanation of all the
matters covered and much of the information contained in this Proxy Statement is
not covered by this summary. The information contained in this summary is
qualified in all respects by reference to the detailed discussion of these
matters contained elsewhere in this Proxy Statement. Shareholders are urged to
read this Proxy Statement, including the exhibits, in its entirety. The
approximate date on which this Proxy Statement and form of proxy are being sent
to shareholders is October 23, 1998.
The Special Meeting
These proxy materials are furnished in connection with the solicitation
of proxies by the Board of Directors of Thermwood Corporation, an Indiana
corporation (the "Company"), for a special meeting of its shareholders to be
held at 11:00 a.m. on November __, 1998, at the Corporate Headquarters, located
at One Buffaloville Road, Dale, Indiana 47523, and at any adjournment or
postponement of such meeting (the "Special Meeting").
Purpose of the Special Meeting
At the Special Meeting, the shareholders will consider and vote upon:
(i) an amendment to Article V of the Company's Articles of
Incorporation (the "Amendment") which would effect a 1-for-37,000
reverse split of the Company's Common Stock, without par value (the
"Common Stock"), by reducing the number of authorized shares of Common
Stock from 20,000,000 shares to 540 shares (such new shares of Common
Stock sometimes referred to herein as the "New Common Stock") and the
number of issued shares by a similar percentage, and which would also
eliminate the Company's class of Preferred Stock (of which no shares
are outstanding), and
(ii) a cash payment of $11.00 per share of the currently
outstanding Common Stock, in lieu of the issuance of any resulting
fractional shares of New Common Stock following the reverse split.
-1-
<PAGE>
Items (i) and (ii) will be considered one proposal and shall be
referred to herein as the "Reverse Stock Split." See "General--Amendment of
Articles of Incorporation to Effect the Reverse Stock Split."
Voting
A majority of the votes entitled to be cast, in person or by proxy, is
necessary for a quorum. Approval of the Reverse Stock Split requires that the
number of shares voted in favor of the Reverse Stock Split exceeds the number of
shares voted against the Reverse Stock Split. Only shareholders of record at the
close of business on October 15, 1998 (the "Voting Record Date") will be
entitled to vote at the Special Meeting. On the Voting Record Date, there were
______ shares of Common Stock outstanding, and the Company has no other class of
equity securities outstanding.
The officers and directors of the Company currently own in the
aggregate 481,402 shares of Common Stock (excluding any shares which may be
acquired by them upon the exercise of stock options or conversion of convertible
debentures), which constitutes approximately 33.4% of the outstanding Common
Stock. Each officer or director who owns Common Stock has indicated that he or
she intends to vote in favor of the proposed Reverse Stock Split. See "Principal
Shareholders and Stock Ownership of Management."
Reasons for the Reverse Stock Split
The Board of Directors determined to propose the Reverse Stock Split in
order (i) to eliminate the cost of maintaining small shareholder accounts, (ii)
to permit small shareholders to receive a fair price for their shares without
having to pay brokerage commissions, (iii) to determine a set monetary value of
the shares of most lost shareholders, whose interests may eventually have to be
turned over to the states under abandoned property laws, and (iv) to relieve
itself and its affiliates of the administrative burden and cost and competitive
disadvantages associated with filing reports and otherwise complying with the
requirements of the Securities Exchange Act of 1934, as amended (the "1934
Act"). The Board believes that the Company derives no material benefit from the
continued registration of the Common Stock under the 1934 Act and that the
monetary expense and burden to management of continued registration and the
threat of a hostile acquisition of the Company while it is publicly traded
significantly outweigh any benefit that may be received by the Company or its
shareholders as a result of such registration. The Board of Directors is
proposing the elimination of the class of Preferred Stock, because if the
Reverse Stock Split is effected, the Board of Directors is planning to elect S
corporation status under the Internal Revenue Code of 1986, as amended (the
"Code"), and the Company will not qualify to make such election if it has more
than one class of stock. See "Special Factors--Reasons for the Reverse Stock
Split" and "Special Factors--Conduct of the Company's Business After the Reverse
Stock Split."
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<PAGE>
Potential Detriments of the Reverse Stock Split to Shareholders
Persons owning fewer than 37,000 shares of Common Stock prior to the
Reverse Stock Split will cease to be shareholders of the Company, and thus will
no longer participate in future potential earnings and growth. It is anticipated
that only Kenneth J. and Linda S. Susnjara and Edgar Mulzer will continue as
shareholders following the Reverse Stock Split. Persons who remain as
shareholders after the Reverse Stock Split will have decreased access to
information concerning the Company and will find it more difficult to sell their
shares. See "Special Factors--Potential Detriments of the Reverse Stock Split."
Effect of the Reverse Stock Split on Certain Affiliates; Management's Conflicts
of Interest in the Reverse Stock Split
Mr. and Mrs. Susnjara and Mr. Mulzer own, in the aggregate,
approximately 18.1% and 14.4%, respectively, of the outstanding shares of Common
Stock of the Company (excluding shares subject to stock options held by them).
Following the Reverse Stock Split, it is anticipated that Mr. and Mrs. Susnjara
and Mr. Mulzer will beneficially own, in the aggregate, 100% of the Common Stock
of the Company. Therefore, they will be the only equity holders to participate
in the future earnings of the Company and their percentage of ownership will be
significantly augmented by the cashing out of the smaller shareholders.
Furthermore, the Company has an option to purchase the shares of Common Stock
held by Mr. Mulzer at any time during the period commencing November 1, 1999,
and ending on October 31, 2002. See "Special Factors--Arrangements with Respect
to Issuer's Common Stock, Stock Options and Convertible Debentures." Therefore,
it is possible that in the future, Mr. and Mrs. Susnjara will be the only equity
holders to participate in the future earnings of the Company. See "Special
Factors--Effect of the Reverse Stock Split on Affiliates; Management's Conflicts
of Interest in the Reverse Stock Split."
Pursuant to the Reverse Stock Split, all of the Company's outstanding
stock options will be cashed out at an amount equal to the product of (i) the
excess, if any, of the cash offered per share of currently outstanding Common
Stock in lieu of fractional shares pursuant to the Reverse Stock Split over the
per share exercise price of the option; times (ii) the number of shares subject
to such option. "Special Factors--Arrangements with Respect to Issuer's Common
Stock, Stock Options and Convertible Debentures."
Since Mr. and Mrs. Susnjara and Mr. Mulzer hold stock options, they
will be entitled to receive certain cash payments from the Company pursuant to
the Reverse Stock Split. It is expected that Mr. Susnjara, Mrs. Susnjara and Mr.
Mulzer will receive $57,187, $10,000 and $53,750, respectively, in settlement of
their outstanding stock options. Mr. and Mrs. Susnjara and Mr. Mulzer are also
expected to receive cash in lieu of fractional shares in the amount of $26,400
and $253,572, respectively. See "Special Factors--Effect of the Reverse Stock
Split on Affiliates; Management's Conflicts of Interest in the Reverse Stock
Split." In addition, Mr. Mulzer will be providing
-3-
<PAGE>
subordinated financing for the Reverse Stock Split and will receive a commitment
fee of $50,000 for providing such financing. See "Financing of the Reverse Stock
Split."
Recommendation of the Board of Directors; Fairness of the Reverse Stock Split
The Board of Directors believes that the cash payment of $11.00 per
share of currently outstanding Common Stock in lieu of the issuance of
fractional shares of Common Stock represents a price that is fair both to the
Company and to its shareholders. As members of the Board, Kenneth J. Susnjara,
Linda S. Susnjara and Edgar Mulzer share this belief. See "Special Factors--
Recommendation of the Board of Directors; Fairness of the Reverse Stock Split,"
and "Special Factors--Opinion of Goelzer."
Opinion of Goelzer
Goelzer & Co., Inc. ("Goelzer"), a business valuation firm, was
retained by the Special Committee to assist the Special Committee and the Board
in evaluating the Company for purposes of determining a fair price to be paid in
lieu of the issuance of fractional shares of New Common Stock as part of the
Reverse Stock Split. Goelzer has advised the Special Committee and the Board of
Directors that in its opinion the $11.00 per share cash price to be paid in lieu
of the issuance of fractional shares of New Common Stock pursuant to the Reverse
Stock Split is fair to holders of Common Stock from a financial point of view.
See "Special Factors--Opinion of Goelzer."
Business of the Company
The Company manufactures high technology machining systems and sells
its products primarily through the assistance of dealer networks established
throughout the United States and Europe. The Company's machining systems are
utilized principally in the woodworking, plastics and aerospace industries. The
Company also offers a variety of technical services. These services include
training, installation assistance, preventive maintenance and upgrading and
enhancement of installed products as technology advances. Technical services are
marketed to customers who purchase equipment and systems directly from the
Company as well as to companies which purchase the Company's products in the
used market.
Conduct of the Company's Business After the Reverse Stock Split
If the Reverse Stock Split is approved and effected, the Company
intends to terminate the registration of its Common Stock under the 1934 Act.
Thereafter, the Company will cease the filing of periodic reports, proxy
statements and other reports and documents otherwise required to be filed with
the Securities and Exchange Commission (the "Commission"). It is expected that
following the Reverse Stock Split, Kenneth J. and Linda S. Susnjara and Edgar
Mulzer will beneficially own 100% of the outstanding shares of the Company. The
Company is likely to elect S corporation status and reduce the size of its Board
of Directors over time. Apart from those changes, the Company intends
-4-
<PAGE>
to continue operating in substantially the same manner as it is currently
conducting its business operations. See "Special Factors--Reasons for the
Reverse Stock Split," and "Special Factors-- Conduct of the Company's Business
After the Reverse Stock Split."
Federal Income Tax Consequences
The receipt of shares of New Common Stock in exchange for presently
outstanding shares of Common Stock will not result in recognition of gain or
loss to the shareholder. The receipt of cash by a shareholder pursuant to the
Reverse Stock Split will be a taxable transaction for federal income tax
purposes. Depending upon the particular circumstances of each shareholder, the
receipt of cash will be treated either as an exchange for property transaction
or as a distribution that will be treated as a dividend to the extent of the
shareholder's ratable share of the Company's undistributed earnings and profits.
See "Special Factors--Federal Income Tax Consequences."
Dissenters' Rights of Appraisal
Although no dissenters' rights are required for the proposed Reverse
Stock Split under the Indiana Business Corporation Law, the Board of Directors
of the Company has adopted a resolution voluntarily granting dissenters' rights
in accordance with Section 23-1-44-8(a)(5) of the Indiana Business Corporation
Law. Any record shareholder entitled to vote on the Amendment may dissent from
the Amendment and obtain payment of the fair value of his or her shares in
accordance with Sections 23-1-44-1 to 20 of the Indiana Business Corporation Law
(the "Dissenters' Rights Statute"). Any shareholder contemplating the exercise
of his or her right to dissent is urged to review carefully the provisions of
the Dissenters' Rights Statute reprinted as Exhibit C to this Proxy Statement.
Exhibit C contains a complete description of the rights and obligations of the
Company and any shareholder who desires to exercise dissenters' rights. EACH
STEP MUST BE TAKEN IN STRICT COMPLIANCE WITH THE APPLICABLE PROVISIONS OF THE
DISSENTERS' RIGHTS STATUTE IN ORDER FOR SHAREHOLDERS TO PERFECT DISSENTERS'
RIGHTS. See "Special Factors--Dissenters' Rights of Appraisal."
Exchange of Certificates and Payment for Fractional Shares
If approved, holders of Common Stock who beneficially own 37,000 shares
or more will receive one share of New Common Stock for each 37,000 shares of
Common Stock owned prior to the Reverse Stock Split. Holders of Common Stock who
do not beneficially own at least 37,000 shares and those whose shares are not an
even multiple of 37,000 shares will receive from the Company, in lieu of the
issuance of certificates for fractional shares of New Common Stock, cash in the
amount of $11.00 per share of Common Stock held prior to the Reverse Stock
Split. Such exchange and/or payment will be made by the Company upon the
physical surrender by shareholders of their share certificates for Common Stock
pursuant to the transmittal instructions to be mailed by the Company to the
shareholders following the approval of the Amendment. For the purpose of the
operation of the Reverse Stock Split (i.e., for determining whether and to what
extent shareholders will receive New Common Stock and/or cash in lieu of
fractional shares), and for no other purpose,
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<PAGE>
the Company will treat the person who is the underlying beneficial owner of
shares held by a nominee as the shareholder. See "Special Factors--Exchange of
Certificates and Payment for Fractional Shares."
Financing of the Reverse Stock Split
The Board of Directors estimates that the total cost to be incurred by
the Company in the Reverse Stock Split for payment of fractional share interests
and the settlement of outstanding options, including transactional expenses of
approximately $360,000, will be $11,660,000. The Company intends to finance this
transaction by borrowing $12,000,000 on a senior basis from a financial
institution based in Chicago and by borrowing $3,000,000 on a subordinated basis
from Edgar Mulzer. See "Financing of the Reverse Stock Split."
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<PAGE>
Selected Historical Financial Data of the Company
The following table summarizes certain historical financial data which
have been derived from the audited consolidated financial statements of the
Company for each of the years in the five-year period ended July 31, 1997 and
the unaudited consolidated financial statements for the nine-month periods ended
April 30, 1998 and 1997. Per share numbers and weighted average number of shares
have been adjusted to reflect the Company's 1-for-5 reverse stock split
effective January 5, 1998. For additional information, see "Financial Statements
of the Company," commencing on page F-1.
<TABLE>
<CAPTION>
Selected Statement of Operations Data (in thousands except per share data)
Nine Months Ended April 30, Fiscal Year Ended July 31,
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, less commissions $ 15,960 $ 12,192 $ 17,779 $ 12,636 $ 12,314 $ 9,985 $ 10,825
Gross profit 6,473 4,764 6,906 4,925 4,786 3,579 2,173
Earnings before income
taxes 1,780 1,417 2,055 1,174 1,140 136 (1,394)
Earnings (loss) from
continuing operations 1,061 866 1,236 2,334 2,350 136 (1,394)
Net earnings (loss) $ 1,061 $ 866 $ 1,236 $ 2,334 $ 2,350 $ 208 $ (1,360)
========== ========= ========= ========= ========= ======== ==========
Earnings (loss) per
share:
Basic $ 0.72 $ 0.49 $ 0.70 $ 1.63 $ 1.92 $ 0.00 $ (1.35)
Diluted $ 0.68 $ 0.48 $ 0.69 $ 1.45 $ 1.49 $ 0.00 $ (1.35)
Weighted average number of shares:
Basic 1,421 1,327 1,350 1,231 1,030 1,030 1,011
Diluted 1,510 1,429 1,446 1,437 1,451 1,030 1,011
Cash dividends declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
Selected Balance Sheet Data (in thousands except per share data)
April 30, July 31,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 13,427 $ 11,273 $ 8,766 $ 7,527 $ 5,418 $ 6,928
Working capital 5,909 5,080 3,791 2,811 1,706 1,291
Long-term obligations 2,621 285 709 1,870 1,862 5,711
Shareholders' equity
(deficit) 5,687 7,087 6,275 3,437 1,456 (1,985)
Book value per share $ 3.98 $ 5.06 $ 4.80 $ 3.37 $ 1.41 $ (2.04)
Ratio of earnings to
fixed charges 11.79 24.14 9.44 4.53 1.30 N/A(1)
</TABLE>
(1) The pretax loss from continuing operations resulted in a fixed charge
coverage deficiency of $1,394,238.
-7-
<PAGE>
Recent Financial Developments
The following tables set forth certain summary financial information
for the Company at July 31, 1998 and July 31, 1997, and for the three and twelve
months ended July 31, 1998 and 1997.
<TABLE>
<CAPTION>
Summary Statement of Operations Data (in thousands except per share data)
Fiscal Year Ended Quarter Ended
July 31, July 31,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales, less commissions $ 21,884 $ 17,779 $ 5,924 $ 6,123
Gross profit 8,993 6,906 2,521 2,662
Earnings before income taxes 2,445 2,055 665 638
Net earnings 1,475 1,236 414 370
Earnings per share
Basic $ 1.00 $ .70 $ .29 $ .30
Diluted $ .89 $ .69 $ .26 $ .25
</TABLE>
Summary Balance Sheet Data (in thousands)
July 31, July 31,
1998 1997
---- ----
(unaudited)
Total assets $ 11,920 $ 11,273
Shareholders' equity 6,102 7,087
Net sales for fiscal year 1998 increased by $4.1 million or 23% from
fiscal year 1997. However, backlog at July 31, 1998 was approximately $1 million
lower than at July 31, 1997. Management attributes the decreased level of orders
at July 31, 1998 to a slowdown in capital purchasing because of a slower
economy. Also, traditionally sales are slower before the International
Woodworking Fair, a furniture industry trade show, which was held in August.
Sales generally increase a month or two after the show. Gross profit for fiscal
year 1997 was 39% of net sales compared to 41% of net sales for fiscal year
1998. In the current year, gross profit was positively affected by the continued
use of more efficient production methods, including in-house fabrication of
components previously finished outside the Company.
-8-
<PAGE>
GENERAL
Purpose of the Special Meeting
At the Special Meeting, the shareholders will consider and vote upon:
(i) an amendment to Article V of the Company's Articles of
Incorporation which would effect a 1-for-37,000 reverse split of the
Company's Common Stock, by reducing the number of authorized shares of
Common Stock from 20,000,000 shares to 540 shares and the number of
issued shares by a similar percentage, and which would also eliminate
the Company's class of Preferred Stock (of which no shares are
outstanding), and
(ii) a cash payment of $11.00 per share of the currently
outstanding Common Stock, in lieu of the issuance of any resulting
fractional shares of New Common Stock following the reverse split.
The Company does not know of any other matters to come before the
Special Meeting. In the event any such matters properly are raised for
consideration and vote, the proxies will vote such shares in their discretion,
for or against such matters.
The proposed Reverse Stock Split is described in more detail in
subsequent sections of this Proxy Statement.
Voting, Vote Required
The shares covered by each proxy will be voted at the meeting FOR the
approval of the proposed Reverse Stock Split unless the proxies are instructed
to vote otherwise, in which case the proxies will vote the shares as instructed.
Approval of the proposed Reverse Stock Split requires that the number
of shares voted in favor of the Reverse Stock Split exceeds the number of shares
voted against the Reverse Stock Split. Only shareholders of record at the close
of business on the Voting Record Date will be entitled to vote thereon. As of
the close of business on the Voting Record Date, the Company had outstanding
approximately _________ shares of Common Stock, which were held by approximately
______ shareholders of record and 2,300 beneficial owners of such shares. Each
share of Common Stock is entitled to one vote at the Special Meeting on all
matters properly presented at the Special Meeting. A majority of votes entitled
to be cast, in person or by proxy, at the Special Meeting is necessary for a
quorum. In determining whether a quorum is present, shareholders who abstain or
cast broker non- votes will be deemed present at the Special Meeting. The
officers and directors of the Company own in the aggregate 481,402 shares of
Common Stock (excluding any shares which may be acquired by them upon the
exercise of stock options or conversion of convertible debentures), which
constitutes approximately 33.4% of the outstanding Common Stock. Each officer or
director who owns Common Stock has indicated that he intends to vote in favor of
the proposed Reverse Stock Split.
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The Reverse Stock Split does not require the approval of a majority of
the unaffiliated shareholders or of the majority of the shareholders who will
receive payment of $11.00 per share in lieu of fractional shares. The Board
believes the Reverse Stock Split should and will be favored by non-affiliates
and by those receiving cash in lieu of fractional shares. However, the Company
has not historically attained a high level of participation among its
unaffiliated holders at meetings for which their proxies have been solicited.
Because the likelihood of significant participation in the Special Meeting by
unaffiliated holders of Common Stock is so low, the Board does not believe that
it makes sense to require a majority vote of unaffiliated holders in order for
the Reverse Stock Split to be consummated. Further, the Board anticipates, based
on previous votes taken at annual meetings, that the vote of non-affiliates who
do decide to participate may not be of sufficient size to be meaningful.
Therefore the Board has decided not to condition the approval of the Reverse
Stock Split on approval by unaffiliated holders.
A shareholder giving a proxy may revoke it at any time before it is
exercised by giving written notice thereof to the Secretary of the Company at
the address referred to below, by submitting a duly executed proxy bearing a
later date, or by attending the Special Meeting and giving the Secretary notice
of his or her intention to vote in person.
The Company will pay the costs of soliciting proxies. No amount is to
be paid to any officer or employee of the Company for soliciting proxies. The
Company has engaged Morrow & Co., Inc. to assist in the solicitation of proxies.
The Company has agreed to pay to Morrow & Co., Inc. a fee of $5,000 plus $5.00
per shareholder contacted, for such services, plus reasonable out-of-pocket
expenses.
The mailing address of the principal executive offices of the Company
is P.O. Box 436, One Buffaloville Road, Dale, Indiana 47523.
Amendment of Articles of Incorporation to Effect the Reverse Stock Split
The Board of Directors of the Company has unanimously determined that
it is advisable to amend the Company's Articles of Incorporation to effect a
1-for-37,000 reverse split of the Company's Common Stock, to eliminate the class
of Preferred Stock, and to provide for the cash payment of $11.00 per share of
the currently outstanding Common Stock in lieu of the issuance of any resulting
fractional shares of New Common Stock following the Reverse Stock Split. The
Board has proposed the Amendment and the Reverse Stock Split to the shareholders
for approval at the Special Meeting. The Amendment will reduce the number of
authorized shares of the Company's Common Stock from 20,000,000 shares to 540
shares and the number of issued shares by a similar percentage and eliminate
altogether the class of Preferred Stock (of which no Shares are outstanding).
Following the Reverse Stock Split, based on the Company's shareholder records,
it is anticipated that only Kenneth J. and Linda S. Susnjara and Edgar Mulzer
will continue as shareholders, holding a total of 12 shares. If the Company's
shareholder records are incomplete or inaccurate and there are presently
shareholders other than Kenneth J. and Linda S. Susnjara and Edgar Mulzer who
hold 37,000 or more shares, or if prior to the effective date of the Reverse
Stock Split another person
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becomes a shareholder of 37,000 or more shares, then the Company is willing to
purchase the shares of such shareholder(s) for the price per share paid to
shareholders who receive cash in lieu of fractional shares, at the request of
such shareholder. No other terms of the Company's Articles of Incorporation will
change.
The Amendment is set forth in Exhibit A to this Proxy Statement.
Because the Company intends to deregister its Common Stock under the
1934 Act, the Company, Kenneth J. Susnjara, Linda S. Susnjara and Edgar Mulzer
have filed a Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Schedule
13E-3"), of which this Proxy Statement is a part, with the Commission.
SPECIAL FACTORS
Background of the Proposed Reverse Stock Split
Of the Company's approximately 286 record shareholders, 247 hold 500 or
fewer shares and represent less than 2% of the outstanding Common Stock. This
large number of small shareholder accounts has been an administrative
inconvenience for the Company for many years. The Board and the Company's
management have long held the view that the continued expense and burden of
maintaining so many small shareholder accounts is not cost efficient for a
business the size of the Company. Many of the Company's shareholders have lost
contact, making it impossible for the Company to communicate with them. Some
others' interests are so small that brokerage commissions or administrative
inconvenience deter them from selling shares. The Board also holds the view that
the Company generally derives no material benefit from continued registration
under the 1934 Act, and in certain respects registration under the 1934 Act
places the Company at a competitive disadvantage vis-a-vis its competitors who
are not required to file reports under the 1934 Act. Management has remained a
public corporation in the past to help facilitate a public market for the
shares. That market has not been as active or liquid as management had desired.
The Board decided to consider a Reverse Stock Split as a means to liquidate the
interests of lost shareholders and its many small shareholder accounts at a fair
price and then to deregister under the 1934 Act.
In March, 1998, management began considering a Reverse Stock Split in
detail, as well as other options that could accomplish the Board's objectives.
The Board considered establishing a stock repurchase program. A stock repurchase
program would be expected to cash out some shareholders and increase earnings
per share; however, the Board rejected this alternative because it would not
accomplish all of the Board's goals. Most significantly, it would not relieve
the administrative inconvenience of having such a large number of small
shareholders or eliminate the costs associated with being a public company.
Additionally, such a program would reduce the public float which might have the
effect of discouraging investment in the Company's shares. The Board also
considered offering long-term bonds to its shareholders in exchange for shares
of Common Stock or making a cash tender offer to its shareholders. The Board
also rejected these alternatives for the
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same reasons, and because there would be no assurance that a significant number
of shareholders would tender or exchange their shares. Therefore, the Board
could not justify the costs associated with such types of offers.
As management considered scenarios that would enable it to deregister
under the 1934 Act, it also considered a transaction by which it would merge
with a new shell corporation. This would have liquidated small shareholder
accounts in the same way as the Reverse Stock Split enabling the Company to
deregister. A merger transaction would have been more expensive because of
required documentation and regulatory requirements, and would have delayed the
Company's deregistration under the 1934 Act relative to the proposed Reverse
Stock Split.
In July 1998, Mr. Susnjara, the Company's President and Chairman of the
Board, and Peter N. Lalos, a director of the Company, met to discuss the
potential of pursuing the Reverse Stock Split. Management presented pertinent
considerations and a proposal of a Reverse Stock Split to the Board at the end
of July, 1998. The Board of Directors then appointed a Special Committee of
Directors, composed of Lee Ray Olinger and Peter N. Lalos, to represent the
interests of the shareholders who would receive cash in lieu of the issuance of
fractional shares of New Common Stock in the proposed Reverse Stock Split. That
Committee hired special counsel to assist it in its deliberations on behalf of
the shareholders who would be cashed out in the Reverse Stock Split. On August
6, 1998, the Special Committee of Directors engaged Goelzer to assist the
Special Committee in evaluating the fairness of the consideration to be given to
shareholders who receive cash in lieu of fractional shares pursuant to the
proposed Reverse Stock Split. After its engagement, representatives of Goelzer
visited the Company, discussed the business of the Company with management, and
spoke with the Company's special counsel.
On August 17, 1998, the Board determined to pursue the Reverse Stock
Split at a ratio of 1- for-38,000, subject to receipt of a written report by
Goelzer with respect to the fairness of the transaction to the shareholders. The
Board determined the reverse split ratio of 38,000-to-1, because it desired to
cash out all of the shareholders except for major shareholders. This would give
the smaller shareholders the opportunity to liquidate their shares at a fair
price rather than remaining minority shareholders in a private company. The
Board had remained a public company in the past to help facilitate a public
market for the shares, because it wanted its shareholders to have a market in
which to sell their shares. The ratio of 38,000-to-1 would have the effect of
cashing out all shareholders except the major shareholders, Kenneth J. and Linda
S. Susnjara and Edgar Mulzer. Goelzer did not assist the Board in making the
reverse split ratio calculation. As described below, the Board later reduced the
reverse split ratio from 38,000-to-1 to 37,000-to-1 in order to minimize the
amount of cash in lieu of fractional shares which would be paid to the surviving
shareholders.
At the August 17, 1998 Board meeting, Goelzer presented its written
analysis of the Company's value, which is discussed below, and rendered an oral
fairness opinion with respect to the cash consideration which will be paid to
the shareholders to be cashed out in the Reverse Stock Split which was followed
up in writing after the meeting. The Board determined to proceed with the
transaction and to submit the Reverse Stock Split to the shareholders for
approval. The Board set
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the price of $11.00 per share for payment in lieu of fractional shares of New
Common Stock pursuant to the Reverse Stock Split. See "Special
Factors--Recommendation of the Board of Directors; Fairness of the Reverse Stock
Split," and "Special Factors--Opinion of Goelzer."
On September 2, 1998, the Board met to finalize the terms of the
Reverse Stock Split and to authorize the filing of this Proxy Statement and the
related Schedule 13E-3 with the Commission. The Board also determined to reduce
the reverse split ratio from 38,000-to-1 to 37,000-to-1 in order to minimize the
amount of cash in lieu of fractional shares which would be paid to the surviving
shareholders. At 38,000-to-1, the Company expected to pay a total of $565,972,
in the aggregate, to the surviving shareholders. At 37,000-to-1, the Company
expects to pay a total of $279,972 to the surviving shareholders.
Reasons for the Reverse Stock Split
The Board of Directors determined to propose the Reverse Stock Split in
order (i) to eliminate the cost of maintaining small shareholder accounts, (ii)
to permit small shareholders to receive a fair price for their shares without
having to pay brokerage commissions, (iii) to determine a set monetary value of
the shares of most lost shareholders, whose interests may eventually have to be
turned over to the states under abandoned property laws, and (iv) to relieve
itself and its affiliates of the administrative burden and cost and competitive
disadvantages associated with filing reports and otherwise complying with the
requirements of 1934 Act registration. The Board believes that the Company
derives no benefit from the continued registration of the Common Stock under the
1934 Act and that the monetary expense and burden to management of continued
registration and the threat of a hostile acquisition of the Company while it is
publicly traded significantly outweigh any material benefit that may be received
by the Company or its shareholders as a result of such registration.
The Company presently has approximately 286 shareholders of record and
approximately 2,300 beneficial owners of such shares. Of the 286 record
shareholders, approximately 247 own 500 or fewer shares. In the aggregate, the
shares held by these small holders comprise less than 2% of the outstanding
Common Stock. The administrative burden and costs to the Company of maintaining
records in respect of these numerous small accounts and the associated cost of
printing and mailing information to them is, in the Board's view, excessive
given the Company's size. These expenditures result in no material benefit to
the Company. The Reverse Stock Split will enable the Company to eliminate much
of this cost.
Management had determined to remain a public corporation in the past to
help facilitate a public market for the shares. That market has not been as
active or liquid as management had desired. Though the Company has numerous
shareholders, its stock is thinly traded. Many investors decline to purchase
shares having a price as low as that of the Common Stock, and brokerage
commissions inhibit the ability of many of the Company's smallest holders to
liquidate their shares economically. Therefore, small shareholders lack
opportunities to realize the fair value of their
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shares. Through the Reverse Stock Split, small holders will have the opportunity
to liquidate their interests without brokerage costs. See "Market for the Common
Stock; Dividends."
Of the approximately 20 holders with whom the Company has lost contact,
nearly all hold 100 or fewer shares. The Company will be entitled to retain the
cash proceeds to which such shareholders are entitled in the Reverse Stock Split
until such shareholders deliver to the Company certificates for their shares of
Common Stock and claim such proceeds. Eventually, the Company may be required to
turn the interests of those holders over to the states pursuant to abandoned
property laws. The Board believes it is in the Company's best interests to fix
at a fair price the value of the Company's obligation to lost holders. This will
avoid having the states become equity holders in the Company. Of course, the
Reverse Stock Split will eliminate these small inactive accounts as shareholders
of record.
The Board believes that the disadvantages to being a public company
outweigh any advantages. The Board has no present intention to raise capital
through sales of securities in a public offering in the future or to acquire
other business entities using stock as the consideration for any such
acquisition. Accordingly, the Company is not likely to make use of any advantage
(for raising capital, effecting acquisitions or other purposes) that the
Company's status as a reporting company may offer.
The Company incurs direct and indirect costs associated with compliance
with the Commission filing and reporting requirements imposed on public
companies. The Company incurs direct costs of approximately $260,000 annually.
The Company incurs substantial indirect costs as a result of, among other
things, the executive time expended to prepare and review such filings. Since
the Company has relatively few executive personnel, these indirect costs can be
substantial. In light of the Company's size and resources, the Board does not
believe such costs are justified.
In addition, to the Company's knowledge, none of the Company's
competitors are publicly held. The Company suffers a competitive disadvantage
from being required to disclose certain information that privately held
companies do not disclose.
Moreover, because of its status as a publicly-traded company with
numerous small shareholders, the Company believes that the Company's business
strategy could be interfered with by a hostile takeover or similar acquisition
that the Board of Directors might believe is not in the best interests of its
shareholders.
Presently management's long-term plans are to remain independent. The
Board believes that it is in the best interests of the Company to continue its
present operations, marketing strategy, development plans and management
structure and not to merge with or sell the Company to another person or entity.
Obligations imposed on management of public companies may eventually prevent the
Company from remaining independent if the Company becomes the subject of a
hostile takeover bid.
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The Board has determined that the Reverse Stock Split is the most
expeditious and economical way of liquidating small shareholders and changing
the Company's status from that of a reporting company to that of a more closely
held, non-reporting company. See "Special Factors-- Recommendation of the Board
of Directors; Fairness of the Reverse Stock Split" and "Special Factors--Conduct
of the Company's Business After the Reverse Stock Split."
The Board of Directors is proposing the elimination of the class of
Preferred Stock, because if the Reverse Stock Split is effected, the Board of
Directors is planning to elect S corporation status, and the Company will not
qualify to make such election if it has more than one class of stock. See
"Special Factors--Conduct of the Company's Business After the Reverse Stock
Split."
Potential Detriments of the Reverse Stock Split to Shareholders
Shareholders owning fewer than 37,000 shares immediately prior to the
effective time of the Reverse Stock Split will, after the Reverse Stock Split
takes place, no longer have any equity interest in the Company and therefore
will not participate in its future potential earnings or growth. It is expected
that all beneficial owners, except Kenneth J. and Linda S. Susnjara and Edgar
Mulzer, will be cashed out in the Reverse Stock Split. It will not be possible
for cashed out shareholders to reacquire an equity interest in the Company if
they so desire because the remaining shareholders will control the Company and
transfers by them of their shares to third parties are not anticipated. See
"Special Factors--Conduct of the Company's Business After the Reverse Stock
Split" and "Special Factors--Arrangements with Respect to Issuer's Common Stock,
Stock Options or Convertible Debentures."
Potential detriments to Company shareholders who remain as shareholders
if the Reverse Stock Split is effected include decreased access to information
and decreased liquidity. If the Reverse Stock Split is effected, the Company
intends to terminate the registration of its Common Stock under the 1934 Act. As
a result of such termination, the Company will no longer be subject to the
periodic reporting requirements and the proxy rules of the 1934 Act. Although
the Company intends to continue to send audited financial statements to its
remaining shareholders each year, less information will be available than if the
Company continued to be a 1934 Act reporting company. In addition, following the
Reverse Stock Split, the Company will no longer meet the requirements for
listing on the American Stock Exchange ("AMEX") or the Pacific Stock Exchange
("PSEX") and will delist its shares of Common Stock. The termination of the
Company's 1934 Act registration and its delisting from AMEX and PSEX will cause
the trading market for the Company's stock, already thin, to disappear. Finally,
as a result of the Company's borrowing funds to pay for the fractional shares
and the transactional costs associated with the Reverse Stock Split, the Company
will incur additional interest expense. See "Special Factors--Financial Effect
of the Reverse Stock Split" and "Special Factors--Conduct of the Company's
Business After the Reverse Stock Split."
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Effect of the Reverse Stock Split on Certain Affiliates; Management's Conflicts
of Interest in the Reverse Stock Split
Mr. and Mrs. Susnjara own 261,400 shares (excluding shares subject to
stock options) representing approximately 18.1% of the outstanding shares of
Common Stock of the Company. Mr. Mulzer owns 208,052 shares (excluding shares
subject to stock options) representing approximately 14.4% of the outstanding
shares of Common Stock of the Company. Since the Reverse Stock Split will cash
out the smaller shareholders, following the Reverse Stock Split, Mr. and Mrs.
Susnjara and Mr. Mulzer are expected to beneficially own 100% of the Common
Stock, or 58.33% and 41.67%, respectively. Therefore, Mr. and Mrs. Susnjara and
Mr. Mulzer are expected to be the only shareholders to participate in any future
growth and earnings of the Company and their percentage of ownership will be
significantly augmented through the cashing out of smaller shareholders.
In addition, the Company and Mr. Mulzer have entered into an agreement
whereby the Company has an option to purchase the shares of Common Stock held by
Mr. Mulzer at any time during the period commencing November 1, 1999 and ending
October 31, 2002 for a per share price equivalent to $15.50 per share of Common
Stock prior to the Reverse Stock Split. See "Special Factors--Arrangements with
Respect to Issuer's Common Stock, Stock Options and Convertible Debentures."
Therefore, in the future there exists the possibility that Mr. and Mrs. Susnjara
will be the only remaining equity holders of the Company, and they alone will
benefit from the Company's earnings. See "Principal Shareholders and Stock
Ownership of Management," "Other Information," and "Additional Information."
Pursuant to the Reverse Stock Split, all of the Company's outstanding
stock options will be cashed out at an amount equal to the product of (i) the
excess, if any, of the cash offered per share of currently outstanding Common
Stock in lieu of fractional shares pursuant to the Reverse Stock Split over the
per share exercise price of the option; times (ii) the number of shares subject
to such option. "Special Factors--Arrangements with Respect to Issuer's Common
Stock, Stock Options and Convertible Debentures."
Since Mr. and Mrs. Susnjara and Mr. Mulzer hold stock options, they
will be entitled to receive certain cash payments from the Company pursuant to
the Reverse Stock Split. It is expected that Mr. Susnjara, Mrs. Susnjara and Mr.
Mulzer will receive $57,187, $10,000 and $53,750, respectively, in settlement of
their outstanding stock options.
Mr. and Mrs. Susnjara and Mr. Mulzer will also receive cash from the
Company in lieu of the issuance of fractional shares pursuant to the Reverse
Stock Split in an aggregate amount of $279,972. It is expected that pursuant to
the Reverse Stock Split, Mr. and Mrs. Susnjara's 261,400 shares will be
converted into 7 shares of New Common Stock, and they will receive cash in lieu
of fractional shares in the amount of $26,400, and that Mr. Mulzer's 208,052
shares will be converted into 5 shares of New Common Stock, and he will receive
cash in lieu of fractional shares in the amount of $253,572. The Board's
decision to reduce the reverse split ratio from 38,000-to-1 to 37,000-to-1
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is expected to reduce the amount of cash in lieu of fractional shares to be paid
to Mr. and Mrs. Susnjara and Mr. Mulzer by $286,000.
Mr. Mulzer will also be providing the Company with a subordinated loan
of $3,000,000 to finance a portion of the costs associated with the Reverse
Stock Split. Interest will be paid over the term of the loan (which is five
years) at the annual rate of 14%, with principal due at maturity. For the
subordinated financing, the Company will pay to Mr. Mulzer a commitment fee of
$50,000. See "Financing of the Reverse Stock Split."
Recommendation of the Board of Directors; Fairness of the Reverse Stock Split
The Board believes that the Reverse Stock Split, taken as a whole, is
fair to, and in the best interests of, the shareholders of the Company who will
receive cash in lieu of fractional shares, those who will receive shares of New
Common Stock and those who will receive both cash and shares. The Board also
believes that the process by which the transaction is to be approved is fair.
The Board unanimously recommends that the shareholders vote for approval and
adoption of the Amendment and the payment of cash in lieu of fractional shares
as described above. Each member of the Board and each officer of the Company who
owns shares of Common Stock has advised the Company that he intends to vote his
shares in favor of the Reverse Stock Split.
In determining to recommend the Reverse Stock Split to the
shareholders, all of the members of the Board, including those Board members who
are not employees of the Company and those whose shares will be cashed out in
the Reverse Stock Split, approved the transaction.
In reaching its determination that the Reverse Stock Split, taken as a
whole, is fair to and in the best interests of the shareholders and in reaching
its recommendation that the shareholders vote for approval and adoption of the
Amendment and the payment of cash in lieu of fractional shares, the Board of
Directors considered, among other things (i) the analysis and opinion of Goelzer
including its discounted cash flow analysis, market comparables analysis,
payback analysis, benchmark or ratio analysis and leveraged recapitalization
analysis, see "Special Factors--Opinion of Goelzer," (ii) each of the director's
knowledge of and familiarity with the Company's business prospects, financial
condition and current business strategy, (iii) information with respect to the
financial condition, results of operations, assets, liabilities, business and
prospects of the Company, and current industry, economic and market conditions,
(iv) the opportunity presented by the Reverse Stock Split for shareholders
owning 37,000 or fewer shares to liquidate their holdings without incurring
brokerage costs, particularly given the relatively illiquid market for the
Common Stock, and (v) the future cost savings and competitive advantages that
will inure to the benefit of the Company and its continuing shareholders as a
result of the Company deregistering its Common Stock under the 1934 Act.
The Board appointed a Special Committee to engage an independent
appraiser to assist in evaluating the fairness of the transaction. The Special
Committee was composed of two outside directors, Lee Ray Olinger and Peter N.
Lalos, neither of whom would continue as shareholders after the Reverse Stock
Split. In addition, the Special Committee hired Richard Wetherill, Esq., as
special
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counsel, to assist the Committee in negotiating the terms of the transaction
and/or preparing a report concerning the fairness of the transaction. The
Special Committee and Goelzer have independently considered the fairness of the
transaction to holders receiving only cash in lieu of the issuance of fractional
shares. The Special Committee unanimously approved the Reverse Stock Split and
recommended it for consideration by the full Board.
Alternatives. Before proposing the Reverse Stock Split, the Board
considered alternative means of achieving its objectives for the Company. The
Board considered a stock repurchase program or offering long-term bonds to its
shareholders in exchange for shares of Common Stock. The Board rejected those
alternatives, because it did not think they would accomplish all of its goals.
As the Company considered scenarios that would enable it to deregister under the
1934 Act, it also gave consideration to a transaction by which it could merge
with a new shell corporation. This would have liquidated small shareholder
accounts in the same way as the Reverse Stock Split enabling the Company to
deregister. A merger transaction would have been more expensive because of
required documentation and regulatory requirements, and would have delayed the
Company's deregistration under the 1934 Act relative to the proposed Reverse
Stock Split. The Board also considered making a cash tender offer to its
shareholders. However, there would be no assurance that many small shareholders
would tender shares. Obviously, shareholders who cannot be located are unlikely
to respond to voluntary tender offers. Therefore, the Board could not justify
the costs associated with such an issuer tender offer. For these reasons, the
Board has decided that the Reverse Stock Split is the optimal means to achieve
its objectives for the Company.
Factors Considered by the Board. Part of the Board's purpose in
engaging Goelzer was to obtain an independent estimate of the fair value of the
Company's Common Stock on a going concern basis. The Board has given significant
weight to the views of Goelzer which are based, in part, on its discounted cash
flow analysis, market comparables analysis, payback analysis, benchmark or ratio
analysis and leveraged recapitalization analysis, all of which the Board
believes are probative of fair going concern value. See "Special
Factors--Opinion of Goelzer."
In addition to the factors enumerated by Goelzer, the Board considered
the Company's business, its current business strategy and its prospects, and
current industry, economic and market conditions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." In addition, the
Board noted that, to its knowledge, none of the Company's competitors are
publicly held, and that the Company suffers a competitive disadvantage from
being required to disclose certain information that privately held companies do
not disclose. Furthermore, there exists the threat of a hostile takeover of the
Company while it is publicly traded.
Finally, the Board considered the current market prices of the
Company's stock, insofar as open market prices are presumptively an accurate
determination of the fair value of any stock. The Board gave no material weight
in determining the fairness of the transaction to the book value of Common Stock
or the liquidation value of Company assets. Based on the Company's unaudited
balance sheet at April 30, 1998, the book value of the shares would be less than
$4.00 per share. The Board believes the Company is considerably more valuable as
a going concern.
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Because of its expertise and independence, the Board has placed
particular weight on the opinion of Goelzer. After considering the factors
discussed above and, in particular, the views expressed by Goelzer, the Board
identified the stated consideration for fractional shares in the transaction at
$11.00 per share of outstanding common stock. Goelzer indicated its willingness
to deliver the opinion accompanying this proxy statement to the effect that the
$11.00 price per share is fair to those holders of Common Stock who will receive
only cash in the Reverse Stock Split.
Fairness to Holders Who Currently Hold More Than 37,000 Shares. The
Board believes that the transaction is fair to such remaining holders. In view
of the considerations discussed above, including Goelzer's views on the range of
the fair value of Company Stock, the Board believes that the consideration being
paid for fractional shares is fair to the remaining shareholders for the same
reasons that it is fair to liquidating shareholders. Furthermore, remaining
shareholders will retain interests in the Company and those interests will be
significantly augmented through the liquidation of small holders. It is expected
that following the Reverse Stock Split, Kenneth J. and Linda S. Susnjara and
Edgar Mulzer, who currently own approximately 18.1% and 14.4%, respectively, of
the outstanding shares (excluding shares subject to stock options), will
beneficially own 100% of the Company. Additional benefits will accrue to these
remaining holders in the form of future savings by the Company of the expense of
1934 Act filings and other administrative costs. Future benefits will also
accrue to remaining shareholders in the form of income tax savings if the
Company elects S corporation status. See "Special Factors--Conduct of the
Company's Business After the Reverse Stock Split." The Board also believes the
price being paid for outstanding stock in the Reverse Stock Split is fair to the
Company and, therefore, fair to those who will remain shareholders. As discussed
above, the Board does not believe that any benefits to the Company associated
with remaining a 1934 Act reporting company are worth the long-term costs. The
use of borrowed funds to effect the Reverse Stock Split is appropriate in view
of the Company's size, its trading market, its long-term prospects and the other
factors described herein. The Board considers the additional interest expense
resulting from the Company's borrowing of funds to pay for fractional shares and
the transactional costs associated with the Reverse Stock Split to be reasonable
to the remaining shareholders.
If the Reverse Stock Split is approved, the Company plans to terminate
the registration of the Common Stock under the 1934 Act. See "Special
Factors--Conduct of the Company's Business After the Reverse Stock Split." This
action would affect the remaining shareholders of the Company. The Company would
be relieved of the obligation to comply with the proxy rules of Regulation 14A
under Section 14 of the 1934 Act, and its officers and directors and
shareholders owning more than 10% of the Common Stock would be relieved of the
stock ownership reporting requirements and "short swing" trading restrictions
under Section 16 of the 1934 Act. Further, the Company would no longer be
subject to the periodic reporting requirements of the 1934 Act and would cease
filing information with the Commission. The Company does, however, plan to
continue to send audited financial statements to all remaining shareholders each
year. Additionally, the Indiana Business Corporation Law grants each shareholder
the right to review certain books and records of the Company. In addition, the
market for the Common Stock, already thin, will disappear. The Board has
considered the effect of deregistration upon the shareholders who will remain
after the Reverse
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Stock Split and has decided that the advantages and savings to the Company of
deregistration outweigh the disadvantages to remaining shareholders.
Moreover, the Board believes the Reverse Stock Split transaction is
being effected in a manner that is fair procedurally to unaffiliated holders.
The transaction is being effected in accordance with all requirements under the
Indiana Business Corporation Law and the Company's Articles of Incorporation and
By-Laws. Over and above the requirements, the Board retained an independent
financial expert, Goelzer, to consider and opine on the price being paid to
liquidating holders. The Board also decided to grant shareholders the right to
exercise dissenters' rights under Section 23-1-44 et seq. of the Indiana
Business Corporation Law, although the Indiana Business Corporation Law does not
require the Company to do so. The Reverse Stock Split will not, however, require
the approval of a majority of unaffiliated shareholders, for reasons discussed
above.
See "General--Voting; Vote Required."
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE AMENDMENT.
The affiliates of the Company who will continue as shareholders
following the Reverse Stock Split, Kenneth J. Susnjara, Linda S. Susnjara and
Edgar Mulzer, all of whom are Board members, are also of the opinion that the
Reverse Stock Split is fair to shareholders of the Company who will receive cash
in lieu of fractional shares, those who will receive shares of New Common Stock
and those who will receive both cash and shares for the same reasons described
above.
Opinion of Goelzer
Goelzer was engaged by the Special Committee of Directors to determine
a range of fair value of the Common Stock, and, depending on the price
determined by the Board, to render an opinion on the fairness of the price to be
paid to liquidating holders in the Reverse Stock Split. The Company imposed no
limitations on Goelzer with respect to the scope of its investigation of the
Company, the preparation of its valuation report or its opinion as to the
fairness of the amount of consideration to be paid to holders of fewer than
37,000 shares.
In connection with rendering its fairness opinion and valuation report,
Goelzer conducted extensive due diligence which included the following
activities:
(i) Conducted detailed interviews with the Company's management concerning
the Company's history and operating record, the nature of the markets
served, competitive situation, financial condition, recent performance
and current outlook;
(ii) Inspected the Company's corporate offices and manufacturing facilities
in Dale, Indiana;
(iii) Analyzed trading data and market capitalization of the Company's common
stock for a period of five years as provided by Bloomberg Analytics;
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(iv) Analyzed the Company's financial statements and studied the Company's
filings under the 1934 Act including the Form 10-K and annual reports
for the last five full fiscal years, as well as the latest available
10-Q for the quarter ended April 30, 1998;
(v) Conducted a search using Bloomberg Analytics for publicly traded
companies which could be used as reasonable comparables in determining
the fair value of the Company. Goelzer searched for companies with
similar operations and for companies which are affected by similar
economic variables, such as furniture manufacturers;
(vi) Conducted a search for merger and acquisition transactions involving
privately held corporations within the woodworking, plastics
manufacturing and furniture manufacturing industries using a
proprietary database consisting of nearly 3,000 transactions;
(vii) Reviewed studies for both premiums paid in acquisitions of control as
well as studies on the lack of marketability for privately held and
thinly traded public securities;
(viii) Performed other studies, analyses and investigations as deemed
appropriate, including discounted cash flow analysis, market
comparables analysis, payback analysis, benchmark or ratio analysis and
leveraged recapitalization analysis, as outlined below.
Goelzer utilized a number of methodologies in determining a range of
fair value. First, Goelzer completed a discounted cash flow ("DCF") analysis of
the Company and then independently performed a market comparable analysis. The
market comparable analysis supported the results of the discounted cash flow
analysis. Goelzer also completed a payback analysis and a benchmark analysis in
which Goelzer scrutinized the various valuation multiples derived by the DCF
analysis. Goelzer is familiar with the multiples being paid for companies of a
comparable size with similar general characteristics to the Company since
Goelzer has been engaged in numerous merger and acquisition advisory roles over
the last two years, as well as dating back to 1969. Finally, Goelzer analyzed a
leveraged recapitalization scenario to ensure all options to the shareholders
were considered.
The DCF analysis used projections deemed to be reasonable by management
and scrutinized by Goelzer. Revenue was projected to increase by 10% per year
through year 2004 and by 3% per year thereafter. Material, labor and other costs
of goods sold were projected to be 59% of revenue based on historical data.
Depreciation was calculated based on historical data and projected capital
expenditures. Operating expenses were estimated to increase by 9% per year, 10%
less than revenue growth has been historically. The effective tax rate was
projected at 39%. Based on management's focus on keeping less work-in-process
and finished goods inventory and more raw materials inventory and reducing the
time period from purchase order to delivery, working capital assumptions
included 30 days outstanding for receivables, 140 days of inventory and 36 days
outstanding for payables. Capital expenditures were estimated to be between
$300,000 and $400,000 annually. The discount factor used by Goelzer in its DCF
analysis was 15.28%.
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This analysis produced a point estimate of intrinsic value of $10.22
per share. The $10.22 per share point estimate of intrinsic value represents a
24% premium over fair market value per share of $8.25 on August 7, 1998, the
date used by Goelzer in its DCF analysis. The high and low price for the shares,
as reported on AMEX, on August 17, 1998, the last trading day before the
announcement of the Reverse Stock Split were both $8.25 as well.
As noted previously, Goelzer searched for reasonably comparable
publicly traded companies. Specifically, Goelzer searched for woodworking and
plastic tool companies and smaller wood furniture manufacturing companies. While
no single company was ideally comparable, the ultimate sample group of five
companies was sufficiently comparable to gain insight into how the public
markets were pricing small machinery and furniture manufacturing companies. The
five comparable companies were (i) Shopsmith, Inc., a manufacturer and marketer
of power woodworking tools primarily for the home workshop, (ii)
Devlieg-Bullard, Inc., a diversified industrial business specializing in
manufacturing tooling, servicing, upgrading, automating and remanufacturing
precision-engineered machine tools and power tools, (iii) DMI Furniture, Inc., a
manufacturer and marketer of residential and commercial office wood furniture,
(iv) Flexsteel Industries, Inc., a manufacturer and marketer of wood and
upholstered furniture for the recreational vehicle market and (v) Pulaski
Furniture Corporation, a manufacturer of mahogany bedroom and dining room
furniture. The multiples analyzed by Goelzer in its comparison of the Company
were price earnings ("PE") and total invested capital to earnings before
interest, taxes, depreciation and amortization ("TIC/EBITDA"). Total invested
capital is defined as equity market capitalization plus negotiated third party
debt. At $10.22 per share, the mean of the sample companies' PE ratio was within
5% of the Company's. Furthermore, the mean of the sample companies' TIC/EBITDA
ratio was within 3% of the Company's at a price of $10.22 per share.
Goelzer also found a direct correlation between market capitalization
and price multiples. In general, Goelzer found those companies with larger
market capitalizations to have higher price multiples. Goelzer believes this
correlation is at least partially due to liquidity factors.
As mentioned previously, Goelzer also conducted a search for reasonably
comparable transactions involving privately held companies. While numerous
transactions in industries similar to the Company's were examined, none were
deemed to be sufficiently comparable for a variety of reasons including lack of
profitability, lack of growth or dissimilar size.
To further verify the reasonableness of the DCF analysis, a cash flow
payback analysis was conducted. At a price of $10.22, a willing buyer could
expect to recoup his or her investment in approximately seven years. The
majority of investors who consider payback look for a return within five to
eight years, depending on the size of the company, the stability of historical
earnings and the amount of risk involved in the cash flow projections. All else
equal, the longer the payback, the higher the value. Considering the Company's
diversified customer base, recent earnings growth and competitive position
within its markets, a payback at the upper end of this range is appropriate. A
payback of seven years further confirms the reasonableness of the DCF analysis.
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In addition to the payback analysis, Goelzer conducted a benchmark
analysis, also known as a ratio analysis. Of the ratios included in the
benchmark analysis, Goelzer considers TIC/EBITDA to be the most appropriate
ratio for the purpose of comparison because it most accurately reflects
operating cash flow. In the majority of corporate equity transactions Goelzer
has encountered involving companies the size of the Company, the price of the
transaction before any minority or lack of marketably discount has occurred in
the range of 3.0x to 7.0x TIC/EBITDA. The Company's DCF analysis produced a
TIC/EBITDA of 5.6x. Again, considering the Company's competitive position and
recent growth, the Company's TIC/EBITDA should be in the middle to upper end of
the benchmark range. At 5.6x, the benchmark analysis further confirms the
reasonableness of the DCF analysis.
A leveraged recapitalization scenario was also considered in an effort
to ensure all options to the shareholders had been considered. In a leveraged
recapitalization, the company borrows heavily to pay the shareholders a special
one-time dividend. After such a transaction, the company would be much riskier
from a financial perspective than it was with a more conservative capital
structure.
The point estimate of value for this scenario was $9.41 per share.
Finally, Goelzer was engaged to analyze the Company on a minority
basis; however, Goelzer studied control premiums paid in the public markets in
an effort to be completely thorough. Specifically, Goelzer relied on the most
recent study available, Control Premiums and Strategic Mergers by George P.
Roach. The article was published in the June, 1998 Business Valuation Review. In
this study, the author studied 1446 mergers or acquisitions between January 1992
and November of 1997. Specifically, he analyzed the control premium in relation
to the acquired company's stock price five days before the announcement of the
acquisition ("Five Day Premium") and thirty days before the premium ("Thirty Day
Premium"). The study also segmented the acquisitions by year and SIC code.
Overall, the median Thirty Day Premium for all transactions was 35.7% and the
Five Day Premium median was 27.0%. In general, the Five Day Premiums were
smaller because news of the pending transaction became available in the market.
From an average trading price of $8.25, the five and thirty day control premiums
indicate a range of value for control of the Company's stock between $10.65 and
$11.20.
In conclusion, all of the due diligence and all of the analysis and
methodologies supported $10.22 as a reasonable point estimate of intrinsic value
for the common stock of the Company on a minority basis. Goelzer did not assign
relative weights to the various analyses. Goelzer's valuation analysis indicated
that a price in excess of $10.22 per share would constitute a fair price in the
contemplated Reverse Stock Split.
A copy of Goelzer's fairness opinion, dated September 2, 1998, is
included as Exhibit B to this Proxy Statement. A copy of Goelzer's valuation
report to the Board of Directors of the Company, dated August 20, 1998, has been
filed as an exhibit to the Schedule 13E-3 filed by the Company with the
Commission. Copies will be made available for inspection and copying at the
principal executive offices of the Company during regular business hours by any
interested
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shareholder of the Company or his representative who has been so designated in
writing. The summary set forth above does not purport to be a complete
description of Goelzer's written analysis.
Goelzer completed its valuation report effective August 20, 1998.
Therefore, Goelzer did not give any consideration to the Company's option
agreement with Edgar Mulzer, dated September 3, 1998. Under such option
agreement the Company has an option, but not the obligation, to purchase the
shares of New Common Stock which will be owned by Mr. Mulzer following the
Reverse Stock Split, exercisable at any time from November 1, 1999 until October
31, 2002, at a per share exercise price equivalent to $15.50 per share of Common
Stock prior to the Reverse Stock Split. However, Goelzer has notified the
Company that the option agreement does not effect its valuation report or its
fairness opinion.
Goelzer has been providing investment banking, business valuation,
financial advisory and related services for three decades. The firm performs its
specialized services for a broad range of clients. Goelzer has been involved in
investment banking activities including structuring transactions, selling
businesses and raising capital since the founding of the firm.
Prior to engaging Goelzer, on behalf of the Special Committee, Peter N.
Lalos contacted four appraisers. Mr. Lalos interviewed these appraisers to
determine, among other factors, how much experience each appraiser had with
valuing manufacturing businesses of a comparable size and nature to the Company
and the approximate time table required to complete an appraisal. Mr. Lalos also
obtained bids from these appraisers. After receiving the bids and interviewing
the potential appraisers, the Special Committee selected Goelzer, because its
expertise and experience in valuing businesses, including familiarity with
valuing privately held and thinly traded public companies, its willingness to
make a thorough examination of the Company, its location in Indiana, its
reputation for high quality and thorough work, and the cost for such services
made Goelzer the best candidate.
For its services, including rendering its opinion, the Company's
Special Committee of the Board of Directors contracted to pay a fee of between
$20,000 to $25,000 and agreed to reimburse reasonable out-of-pocket expenses.
Neither Goelzer nor, to the best knowledge of Goelzer, any affiliate of
Goelzer has had any material relationship in the past five years with the
Company or any of its affiliates, nor is any material relationship contemplated.
Business of the Company
General. The Company is a manufacturer of computer based systems and
equipment. It designs, develops, produces, markets and services
computer-controlled machine tools that perform high speed machining, trimming,
carving and routing functions. It also markets technical services in conjunction
with the sale and maintenance of its products. These services include training,
installation assistance, preventive maintenance and upgrading and enhancement of
installed products as technology advances. In addition, the Company manufactures
machine control systems and related
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computer software which it uses primarily in its automated industrial equipment
and has marketed independently on a limited basis to others.
The Company's industrial products perform certain production functions
or automate specific tasks accomplished in factories. These products are used in
a variety of manufacturing operations principally in the woodworking, plastics
and aerospace industries. The computer-controlled machine systems are primarily
employed to cut or machine materials such as wood, plastic and non-ferrous metal
into final shape. The machine control systems and related software can control
the operation of a variety of industrial machines and machine tools.
The Company sells its products primarily through the assistance of
dealer networks established throughout the United States and Europe. It also has
a wholly-owned subsidiary, Carolina CNC, Inc., a North Carolina corporation,
which conducts sales in the southeastern region of the United States. The
Company's primary marketing strategy is to provide machines which combine
operations traditionally performed on several different machines. It attempts to
provide complete, pre-engineered, standard automation systems which require
little or no engineering input from the end user. The Company's systems are
designed for easy installation, programming and use and may be operated and
maintained by existing plant personnel without extensive training or technical
background. The Company's technical services are marketed to customers who
purchase equipment and systems directly from the Company as well as to companies
which purchase the Company's products in the used market.
The Company's overall operations have improved steadily over the last
five years. The Company's operating income for fiscal year 1997 (the latest year
of audited financial statements) was $2.1 million compared to a loss of $780,000
in fiscal 1993, for an overall increase in operating income of $2.9 million.
Over the same period, net sales increased by $7 million or 64%, to $17.8 million
in fiscal 1997.
Management estimates that the current market for computer numerical
controlled ("CNC") routers is approximately $70 million. The Company has
steadily increased its share of that market since 1994, increasing its sales at
a rate of approximately 40% from fiscal 1996 to 1997 and 23% from fiscal 1997 to
1998. For fiscal year 1998, the Company's sales in the CNC router market were
approximately $17 million. While management remains optimistic about its growth
potential, it also recognizes that, given the limited size of the market, growth
may not continue at the same rate in coming years.
Management is also looking for ways in which to expand the market for
CNC routers. The Company is attempting to convince the furniture industry to
replace the traditional factory structure with a structure based on the CNC
router. If the Company is successful in transforming the market from current
practices that have been in place for over 75 years, the Company could recognize
a significant increase in sales. There is, however, no assurance that this
market expansion will take place, and if such an expansion does take place,
other manufacturers of CNC routers would also compete for those sales.
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European Operations. The Company has a wholly-owned subsidiary,
Thermwood (Europe) Limited, a United Kingdom company, which presently maintains
sales offices in England and Vienna, Austria for conducting sales to the
European Community. During the 1998 fiscal year, the Company lost $250,000 in
connection with its European operations. Neither of the foreign sales offices is
generating a profit. Therefore, the Company has decided to close the Vienna
office by September 30, 1998.
Recent Business Developments. From August 20 to 23, 1998, Kenneth J.
Susnjara and other representatives of the Company attended the International
Woodworking Fair, a furniture industry trade show held every two years. The
Company's orders generally decrease in the two- to three-month period preceding
this show as customers wait to make purchasing decisions until after the show.
Normally order rates increase for approximately six weeks after the show, which
tends to offset the decreased sales immediately prior to the show.
At the International Woodworking Fair, the Company received eight
signed quotes for the sale of its equipment. Each signed quote will be
considered a bona fide order upon receipt of a customer deposit. Normally ten to
fifteen percent of the quotes received at the fair fail to materialize into
orders. Based on the Company's sales performance from prior International
Woodworking Fairs, management believes that the Company's sales generated at the
1998 International Woodworking Fair will be comparable to the sales generated
from the most recent previous fair held in 1996.
At the International Woodworking Fair, Mr. Susnjara presented the
Company's idea for the application of CNC routers as a replacement for the
traditional furniture industry factory structure. Management believes that this
idea created a high level of interest among customers and competitors, but the
Company has not received any orders based on this new application of the
existing equipment. Management does not expect orders for this new application
immediately and estimates that it will take approximately three to five years
for the industry to begin to utilize this technology, if it does so at all.
Also at the recent trade show, several of the Company's competitors
demonstrated CNC routers which operate much faster than the Company's current
equipment. The Company's fastest CNC routers operate in the range of 900 to 1200
inches per minute, while some of its competitors' machines operated in the range
of 2700 to 3000 inches per minute. Management believes that the existence of
these faster machines which compete with the Company's products could adversely
impact the Company's sales in the future.
Year 2000 Issues. During the fiscal year ended July 31, 1998, the
Company began a risk evaluation of potential Year 2000 issues. The outcome of
this evaluation was the formation of a Year 2000 Committee which consists of the
Chief Executive Officer, Vice President of Engineering, Information Systems
Manager and two other employees. The purpose of this committee is to assess all
risks, analyze current systems, coordinate upgrades and replacements and report
current and projected status of all known Year 2000 compliance issues.
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During the assessment phase, computer-related systems and software
vendors were identified. Correspondence requesting the status of Year 2000
compliance is scheduled to be delivered in the first quarter of fiscal 1999 to
the vendors that have not supplied Year 2000 statements.
The Company has one known mission-critical system that is not Year 2000
compliant. This system has a Year 2000 certified replacement product that is
scheduled for implementation during the second quarter of fiscal 1999. The
Company is currently installing upgrades to the non-mission critical systems and
should be completed by the end of the second quarter of fiscal 1999.
The replacement or remedial costs for the Company's Year 2000
compliance issues are estimated to be less than $150,000 which the Company will
recognize as incurred in the next three to five years as depreciation expense.
This estimated cost is primarily due to software and hardware upgrades that
include new features, which are combined with Year 2000 corrections.
The Company has tested the machine control systems and related computer
software which it sells and believes that such equipment is Year 2000 compliant.
Forward-Looking Statements. The foregoing discussion and statements
appearing elsewhere in this proxy statement contain forward-looking statements
which involve a number of risks and uncertainties. A number of factors could
cause results to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements. These
factors include, but are not limited to, continued acceptance of the Company's
products in the marketplace, competitive factors, new products and technological
changes, the Company's dependence on third-party suppliers and other factors set
forth in this document and in the Company's filings with the Securities and
Exchange Commission. These factors should be considered in evaluating any
forward- looking statements, and undue reliance should not be placed on such
statements. The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
Arrangements with Respect to Issuer's Common Stock, Stock Options and
Convertible Debentures
Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plan of
Thermwood Corporation (the "Non-Qualified Plan") is the Company's non-qualified
stock option plan for officers, key employees and directors of the Company.
Effective as of September 1, 1998, each of Kenneth J. Susnjara, Linda Susnjara,
Edgar Mulzer and Peter N. Lalos held options to purchase 10,000 shares under the
Non-Qualified Plan. The exercise price of such options is $5.625 per share with
respect to Kenneth J. Susnjara, Edgar Mulzer and Peter N. Lalos and $10.00 per
share with respect to Linda Susnjara. Pursuant to the terms of the Non-Qualified
Plan, the number of shares issuable upon exercise of the options and the option
prices may be proportionally adjusted in conjunction with the Reverse Stock
Split. Since the proportional adjustment will result in the payment of cash in
lieu of fractional shares, each optionee under the Non-Qualified Plan will be
entitled to receive a cash
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payment, without interest, in an amount equal to the product of (i) the excess,
if any, of the cash offered per share of currently outstanding Common Stock in
lieu of fractional shares pursuant to the Reverse Stock Split over the per share
exercise price of the option; times (ii) the number of shares pursuant to such
option. Following the Reverse Stock Split, such optionees will no longer hold
options to acquire the Company's Common Stock.
Incentive Stock Option Plan. The Company also has a qualified stock
option plan, the Incentive Stock Option Plan of Thermwood Corporation (the
"Incentive Plan"). At September 1, 1998, various officers and key employees held
a total of 50,600 options under the Incentive Plan, all of which were currently
exercisable at a weighted average exercise price of $8.32 per share. Pursuant to
the terms of the Incentive Plan, the number of shares issuable upon exercise of
the options and the option prices may be proportionally adjusted in conjunction
with the Reverse Stock Split. Since the proportional adjustment will result in
the payment of cash in lieu of fractional shares, each optionee under the
Incentive Plan will be entitled to receive a cash payment, without interest, in
an amount equal to the product of (i) the excess, if any, of the cash offered
per share of currently outstanding Common Stock in lieu of fractional shares
pursuant to the Reverse Stock Split over the per share exercise price of the
option; times (ii) the number of shares pursuant to such option. Following the
Reverse Stock Split, such optionees will no longer hold options to acquire the
Company's Common Stock.
Following the Reverse Stock Split, the Company may establish an
employee bonus plan which will pay cash bonuses to employees as rewards and
incentives for their contributions to the Company. See "Special Factors--Conduct
of the Company's Business After the Reverse Stock Split."
Other Options. R. Jerry Falkner, a principal in a former public
relations firm for the Company, held an option to purchase 4,000 shares at
$8.4375 per share pursuant to an Option Agreement dated February 22, 1996. The
Company and Mr. Falkner agreed to terminate the option agreement in
consideration of a cash payment from the Company to Mr. Falkner in an amount
equal to the product of (i) the excess of the cash offered per share of
currently outstanding Common Stock in lieu of fractional shares pursuant to the
Reverse Stock Split over the per share exercise price of the option; times (ii)
the number of shares pursuant to such option. The total payment to Mr. Falkner
of $10,250.00 was made on August 27, 1998, and the option agreement was
terminated.
In addition to options under the Incentive Plan, Kenneth J. Susnjara
also holds options to acquire 60,000 shares of Common Stock at an exercise price
of $15 per share and options to acquire 60,000 shares of Common Stock at an
exercise price of $30 per share. If the Amendment is approved, these options
will be canceled as of the effective date of the Reverse Stock Split.
12% Convertible Subordinated Debentures. The Company had outstanding as
of September 1, 1998, 12% Convertible Subordinated Debentures (the "Debentures")
which are convertible into an aggregate of 26,200 shares of Common Stock. The
Debentures are governed by an Indenture between the Company and American Stock
Transfer & Trust Company, as trustee, dated February 3, 1993 (the "Indenture").
Pursuant to the Indenture, the conversion privilege and the conversion
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price of the Debentures will be adjusted in conjunction with the Reverse Stock
Split so that each Debenture holder will be entitled to receive upon conversion
the number and kind of shares which he would have received if he had converted
the Debenture immediately prior to the Reverse Stock Split. Since such an
adjustment would result in the right to receive the payment of cash in lieu of
fractional shares, each Debenture holder would be entitled to receive upon
conversion, without interest, cash in the amount of the product of (i) the cash
offered per share of currently outstanding Common Stock in lieu of fractional
shares pursuant to the Reverse Stock Split; times (ii) the number of shares
issuable upon conversion of the Debenture. In the alternative, the Debenture
holder may decide, in its discretion, not to convert the Debenture and such
Debenture will remain an outstanding obligation of the Company, provided,
however, that such Debenture will not be convertible into Common Stock.
Option to Purchase Common Stock from Mr. Mulzer. The Company has
entered into an Option Agreement, dated September 3, 1998, with Edgar Mulzer
whereby the Company has an option to purchase the shares of New Common Stock
owned by Mr. Mulzer for $573,500.00 per share over a period commencing on
November 1, 1999, and ending on October 31, 2002. Since Mr. Mulzer holds such a
significant percentage of the Company's Common Stock, the Company entered into
the Option Agreement to reduce the possibility of the acquisition of the shares,
particularly in the event of Mr. Mulzer's death, by persons or entities whose
purposes or interests may not be in the best interests of the Company, its
business or the shareholders. The price per share offered to Mr. Mulzer is
equivalent to $15.50 per share of Common Stock prior to the Reverse Stock Split.
This option price reflects a premium due to the large block of shares held by
Mr. Mulzer following the Reverse Stock Split and the risk assumed by Mr. Mulzer
of locking in the obligation to sell at a fixed price over a period of several
years. However, no assurances can be made with respect to any projected increase
in the value of the shares over time.
Conduct of the Company's Business After the Reverse Stock Split
The Company expects its business and operations to continue as they are
currently being conducted and, except as disclosed below, the Reverse Stock
Split is not anticipated to have any effect upon the conduct of such business.
If the Reverse Stock Split is consummated, all persons beneficially owning
37,000 or fewer shares at the effective time of the Reverse Stock Split will no
longer have any equity interest in, and will not be shareholders of, the Company
and therefore will not participate in its future potential or earnings and
growth. Instead, each such beneficial owner of Common Stock will have the right
to receive $11.00 per share in cash, without interest.
If the Reverse Stock Split is effected, based on the Company's
shareholder records, it is expected that only Kenneth J. and Linda S. Susnjara
and Edgar Mulzer will remain as shareholders, beneficially owning 100% of the
outstanding Common Stock. Such individuals now own approximately 40.89% of the
fully diluted Common Stock (including shares subject to options). See "Principal
Shareholders and Stock Ownership of Management." If the Company's shareholder
records are incomplete or inaccurate and there are presently shareholders other
than Kenneth J. and Linda S. Susnjara and Edgar Mulzer who hold 37,000 shares or
more, or if prior to the effective date
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of the Reverse Stock Split another person becomes a shareholder of 37,000 shares
or more, then the Company is willing to purchase the shares of such
shareholder(s) for the price per share paid to shareholders who receive cash in
lieu of fractional shares, at the request of such shareholder.
The Company plans, as a result of the Reverse Stock Split, to become a
privately held company. The registration of the Common Stock under the 1934 Act
will be terminated and the Company will no longer be listed on AMEX or PSEX. In
addition, because the Common Stock will no longer be publicly held, the Company
will be relieved of the obligation to comply with the proxy rules of Regulation
14A under Section 14 of the 1934 Act, and its officers and directors and
shareholders owning more than 10% of the Common Stock will be relieved of the
stock ownership reporting requirements and "short swing" trading restrictions
under Section 16 of the 1934 Act. Further, the Company will no longer be subject
to the periodic reporting requirements of the 1934 Act and will cease filing
information with the Commission. Among other things, the effect of this change
will be a savings to the Company in not having to comply with the requirements
of the 1934 Act.
The Amendment will decrease the number of authorized shares to 540
shares of Common Stock of which approximately 12 shares are expected to be
outstanding. With the exception of the number of authorized shares and the
number of outstanding shares, the terms of the Common Stock before and after the
Reverse Stock Split will remain the same.
The Amendment will also eliminate the class of Preferred Stock. No
shares of Preferred Stock are currently outstanding.
If the Reverse Stock Split is effected, the Company expects that it
will elect to have special tax treatment as an S corporation under the Code. In
order to meet the requirements to qualify as an S corporation, the Company would
also need to dissolve its foreign subsidiary, Thermwood (Europe) Limited, into
the Company. If the Company elects to be taxed as an S corporation, it is
expected to eliminate the payment of income tax on its earnings.
The Company has never declared a dividend. As an S corporation, the
Company expects to change its dividend policy. The Company will declare annual
cash dividends to its shareholders in such amounts as the Board of Directors of
the Company determines to be appropriate which are expected to be at least equal
to the amount of taxes the shareholders will be required to pay on the Company's
income.
Management has discussed establishing an employee bonus plan following
the Reverse Stock Split which will pay cash bonuses to officers, directors and
key employees in order to increase their incentive to work for the Company and
to attract and retain capable personnel. Management has not considered the
details of such a plan at this time and no written plan has been adopted.
Finally, the Company anticipates that following the Reverse Stock
Split, the Company will reduce the size of its Board of Directors, over time, to
three directors.
-30-
<PAGE>
Over the last several years, the Company has engaged in preliminary
discussions with various competitors regarding the prospect of a merger or
acquisition or entering into a joint venture or manufacturing arrangement. As
recently as July, 1998, the Company was approached by a representative of an
investment banking firm representing a competitor who expressed an interest in
discussing a merger, acquisition or other business arrangement. All such
discussions were terminated at the preliminary stage and management does not
consider them material. Management does not presently have an interest in any
such proposals. Although management is not currently in negotiations with
respect to any proposed merger or similar transaction, there is always a
possibility that the Company may enter into such an arrangement in the future
and the remaining shareholders of the Company may receive payment for shares in
any such merger or similar transaction in excess of the $11.00 offered to be
paid to shareholders in lieu of fractional shares pursuant to the proposed
Reverse Stock Split.
Other than as described in this Proxy Statement, neither the Company
nor its management has any current plans or proposals to effect any
extraordinary corporate transaction, such as a merger, reorganization or
liquidation; to sell or transfer any material amount of its assets; to change
its Board of Directors or management; to change materially its indebtedness or
capitalization; or otherwise to effect any material change in its corporate
structure or business.
-31-
<PAGE>
Federal Income Tax Consequences
THE FOLLOWING DISCUSSION SUMMARIZING CERTAIN FEDERAL INCOME TAX
CONSEQUENCES IS BASED ON CURRENT LAW AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX EFFECTS OF THE REVERSE STOCK SPLIT IN LIGHT OF
THEIR INDIVIDUAL CIRCUMSTANCES.
Exchange of Currently Outstanding Common Stock Solely for New Common
Stock. A shareholder who receives solely shares of New Common Stock pursuant to
the Reverse Stock Split will recognize no gain or loss under Section 354 of the
Code. The aggregate basis of the shares of New Common Stock received by such
shareholders pursuant to the Reverse Stock Split will be the same as the tax
basis of the currently outstanding Common Stock surrendered in exchange. The
holding period of the New Common Stock received by such shareholder will include
the holding period of the currently outstanding Common Stock surrendered in the
exchange, provided the New Common Stock was held as a capital asset at the time
of the Reverse Stock Split.
Exchange of Currently Outstanding Common Stock for a Combination of
Cash and New Common Stock. A shareholder who receives New Common Stock and cash
pursuant to the Reverse Stock Split will recognize gain (if any), but in an
amount not in excess of the amount of cash received. Such gain will be
recognized in the year in which the New Common Stock and cash are received, or
in the year the New Common Stock or cash is entitled to be received (i.e., at
the time of the Reverse Stock Split). Any recognized gain will be eligible for
capital gain treatment (assuming the shareholder's Common Stock is held as a
capital asset) unless such receipt of cash has the effect of a distribution of a
dividend, as provided in Section 356 of the Code, in which case such gain will
be taxable as ordinary income to the extent of the shareholder's ratable share
of the Company's earnings and profits. The principles applicable under Section
302 of the Code and the United States Supreme Court decision in Clark v.
Commissioner, 109 S.Ct. 1455, 89-1 U.S.T.C. 9230 (1989), will serve as
guidelines in determining whether the receipt of cash has the effect of the
distribution of a dividend under Section 356 of the Code. Under these
principles, the distribution to a shareholder will not be considered to have the
effect of the distribution of a dividend if it is "substantially
disproportionate" with respect to the shareholder or if it is "not essentially
equivalent to a dividend" to the shareholder. For purposes of these tests and
under Clark, the shareholder presumably is treated as if he or she received
solely New Common Stock pursuant to the Reverse Stock Split and then received
cash through a redemption by the Company of a number of such shares having a
value equal to the cash amount.
Under Clark, a distribution will be "substantially disproportionate"
with respect to a shareholder if the shareholder's proportionate interest in the
New Common Stock actually held by the shareholder after the Reverse Stock Split
is less than 80% of what the shareholder's proportionate interest in the Common
Stock would have been if solely Common Stock had been distributed in the Reverse
Stock Split. In applying this test for purposes of Section 356 of the Code, the
constructive
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<PAGE>
ownership rules of Section 318 of the Code (under which shareholders are treated
as holding not only their own shares but also shares held by certain related
persons and entities) are applicable.
Even though a distribution does not satisfy the substantially
disproportionate test discussed above, it still may be "not essentially
equivalent to a dividend" to a shareholder depending upon the shareholder's
particular facts and circumstances. The United States Supreme Court in Davis v.
United States, 397 U.S. 301 (1970), concluded that in order for a distribution
to be considered not essentially equivalent to a dividend, there must be a
"meaningful reduction in the shareholder's proportionate interest." Shareholders
who increase their proportionate interest in the Company as a result of the
Reverse Stock Split will not experience a meaningful reduction in their
proportionate interest in the Company, and therefore will be treated as having
received a distribution of cash essentially equivalent to a dividend. See Rev.
Rul. 78-351, 1978-2 C.B. 148 (holding that fractional share rule of Rev. Rul.
69-34, 1969-1 C.B. 105 does not apply in the case of a reverse stock split under
circumstances substantially identical to these).
A shareholder who receives New Common Stock and cash will receive a
basis in such New Common Stock which will be the same as the basis of the Common
Stock surrendered in the exchange, decreased by the amount of any cash received,
and increased by the amount of any gain recognized on the exchange. The holding
period of the New Common Stock received by such a shareholder will include the
holding period of the Common Stock surrendered in the exchange, provided the New
Common Stock was held as a capital asset as of the time of the Reverse Stock
Split.
Exchange of Common Stock Solely for Cash. In the case of a shareholder
who receives only cash in exchange for all of his or her Common Stock, the cash
will be treated as received by the shareholder as a distribution in redemption
of the shareholder's Common Stock, subject to the provisions and limitations of
Section 302 of the Code. Where, after such distribution, a former shareholder
does not own shares of Common Stock directly or indirectly through the
constructive ownership rules of Section 318(a) of the Code, the redemption will
be treated as a complete termination of interest within the meaning of Section
302(b)(3) of the Code. As provided in Section 1001 of the Code, gain or loss
will be recognized by such shareholders in an amount equal to the difference
between the amount of cash received in the redemption and the adjusted basis of
the Common Stock surrendered. Provided that the Common Stock is a capital asset
in the hands of such shareholders, the gain or loss, if any, will constitute
capital gain or loss. The gain or loss will be long-term capital gain or loss if
the shareholder will have held, or be deemed to have held, his or her Common
Stock for more than one year as of the time of the Reverse Stock Split.
Capital Gain and Alternative Minimum Tax. Long-term capital gain for
noncorporate taxpayers is generally taxed at a maximum rate of 20%. Capital
losses are deductible generally only to the extent of capital gains.
Capital gain and dividends are also included in alternative minimum
taxable income, which may be subject to a special minimum tax at a 26% or 28%
rate (depending on the taxpayer's
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<PAGE>
alternative minimum taxable income) to the extent the minimum tax exceeds
regular tax liabilities. Alternative minimum taxable income is reduced by
various exemption amounts, which are phased out above certain levels.
Special taxation and withholding rules may apply to any shareholder
that is a nonresident alien or a foreign corporation. These rules are beyond the
scope of this discussion and should be discussed with a personal tax advisor.
Shareholders will be required to provide their social security or other taxpayer
identification numbers (or, in some instances, certain other information) to the
Exchange Agent (as defined below) in connection with the Reverse Stock Split to
avoid backup withholding requirements that might otherwise apply. See "Exchange
of Certificates and Payment for Fractional Shares." The letter of transmittal
will require each shareholder to deliver such information when the Common Stock
certificates are surrendered following the effective date of the Amendment.
Failure to provide such information may result in backup withholding.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY AND DOES NOT REFER TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY
SPECIFIC SHAREHOLDER. SHAREHOLDERS, PARTICULARLY THOSE WHO HAVE ACQUIRED SHARES
OF COMMON STOCK IN COMPENSATION-RELATED TRANSACTIONS, ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS FOR MORE SPECIFIC AND DEFINITIVE ADVICE AS TO THE FEDERAL
INCOME TAX CONSEQUENCES TO THEM OF THE TRANSACTION, AS WELL AS ADVICE AS TO THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Financial Effect of the Reverse Stock Split
The following pro forma financial information presents the effect on
the Company's historical financial position of the Reverse Stock Split and the
cash payment of $11.00 per share in lieu of the issuance of fractional shares
resulting from the Reverse Stock Split. The unaudited pro forma balance sheets
reflect the transaction as if it occurred on the balance sheet dates. The
unaudited pro forma statements of operations reflect the transaction as if it
occurred at the beginning of the periods presented. The pro forma financial
information assumes that a total of approximately $11,300,000 would be borrowed
to purchase fractional shares and settle outstanding stock options and
approximately $360,000 would be paid for related costs. Excluded from the pro
forma statements of operations are $190,000 and $138,000 of compensation expense
for the year ended July 31, 1997 and the nine-month period ended April 30, 1998,
respectively, incurred in connection with the settlement of the outstanding
common stock options.
The unaudited pro forma balance sheets are not necessarily indicative
of what the Company's financial position would have been if the Reverse Stock
Split had been effected on the dates indicated, or will be in the future. The
information shown in the unaudited pro forma statements of operations is not
necessarily indicative of the results of future operations.
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<PAGE>
The unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and accompanying footnotes
of the Company elsewhere in this Proxy Statement.
See "Financial Statements of the Company" beginning on page F-1.
-35-
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEET - PROFORMA (UNAUDITED)
July 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 512 - 512
Accounts receivable, net 1,802 - 1,802
Inventories 4,618 - 4,618
Deferred income taxes 1,676 - 1,676
Prepaid expenses 372 - 372
----------- ------------- -----------
Total Current Assets 8,980 - 8,980
----------- ------------- -----------
Net property and equipment 1,824 - 1,824
----------- ------------- -----------
Other Assets
Patents, trademarks and other 142 250 (a) 392
Deferred income taxes 326 - 326
----------- ------------- -----------
Total Other Assets 468 250 718
----------- ------------- -----------
Total Assets $ 11,272 250 11,522
=========== ============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,375 - 1,375
Accrued liabilities 1,225 - 1,225
Accrued income taxes 386 - 386
Customer deposits 907 - 907
Current portion of long-term liabilities 8 2,000 (b) 2,008
----------- ------------- -----------
Total Current Liabilities 3,901 2,000 5,901
----------- ------------- -----------
Long-term Liabilities - less current portion
Capital lease obligations 6 - 6
Note payable to bank - 9,489 (b) 9,489
Bonds payable, net of unamortized discount 279 (279) (c) -
----------- ------------- -----------
Total Long-term Liabilities 285 9,210 9,495
----------- ------------- -----------
Shareholders' Equity
Preferred stock, no par value 2,546 - 2,546
Common stock, no par value 10,599 (7,094) (d) 3,505
Accumulated deficit (6,034) (3,891) (e) (9,925)
----------- ------------- -----------
7,111 (10,985) (3,874)
Less subscriptions receivable (25) 25 (d) -
------------ ------------- -----------
Total Shareholders' Equity (Deficit) 7,086 (10,960) (3,874)
----------- -------------- ------------
Total Liabilities and Shareholders' Equity $ 11,272 250 11,522
=========== ============= ===========
Book Value Per Share $ 5.06 (8.37)
</TABLE>
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<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEET - PROFORMA (UNAUDITED)
April 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 50 - 50
Accounts receivable, net 3,071 - 3,071
Inventories 5,976 - 5,976
Deferred income taxes 1,676 - 1,676
Prepaid expenses 255 - 255
----------- ------------- -----------
Total Current Assets 11,028 - 11,028
----------- ------------- -----------
Net property and equipment 1,943 - 1,943
----------- ------------- -----------
Other Assets
Patents, trademarks and other 130 250 (a) 380
Deferred income taxes 326 - 326
----------- ------------- -----------
Total Other Assets 456 250 706
----------- ------------- -----------
Total Assets $ 13,427 250 13,677
=========== ============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,514 - 1,514
Accrued liabilities 845 - 845
Accrued income taxes 1,006 - 1,006
Customer deposits 1,736 - 1,736
Current portion of long-term liabilities 17 2,000 (b) 2,017
----------- ------------- -----------
Total Current Liabilities 5,118 2,000 7,118
----------- ------------- -----------
Long-term Liabilities - less current portion
Capital lease obligations 5 - 5
Notes payable to banks 2,446 9,495 (b) 11,941
Bonds payable, net of unamortized discount 170 (170) (c) -
----------- ------------- -----------
Total Long-term Liabilities 2,621 9,325 11,946
----------- ------------- -----------
Shareholders' Equity
Common stock, no par value 10,737 (7,260) (d) 3,477
Accumulated deficit (5,016) (3,848) (e) (8,864)
------------ -------------- ------------
5,721 (11,108) (5,387)
Less subscriptions receivable (33) 33 (d) -
------------ ------------- -----------
Total Shareholders' Equity (Deficit) 5,688 (11,075) (5,387)
----------- -------------- ------------
Total Liabilities and Shareholders' Equity $ 13,427 250 13,677
=========== ============= ===========
Book Value Per Share $ 3.98 (11.63)
</TABLE>
-37-
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS - PROFORMA (UNAUDITED)
For the year ended July 31, 1997
(In thousands, except per share data and ratios)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net Sales $ 17,780 - 17,780
Cost of sales 10,874 - 10,874
----------- ------------- -----------
Gross Profit 6,906 - 6,906
Research and development, marketing,
Administrative and general expenses 4,795 - 4,795
----------- ------------- -----------
Operating income 2,111 - 2,111
----------- ------------- -----------
Other income (expense):
Interest expense (76) (1,085) (f) (1,161)
Other 19 - 19
----------- ------------- -----------
Other expense, net (57) (1,085) (1,142)
------------ -------------- ------------
Earnings before income taxes 2,054 (1,085) 969
Income taxes (819) 434 (g) (385)
------------ ------------- ------------
Net earnings $ 1,235 (651) 584
=========== ============== ===========
Earnings applicable to common
shareholders
Basic $ 951 (731) (h) 220
Diluted $ 998 (778) (h) 220
Earnings per share,
Basic $ 0.70 $ 0.72
Diluted $ 0.69 $ 0.72
Ratio of earnings to fixed charges 24.14 1.83
</TABLE>
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<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS - PROFORMA (UNAUDITED)
For the nine-months ended April 30, 1998
(In thousands, except per share data and ratios)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net Sales $ 15,960 - 15,960
Cost of sales 9,487 - 9,487
----------- ------------- -----------
Gross Profit 6,473 - 6,473
Research and development, marketing,
Administrative and general expenses 4,547 - 4,547
----------- ------------- -----------
Operating income 1,926 - 1,926
----------- ------------- -----------
Other income (expense):
Interest expense - other (160) (841) (f) (1,001)
Other 14 - 13
----------- ------------- -----------
Other expense, net (146) (841) (988)
------------ -------------- ------------
Earnings before income taxes 1,780 (841) 938
Income taxes (719) 336 (g) (383)
------------ ------------- ------------
Net earnings $ 1,061 (505) 555
=========== ============== ===========
Earnings applicable to common
shareholders
Basic $ 1,018 (549) (h) 469
Diluted $ 1,031 (562) (h) 469
Earnings per share,
Basic $ 0.72 $ 1.13
Diluted $ 0.68 $ 1.13
Ratio of earnings to fixed charges 11.79 1.94
</TABLE>
-39-
<PAGE>
EXPLANATION OF PRO FORMA ADJUSTMENTS
(Unaudited)
(a) Increase in other assets relating to accounting and legal fees
($250,000) incurred in connection with the issuance of debt.
(b) Increase in notes payable as a result of the following:
<TABLE>
<CAPTION>
April 30, 1998 July 31, 1997
(in thousands)
<S> <C> <C>
Purchase and retirement of
fractional shares at $11 per share $ 10,605 $ 10,283
Settlement of outstanding stock
options, net of income taxes (1) 138 190
Repurchase of common shares upon
conversion of bonds 398 662
Estimated debt issuance costs 250 250
Offering expenses, net of income taxes 104 104
------------ -----------
$ 11,495 $ 11,489
============ ===========
</TABLE>
(1) The one-time charge of $138,000 and $190,000 in 1998 and 1997,
respectively, relating to the settlement of outstanding stock options
has been excluded from pro forma net earnings adjustments.
(c) Decrease in bonds payable as a result of the conversion to common
stock.
(d) Decrease in common stock as a result of the purchase and retirement of
fractional shares.
(e) Increase in accumulated deficit for the excess of the purchase price
over the average issue price of all shares purchased and retired and
the settlement of outstanding stock options, net of related income
taxes.
(f) Increase in interest expense resulting from the additional debt
incurred, with $3 million bearing interest at 14% and the remainder
bearing interest at approximately 8%, offset by reduced interest on
converted Bonds.
(g) Decrease in income taxes (40% effective rate) based on pro forma
adjustments to earnings before income taxes. If the Reverse Stock Split
is effected, the Company expects that it will elect S-corporation
status which will eliminate the payment of income taxes on its
earnings. The future effects of this election have not been reflected
in pro forma income taxes.
(h) Total weighted average number of shares utilized in calculating
historical and pro forma earnings per share were determined as follows:
-40-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended April 30, 1998 Year Ended July 31, 1997
-------------------------------- ------------------------
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- ------- ----- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding 1,421 1,421 1,421 1,421 1,350 1,350 1,350 1,350
Less Pro Forma common shares
retired in connection with the
reverse stock split - - (967) (967) - - (937) (937)
----------------- ------- ----------------------------------- -------
Adjusted weighted average
common shares 1,421 1,421 454 454 1,350 1,350 413 413
Weighted average common
equivalent shares related to
dilutive stock options - 56 - - - 36 - -
Weighted average common
equivalent shares related to
convertible bonds - 36 - - - 60 - -
--------------------------------------------------------------------------------------
Total weighted average number
of shares 1,421 1,513 454 454 1,350 1,446 413 413
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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<PAGE>
Dissenters' Rights of Appraisal
The foregoing is only a general summary of the provisions of the
Dissenters' Rights Statute and should not be considered a comprehensive
description. A copy of the Dissenters' Rights Statute is attached hereto as
Exhibit C as a complete description of the rights and obligations of the Company
and any shareholder who desires to exercise dissenters' rights. EACH STEP MUST
BE TAKEN IN STRICT COMPLIANCE WITH THE APPLICABLE PROVISIONS OF THE DISSENTERS'
RIGHTS STATUTE IN ORDER FOR SHAREHOLDERS TO PERFECT DISSENTERS' RIGHTS.
Although no dissenters' rights are required for the proposed Reverse
Stock Split under the Indiana Business Corporation Law, the Board of Directors
of the Company has adopted a resolution voluntarily granting dissenters' rights
in accordance with Section 23-1-44-8(a)(5) of the Indiana Business Corporation
Law. Any record shareholder entitled to vote on the Amendment may dissent from
the Amendment and obtain payment of the fair value of his or her shares in
accordance with the Dissenters' Rights Statute.
Any shareholder who desires to assert dissenters' rights must (i)
deliver to the Company before the vote is taken written notice of such
shareholder's intent to demand payment for his or her shares of Common Stock if
the proposed Reverse Stock Split is effected; and (ii) not vote his or her
shares of Common Stock in favor of the proposed Reverse Stock Split.
A shareholder of record may assert dissenters' rights as to fewer than
all the shares of Common Stock registered in that shareholder's name only if the
shareholder dissents (in accordance with the provisions of the Dissenters'
Rights Statute) with respect to all the shares of Common Stock beneficially
owned by any one person and notifies the Company in writing of the name and
address of each person on whose behalf the shareholder is asserting dissenters'
rights.
A beneficial owner of shares of Common Stock held by a nominee as the
record shareholder may assert dissenters' rights as to shares of Common Stock
held on such shareholder's behalf only if (i) such beneficial shareholder
submits to the Company the record shareholder's written consent to the dissent
no later than the time the beneficial shareholder asserts dissenters' rights,
and (ii) the beneficial shareholder asserts dissenters' rights (in accordance
with the provisions of the Dissenters' Rights Statute) with respect to all the
beneficial shareholder's shares or those shares over which the beneficial
shareholder has power to direct the vote.
If the Reverse Stock Split is authorized by the shareholders at the
Special Meeting, the Company must deliver a written dissenters' notice to
properly dissenting shareholders within ten days after approval of the Reverse
Stock Split. Such dissenters' notice must (i) state where the payment demand
must be sent and where and when certificates for shares of Common Stock must be
deposited, (ii) supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the terms of the
proposed Reverse Stock Split and requires that the person acquired beneficial
ownership of the shares before that date, (iii) set a date by which the Company
must receive the payment demand, which date may not be fewer than thirty (30)
nor more
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<PAGE>
than sixty (60) days after the date the dissenters' notice is delivered, and
(iv) be accompanied by a copy of the Dissenters' Rights Statute.
A shareholder who receives a dissenters' notice must (i) demand
payment, (ii) certify whether the shareholder acquired beneficial ownership of
the shares before the date set forth in the dissenters' notice and (iii) deposit
his or her certificates in accordance with the terms of the notice. The
shareholders who demand payment and deposit their shares in accordance with the
terms of the dissenters' notice retain all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed corporate
action to effect the Reverse Stock Split. Any shareholder who fails to demand
payment or deposit share certificates as required by the dissenters' notice by
the respective dates set forth therein will not be entitled to payment for his
or her shares under the Dissenters' Rights Statute and will be considered to
have voted his or her shares in favor of the Reverse Stock Split.
Once the shareholders' action approving the Reverse Stock Split has
been taken, the Company must pay each dissenting shareholder who properly
complied with the requirements set forth above the amount the Company estimates
to be the fair value of the dissenters' shares. The payment must be accompanied
by (i) the Company's balance sheet as of the fiscal year ending not more than
sixteen (16) months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year and the
latest available interim financial statements, if any; (ii) a statement of the
Company's estimate of the fair value of the shares; and (iii) a statement of the
dissenters' right to demand payment under the Dissenters' Rights Statute.
However, the Company may elect to withhold such payment from dissenting
shareholders who acquired beneficial ownership of the shares of Common Stock
after the date set forth in the dissenters' notice as the date of the first
announcement to new media or shareholders of the terms of the Reverse Stock
Split (the "Post Announcement Shareholders"). If the Company does elect to
withhold payment from the Post Announcement Shareholders, it must send each Post
Announcement Shareholder an offer to pay the Company's estimate of the fair
value of the shares provided such Post Announcement Shareholders agree to accept
the payment offered in full satisfaction of their dissenters' demands.
A dissenting shareholder may notify the Company in writing of its own
estimate of the fair value of the shares and demand payment of the dissenter's
estimate, less any payment already made to such shareholder. A dissenting
shareholder also may reject the Company's offer and demand payment of the fair
value of the shares if (i) the dissenting shareholder believes that the amount
paid or offered is less than fair value, (ii) the Company fails to make payment
within sixty (60) days after the date set for demanding payment or (iii) the
Company, having failed to take the proposed Reverse Stock Split action, does not
return the deposited stock certificates within sixty (60) days after the date
set for demanding payment. A dissenting shareholder waives the right to demand
payment of such shareholder's estimate unless the shareholder notifies the
Company of the dissenting shareholder's demand for payment within thirty (30)
days after the Company has made or offered payment for the dissenters' shares.
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<PAGE>
If a demand for payment remains unsettled, the Company must commence a
proceeding within sixty (60) days after receiving the payment demand and
petition the proper court to determine the fair value of the shares. If the
Company does not commence the proceeding within such period, it must pay each
dissenting shareholder whose demand remains unsettled the amount demanded. The
state court in which a proceeding must be commenced is the circuit or superior
court of Spencer County, Indiana, where the Company's principal office is
located. Each dissenting shareholder made a party to the proceeding is entitled
to judgment for the amount, if any, by which the court finds the fair value of
the dissenting shareholder's shares, plus interest, exceeds the amount paid by
the Company.
The court in an appraisal proceeding will determine and assess costs
against all parties in such amounts as the court finds equitable. The court may
assess fees and expenses of counsel and experts against either the Company or a
dissenter if the court finds that the party against whom the fees and expenses
are asserted acted arbitrarily, vexatiously, or not in good faith. In addition,
if the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the Company, the court may award
to those counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefitted.
Exchange of Certificates and Payment for Fractional Shares of New Common Stock
If the Reverse Stock Split is approved by the shareholders, the Company
will file Articles of Amendment to its Articles of Incorporation with the
Secretary of State of Indiana. The Reverse Stock Split will become effective on
the date of that filing (the "Effective Date"). American Stock Transfer & Trust
Company has been appointed exchange agent (the "Exchange Agent") to carry out
the exchange of certificates for New Common Stock and/or cash.
As soon as practicable after the Effective Date, the shareholders will
be notified and asked to surrender their certificates representing shares of
Common Stock to the Exchange Agent. Those shareholders beneficially owning
37,000 shares or more will receive in exchange certificates representing shares
of New Common Stock on the basis of one share of New Common Stock for each
37,000 shares of Common Stock held prior to the Reverse Stock Split, and in
cases where a shareholder does not beneficially own a number of shares evenly
divisible by 37,000, cash in the amount of $11.00 per share of the currently
outstanding Common Stock in lieu of receiving fractional shares of New Common
Stock following the Reverse Stock Split. Shareholders owning fewer than 37,000
shares on the Effective Date will receive in exchange a cash payment in the
amount of $11.00 per share.
For the purpose of the operation of the Reverse Stock Split (i.e., for
determining whether and to what extent shareholders will receive New Common
Stock and/or cash in lieu of fractional shares), and for no other purpose, the
Company will treat the person who is the underlying beneficial owner of shares
held by a nominee as the shareholder.
-44-
<PAGE>
If the Reverse Stock Split is effected, any shareholder beneficially
owning fewer than 37,000 shares of the currently outstanding Common Stock will
cease to have any rights with respect to the Common Stock of the Company, except
to be paid in cash, as described in this Proxy Statement. No interest will be
paid or accrued on the cash payable to shareholders after the Reverse Stock
Split is effected.
No service charges will be payable by shareholders in connection with
the exchange of certificates or the payment of cash in lieu of issuing
fractional shares, all expenses of which will be borne by the Company.
FINANCING OF THE REVERSE STOCK SPLIT
The Board estimates that the total cost to the Company of the Reverse
Stock Split for the payment of the fractional share interests and the settlement
of outstanding stock options in the Reverse Stock Split and the estimated
transactional fees and expenses will be approximately $11,300,000 and $360,000,
respectively. The Company intends to finance this transaction by borrowing funds
from a financial institution based in Chicago, Illinois. This borrowing will be
repaid over time from the Company's working capital.
The Company has engaged SPP Hambro & Co., LLC ("SPP") to act as advisor
to the Company in connection with its issuance of approximately $12,000,000 of
senior bank debt. The proceeds of the Senior Bank Debt will be used to
consummate the Reverse Stock Split, to refinance existing indebtedness, and for
general corporate purposes. SPP will be paid a fee equal to 1.5% of the
principal amount of any Senior Debt or Senior Debt Facilities raised, plus
reasonable out-of-pocket costs. This fee is currently estimated at $180,000.
The Company has signed a letter of intent with a financial institution
based in Chicago, Illinois for $12 million of senior financing. Of this amount,
$6.5 million consists of a line of credit under a two-year revolving credit
facility. The interest rate may either be Prime Plus or LIBOR Plus and varies
based on the ratio of the Company's senior funded debt to the trailing twelve
month EBITDA (earnings before interest expense, income taxes, depreciation
expense, and amortization expense). Interest is reset annually. The non-use fee
for the line of credit will also vary based on that ratio. The interest rates
and non-use fees for this $6.5 million line of credit vary as provided in the
following table:
Level Ratio Prime Plus LIBOR Plus Non-Use Fee
----- ----- ---------- ---------- -----------
I *4.00:1 # 3.50:1 1.50% 275 b.p. 50.0 b.p.
II *3.50:1 # 2.50:1 1.00% 250 b.p. 37.5 b.p.
III *2.50:1 # 2.00:1 .50% 225 b.p. 37.5 b.p.
IV *2.00:1 0% 200 b.p. 25.0 b.p.
* less than or equal to
# greater than
Advances will be permitted under the line of credit in amounts equal to 85% of
eligible accounts receivable and 50% of eligible inventory (including work in
process). Interest on borrowings is payable over the term of the loan and
principal is due at maturity.
The remaining $5.5 million of the amount financed by the Chicago lender
will consist of a five-year term loan with similar pricing. The interest rate
will be reset annually pursuant to the following table:
Level Ratio Prime Plus LIBOR Plus Non-Use Fee
I *4.00:1 # 3.50:1 1.75% 300 b.p. N/A
II *3.50:1 # 2.50:1 1.25% 275 b.p. N/A
III *2.50:1 # 2.00:1 .75% 250 b.p. N/A
IV *2.00:1 0% 225 b.p. N/A
* less than or equal to
# greater than
Interest on borrowings under this term loan is payable on a monthly basis.
Principal payments in the monthly amount of $62,500 for the first year of the
loan term and $98,954 over the remaining four years of the loan term are
required. The Company's excess cash flow must be applied to repay the term loan,
depending on the collateral coverage for the loan.
The commitment fee for this $12,000,000 senior financing is 1.25% of
the total amount financed, or $150,000. The financing will be secured by all
corporate assets of the Company. Standard financial covenants will be included
in the loan documents.
In addition, one of the Company's largest shareholders, Edgar Mulzer
will be providing the Company with a loan of $3,000,000, the repayment of which
will be subordinated to the senior financing described above. For this
subordinated financing, there is a commitment fee of $50,000. Interest is paid
over the term of the loan (which is five years) at the annual rate of 14%.
Principal is due at maturity.
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth as of September 1, 1998, the number of
shares of Common Stock owned and the percentage of Common Stock owned before and
after the Effective Date of the Reverse Stock Split for each of the following
persons: (i) each person who, to the knowledge of the Company, beneficially owns
more than 5% of the outstanding Common Stock; (ii) each director and executive
officer; and (iii) all officers and directors as a group. Unless otherwise
noted, all addresses are c/o Thermwood Corporation, P.O. Box 436, Buffaloville
Road, Dale, Indiana 47523.
-45-
<PAGE>
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares Total Shares Shares Owned Total Shares
Owned at Owned Prior to Following Owned Following
Names and Addresses September 1, Reverse Stock Reverse Stock Reverse Stock
of Beneficial Owners (1) 1998 Split (11) Split (12) Split (12)
------------------------ ---- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Kenneth J. Susnjara (2) 411,400 (3) 25.86% 7 58.33%
Edgar Mulzer 218,052 (4) 15.03% 5 41.67%
401 10th Street
Tell City, IN 47586
Peter N. Lalos 22,000 (5) * -0- ---
14312 Darnestown Rd.
Gaithersburg, MD 20878
Linda S. Susnjara (2) 411,400 (3) 25.86% 7 ---
Lee Ray Olinger 400 (6) * -0- ---
c/o First Bank of
Huntingburg
4th and Main Street
Huntingburg, IN 47542
Michael P. Hardesty 8,400 (7) * -0- ---
Rebecca F. Fuller 2,600 (8) * -0- ---
David J. Hildenbrand 6,600 (9) * -0- ---
Richard A. Kasten 950 * -0- ---
Donald L. Ubelhor 6,000 (10) * -0- ---
All Officers and Directors 676,402 40.89% 12 100%
as a Group (10 persons)
</TABLE>
* Less than 1%.
(1) Except as otherwise noted, all shares are beneficially owned and the
sole voting and investment power is held by the persons indicated.
(2) Mr. and Mrs. Susnjara may each be deemed to be a beneficial owners of
the Company's securities owned by the other because of their marital
relationship. Accordingly, the shares shown as beneficially owned by
Mr. Susnjara are identical to the shares shown beneficially owned by
Mrs. Susnjara.
-46-
<PAGE>
(3) Includes 10,000 shares of subject to options granted under the
Incentive Plan, 20,000 shares subject to options granted under the
Non-Qualified Plan, and 120,000 shares subject to Stock Option
Agreements with the Company (which options are expected to be canceled
on the Effective Date of the Reverse Stock Split if the Amendment is
approved).
(4) Includes 10,000 shares subject to options granted under the
Non-Qualified Plan.
(5) Includes shares subject to debentures presently convertible into 4,000
shares of Common Stock and 10,000 shares subject to options granted
under the Non-Qualified Plan.
(6) Includes 400 shares held by Mr. Olinger's wife.
(7) Includes 8,000 shares subject to options granted under the Incentive
Plan.
(8) Includes 2,000 shares subject to options granted under the Incentive
Plan.
(9) Includes 5,400 shares subject to options granted under the Incentive
Plan.
(10) Includes 5,600 shares subject to options granted under the Incentive
Plan.
(11) Calculated pursuant to Rule 13d-3(d)(1) promulgated under the 1934 Act,
and based on 1,441,106 shares outstanding as of September 1, 1998.
(12) Based on the Company's review of available shareholder records.
-47-
<PAGE>
OTHER INFORMATION CONCERNING AFFILIATES
Family Relationships. Linda S. Susnjara and Kenneth J. Susnjara are husband
and wife. There is no other family relationship among any of the directors or
executive officers of the Company.
Arrangements with AAI. Linda S. Susnjara and Kenneth J. Susnjara are the
owners of Automation Associates Incorporated ("AAI"), a dealer of the Company's
industrial products. The agreement between the Company and AAI contains the same
terms and conditions as do the Company's agreements with its other dealers. The
Company paid AAI $447,667 and $349,584 in commissions during the 1997 and 1996
fiscal years, respectively, for assisting in effecting sales. AAI also leases
space from the Company at what management believes is a fair market rate. Rental
payments were $6,800 during the 1997 fiscal year and $7,200 during the 1996
fiscal year. Management believes that the terms of the transactions between the
Company and AAI are as fair as those which the Company would have obtained if
these transactions had been effected with independent third parties. These
transactions were approved by a majority of the disinterested directors.
Transactions with Mr. Mulzer. On November 18, 1993, an aggregate of
$3,437,120 owed to Mr. Mulzer by the Company was converted to 1,000,000 shares
of Preferred Stock. Mr. Mulzer, as the sole holder of the Preferred Stock, was
entitled to receive cumulative cash dividends out of the net profits of the
Company at the rate of $.34 per share per annum, payable monthly in equal
installments within the first fifteen days of the each month for the preceding
month as directed by the Board of Directors of the Company. The Company had the
right in its sole discretion to redeem the Preferred Stock at any time at $3.40
per share.
The Company redeemed 162,000 and 100,000 shares of the Preferred Stock for
a total of $550,800 and $340,000 during fiscal years 1997 and 1996,
respectively. The Company paid dividends in the amount of $285,204 and $330,055
for the fiscal years 1997 and 1996, respectively.
In October, 1998, using funds borrowed from a bank under a $3.5 million
line of credit, the Company repurchased the balance of 738,000 shares of
Preferred Stock from Mr. Mulzer for $2,546,320. Prior to the repurchase of such
shares, the Company paid dividends in fiscal year 1998 of $43,256.
The Company's arrangements with Mr. Mulzer were approved by the majority
of disinterested directors.
DESCRIPTION OF COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote per share
upon each proposal or matter presented at any meeting of shareholders and is
entitled to receive such dividends, if any, as may be declared from time to time
by the Board of Directors from funds legally available therefor.
-48-
<PAGE>
Upon liquidation or dissolution of the Company, the holders of shares are
entitled to receive pro rata all assets available for distribution to holders of
Common Stock.
If the Amendment is approved and the Reverse Stock Split takes place, the
terms, rights and preferences of the Common Stock will be unchanged.
MANAGEMENT OF THE COMPANY
The executive officers and directors of the Company are as follows (unless
otherwise indicated, the business address of each of the persons listed below is
at the Company's principal executive officers and each of such persons is a
citizen of the United States of America):
Name Age Position
Kenneth J. Susnjara (1) 51 Chairman of the Board, President and Director
Linda S. Susnjara (1) 49 Secretary and Director
Michael P. Hardesty 44 Vice President of Engineering
Rebecca F. Fuller 48 Treasurer
David J. Hildenbrand 41 Vice President of Sales
Richard Kasten 46 Vice President of Technical Services
Donald Ubelhor 41 Vice President of Manufacturing
Peter N. Lalos 64 Director
Edgar Mulzer 80 Director
Lee Ray Olinger 71 Director
- ---------------
(1) Mr. and Mrs. Susnjara are husband and wife.
Mr. Susnjara co-founded the Company in 1969 and has been a director
since inception and Chairman, President and Chief Executive Officer since 1971.
He also served as Treasurer prior to March 1979 and again from October 1983 to
June 1985. He has devoted his full time to the Company's business except for a
brief period in 1985 when he acted as a distributor for the Company. Mr.
Susnjara is the author of a book on industrial robotics entitled A Manager's
Guide to Industrial
-49-
<PAGE>
Robotics and a book on furniture manufacturing titled Furniture Manufacturing in
the New Millennium.
Mrs. Susnjara has been a director of the Company since 1985 and
Secretary since 1989. She is and has been since 1985 the President of AAI, a
dealer of the Company's industrial products. Mrs. Susnjara is not active in the
Company's business.
Mr. Hardesty has been the Company's Vice President of Engineering since
August 1988. He joined the Company in 1975 and was employed first as a project
engineer, then project manager and then general manager until July 1980 when he
was promoted to Vice President of Operations. He served in that capacity until
May 1985 when he became Vice President of the Machining Products Division, a
position he held until assuming his current position in 1988.
Mrs. Fuller joined the Company in 1981 and was promoted to accounting
manager in 1983 and controller in 1985. She assumed her current position as
Treasurer in July 1993.
Mr. Hildenbrand became a Vice President of the Company in August, 1988.
Previously, he had been employed by the Company in various technician and sales
manager positions since 1977. He has also been a director of Thermwood (Europe)
Ltd. since July, 1996.
Mr. Kasten became a Vice President in December, 1993. Previously, he
had been employed by the Company as a manager of applications since 1990.
Mr. Ubelhor became Vice President of Manufacturing in August, 1997.
Previously, he had been the Company's Production Manager since 1993.
Mr. Lalos has been engaged in the private practice of law in Washington
D.C. since 1961 and is the senior partner in the law firm of Lalos & Keegan. He
served as Secretary of the Company from September 1981 until December 1989 and
as a director from April 1981 until July 1986. He was reelected to the Board of
Directors in December, 1989.
Mr. Mulzer was Chairman of the Board of The Dale State Bank, a
commercial bank in Dale, Indiana, from 1970 through 1993. Mr. Mulzer is
currently retired. He became a director of the Company in September 1974 and has
served continuously in that capacity to the present.
Mr. Olinger has been a director since December, 1989. He has been a
director since 1949 and Chairman of the Board since 1986 of First Bank of
Huntingburg, a commercial bank in Huntingburg, Indiana.
-50-
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table summarizes certain historical financial data which
have been derived from the audited consolidated financial statements of the
Company for each of the years in the five-year period ended July 31, 1997 and
the unaudited consolidated financial statements for the nine-month periods ended
April 30, 1998 and 1997. Per share numbers and weighted average number of shares
have been adjusted to reflect the Company's 1-for-5 reverse stock split
effective January 5, 1998. For additional information, see "Financial Statements
of the Company," commencing on page F-1.
Selected Statement of Operations Data (in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended April 30, Fiscal Year Ended July 31,
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, less commissions $ 15,960 $ 12,192 $ 17,779 $ 12,636 $ 12,314 $ 9,985 $ 10,825
Gross profit 6,473 4,764 6,906 4,925 4,786 3,579 2,173
Earnings before income
taxes 1,780 1,417 2,055 1,174 1,140 136 (1,394)
Earnings (loss) from
continuing operations 1,061 866 1,236 2,334 2,350 136 (1,394)
Net earnings (loss) $ 1,061 $ 866 $ 1,236 $ 2,334 $ 2,350 $ 208 $ (1,360)
========== ========= ========= ========= ========= ======== ==========
Earnings (loss) per
share:
Basic $ 0.72 $ 0.49 $ 0.70 $ 1.63 $ 1.92 $ 0.00 $(1.35)
Diluted $ 0.68 $ 0.48 $ 0.69 $ 1.45 $ 1.49 $ 0.00 $(1.35)
Weighted average number of shares:
Basic 1,421 1,327 1,350 1,231 1,030 1,030 1,011
Diluted 1,510 1,429 1,446 1,437 1,451 1,030 1,011
Cash dividends declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
Selected Balance Sheet Data (in thousands except per share data)
April 30, July 31,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 13,427 $ 11,273 $ 8,766 $ 7,527 $ 5,418 $ 6,928
Working capital 5,909 5,080 3,791 2,811 1,706 1,291
Long-term obligations 2,621 285 709 1,870 1,862 5,711
Shareholders' equity
(deficit) 5,687 7,087 6,275 3,437 1,456 (1,985)
Book value per share $ 3.98 $ 5.06 $ 4.80 $ 3.37 $ 1.41 $(2.04)
Ratio of earnings to
fixed charges 11.79 24.14 9.44 4.53 1.30 N/A(1)
</TABLE>
(1) The pretax loss from continuing operations resulted in a fixed charge
coverage deficiency of $1,394,238.
-51-
<PAGE>
Recent Financial Developments
The following tables set forth certain summary financial information for the
Company at July 31, 1998 and July 31, 1997, and for the three and twelve months
ended July 31, 1998 and 1997.
<TABLE>
<CAPTION>
Summary Statement of Operations Data (in thousands except per share data)
Fiscal Year Ended Quarter Ended
July 31, July 31,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales, less commissions $ 21,884 $ 17,779 $ 5,924 $ 6,123
Gross profit 8,993 6,906 2,521 2,662
Earnings before income taxes 2,445 2,055 665 638
Net earnings 1,475 1,236 414 370
Earnings per share
Basic $ 1.00 $ .70 $ .29 $ .30
Diluted $ .89 $ .69 $ .26 $ .25
</TABLE>
Summary Balance Sheet Data (in thousands)
July 31, July 31,
1998 1997
(unaudited)
Total assets $ 11,920 $ 11,273
Shareholders' equity 6,102 7,087
Net sales for fiscal year 1998 increased by $4.1 million or 23% from
fiscal year 1997. However, backlog at July 31, 1998 was approximately $1 million
lower than at July 31, 1997. Management attributes the decreased level of orders
at July 31, 1998 to a slowdown in capital purchasing because of a slower
economy. Also, traditionally sales are slower before the International
Woodworking Fair, a furniture industry trade show, which was held in August.
Sales generally increase a month or two after the show. Gross profit for fiscal
year 1997 was 39% of net sales compared to 41% of net sales for fiscal year
1998. In the current year, gross profit was positively affected by the continued
use of more efficient production methods, including in-house fabrication of
components previously finished outside the Company.
-52-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal Years Ended July 31, 1997, 1996 and 1995
Results of Operations. Net sales for fiscal year 1997 were $17,779,415,
an increase of 41% from fiscal year 1996, and a 44% increase from fiscal year
1995. European sales for the first year in operation were $1,035,484, or
approximately 6% of total net sales. Machine sales consisted of $16,420,313, or
82% of total gross sales. Technical services were $3,660,548, or 18% of total
gross sales. Backlog increased to $4,080,000 at July 31, 1997 from $1,630,000 at
July 31, 1996. Management attributes the increased level of orders at July 31,
1997 to a better market share because of lower prices and a good market due to
sustained economic growth in the United States.
Gross profit for fiscal year 1997 was $6,905,916, or 38.84% of net
sales. The percentage of current year gross profit to net sales has decreased
slightly from last year's 38.97% and 38.86% for 1995. Gross profit for the
European operations was $374,021, or 36.12% of net European sales. In the
current year, gross profit was positively affected by the continued use of more
efficient production methods, including in-house fabrication of components
previously finished outside the Company. However, the total gross profit was
lower than the two prior years because of the lower gross profit of the European
sales. Management expects the first quarter of fiscal year 1998 to reflect
higher margins due to generally higher margins on newly designed products and
better production efficiency due to a more experienced work force, and improved
manufacturing processes. Although management anticipates that gross profit
percentages from operations should continue to improve during 1998, no assurance
to this effect can be given.
Research and development, marketing, administrative and general
expenses were $4,794,563 in fiscal year 1997, compared to $3,638,536 in 1996 and
$3,315,904 in 1995. Research and development expenditures aggregating $216,000
in 1997, versus $284,000 in 1996 and $246,000 in 1995 are included in the
foregoing amounts. In management's opinion, with its new products and
experienced work force the Company can continue to take advantage of the
favorable economic conditions.
The major portion of the increased research and development, marketing
and administrative and general expenses from 1995 to 1997 was attributable to
European operations which did not exist in fiscal year 1996. These expenses
amounted to $570,000, or approximately 12% of total expenses in fiscal year
1997. Increased wages and benefits and increased advertising and marketing
efforts also contributed to the higher level of expenses.
Interest expense for fiscal year 1997 was $75,686, a decrease of
$42,913 from 1996 and a decrease of $219,239 from 1995. The steady decrease from
prior years is primarily due to the conversion of 12% convertible debentures to
common stock during fiscal years 1997 and 1996.
-53-
<PAGE>
Operating income for fiscal year 1997 was $2,111,353 compared to
operating income of $1,286,817 and $1,470,333 in 1996 and 1995, respectively.
The increase in operating income in 1997 over 1996 resulted primarily from
increased sales. The European operations had an operating loss of $195,971.
Fiscal year 1997 net earnings were $1,235,824, compared to net earnings of
$2,334,428 and $2,349,794 in 1996 and 1995, respectively. Deferred tax benefits
of $1,178,000 and $1,236,000 recognized in 1996 and 1995, respectively,
contributed to increases in those years. This benefit primarily resulted from a
reduction in a deferred tax asset valuation allowance based on management's
expectation that future earnings would more likely than not allow for
realization of deferred tax assets including utilization of net operating loss
carryforwards. As the deferred tax valuation allowance was eliminated prior to
fiscal year 1997, income tax expense was provided on all 1997 earnings. Federal
income tax expense for fiscal year 1997 was $786,000, compared to income tax
benefits of $1,064,000 and $1,110,000 for fiscal years ended July 31, 1996 and
1995, respectively.
The Company has federal income tax net operating loss carryforwards of
approximately $4,896,000 which expire in the years 1998 through 2009. It also
has other tax credits of lesser value which appear in Note I of Notes to
Financial Statements.
Liquidity and Capital Resources. At July 31, 1997 the Company's working
capital was $5,080,310 compared to $3,790,586 at July 31, 1996. This increase
was primarily due to increased sales and accounts receivable. The increase in
accounts receivable was due to increased sales in the fourth quarter.
Inventories also increased, primarily due to in-house processing of components
previously purchased completely fabricated. The increase in inventory levels,
however, also contributed to increased accounts payable.
Management believes that the focus on marketing, sale and manufacture
of standard machines at the lowest possible price has been a major factor in the
increased market share, margins and profitability.
The Company had a positive cash flow from operating activities for the
1997 fiscal year in the amount of $1,791,778. Net earnings of $1,235,824, along
with the add back of other non-cash expenses such as depreciation and
amortization of $338,274, and an increase in accounts payable and customer
deposits contributed to a positive cash flow. However, an increase in
inventories and accounts receivable used cash resources.
During the 1997 fiscal year, the Company's investing activities were
primarily for remodeling engineering and supervisors' offices, replacement of
computer equipment and the retrofitting of production equipment with Thermwood
Controls. Expenditures for fixed assets in the 1998 fiscal year are anticipated
to be for normal replacements and purchases of labor-saving equipment for
production. The Company also has plans for expansion of the production area to
increase efficiency and capacity due to an anticipated increased level of sales.
-54-
<PAGE>
Principal payments on lease obligations during the 1997 fiscal year
were for leased office equipment. Cash flows from financing activities included
$285,204 of dividend payments on preferred stock and redemption of $550,800 of
preferred stock.
Nine Months Ended April 30, 1998 Compared to Nine Months Ended April 30, 1997
Results of Operations. Net sales for the quarter ended April 30, 1998
were $6,101,645 an increase of 38.5% from the third quarter net sales in fiscal
1997 and an increase of 20.7% over the second quarter of fiscal year 1998. Net
sales for the nine months of the current fiscal year were $15,959,851, an
increase of $3,768,187, or 30.9%, from last year's nine-month period.
Gross profit for the current quarter was $2,579,781, an increase of
59.1% from the third quarter last year and an increase of 39.4% from the second
quarter of fiscal year 1998. Gross profit for the nine months needed April 30,
1998 was an increase of $1,709,186, or 35.9%, over the same period of fiscal
year 1997. Gross profit as a percentage of net sales was 42.3% for the third
quarter of fiscal year 1998 compared to 36.8% for the third quarter of 1997 and
36.6% during the second quarter of fiscal year 1998 and increased from 39.1% to
40.6% for the nine-month periods ended April 30, 1997 and 1998, respectively.
The higher gross profit for the third quarter of fiscal 1998 was
reduced by research and development, marketing and administrative and general
and interest costs and other income to result in earnings before income taxes of
$836,283, an improvement of $424,842 over a profit of $411,441 for the same
period in fiscal year 1997. The cost of sales increase of 26.6% from the third
quarter of fiscal year 1997 was due primarily to proportionately higher net
sales for the same period and was actually less proportionately than the 38.5%
sales increase over the same period of fiscal year 1997. Earnings before income
taxes for the nine-month period of fiscal year 1998 were $1,779,578, or a 25.6%
increase over the same period for fiscal year 1997. Cost of sales also increased
27.7% during the nine-month period ending April 30, 1998, again below the 30.9%
increase in sales for the same period.
Research and development, marketing and administrative and general
expense for the third quarter of fiscal year 1998 increased approximately 40.8%
from the third quarter of fiscal year 1997 and increased approximately 38.6% for
the nine-month period ended April 30, 1998, compared to the same period in
fiscal year 1997. The year-to-date increase is due primarily to increases in
salaries and bonuses based upon profitability.
European operations contributed 7% of total sales in fiscal year 1998,
or $1,175,916 compared to 4% of total sales, or $535,112 in fiscal year 1997.
This was a 120% increase in European sales over fiscal year 1997. Research and
development, marketing and administrative and general expenses for the European
operations were approximately 14% of the total for the Company and an increase
of $371,000, or 134% over fiscal year 1997.
-55-
<PAGE>
Interest expense in the third quarter of fiscal year 1998 was $72,810,
an increase of approximately $56,000 over $16,734 for the same quarter last year
and an increase of approximately $11,000 from the second quarter of fiscal year
1998. For the nine-month period ended April 30, 1998 interest expense was
$160,069 compared to $70,030 for the same period of fiscal year 1997, an
increase of approximately $90,000. This higher level of interest is due
primarily to the loan from a bank for the repurchase of the preferred stock and
for expansion of production facilities. Interest on the convertible debentures
for the quarter ended April 30, 1998 was approximately $5,000 compared to
approximately $16,000 for the same period in fiscal year 1997. The remaining
balance of debentures is approximately $170,000, net of unamortized discount, at
April 30, 1998.
The net earnings in the third quarter of fiscal year 1998 were
$491,954, an increase of 94% over the third quarter of fiscal year 1997. For the
nine-month period ended April 30, 1998, net earnings were $1,060,882, a 22.6%
increase over the $865,680 net earnings for the nine-month period ended April
30. Income taxes of $718,696 were accrued for the nine months ended April 30,
1998 compared to $550,901 accrued for the same period in 1997.
Liquidity and Capital Resources. At April 30, 1998, the Company's
working capital was $5,908,730 compared to $5,080,310 at July 31, 1997. This
increase was due primarily to increases in inventory. The Company is now
purchasing bulk quantities of raw materials in order to produce many components,
which were previously purchased already machined, thus increasing
work-in-process inventory. Increased inventories were the result of a slower
turnover rate because of the processing time for work-in-process inventories.
An increase in backlog of approximately $360,000 from the $4,080,000 at
July 31, 1997 contributed to increased raw material and work-in-process
inventories. Increased inventories contributed to the increase in working
capital by approximately $1,360,000. Inventory levels were increased to support
the backlog covering the shorter production period and faster turnaround
demanded by customers.
Backlog increased during the third fiscal quarter ended April 30, 1998
to $4,440,000 compared to approximately $3,800,000 both at the end of the
preceding quarter and also for the quarter ended April 30, 1997. Accounts
receivable also increased approximately $1,300,000 while accounts payable and
customer deposits increased approximately $140,000 and $800,000, respectively,
from July, 1997 due to higher sales levels.
Shareholders' equity decreased from $7,087,313 at July 31, 1997 to
$5,687,096 in the nine month period ended April 30, 1998. A total of 24,000
shares of common stock at a price of $5 per share were issued upon conversion of
12% debentures during the nine months ended April 30, 1998 for an increase to
shareholders' equity in the amount of $106,926, net of discount and issuance
costs. In the first nine months of fiscal 1997, 81,000 shares were added to
common stock at a net amount of $357,980.
-56-
<PAGE>
The Company has repurchased the balance of 738,000 shares of preferred
stock for $2,546,320 for the nine months ended April 30, 1998 and entered into a
line of credit with a bank in the amount $3.5 million. This transaction enabled
the Company to take clear title to its land and building which were connected to
a lease agreement with the related party who held the preferred stock. This then
enabled the Company to proceed with an expansion of its production facilities of
20,000 square feet. For the same period in fiscal year 1997, the Company
redeemed 119,200 shares of the preferred stock at $3.40 per share.
LITIGATION
The Company is not named as a plaintiff in any litigation. The Company
is named as a defendant in one suit relating to a product warranty. Management
is of the opinion that such suit is incidental to the business of the Company
and the ultimate disposition thereof will not have a material adverse effect on
the Company's financial position or results of operations.
MARKET FOR THE COMMON STOCK; DIVIDENDS
Market Information
The Company's Common Stock is traded on AMEX and PSEX. The following
table sets forth the high and low sales prices per share (adjusted to reflect
the Company's 1-for-5 Reverse Stock Split in January, 1998) as reported on AMEX.
High Low
Fiscal 1998: Fourth Quarter $10.06 $7.50
Third Quarter $ 9.12 $7.50
Second Quarter $13.10 $9.05
First Quarter $14.05 $9.70
Fiscal 1997: Fourth Quarter $10.00 $7.50
Third Quarter $10.00 $7.50
Second Quarter $10.60 $6.90
First Quarter $11.90 $9.70
On the Record Date, the high and low sales price per share of Common
Stock were $____ and $____, respectively.
The Company publicly announced the $11.00 per share price which would
be paid in lieu of fractional shares in the Reverse Stock Split on August 18,
1998. On August 17, 1998, the last trading day before the announcement of the
Reverse Stock Split, the high and low price for shares
-57-
<PAGE>
of Common Stock, as reported on AMEX, were both $8.25. On October 5, 1998, the
high and low price for shares of Common Stock, as reported on AMEX, were both
$9.8125.
Company and Affiliate Purchases of Common Stock
The Company has not purchased any shares of Common Stock since August
1, 1995. Since August 1, 1995, Edgar Mulzer purchased on the open market _____
shares at $_____ on _______________ and ______ shares at $________ on
_______________. Since August 1, 1995, Mr. and Mrs. Susnjara purchased on the
open market 400 shares at $7.625 per share on May 1, 1998, 400 shares at $7.625
per share on May 4, 1998, and 600 shares at $7.625 per share on May 5, 1998. In
addition, Mr. and Mrs. Susnjara converted Debentures into 10,000 shares of
Common Stock on September 2, 1998. These are the only transactions in shares of
the Company effected by such individuals since August 1, 1995.
Neither the Company nor any of its affiliates, directors or executive
officers has purchased or sold any Common Stock in the last sixty days.
Dividends
The Company has never paid dividends on its Common Stock. The current
policy of the Board of Directors is to retain earnings, if any, to finance the
operation of the Company's business. If the Reverse Stock Split is effected, the
Company expects to elect S corporation status. After such election, the Board of
Directors expects to declare annual distributions of income or dividends in such
amounts as it deems appropriate. Such distributions are likely to be in amounts
at least equal to the taxes on Company income which the shareholders will be
required to pay.
SHAREHOLDER PROPOSALS
A shareholder proposal which is intended to be presented at the next
annual meeting of shareholders must be received by the Company at its principal
executive offices, whose mailing address is P.O. Box 436, One Buffaloville Road,
Dale, Indiana 47523 no later than September 15, 1998, if it is to be included in
any proxy solicitation material mailed by the Company. In addition, if a
shareholder intends to present a proposal at the next annual meeting without
including the proposal in the proxy materials related to that meeting, and if
the proposal is not received by the Company by October 4, 1998, then the proxies
designated by the Board of Directors for the next annual meeting may vote in
their discretion on any such proposal any shares for which they have been
appointed proxies without mention of such matter in the proxy statement or on
the proxy card for such meeting. If the Company has effected the Reverse Stock
Split and terminated the Registration of the Common Stock under the 1934 Act
prior to its next annual meeting of shareholders, it will no longer be subject
to the proxy solicitation rules in the 1934 Act with respect to that meeting.
-58-
<PAGE>
INDEPENDENT ACCOUNTANTS
Representatives of KPMG Peat Marwick LLP, the Company's independent
auditors for the last and current fiscal year, are not expected to be at the
Special Meeting.
ADDITIONAL INFORMATION
The Company files periodic reports, proxy statements and other
information with the Commission under the 1934 Act relating to its business,
financial condition and other matters. The Company has filed a Schedule 13E-3
with the Commission in connection with the proposed Reverse Stock Split. This
Proxy Statement does not contain all of the information set forth in the
Schedule 13E-3, certain portions of which have been omitted pursuant to the
rules and regulations of the Commission. The Schedule 13E-3, including exhibits
and other filings made by the Company as described above, may be inspected
without charge, and copies may be obtained at prescribed rates, at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; 75 Park Place, Room 1228, New
York, New York, 10007; Room 1204, Everett McKinley Dirkson Building, 219 South
Dearborn Street, Chicago, Illinois 60604; and Museum Square Building, Suite 500
East, 5757 Wilshire Boulevard, Los Angeles, California, 90036. Copies of such
materials can also be obtained by mail, upon payment of the Commission's
prescribed rates, from the Commission's Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549. Such materials are also available from the
Commission's Internet site, www.seg.gov. The Schedule 13E-3 is also available
for inspection and copying at the principal executive offices of the Company,
during normal business hours, at One Buffaloville Road, Dale, Indiana 47523.
COSTS
The following is an estimate of the costs incurred or expected to be
incurred by the Company in connection with the Reverse Stock Split. Amounts
shown below exclude the cost of paying for fractional shares after the Reverse
Stock Split is effected. Final costs of the transaction may be more or less than
the estimates shown below.
Legal fees $ 55,000
Transfer and exchange agent fees 5,000
Fees for valuation 25,000
Printing and mailing costs 15,000
Fees for advisor on financing 180,000
Counsel fees and other expenses of financing 30,000
Proxy solicitation costs 7,500
Commission filing fees 2,200
Accounting fees 40,000
------
Total $ 359,700
-59-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF THERMWOOD CORPORATION AND SUBSIDIARY
Report of KPMG Peat Marwick LLP F-1
Consolidated Balance Sheets -- July 31 1997 and July 31, 1996 F-2
Consolidated Statements of Operations -- Years ended July 31, 1997,
1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity -- Years ended July 31,
1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows -- Years ended July 31, 1997, 1996 F-7
and 1995
Notes to Consolidated Financial Statements (fiscal years) F-9
Unaudited Interim Financial Information
- ---------------------------------------
Consolidated Statements of Operations -- Three and nine months ended
April 30, 1998 and 1997 F-22
Consolidated Balance Sheets -- April 30, 1998 and July 31, 1997 F-24
Consolidated Statements of Cash Flows -- Nine months ended
April 30, 1998 and 1997 F-26
Notes to Consolidated Financial Statements (interim financials) F-28
-60-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Thermwood Corporation:
We have audited the accompanying consolidated balance sheets of
Thermwood Corporation and subsidiary as of July 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended July 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Thermwood
Corporation as of July 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended July
31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 12, 1997, except as to Note L which is as of October 7, 1997, and Note
M which is as of January 5, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
1997 1996
-----------------------------------------
Assets
Current Assets
<S> <C> <C>
Cash $ 512,480 $ 18,995
Accounts receivable, less allowance for
doubtful accounts of $25,000 for 1997
and 1996 1,802,569 812,540
Inventories 4,618,001 3,329,337
Deferred income taxes 1,676,000 1,073,000
Prepaid expenses 372,287 339,015
-------------- -------------
Total Current Assets 8,981,337 5,572,887
-------------- -------------
Property and Equipment
Land 73,260 73,260
Buildings and improvements 1,352,059 1,235,621
Furniture and equipment 2,768,255 2,331,461
Construction in progress 6,257 168,140
Less accumulated depreciation
and amortization (2,375,826) (2,115,795)
----------- -----------
Net Property and Equipment 1,824,005 1,692,687
-------------- -------------
Other Assets
Patents, trademarks and other 133,026 131,899
Bond issuance costs less
accumulated amortization 8,665 27,817
Deferred income taxes 326,000 1,341,000
-------------- -------------
Total Other Assets 467,691 1,500,716
-------------- -------------
Total Assets $ 11,273,033 $ 8,766,290
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
1997 1996
-----------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
<S> <C> <C>
Accounts payable $ 1,375,005 $ 694,603
Accrued compensation and payroll taxes 582,652 349,136
Customer deposits 907,110 494,009
Other accrued liabilities 1,028,505 238,288
Current portion of capital lease obligations 7,755 6,264
--------------- --------------
Total Current Liabilities 3,901,027 1,782,300
--------------- --------------
Long-Term Liabilities, Less Current Portion
Capital lease obligations 5,918 15,474
Bonds payable, net of unamortized discount of
$22,225 for 1997 and $69,721 for 1996 278,775 693,279
--------------- --------------
Total Long-Term Liabilities 284,693 708,753
--------------- --------------
Shareholders' Equity
Preferred stock, no par value, 2,000,000 shares authorized, 1,000,000 shares
issued and 738,000 and 900,000 shares
outstanding for 1997 and 1996, respectively 2,546,320 3,097,120
Common stock, no par value, 4,000,000
shares authorized, 1,400,109 and
1,307,709 shares issued and outstanding
for 1997 and 1996, respectively 10,599,285 10,190,404
Accumulated deficit (6,033,542) (6,984,162)
---------------- ---------------
7,112,063 6,303,362
Less subscriptions receivable 24,750 28,125
-------------- -------------
Total Shareholders' Equity 7,087,313 6,275,237
-------------- -------------
Total Liabilities and Shareholder's Equity $ 11,273,033 $8,766,290
=============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended July 31
1997 1996 1995
-------------------------------------------------------------
Sales
<S> <C> <C> <C>
Machine sales $ 16,420,313 $ 10,966,096 $ 11,042,793
Technical services 3,660,548 3,298,567 2,785,525
---------------- -------------- ---------------
20,080,861 14,264,663 13,828,318
Less commissions 2,301,446 1,628,172 1,514,047
---------------- -------------- ---------------
Net Sales 17,779,415 12,636,491 12,314,271
Cost of Sales
Machines 8,841,911 5,577,272 5,951,699
Technical services 2,031,588 2,133,866 1,576,335
---------------- -------------- ---------------
Total Cost of Sales 10,873,499 7,711,138 7,528,034
---------------- -------------- ---------------
Gross Profit 6,905,916 4,925,353 4,786,237
Research and development,
marketing, administrative
and general expenses 4,794,563 3,638,536 3,315,904
---------------- -------------- ---------------
Operating income 2,111,353 1,286,817 1,470,333
---------------- -------------- ---------------
Other income (expense):
Interest expense -
related party - (889) (7,791)
Interest expense - other (75,686) (117,710) (287,134)
Other 19,157 6,210 (35,614)
---------------- -------------- ----------------
Other expense, net (56,529) (112,389) (330,539)
------------------ -------------- ----------------
Earnings before income taxes 2,054,824 1,174,428 1,139,794
Income tax (expense) benefit (819,000) 1,160,000 1,210,000
---------------- -------------- ----------------
Net earnings $ 1,235,824 $ 2,334,428 $ 2,349,794
================ ============== ================
Net earnings applicable to
common shareholders $ 950,620 $ 2,004,373 $ 1,981,884
================ ============== ================
Earnings per share
Basic $ 0.70 $ 1.63 $ 1.92
================ ============== ===============
Diluted $ 0.69 $ 1.45 $ 1.49
================ ============== ===============
Weighted average number of shares:
Basic 1,349,143 1,231,146 1,029,903
Diluted 1,446,198 1,436,820 1,451,424
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
Subscriptions Accumulated
Shares Amount Shares Amount Receivable (Deficit)
------ ------ ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at
July 31, 1994 1,000,000 $3,437,120 1,029,909 $8,988,897 $ - $(10,970,419)
Preferred
dividends paid - - - - - (367,910)
Net earnings ________ _________ ________ _____ _____ 2,349,794
--------------
Balances at
July 31, 1995 1,000,000 $3,437,120 1,029,909 $8,988,897 $ - $(8,988,535)
Preferred
dividends paid - - - - - (330,055)
Redemption of
preferred stock (100,000) (340,000) - - - -
Conversion of
12% debentures,
net of related
bond issuance
costs and unamor-
tized discount - - 261,400 1,115,507 - -
Exercise of
qualified stock
options - - 10,400 56,000 (28,125) -
Exercise of other
stock options - - 6,000 30,000 - -
Net earnings - - - - - $2,334,428
---------- ---------- ----------- ----------- ---------- ----------
Balances at
July 31, 1996 900,000 $3,097,120 1,307,707 $10,190,404 $(28,125) $(6,984,162)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
Preferred Stock Common Stock
Subscriptions Accumulated
Shares Amount Shares Amount Receivable (Deficit)
------ ------ ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at
July 31, 1996 900,000 $3,097,120 1,307,709 $10,190,404 $ (28,125) $ (6,984,162)
Subscriptions
received - - - - 3,375 -
Preferred dividends
paid - - - - - (285,204)
Redemption of
preferred stock (162,000) (550,800) - - - -
Conversion of 12%
debentures, net of
related bond issuance
costs and unamor-
tized discount - - 92,400 408,881 - -
Net earnings - - - - - 1,235,824
----------- ----------- ----------- ----------- ----------- ---------
Balances at
July 31, 1997 738,000 $ 2,546,320 1,400,109 $ 10,599,285 $ (24,750) $ (6,033,542)
=========== ============ =========== ============ ============= ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31
------------------------------------------------
1997 1996 1995
---------- ---------- -------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net earnings $ 1,235,824 $ 2,334,428 $ 2,349,794
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 338,274 295,510 329,012
Provision for inventories - 21,012 80,000
Gain on disposal of equipment - (15,625) (1,850)
Deferred income taxes 412,000 (1,178,000) (1,236,000)
Changes in operating assets and
liabilities:
Accounts receivable (990,029) 369,060 (500,252)
Inventories (1,288,664) (341,402) (244,890)
Prepaid expenses and
other assets (32,864) 41,151 (140,219)
Accounts payable and
other accrued expenses 1,704,136 (263,205) (114,974)
Customer deposits 413,101 (148,350) 273,154
--------------- ---------------- ---------------
Net cash provided by
operating activities 1,791,778 1,114,579 793,775
--------------- --------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of equipment - 40,000 1,850
Purchases of patents, property
and equipment (457,599) (502,350) (350,111)
--------------- --------------- ---------------
Net cash used by
investing activities (457,599) (462,350) (348,261)
--------------- --------------- ----------------
</TABLE>
F-7
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Years Ended July 31
-------------------------------------------------
1997 1996 1995
---------- ---------- --------------
Cash Flows From Financing Activities:
Principal payments on
<S> <C> <C> <C>
lease obligations (8,065) (31,598) (76,767)
Redemption of preferred stock (550,800) (340,000) -
Payment of dividends on
preferred stock (285,204) (330,055) (367,910)
Proceeds from subscriptions
receivable 3,375 - -
Proceeds from exercise of
stock options - 57,875 -
--------------- --------------- --------------
Need cash used by
financing activities (840,694) (643,778) (444,677)
--------------- ----------------- --------------
Increase in cash 493,485 8,451 837
Cash at beginning of year 18,995 10,544 9,707
--------------- ---------------- ---------------
Cash at end of year $ 512,480 $ 18,995 $ 10,544
=============== ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General:
The consolidated financial statements include the accounts of Thermwood
Corporation and its wholly-owned subsidiary, Thermwood Europe Limited, a United
Kingdom company. The term "Company" refers to the consolidated operations of
Thermwood Corporation and its subsidiary.
The Company operates within a single business segment called industrial
automation equipment, and manufactures high technology machining systems. The
Company sells its products primarily through the assistance of dealer networks
established throughout the United States and Europe. Three dealers accounted for
approximately 42% of the Company's business; however, no customer accounts for
more than 10% of the Company's sales in fiscal 1997, 1996 or 1995. The loss of
any large dealer could have a materially adverse effect on the Company's
business.
The Company also offers a variety of technical services. These services
include training, installation assistance, preventive maintenance and upgrading
and enhancement of installed products as technology advances. The Technical
Services Division also has responsibility for the quality control of the
Company's industrial products during their manufacture. Technical services are
marketed to current customers as well as to companies that purchase Thermwood
equipment in the used market. Sales and service by the Technical Services
Division in fiscal year 1997 amounted to approximately 18% of total sales.
The Company's machining systems are utilized principally in the
woodworking, plastics and boating industries. The Company is not dependent upon
a single supplier or only a few suppliers.
Principles of Consolidation:
All significant intercompany transactions and accounts have been
eliminated in consolidation.
Use of Estimates and Assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
F-9
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Revenues and Warranties:
The manufacturing process may extend over several months and advance
cash deposits are normally required from customers. Sales are recorded
principally when machines are shipped. In certain instances, customers accept
title to machines but request that the Company delay shipment for a short period
of time. In these cases, the customer is billed under the Company's normal terms
and conditions. Revenue is recognized upon transfer of title to the customer. No
transactions of this nature occurred in fiscal 1997; sales of one machine (sale
price of approximately $100,000) under this arrangement occurred in each of 1996
and 1995.
Revenues of technical services are recognized when the service is
performed. Estimated costs of product warranties are charged to cost of sales at
the time of sale.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment:
Property and equipment are recorded at cost for assets purchased and at
the present value of minimum lease payments for assets acquired under capital
leases. Depreciation and amortization are computed by the straight-line method
over the estimated useful lives of the assets, as shown below:
Buildings and improvements 10 to 30 years
Equipment 3 to 10 years
Depreciation expense for 1997, 1996 and 1995 was $304,716, $256,290 and
$289,339, respectively.
Research and Development:
Research and development costs are expenses as incurred. Expenditures
for research and development were approximately $216,000, $284,000 and $246,000
during 1997, 1996 and 1995, respectively.
F-10
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Customer Deposits:
Customer deposits are recorded as a current liability with no offset
against costs incurred on work-in-process. As of July 31, 1997, substantially
all of the deposits had no incurred work-in-process cost.
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share,"
which requires companies to present basic and diluted earnings per share. A
reconciliation of the numerator and denominator for the basic and diluted
earnings per share calculation follows:
<TABLE>
<CAPTION>
1997 1996 1995
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Earnings
<S> <C> <C> <C> <C> <C> <C>
Net earnings $1,235,824 1,235,824 2,334,428 2,334,428 2,349,794 2,349,794
Less preferred stock
dividend (285,204) (285,204) (330,055) (330,055) (367,910) (367,910)
Add interest expense on
convertible bonds
payable - 62,580 - 98,436 - 263,388
Add amortization of bond
discount and issuance
costs - 13,120 - 30,583 - 27,660
Income tax effects of
earnings adjustments - (28,009) - (44,037) - (107,688)
----------- -------- ----------- -------- ----------- ---------
Total earnings $ 950,620 998,311 2,004,373 2,079,355 1,981,884 2,165,244
======= ======= ========= ========= ========= =========
Weighted average number
of shares
Common shares
outstanding 1,349,743 1,349,743 1,231,146 1,231,146 1,029,903 1,029,903
Common equivalent shares
related to dilutive stock
options - 36,255 - 53,075 - 7,521
Common equivalent shares
related to convertible
bonds - 60,200 - 152,600 - 414,000
----------- ------ ----------- ------- ----------- -------
Total weighted average
number of shares 1,349,743 1,446,198 1,231,146 1,436,820 1,029,903 1,451,424
========= ========= ========= ========= ========= =========
Earnings per share $ 0.70 0.69 1.63 1.45 1.92 1.49
======= ======= ======= ======= ======= =======
</TABLE>
F-11
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Income Taxes:
Deferred tax assets and liabilities are recognized for the future as tax
consequences attributable to differences between the financial statement amounts
for assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates which apply to taxable
income in the years in which those temporary differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period the change is enacted. A valuation allowance
is provided when it is more likely than not that some portion or all of net
deferred tax assets will not be realized.
Reclassifications:
Certain amounts presented in prior years' financial statements have been
reclassified to conform to the current year presentation.
NOTE B -- INVENTORIES:
Inventories at July 31 consist of:
1997 1996
------------- -------------
Finished goods $ 644,477 $ 508,910
Work-in-process 1,171,484 903,447
Raw materials 2,802,040 1,916,980
-------------- -------------
$ 4,618,001 $ 3,329,337
============== =============
F-12
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C--LEASES:
The Company has leased its production facilities and certain equipment,
primarily from related parties. Amounts included in property and equipment at
July 31 relating to capital leases are as follows:
1997 1996
------------- -------------
Land $ 73,260 $ 73,260
Building and improvements 1,171,778 1,171,778
Furniture and equipment 266,929 266,929
-------------- -------------
1,511,967 1,511,967
Less accumulated amortization (799,558) (740,782)
--------------- --------------
$ 712,409 $ 771,185
=============== ==============
Included in Land, Building and Improvements above are assets with a net
book value of $533,928 and $696,454 at July 31, 1997 and 1996, respectively,
leased from a director of the Company under a capital lease expiring in
February, 2007. During fiscal year 1994, the obligation under this lease was
converted to Preferred Stock (Note G). The Company has the option to purchase
the assets under this lease at any time for a purchase price of $1,608,629 less
the aggregate amount paid to the director for the redemption of the Series A
Preferred Stock, which payments aggregated $890,800 through July 31, 1997.
Future minimum lease payments as of July 31, 1997 for all leases are as follows:
Years ending July 31: Capital Operating
Leases Leases
1998 $ 8,916 $ 42,108
1999 7,114 42,108
2000 0 42,108
2001 0 42,108
2002 0 1,200
------------ -------------
Total minimum lease payments 16,030 $ 169,632
=============
Less amount representing interest
(principally at 14%) (2,357)
-------------
Present value of net minimum lease
payments $ 13,673
=============
Total operating lease expense for 1997, 1996 and 1995 was $44,390, $18,130 and
$18,315 respectively.
F-13
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D -- BONDS PAYABLE:
In 1993 the Company completed a public offering of 2,070 units totaling
$2,070,000. Each unit consisted of one Convertible Debenture in the principal
amount of $1,000, bearing interest at 12% per year, and 500 Redeemable Warrants.
The bonds were issued at a discount of $254,573 which is being amortized using
the interest method.
The Debentures, which mature in February 2003, are convertible, unless
previously redeemed, into shares of the Company's common stock at a price of
$5.00 per share, subject to anti-dilutive adjustments. Interest is payable
quarterly. The Company may, on 30 days written notice, and with the approval of
the underwriter of the public offering, redeem the Debentures, in whole or in
part, if the closing price of the Company's common stock for the immediately
preceding 30 consecutive trading days equals or exceeds $12.50 per share. The
redemption price will be 105% plus accrued interest through the date of
redemption.
During fiscal year ended July 31, 1997 holders tendered $462,000 of the
debentures for conversion into 92,400 common shares.
Each Warrant entitled the holder to purchase one share of common stock
at a price of $15.00 per share, subject to anti-dilutive adjustments, through
February 1996. The warrants expired on February 21, 1996.
F-14
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- COMMON STOCK OPTIONS:
The Company has both a qualified and a nonqualified stock option plan.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for these plans. Had
compensation cost been determined based on the fair value at the grant date for
awards under those plans consistent with the method of Statement of Financial
Accounting Standards No. 123 (FAS 123), the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below:
1997 1996
------------- --------------
Net Earnings
As Reported $ 1,235,824 $ 2,334,428
Pro Forma 1,214,168 1,985,024
Basic Earnings Per Share
As Reported $0.70 $ 1.63
Pro Forma 0.69 1.34
Diluted Earnings Per Share
As Reported 0.69 1.45
Pro Forma 0.68 1.20
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. The Statement does not apply to awards granted
prior to December 16, 1995. The fair value of each option is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in fiscal years 1997 and 1996: no dividend yield for
both years; expected volatility of 56 percent and 72 percent for 1997 and 1996,
respectively, risk-free interest rates of 6.2 percent and 6.6 percent for 1997
and 1996, respectively, expected lives of 10 years for all options except 5
years for options to purchase 120,000 shares granted in 1996.
The Company reserved 80,000 shares of common stock for issuance under
the qualified plan. Options to purchase 57,000 of the shares have been granted,
5,000 of which were granted during fiscal year 1997. None of these options were
exercised during fiscal year 1997. As of July 31, 1997, 46,600 were exercisable.
These options must be exercised within ten years of the grant date.
F-15
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- COMMON STOCK OPTIONS: (continued)
The nonqualified plan provides for the issuance of options to purchase
up to 70,000 shares of common stock of which options to purchase 40,000 shares
were outstanding and exercisable as of July 31, 1997.
Other options to purchase 140,000 shares have been granted by the Board
of Directors, all of which were outstanding and exercisable as of July 31, 1997.
An option to purchase 120,000 of these shares was granted to the President of
the Company. The option extends through October 18, 1997 and permits the
purchase of 60,000 shares at $15.00 per share and 60,000 at $30.00 per share.
A 6,000 share option was granted to an employee at $5.00 per share and
is exercisable through October 1997. Options for an additional 4,000 shares at
$8.4375 per share were granted during fiscal year 1996 to a principal in a
former public relations firm for the Company. The options are currently
exercisable and extend through February, 2006. During fiscal year 1997 options
for 10,000 shares were granted to another public relations firm. These options
are exercisable as of July 31, 1997, 5,000 of which are exercisable at $12.50
per share and 5,000 at $25.00 per share and expire 30 days after termination of
the service agreement between the Company and the firm.
A summary of common stock options for the years ended July 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 211,600 $ 15.95 207,000 $ 24.25 208,950 $ 24.25
Granted 15,000 $14.75 151,000 $ 19.30 0 0
Canceled/expired 0 0 130,000 $ 35.05 1,950 $ 8.15
Exercised 0 0 16,400 $ 6.85 0 0
------------ ------- ----------- ------- ----------- -------
Outstanding at end
of year 226,600 $ 15.90 211,600 $ 15.95 207,000 $ 24.25
============ ======= ======== ======== ======== =======
Exercisable at end of year 226,600 211,600 207,000
============ ======= =======
Weighted average fair value of
options granted during the year $6.90 $3.75 $ --
===== ===== =====
</TABLE>
F-16
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F -- SHAREHOLDERS' EQUITY:
The Company is authorized to issue 2,000,000 shares of non-voting preferred
stock, no par value Series A Preferred Stock, of which 1,000,000 shares were
issued and 738,000 and 900,000 shares were outstanding at July 31, 1997 and
1996, respectively. All of these shares were issued to a director/shareholder in
a conversion of debt transaction (Note G). The holders of Series A Preferred
Stock are entitled to receive cumulative cash dividends out of the net profits
of the Company at the rate of thirty-four cents ($0.34) per share per annum,
payable monthly in equal installments within the first fifteen days of each
month for the preceding month as directed by the Board of Directors of the
Company. The Company has the right in its sole discretion to redeem the stock at
any time at $3.40 per share. During fiscal years 1997 and 1996, 162,000 and
100,000 shares were redeemed by the Company for $550,800 and $340,000,
respectively. In the event of the liquidation of the Company, the holders of the
Series A Preferred Stock are entitled to receive $3.40 per share plus any unpaid
cumulative and current dividends before payment to holders of shares of the
Company's common stock.
NOTE G -- RELATED PARTY TRANSACTIONS:
Director and shareholder - The Company leased land, building and
improvements from a director/shareholder and a leasing company owned by this
director. The net book value of these leased assets was $533,928 and $696,454 at
July 31, 1997 and 1996, respectively. On November 18, 1993, the Company entered
into an agreement with the director/shareholder, whereby approximately $3.4
million in long-term debt (including amounts due under capital leases) was
converted to 1,000,000 shares of the Company's Series A Preferred Stock.
Director and shareholder - A director and shareholder is a partner in the
law firm retained as the Company's outside counsel. Total expenses for legal
services from the firm were $76,699, $103,180 and $93,929 for 1997, 1996 The
Company had accounts payable of $14,462 at July 31, 1997 relating to such legal
services.
President and secretary - The president and secretary of the Company who are
husband and wife and are also directors of the Company, are the owners of a
dealership which leases office space from and sells equipment for the Company.
The Company primarily sells its machines directly to the purchaser within this
dealer's region; however, sales may also be made directly to the dealer who in
turn sells the machines to the purchaser. The agreement between the Company and
the dealer is a standard agreement similar to other dealer agreements entered
into by the Company.
Rent income from the dealership was $6,800, $7,200 and $7,200 for 1997, 1996
and 1995, respectively. Sales commissions of $447,667, $349,584 and $578,298
were paid to the dealership during 1997, 1996, and 1995, respectively, for
assisting in effecting sales.
F-17
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I--INCOME TAXES:
The provisions for income taxes for the years ended July 31 consist of:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- --------------
Federal:
<S> <C> <C> <C>
Currently payable $ (407,000) $ (18,000) $ (26,000)
Deferred (expense) benefit (379,000) 1,082,000 1,136,000
----------------- -------------- -------------
(786,000) 1,064,000 1,110,000
----------------- -------------- -------------
State:
Currently payable 0 0 0
Deferred (expense) benefit (33,000) 96,000 100,000
----------------- -------------- -------------
(33,000) 96,000 100,000
----------------- -------------- -------------
Total income tax (expense) benefit $ (819,000) $ 1,160,000 $ 1,210,000
================== ============== =============
</TABLE>
A reconciliation of expected income taxes using an effective combined state and
federal income tax rate of 37% and actual income taxes for the years ended July
31, follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Net earnings before income taxes $ 2,054,824 $ 1,174,428 $ 1,139,794
================= ================ ==============
Expected income tax expense $ (760,000) $ (435,000) $ (422,000)
Utilization of net operating
loss carryforwards 0 119,000 474,000
Reduction in deferred tax asset
valuation allowance 0 1,480,000 1,163,000
Effect of non-deductible items:
Meals and entertainment (14,000) (11,000) (9,000)
Other (45,000) 7,000 4,000
------------------ ---------------- --------------
Total actual income tax
(expense) benefit $ (819,000) $ 1,160,000 $ 1,210,000
================== ================ ==============
</TABLE>
F-18
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- INCOME TAXES: (continued)
The tax effects of significant temporary differences represented by deferred tax
assets and deferred tax liabilities at July 31 are as follows:
Deferred tax assets: 1997 1996
------------- ---------------
Inventory valuation $ 246,000 $ 248,000
Warranty reserves 73,000 42,000
Net operating loss carryforwards 1,812,000 2,224,000
Other 3,000 90,000
-------------- --------------
Deferred tax assets 2,134,000 2,604,000
-------------- -------------
Deferred tax liability:
Property and equipment 132,000 190,000
-------------- -------------
Net deferred tax assets $ 2,002,000 $ 2,414,000
============== ==============
During the fourth quarter of the fiscal year 1996, management adjusted
the deferred tax asset valuation allowance based on its assessment as to the
likelihood that future earnings would be sufficient to realize deferred tax
assets, including net operating loss carryforwards.
At July 31, 1997, the Company had the following carryforwards for tax
purposes:
Operating loss carryforwards expiring in 2004 - 2009 $ 4,896,000
General business credits expiring in 1998 - 2001 $ 31,000
The amount of such loss carryforwards and other credits available for
utilization in any future year could be limited in the event of a change in
ownership as defined by income tax laws.
F-19
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J--ADDITIONAL INFORMATION:
Other accrued liabilities at July 31 consist of:
1997 1996
------------- --------------
Property taxes $ 66,138 $ 43,498
Income taxes 387,000 0
Accrued warranties 196,777 114,992
Other 378,590 79,798
-------------- --------------
$ 1,028,505 $ 238,288
============== ==============
Cash Flow Information:
The Company paid cash for interest in the amount of $69,739, $146,810
and $280,123 during 1997, 1996 and 1995, respectively. The Company paid cash for
income taxes in the amount of $30,000, $9,000 and $35,000 during 1997, 1996 and
1995, respectively.
Non-cash Investing and Financing Activities:
During 1995 the Company entered into a lease for office equipment with
an unrelated party and incurred a capital lease obligation of $31,929. During
1997 and 1996, bonds with face values of $462,000 and $1,307,000, respectively,
were converted to 92,4,000 and 261,400 shares of common stock.
NOTE K -- PENSION AND PROFIT SHARING PLAN:
The Company has a deferred income 401(k) savings plan for its
employees. The Company matches 25% of employee contributions up to 3% of each
employee's wages. Pension expense for 1997, 1996 and 1995 amounted to $35,840,
$19,274 and $18,588, respectively. The Company also has a management profit
sharing plan. Profit sharing expense amounted to $647,407, $384,390 and $423,037
for 1997, 1996 and 1995, respectively.
F-20
<PAGE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L -- SUBSEQUENT EVENTS:
On October 7, 1997, the Company entered into a line of credit with a
bank in the amount of $3.5 million. The balance of preferred stock in the amount
of $2,546,320 was repurchased from the shareholder. This transaction enabled the
Company to take clear title to its land and building. An expansion of 20,000
square feet to the production facilities was started and is expected to be
completed in January, 1998. Management estimates the total cost of the expansion
will be approximately $500,000.
NOTE M -- REVERSE STOCK SPLIT
On December 18, 1997, the Board of Directors approved a 1-for-5 reverse
stock split of the Company's common shares effective January 5, 1998. One new
common share was issued for every five common shares held by shareholders of
record on January 5, 1998. All common share and per share amounts in the
accompanying financial statements have been restated to reflect the effects of
the 1-for-5 reverse stock split.
F-21
<PAGE>
The financial statements which follow are unaudited.
F-22
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30 April 30
------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------ --------------- ---------------
Sales
<S> <C> <C> <C> <C>
Machine sales $ 5,170,143 $ 4,141,185 $ 14,637,831 $ 11,293,060
Technical sales 1,671,128 801,924 3,530,726 2,487,394
-------------- -------------- --------------- ----------------
6,841,271 4,943,109 18,168,557 13,780,454
Less commissions 739,626 538,708 2,208,706 1,588,790
-------------- -------------- --------------- ----------------
Net Sales 6,101,645 4,404,401 15,959,851 12,191,664
Cost of Sales
Machine sales 2,781,647 2,313,540 7,676,162 6,088,214
Technical sales 740,217 469,146 1,810,972 1,339,919
-------------- -------------- --------------- ----------------
Total Cost of Sales 3,521,864 2,782,686 9,487,134 7,428,133
-------------- -------------- --------------- ----------------
Gross Profit 2,579,781 1,621,715 6,472,717 4,763,531
Research and development,
marketing, administrative
and general expenses 1,682,931 1,195,179 4,546,551 3,280,230
-------------- -------------- --------------- ----------------
Operating income 896,850 426,536 1,926,166 1,483,301
-------------- -------------- --------------- ----------------
Other income(expense):
Interest expense (72,810) (16,734) (160,069) (70,030)
Other 12,243 1,639 13,481 3,310
-------------- -------------- --------------- ----------------
Other expense, net (60,567) (15,095) (146,588) (66,720)
-------------- -------------- --------------- ----------------
Earnings before income taxes 836,283 411,441 1,779,578 1,416,581
Income tax expense 344,329 157,847 718,696 550,901
-------------- -------------- --------------- ----------------
Net earnings $ 491,954 $ 253,594 $ 1,060,882 $ 865,680
============== ============== =============== ================
</TABLE>
F-23
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30 April 30
------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------ --------------- --------------
Net earnings applicable to common:
shareholders:
Earnings per common and common equivalent share:
<S> <C> <C> <C> <C>
Basic $ 0.34 $ 0.13 $ 0.72 $ 0.47
Diluted 0.32 0.13 0.68 0.47
Weighted average number of shares
Basic 1,430,109 1,387,509 1,421,087 1,387,509
Diluted 1,519,434 1,477,164 1,510,412 1,477,164
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
April 30 July 31
1998 1997
ASSETS
Current Assets
<S> <C> <C>
Cash $ 50,198 $ 512,480
Accounts receivable 3,071,235 1,802,569
Inventories 5,975,490 4,618,001
Deferred income taxes 1,676,000 1,676,000
Prepaid expenses 254,762 372,287
------------------- -----------------
Total Current Assets 11,027,685 8,981,337
------------------- -----------------
Property and Equipment (Net of Accumulated
Depreciation) 1,942,932 1,824,005
------------------- -----------------
Other Assets
Patents, trademarks and other 130,283 141,691
Deferred income taxes 326,000 326,000
------------------- -----------------
Total Other Assets 456,283 467,691
------------------- -----------------
Total Assets $ 13,426,900 $ 11,273,033
=================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable 1,514,143 1,375,005
Accrued liabilities 845,492 1,225,157
Accrued income taxes 1,006,414 386,000
Customer deposits 1,735,724 907,110
Current portion of long-term liabilities 17,182 7,755
------------------- -----------------
Total Current Liabilities 5,118,955 3,901,027
------------------- -----------------
Long-term Liabilities - less current portion
Capital lease obligations 4,684 5,918
Note payable to bank 2,446,320 0
Bonds payable, net of unamortized discount 169,845 278,775
------------------- -----------------
Total Long-term Liabilities 2,620,849 284,693
------------------- -----------------
</TABLE>
F-25
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
April 30 July 31
1998 1997
<S> <C> <C>
Shareholders' Equity
Preferred Stock, no par value, 2,000,000 shares
authorized, 1,000,000 shares issued and 738,000
shares outstanding at July 31, 1997 --- 2,546,320
Common stock, no par value, 20,000,000 shares
authorized, 1,388,709 shares in 1997 and
1,430,109 shares in 1998 issued and outstanding 10,736,211 10,599,285
Accumulated deficit (5,015,915) (6,033,542)
-------------------- ------------------
5,720,296 7,112,063
Less subscriptions receivable 33,200 24,750
------------------- -----------------
Total Shareholders' Equity 5,687,096 7,087,313
------------------- -----------------
Total Liabilities and Shareholders' Equity $ 13,426,900 $ 11,273,033
=================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended April 30
1998 1997
Cash Flows From Operating Activities:
<S> <C> <C>
Net earnings $ 1,060,882 $ 865,680
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Depreciation and amortization 278,612 223,405
Changes in operating assets and liabilities:
Accounts receivable (1,268,666) (487,874)
Inventories (1,357,489) (1,188,664)
Prepaid expenses and other assets 117,525 525,357
Accounts payable 139,138 404,550
Accrued liabilities 240,748 181,939
Customer deposits 828,614 387,698
--------------- --------------
Net cash provided by operating activities 39,364 912,091
--------------- --------------
Cash Flows From Investing Activities:
Purchases of patents, property and equipment (378,706) (275,046)
Net cash used by investing activities (378,706) (275,046)
Cash Flows from Financing Activities:
Principal payments on notes payable (100,000) 0
Principal payments on lease obligations (1,234) (4,615)
Note payable at bank 2,546,320 ---
Payment of dividends on preferred stock (43,256) (219,112)
Redemption of preferred stock (2,546,320) (405,280)
Proceeds from subscriptions receivable 21,550 3,375
--------------- ---------------
Net cash used by financing activities (122,940) (625,632)
---------------- ----------------
Increase (decrease) in cash (462,282) 11,413
Cash at beginning of period 512,480 18,995
--------------- ---------------
Cash at end of period $ 50,198 $ 30,408
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended April 30
1998 1997
ADDITIONAL INFORMATION:
<S> <C> <C>
Interest paid $ 146,083 $ 70,030
=============== ==============
Conversion of bonds payable, net of unamortized
discount $ 120,000 $ 357,980
=============== ==============
Subscriptions receivable for common stock issued $ 30,000 $ 0
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
Note A - Basis of Presentation
The unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. The statements have not been examined by
independent accountants but include, in the opinion of the Company, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the condensed financial position and the results of operations for the
periods presented. These financial statements should be read in conjunction with
the Company's financial statements included on Form 10-K for the year ended July
31, 1997 and Forms 10-Q for the quarters ended April 30, 1998 and 1997.
Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the year ended July 31, 1998.
Note B - Inventories
Inventories are priced at the lower of cost (first-in, first-out
method) or market.
April 30 July 31
1998 1997
Components of Inventory:
Raw material $ 3,104,938 $ 2,802,040
Work in process 2,436,370 1,171,284
Finished goods 434,182 644,477
----------------- -----------------
Total $ 5,975,490 $ 4,618,001
================= =================
Note C - Reclassifications
Certain amounts presented in the prior year condensed financial
statements have been reclassified to conform to the current year presentation.
Note D - Earnings per Share
Effective January 31, 1998, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standard No. 128, Earnings Per Share (FAS 128). FAS 128 specifies the
computation, presentation, and disclosure requirements for earnings per share
for public entities. Adoption of this standard did not have a material impact on
the Company's earnings per share in 1998 or 1997.
F-29
<PAGE>
Earnings per share for the three-month and nine-month periods ended April 30,
1998 and 1997 were determined as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
April 30 April 30
------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------ --------------- ---------------
INCOME
<S> <C> <C> <C> <C>
Net earnings $ 491,954 $ 253,594 $ 1,060,882 $ 865,680
Less preferred stock dividends 0 69,662 43,256 219,112
-------------- -------------- --------------- ----------------
Basic earnings available to
common shareholders 491,954 183,932 1,017,626 646,568
Interest and amortization related to
Convertible debt, net of taxes 4,445 9,866 13,336 41,618
-------------- -------------- --------------- ----------------
Diluted earnings available to
common shareholders $ 496,399 $ 193,798 $ 1,030,962 $ 688,186
============== ============== =============== ================
SHARES
Weighted average shares
- Basic 1,430,109 1,387,509 1,421,087 1,327,265
Convertible bonds 36,200 60,200 36,200 60,200
Dilutive common stock options 56,120 41,347 56,120 41,347
-------------- -------------- --------------- ----------------
Weighted average shares
- Diluted 1,522,429 1,489,056 1,513,407 1,428,812
============== ============== =============== ================
Basic earnings per share $ 0.34 $ 0.13 $ 0.72 $ 0.49
Diluted earnings per share $ 0.33 $ 0.13 $ 0.68 $ 0.48
</TABLE>
F-30
<PAGE>
EXHIBIT A
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
ARTICLE V
Shares
Section 1. Number. The total number of shares which the Corporation has
authority to issue is 540 shares, without par value.
Section 2. Terms. The capital stock of the Corporation shall consist of
540 shares of common stock, without par value. The common stock of the
Corporation shall be of one class and each share of common stock shall be
entitled to one (1) vote at all meetings of the shareholders of the Corporation.
The Corporation, in the discretion and upon resolution of the Board of
Directors, may at any time and from time to time issue and dispose of any of the
authorized and unissued shares of stock of the Corporation and may create
optional rights to purchase or subscribe for shares of stock of the Corporation.
Such stock may be issued and disposed of for such kind and amount of
consideration and to such persons, firms and corporations, and such optional
rights may be created, and warrants or other evidence of such rights issued, on
such terms, at such prices and in such manner as may be determined by resolution
adopted by the Board of Directors, subject to any provisions of law then
applicable. The Corporation, in the discretion and upon resolution of the Board
of Directors, may at any time and from time to time repurchase any of the
securities of the Corporation. Such securities may be repurchased for such kind
and amount of consideration and from such persons, firms and corporations, on
such terms and conditions, at such prices and in such manner as may be
determined by the Board of Directors, subject to any provisions of law then
applicable.
A-1
<PAGE>
EXHIBIT B
OPINION OF GOELZER & CO., INC.
September 2, 1998
Board of Directors
Thermwood Corporation
Attn: Peter N. Lalos
P.O. Box 436
Old Buffaloville Road
Dale, Indiana 47523
Dear Members of the Board:
You have requested Goelzer's opinion as to the fairness, from a financial
point of view, of the terms of the 1-for-37,000 reverse split of the common
stock of Thermwood Corporation ("Thermwood" or the "Company"). The terms of the
transaction are set forth in the Proxy Statement ("Proxy"). In summary, minority
shareholders which will hold less than one share of common stock after the split
will receive a cash payment of $11.00 per share of the currently outstanding
common stock, in lieu of the issuance of any resulting fractional shares of new
common stock following the reverse split.
While Goelzer has provided valuation analysis to the Board of Directors
regarding the range of fair value, the final determination of such matters was
made by the Board of Directors of Thermwood. Goelzer has not rendered any
investment banking or other services to the Company in the past. For the purpose
of this opinion, Goelzer has undertaken analyses, investigations and interviews
deemed necessary and relevant. In the course of such activities Goelzer has
among other things:
1. Reviewed the Proxy Statement;
2. Conducted detailed interviews with Thermwood's
management concerning the Company's history and
operating record, the nature of the markets served,
competitive situation, financial condition, recent
performance and current outlook;
3. Inspected Thermwood's corporate offices and
manufacturing facilities in Dale, Indiana;
4. Analyzed trading data and market capitalization of
Thermwood's common stock for a period of five years
as provided by Bloomberg Analytics;
<PAGE>
5. Analyzed the Company's financial statements and
studied Thermwood's filings under the Securities
Exchange Act of 1934 including the Form 10-K and
annual reports for the last five full years, as well
as the latest available 10-Q for the quarter ending
April 30, 1998;
6. Conducted a search using Bloomberg Analytic for
publicly traded companies which could be used as
reasonable comparables in determining the fair value
of Thermwood. Goelzer searched for companies with
similar operations and for companies which are
affected by similar economic variables, such as
furniture manufacturers;
7. Conducted a search for merger and acquisition
transactions involving privately held corporations
within the woodworking, plastics manufacturing and
furniture manufacturing industries using a
proprietary database consisting of nearly 3,000
transactions;
8. Reviewed studies for both premiums paid in
acquisitions of control as well as studies on the
lack of marketability for privately held and thinly
traded public securities;
9. Performed such other studies, analyses and
investigations as deemed appropriate.
In rendering this opinion Goelzer has relied on the accuracy and
completeness of the information furnished and has not attempted to independently
verify such information nor has Goelzer made or caused to be made any
independent evaluation of the assets of Thermwood.
Based upon the foregoing, it is our opinion that the reverse split is
fair, from a financial point of view, to the shareholders of Thermwood.
Respectfully submitted,
/s/ Goelzer & Co., Inc.
Goelzer & Co., Inc.
<PAGE>
EXHIBIT C
DISSENTERS' RIGHTS STATUTE
TITLE 23. BUSINESS AND OTHER ASSOCIATIONS
ARTICLE 1. BUSINESS CORPORATIONS - TYPES
CHAPTER 44. DISSENTERS' RIGHTS
ss. 23-1-44-1. "Corporation" defined
As used in this chapter, "corporation" means the issuer of the shares held
by a dissenter before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer.
ss. 23-1-44-2. "Dissenter" defined
As used in this chapter, "dissenter" means a shareholder who is entitled
to dissent from corporate action under section 8 [IC 23-1-44-8] of this chapter
and who exercises that right when and in the manner required by sections 10
through 18 [IC 23-1-44-10 through IC 23-1- 44-18] of this chapter.
ss. 23-1-44-3. "Fair value" defined
As used in this chapter, "fair value," with respect to a dissenter's
shares means the value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would be
inequitable.
ss. 23-1-44-4. "Interest" defined
As used in this chapter, "interest" means interest from the effective date
of the corporate action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans or, if none, it a rate that
is fair and equitable under all the circumstances.
ss. 23-1-44-5. "Record shareholder" defined
As used in this chapter, "record shareholder" means the person in whose
name shares are registered in the records of a corporation or the beneficial
owner of shares to the extent that treatment as a record shareholder is provided
under a recognition procedure or a disclosure procedure established under IC
23-1-30-4.
ss. 23-1-44-6. "Beneficial shareholder" defined
<PAGE>
As used in this chapter, "beneficial shareholder" means the person who is
a beneficial owner of shares held by a nominee as the record shareholder.
ss. 23-1-44-7. "Shareholder" defined
As used in this chapter, "shareholder" means the record shareholder or the
beneficial shareholder.
ss. 23-1-44-8. Shareholder dissent
(a) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party if:
(A) Shareholder approval is required for the merger by IC
23-1-40-3 or the articles of incorporation; and
(B) The shareholder is entitled to vote on the merger.
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed
to the shareholders within one (1) year after the date of sale.
(4) The approval of a control share acquisition under IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders an entitled to
dissent and obtain payment for their shares.
(b) This section does not apply to the holders of shares of any class or
series if, on the date fixed to determine the shareholders entitled to receive
notice of and vote at the meeting of shareholders at which the merger, plan of
share exchange, or sale or exchange of property is to be acted on, the shares of
that class or series were:
(1) Registered on a United States securities exchange insists under the
Exchange Act (as defined in IC 23-1-43-9); or
<PAGE>
(2) Traded on the National Association of Securities Dealers, Inc.
Automated Quotations System Over-the-Counter Markets -- National Market
Issues or a similar market.
(c) A shareholder:
(1) Who is entitled to dissent and obtain payment for the shareholder's
shares under this chapter; or
(2) Who would be so entitled to dissent and obtain payment but for the
provisions of subsection (b); may not challenge the corporate action
creating (or that, but for the provisions of subsection (b), would have
created) the shareholder's entitlement.
ss. 23-1-44-9. Beneficial shareholder dissent
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one (1) person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
shareholder dissents and the shareholder's other shares were registered in the
names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder's behalf only if:
(1) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(2) The beneficial shareholder does so with respect to all the
beneficial shareholder's shares or those shares over which the beneficial
shareholder has power to direct the vote.
ss. 23-1-44-10. Notice of dissenters' rights preceding shareholder vote
(a) If proposed corporate action creating dissenters' rights under section
8 [IC 23- 1-44-8] of this chapter is submitted to a vote at a shareholders'
meeting, the meeting notice must state that shareholders are or may be entitled
to assert dissenters' rights under this chapter.
(b) If corporate action creating dissenters' rights under section 8 of
this chapter is taken without a vote of shareholders, the corporation shall
notify in writing all shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in section
12 [IC 23-1-44-12] of this chapter.
<PAGE>
ss. 23-1-44-11. Notice of intent to dissent
(a) If proposed corporate action creating dissenters' rights under section
8 [IC 23- 1-44-8] of this chapter is submitted to a vote at a shareholders'
meeting, a shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) Must not vote the shareholder's shares in favor of the proposed
action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
ss. 23-1-44-12. Notice of dissenters' rights following action creating rights
(a) If proposed corporate action creating dissenters' rights under section
8 [IC 23- 1-44-8] of this chapter is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of section 11 [IC 23-1-44-11] of this chapter.
(b) The dissenters' notice must be sent no later than ten (10) days after
approval by the shareholders, or if corporate action is taken without approval
by the shareholders, then ten (10) days after the corporate action was taken.
The dissenters' notice must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more than sixty
(60) days after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter.
ss. 23-1-44-13. Demand for payment by dissenter
<PAGE>
(a) A shareholder sent a dissenters' notice described in IC 23-1-42-11 or
in section 12 [IC 23-1-44-12] of this chapter must demand payment, certify
whether the shareholder acquired beneficial ownership of the shares before the
date required to be set forth in the dissenter's notice under section 12(b)(3)
[IC 23-1-44-12(b)(3)] of this chapter, and deposit the shareholder's
certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
shares under subsection (a) retains all other rights of a shareholder until
these rights are cancelled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholders shares under this
chapter and is considered, for purposes of this article, to have voted the
shareholder's shares in favor of the proposed corporate action.
ss. 23-1-44-14. Transfer of shares restricted after demand for payment
(a) The corporation may restrict the transfer of uncertificated shares
from the date of the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under section 16 [IC
23-1-44-16] of this chapter.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
ss. 23-1-44-15. Payment to dissenter
(a) Except as provided in section 17 [IC 23-1-44-17] of this chapter, as
soon as the proposed corporate action is taken, or, if the transaction did not
need shareholder approval and has been completed, upon receipt of a payment
demand, the corporation shall pay each dissenter who complied with section 13
[IC 23-144-13] of this chapter the amount the corporation estimates to be the
fair value of the dissenter's shares.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares; and
(3) A statement of the dissenter's right to demand payment under
section 18 [IC 23-1-44-18] of this chapter.
ss. 23-1-44-16. Return of shares and release of restrictions
<PAGE>
(a) If the corporation does not take the proposed action within sixty (60)
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 12 [IC 23-1-44-12] of this chapter and repeat
the payment demand procedure.
ss. 23-1-44-17. Offer of fair value for shares obtained after first announcement
(a) A corporation may elect to withhold payment required by section 15 [IC
23-1- 44-15] of this chapter from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares and a statement of the dissenter's right to demand payment
under section 18 [IC 23-1-44-18] of this chapter.
ss. 23-1-44-18. Dissenter demand for fair value under certain conditions
(a) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and demand payment of
the dissenter's estimate (less any payment under section 15 [IC 23-1-44-15] of
this chapter), or reject the corporation's offer under section 17 [IC
23-1-44-17] of this chapter and demand payment of the fair value of the
dissenter's shares, if:
(1) The dissenter believes that the amount paid under section 15 of
this chapter or offered under section 17 of this chapter is less than the
fair value of the dissenter's shares;
(2) The corporation fails to make payment under section 15 of this
chapter within sixty (60) days after the date set for demanding payment;
or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after the date set
for demanding payment.
(b) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (a) within thirty (30) days after the corporation made
or offered payment for the dissenter's shares.
<PAGE>
ss. 23-1-44-19. Effect of failure to pay demand -- Commencement of judicial
appraisal proceeding
(a) If a demand for payment under IC 23-1-42-11 or under section 18 [IC
23-1- 44-18] of this chapter remains unsettled, the corporation shall commence a
proceeding within sixty (60) days after receiving the payment demand and
petition the court to determine the fair value of the shares. If the corporation
does not commence the proceeding within the sixty (60) day period, it shall pay
each dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit or
superior court of the county where a corporation's principal office (or, if none
in Indiana, its registered office) is located. If the corporation is a foreign
corporation without a registered office in Indiana, it shall commence the
proceeding in the county in Indiana where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign corporation
was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment.
(1) For the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold
payment under section 17 [IC 23-1-44-17] of this chapter.
ss. 23-1-44-20. Judicial determination and assessment of costs
(a) The court in an appraisal proceeding commenced under section 19 [IC
23-1- 44-19] of this chapter shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court. The court shall assess the costs against such parties and in such
amounts as the court finds equitable.
<PAGE>
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sections 10 through 18 [IC 23-1-44-10 through IC
23-1-44-18] of this chapter; or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
<PAGE>
PROXY THERMWOOD CORPORATION
Old Buffaloville Road, Dale, Indiana 47523
This Proxy is solicited by the Board of Directors
The undersigned appoints Peter N. Lalos and Lee Ray Olinger, or either of them,
with individual power of substitution, to vote all shares of the Corporation
which the undersigned is entitled to vote at the Special Meeting of Shareholders
on November __, 1998, at the Company's headquarters at Old Buffaloville Road,
Dale, Indiana at 11:00 a.m., Dale, Indiana time, or any adjournment thereof,
with all authority the undersigned would have if personally present, as
specified, respecting the following matters described in the accompanying Proxy
Statement and, in their discretion, on other matters which come before the
meeting. A vote FOR Items 1 and 2 is recommended.
(1) Reverse Stock Split -- Proposal to amend Corporation's Articles of
Incorporation which would effect a 37,000-to-1 reverse split of the
Corporation's Common Stock, without par value, by reducing the number of
authorized shares of Common Stock from 20,000,000 to 540 shares, and which would
also eliminate the number of authorized shares of Preferred Stock (of which no
shares are outstanding), which split provides for the payment of $11.00 per
share of currently outstanding Common Stock in lieu of the issuance of any
resulting fractional share of new Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(2) In their discretion, upon such other business as may properly come before
the meeting.
(Continued and to be Signed on Reverse Side)
<PAGE>
This proxy will be voted in accordance with shareholder specifications. Unless
directed to the contrary, this proxy will be voted for Item 1. Receipt of
accompanying Notice of Meeting and Proxy Statement is hereby acknowledged.
----------------------------------, 1998
(Date)
----------------------------------------
----------------------------------------
(Signature)
Please sign name as fully and exactly as
it appears opposite. When signing in a
fiduciary or representative capacity,
please give full title as such. Where
more than one owner, each owner should
sign. Proxies executed by a corporation
should be signed in full corporate name
by duly authorized officer.
PLEASE MARK, SIGN, DATE AND MAIL IN
ENCLOSED
