SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
Thermwood Corporation
(Name of the Issuer)
Thermwood Corporation
(Name of Person(s) Filing Statement)
Common Stock, without par value
(Title of Class of Securities)
883672107
(CUSIP Number of Class of Securities)
Barry Feiner, Esq.
190 Willis Avenue
Mineola, New York 11501
Telephone Number: 516 747-0300
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of
Person(s) Filing Statement)
(Date Tender Offer First Published,
Sent or Given to Security Holders)
Calculation of Filing Fee
Transaction valuation Amount of filing fee
$7,678,211 1 $1,535.64
---------- ---------
1. Calculated by multiplying the 1,266,509 Shares (which consists of the maximum
number of currently issued Shares that can be exchanged, the Shares issuable
upon conversion of existing convertible debentures and the Shares issuable upon
exercise of the 60,600 options) by the average of the high and low prices
reported by the American Stock Exchange on December 28, 1998.
[X ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
1
<PAGE>
Amount Previously Paid: $2,265.07
Form or Registration No.: Form S-4
Filing Party: Thermwood Corporation
Date Filed: January 4, 1999
Pursuant to General Instruction B to Schedule 13e-4, Thermwood Corporation
hereby incorporates by reference its Registration Statement on Form S-4,
previously filed with the Commission. The Preliminary Prospectus, contained in
the Company's registration statement on Form S-4 is attached as Exhibit (e)(1).
References in the following itemized responses in this Issuer Tender Offer
Statement refer to portions of the Preliminary Prospectus incorporated by
reference in answer thereto.
Item 1. Security and Issuer.
(a) PROSPECTUS COVER PAGE; PROSPECTUS SUMMARY -- Our Principal Office.
(b)-(c) MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(d) NOT APPLICABLE.
Item 2. Source and Amounts of Funds or Other Consideration.
(a) DESCRIPTION OF THE DEBENTURES AND THE INDENTURE; EXCHANGE OFFER --
Fees And Expenses.
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources; EXCHANGE
OFFER -- Fees And Expenses.
Item 3. Purpose of the Tender Offer and Plans or Proposals of the Issuer or
Affiliate.
(a) To the Company's knowledge, there are no plans by any person to
acquire or dispose of any additional securities of the Company other
than pursuant to existing option plans and convertible debentures.
In this regard, see MANAGEMENT -- Executive Compensation and
PRINICIPAL SHARE-HOLDERS AND STOCK OWNERSHIP OF MANAGEMENT.
(b-c) NOT APPLICABLE.
(d) SPECIAL FACTORS -- Conduct of the Company's Business After the
Exchange Offer.
2
<PAGE>
(e) CAPITALIZATION; SPECIAL FACTORS -- Financial Effect of the Exchange
Offer; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources --
Effects of the Exchange Offer
(f) NOT APPLICABLE.
(g-j) SPECIAL FACTORS -- Purpose And Effect Of The Exchange Offer, --
Conduct of the Company's Business After the Exchange Offer, --
Effect on Common Stock, Stock Options and Convertible Debentures;
FEDERAL INCOME TAX CONSEQUENCES; RISK FACTORS -- Possible Adverse
Effects If You Remain a Shareholder and -- Risks Related to
Acquisition of Debentures.
Item 4. Interest in Securities of the Issuer.
CERTAIN TRANSACTIONS -- Company and Affiliate
Purchases of Common Stock.
Item 5. Contacts, Arrangements, Understandings or Relationships With Respect
to the Issuer's Securities.
CERTAIN TRANSACTIONS.
Item 6. Persons Retained, Employed or to Be Compensated.
COVER PAGE OF PROSPECTUS; EXCHANGE OFFER -- FEES AND EXPENSES;
PLAN OF DISTRIBUTION.
Item 7. Financial Statements.
(a)-(b) SELECTED CONSOLIDATED FINANCIAL DATA; CONSOLIDATED FINANCIAL
STATEMENTS; SPECIAL FACTORS -- Financial Effect of the Exchange
Offer.
3
<PAGE>
Item 8. Additional Information.
NOT APPLICABLE.
Item 9. Material to be Filed as Exhibits.
(a) Preliminary Prospectus (see Exhibit (e)(1) below)
(b) DuBois County Bank $3,500,000 credit documents1
(c) (1) Incentive Stock Option Plan2
(2) Restated Non-Qualified Stock Option Plan2
(3) Indenture dated as of February 3, 1993, between Thermwood
Corporation and American Stock Transfer and Trust Company,
Trustee, relating to 12% Convertible Subordinated
Debentures due February 25, 2003, and resolutions relating
to effect of reverse stock split on those debentures2
1 Agreement between Thermwood Corporation and Edgar Mulzar
("Securityholder") concerning Securityholder's intentions
with regard to his Company securities in the Exchange
Offer. *
1 Agreement between Thermwood Corporation and Peter N. Lalos
("Securityholder") concerning Securityholder's intentions
with regard to his Company securities in the Exchange
Offer. *
1 Agreement between Thermwood Corporation and Lee Ray Olinger
("Securityholder") concerning Securityholder's intentions
with regard to his Company securities in the Exchange
Offer. *
1 Agreement between Thermwood Corporation and Rebecca F. Fuller
("Securityholder") concerning Securityholder's intentions
with regard to his Company securities in the Exchange
Offer. *
1 Agreement between Thermwood Corporation and Michael
Hardesty P. ("Securityholder") concerning Securityholder's
intentions with regard to his Company securities in the
Exchange Offer. *
1 Agreement between Thermwood Corporation and David J.
Hildenbrand ("Securityholder") concerning Securityholder's
intentions with regard to his Company securities in the
Exchange Offer. *
1 Agreement between Thermwood Corporation and Richard Kasten
("Securityholder") concerning Securityholder's intentions
with regard to his Company securities in the Exchange
Offer. *
1 Agreement between Thermwood Corporation and Donald L.
Uebelhor ("Securityholder") concerning Securityholder's
intentions with regard to his Company securities in the
Exchange Offer. *
(d) Not Applicable
(e) Preliminary Prospectus
(f) Not applicable
- ----------------
* To be filed by amendment.
1. Filed as an exhibit to the Company's Registration Statement on Form S-4 filed
with the SEC on January 4, 1999, and incorporated herein by this reference.
2. Previously filed as an exhibit to the Issuer's prior Schedule 13E-3 filed
with the SEC on September 4, 1998, and incorporated herein by this reference.
4
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that the
information set forth in this statement is true, complete and correct.
December 29, 1998
-----------------
(Date)
Thermwood Corporation
By: /s/ Kenneth J. Susnjara
------------------------------
Kenneth J. Susnjara, President
/s/ Kenneth J. Susnjara
------------------------------
Kenneth J. Susnjara
/s/ Linda S. Susnjara
------------------------------
Linda S. Susnjara
/s/ Edgar Mulzer
------------------------------
Edgar Mulzer
/s/ Lee Ray Olinger
------------------------------
Lee Ray Olinger
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY APPLICABLE STATE SECURITIES
COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, Dated January 4, 1999
THERMWOOD CORPORATION
Offer to Exchange 12% 15 Year Subordinated Debentures For All of our
Outstanding Shares of Common Stock Other than those Shares owned by two of our
major Shareholders
The following terms apply to the 12% 15 Year Subordinated Debentures
(the "Debentures") we are offering:
Principal Amount of Debenture The principal amount of the Debenture that you
will receive will be equal to $11.00 times the
number of Shares that you tender.
Annual Interest Rate 12% simple interest.
Payment of Interest Interest will be paid quarterly in cash.
Maturity Fifteen years after the Debentures have been
issued.
Redemption by Holder We will redeem up to $50,000 total value of the
Debentures of the estate of any Holder upon
notice of the Holder's death. This right of
redemption may only be exercised by the estate
of the original Holder. It does not pass to
any other transferee.
Redemption by Us We can redeem the Debentures for $15.00 per
Debenture during the second year after their
issuance. During each subsequent year, the
redemption price will decrease by $0.30 per
Debenture. We cannot redeem the Debentures
during the first year after they have been
issued. We must provide the Holder with written
notice of our intention to redeem the
Debentures at least 30 days before we redeem
the Debentures.
Subordination The Debentures will be second in right of
repayment (i.e., subordinated) to all of our
Senior Debt and the debt of our subsidiaries.
Senior Debt is any indebtedness incurred in
connection with borrowings by us (including our
subsidiaries) from a bank, trust company,
insurance company, or from any other
institutional lender, whether or not such
indebtedness is specifically designated as
being "Senior Debt." If we were to become
insolvent, such Senior Debt would have a prior
connection with our liquidation. The
outstanding convertible debentures and the
Debentures rank equally for purposes of
repayment.
Transferability There are no transfer restrictions on the
Debentures. However, transfer of the Debentures
may be restricted by state securities laws if
our securities are delisted from the American
Stock Exchange and the Pacific Stock Exchange
and we terminate our status as an issuer
required to file reports under the Federal
securities laws
If you transfer your Debentures, the right in
the Debentures to redemption upon death of the
initial Holder will terminate.
<PAGE>
We are offering to acquire all of our Common Shares owned by Shareholders
other than the 251,400 Shares owned by Kenneth and Linda Susnjara, two of our
major Shareholders. We will issue Debentures in the aggregate principal amount
equal to $11.00 times the number of Common Shares that we acquire. We will
acquire all Shares tendered by Shareholders regardless of how many or how few
Shares are tendered. In addition, we will negotiate with each Holder of our
Qualified and Non-Qualified options (other than Kenneth and Linda Susnjara) and
offer him or her the right to exchange his or her options for Debentures. The
principal amount of Debentures that we will issue in exchange for the options
will equal $11.00 minus the per Share exercise price of the options, multiplied
by the number of Shares that would have been issuable upon exercise of the
options.
For more complete details on the Exchange Offer, see "Exchange Offer."
Our offer to acquire the Shares will expire at 5:00 P.M., New York City
time, on _________, 1999. We may extend the offering period. For more details on
the Exchange Offer see "Exchange Offer."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS
PROSPECTUS. Among other risks involved in exchanging your Common Shares for
Debentures, the Debentures are unsecured obligations which are subordinated to
our Senior Debt.
You should rely only on the information contained in this Prospectus or
that we have referred you to. We have not authorized anyone to provide you with
information that is different. We are not offering to sell or asking you to buy
anything other than the Debentures. We are not offering to sell or asking you to
buy anything in any jurisdiction where doing so would be against the law.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE DEBENTURES OR THE EXCHANGE OFFER,
DETERMINED THE FAIRNESS OR MERITS OF THE EXCHANGE OFFER NOR DETERMINED THAT THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Dirks & Company, Inc. ("Dirks") will assist us in soliciting
Shareholders to exchange their Shares for Debentures. Dirks will receive a fee
of $100,000 plus a solicitation fee equal to 2% of the face value of all
Debentures issued in the Exchange Offer other than Debentures issued to
Shareholders whose total holdings are more than 10% of the Company's outstanding
Common Stock.
There is no public trading market for these debt securities. We
anticipate, but cannot assure, that the Debentures will be tradable in the
over-the-counter market. We do not intend to list the Debentures on any stock
exchange. Our Common Shares are traded on the American and Pacific Stock
Exchanges under the symbol "THM." On December 22, 1998, the closing price for
these Shares, as reported on the American Stock Exchange, was $6.125 per Share.
If we are successful in repurchasing all or a significant portion of the Common
Shares, we intend to delist the Common Shares from these stock exchanges.
The Solicitation Agent for the Offer is
Dirks & Company, Inc.
The date of this Prospectus is ___________________, 1999
<PAGE>
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-4 (the "Registration Statement") with respect
to the 12% Subordinated Debentures due 2014 (the "Debentures"). This Prospectus,
which is a part of the Registration Statement, omits certain information
included in the Registration Statement. Information omitted from this
Prospectus, but contained in the Registration Statement, may be inspected and
copied at the SEC's Public Reference Room at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You
may also obtain information about the Company from the following regional
offices of the SEC: Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material can be obtained by mail from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. You may obtain our electronic
filings filed through the SEC's Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR") through the SEC's home page on the Internet at
http://www.sec.gov. We file annual, quarterly, and special reports, proxy
statements, and other information with the SEC.
1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may
not contain all of the information that is important to you. To understand the
Offering fully, you should read the entire Prospectus carefully, including the
"Risk Factors" and the Consolidated Financial Statements and Notes thereto
before you decide whether to exchange your Shares for Debentures. References in
this Prospectus to "Thermwood," "the Company," "we," "us," and "our" refer to
Thermwood Corporation and its subsidiaries. References to "Shares" and "Common
Shares" refer to Shares of our Common Stock. On January 5, 1998 the Company
effected a one-for-five reverse stock split of its Shares, and all related Share
and per Share information has been adjusted to give retroactive effect to this
split except where text indicates otherwise.
The statements, other than statements of historical facts included in
this Prospectus, including statements set forth under the "Summary," "Risk
Factors," "Special Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business" regarding the Company's
future financial position, business strategy, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or other similar words. You are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Prospectus. Except as required by law, we are not
obligated to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this Prospectus or to
reflect the occurrence of unanticipated events. Important factors that could
cause actual results to differ materially from our expectations (the "Cautionary
Statements") are disclosed under "Risk Factors" and elsewhere in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the Cautionary Statements.
Our Business
We are a manufacturer of computer-based systems and equipment for the
woodworking and plastics industries. We develop, produce, market and service:
- -- computer-controlled (CNC) routing machines that perform high speed machining,
trimming and routing functions on wood, plastic and certain non-ferrous metals;
- -- wood carving computer controlled routing systems;
- -- products that support the above machines, including programming software and
hardware, training tapes, tooling, fixtures and other consumable items.
Our industrial products perform certain production functions or
automate specific tasks accomplished in factories. These products are used in a
variety of manufacturing operations. For instance, the CNC routing machines are
primarily employed to cut or machine materials such as wood, plastic and
non-ferrous metal into final shape. The wood carving computer controlled routing
systems carve wood components such as chair legs and bed posts used in furniture
manufacturing.
Our Principal Offices
Our principal executive office is located at Old Buffaloville Road
(P.O. Box 436), Dale, Indiana 47523. The telephone number at this address is
(812) 937-4476.
The Exchange Offer
The Offer: We are offering to acquire all of our Shares owned by
Shareholders other than the 251,400 Shares owned jointly by the Holders of the
largest block of stocks. We will issue Debentures to each tendering Shareholder
in the principal amount of $11.00 times the number of Shares that we acquire
from such Shareholder. We will acquire all Shares tendered by Shareholders
regardless of how many or how few Shares are tendered. Our offer to acquire the
Shares will expire at 5:00 P.M., New York City time, on ____________, 1999. We
may extend the offering. In addition, during this period, we will negotiate with
each Holder of our Qualified and Non-Qualified options (other than Kenneth and
Linda Susnjara) and offer him or her the right to exchange his or her options
for Debentures. The principal amount of Debentures that we will issue in
exchange for the options will equal $11.00 minus the per Share exercise price of
the options, multiplied by the number of Shares that would have been issuable
upon exercise of the options. See "Exchange Offer."
2
<PAGE>
Procedures for Tendering Shares: If you wish to accept the Exchange
Offer, you must complete, sign and date the Letter of Transmittal or transmit an
Agent's Message (as defined in "The Exchange Offer -- Procedures for Tendering -
Book-Entry Transfer") in connection with a book-entry transfer, in accordance
with the instructions contained in the Letter of Transmittal, and deliver such
Letter of Transmittal or such Agent's Message, together with the Shares and any
other required documentation to the exchange agent (the "Exchange Agent") at its
address set forth herein. See "Exchange Offer - Procedures for Tendering."
Special Procedures for Beneficial Owners: If your Shares are registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your Shares, you should contact such registered Holder
promptly and instruct it to tender the Shares on your behalf. If you wish to
tender on your own behalf, you must, prior to completing and executing the
Letter of Transmittal and delivering your Shares, either make appropriate
arrangements to register ownership of the Shares in your name or obtain a
properly completed Stock Power from the registered Holder. The transfer of
registered ownership may take considerable time. See "Exchange Offer --
Procedures for Tendering."
Guaranteed Delivery Procedures: If you wish to tender your Shares but
your Shares are not entirely available or you cannot deliver your Shares, the
Letter of Transmittal or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration Date or you cannot
complete the procedure for book-entry transfer on a timely basis, you must
tender your Shares according to the guaranteed delivery procedures set forth in
"Exchange Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights: You may withdraw your tenders at any time prior to
5:00 P.M., New York City time, on the Expiration Date. See "Exchange Offer --
Withdrawal of Tenders."
Acceptance of Shares and Delivery of Debentures: We will accept for
exchange any and all Shares which are properly tendered in the Exchange Offer
prior to 5:00 P.M., New York City time, on the Expiration Date and not
withdrawn. The Debentures issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
The Exchange Agent: American Stock Transfer and Trust Company is
serving as Exchange Agent in connection with the Exchange Offer. See "Exchange
Offer -- Exchange Agent."
Tax Consequences: Your exchange of Common Stock for Debentures should
be treated as a redemption of the Shares for Federal income tax purposes.
Depending upon the facts of your situation, you may realize a taxable gain on
the Exchange. This means that, as a result of the exchange you may owe taxes on
the transaction even though you will not have received cash in the transaction
to pay such taxes. See "Federal Income Tax Consequences."
Intention of Affiliates: Kenneth J. and Linda S. Susnjara, two of the
Company's principal Shareholders, do not intend to exchange their Shares or
their Qualified and Non-Qualified options and, accordingly, will continue to be
Shareholders after completion of the Exchange Offer. Pursuant to an arrangement
with Mr. Susnjara, Edgar Mulzer, the other principal Shareholder of the Company,
and Peter N. Lalos and Lee Ray Olinger, two Directors of the Company that own
Shares, have agreed that they will exchange all of their Shares for Debentures
if at least 95% of the approximately 963,307 currently issued and outstanding
Shares owned by non-affiliates are tendered and exchanged in the Exchange
Offering. All of the other Executive Officers intend to exchange their Shares
and their options for Debentures. The primary purpose for the structure of the
Exchange Offer is to maximize the number of Shares owned by Kenneth and Linda
Susnjara after the Exchange Offer. If 95% of the Shares owned by non-affiliates
and all of the Shares owned by Messrs. Mulzer, Lalos and Olinger are exchanged,
the Shares owned by Kenneth and Linda Susnjara would represent approximately 84%
of the then issued and outstanding Shares.
For more details on the Exchange Offer, including the procedure for
exchanging your Shares for Debentures, see "Exchange Offer."
3
<PAGE>
Description of the Terms of the Debentures
Principal Amount of Debenture The principal amount of the Debenture that
you will receive will be equal to $11.00
times the number of Shares that you tender.
Annual Interest Rate 12% simple interest.
Payment of Interest We will pay interest quarterly in cash on
January 1, April 1, September 1 and
December 1 of each year, commencing
April 1, 1999.
Maturity The Debentures will mature fifteen years
after they have been issued.
Redemption by Holder We will redeem up to $50,000 total value
of the Debentures of any Holder upon
notice of the Holder's death. This right
of redemption may only be exercised by the
original Holder. It does not pass to any
transferee.
Redemption by Us We can redeem the Debentures for $15.00
per Debenture during the second year after
their issuance. During each subsequent
year, the redemption price will decrease
by $0.30 per Debenture. We cannot redeem
the Debentures during the first year after
they have been issued. We must provide the
Holder with written notice of our
intention to redeem the Debentures at
least 30 days before we redeem the
Debentures.
Subordination The Debentures will be second in right of
repayment (i.e., subordinated) to all of
our Senior Debt and the debt of our
subsidiaries. Senior Debt is any
indebtedness incurred in connection with
borrowings by us (including our
subsidiaries) from a bank, trust company,
insurance company, or from any other
institutional lender, whether or not such
indebtedness is specifically designated as
being "Senior Debt." If we were to become
insolvent, such Senior Debt would have a
priority of right to repayment in
connection with our liquidation. The
outstanding convertible debentures and the
Debentures rank equally for purposes of
repayment.
Transferability There are no transfer restrictions on the
Debentures. However, transfer of the
Debentures may be restricted by state
securities laws if our securities are
delisted from the American Stock Exchange
and the Pacific Stock Exchange and we
terminate our status as an issuer required
to file reports under the Federal
securities laws. In addition, the right
to redemption upon death of the initial
Holder will terminate.
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Summary Consolidated Financial Data
(in thousands except per Share data)
Our consolidated financial information set forth below should be read
in conjunction with the more detailed Consolidated Financial Statements,
including the Notes thereto, "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The pro forma financial
information illustrates the effect of: (i) the exchange of Shares for
Debentures; (ii) settlement of certain outstanding options; and (iii) exchange
of Shares issuable upon conversion of convertible debentures outstanding, as if
these events had occurred as of the dates and for the periods listed in the
following tables. For more detailed information on the pro forma effects of
these events, see the pro forma financial information and the "Explanation Of
Pro Forma Adjustments" in "Special Factors -- Financial Effect of the Exchange
Offer."
<TABLE>
<CAPTION>
Statements of Operations Data: Quarter ended October 31 Year ended July 31,
-------------------------- ----------------------------------------------------------
Proforma Proforma
1998 1998 1997 1998 1998 1997 1996 1995 1994
------- ------ ------- -------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 5,625 $5,625 $ 4,805 $ 21,940 $ 21,840 $17,779 $12,636 $12,314 $9,985
Gross profit 2,389 2,389 2,043 8,842 8,842 6,906 4,925 4,786 3,579
Earnings from
continuing operations (124) 218 355 208 1,318 1,236 2,334 2,350 136
Net earnings (124) 218 355 208 1,318 1,236 2,334 2,350 208
Earnings before interest,
income taxes, depreciation
and amortization 437 572 688 2,631 2,766 2,469 1,589 2,022 922
======= ====== ======= ======== ======== ======= ======= ======= ======
Earnings per Share:
Basic $ (0.48) $ 0.15 $ 0.22 $ 0.85 $ 0.89 $ 0.70 $ 1.63 $ 1.92 $ ---
Diluted $ (0.48) $ 0.15 $ 0.21 $ 0.83 $ 0.86 $ 0.69 $ 1.45 $ 1.49 $ ---
======= ====== ======= ======== ======== ======= ======= ======= ======
Weighted average number
of Shares:
Basic 258 1,441 1,409 245 1,425 1,349 1,231 1,030 1,030
Diluted 262 1,481 1,535 249 1,517 1,446 1,437 1,451 1,030
Cash dividends declared
per Common Share --- --- --- --- --- --- --- --- ---
Balance Sheet Data: October 31 July 31,
-------------------------- ----------------------------------------------------------
Proforma Proforma
1998 1998 1997 1998 1998 1997 1996 1995 1994
------- ------ ------- -------- -------- ------- ------- ------- ------
Total assets $12,283 $12,083 $11,325 $ 11,524 $ 11,324 $11,273 $ 8,766 $ 7,527 $5,418
Working capital 5,368 5,568 5,324 5,125 5,324 5,080 3,791 2,811 1,706
Long-term obligations 9,723 2,302 2,367 9,764 2,367 285 709 1,870 1,862
Shareholders'equity (1,190) 6,231 5,948 (1,449) 5,948 7,087 6,275 3,437 1,456
</TABLE>
For a discussion of the tax consequences of exchanging Shares for
Debentures, see "Federal Income Tax Consequences."
5
<PAGE>
RISK FACTORS
Before you invest in our Debentures, you should be aware that there are
various risks, including those described below. You should consider carefully
these risk factors together with all of the other information included in this
Prospectus before you decide to exchange your Shares for Debentures.
Possible Adverse Effects If You Remain a Shareholder
If you choose to remain a Shareholder of the Company and, as a result
of the Exchange Offer, the number of Common Shareholders drops below 300, the
following events most likely will occur:
- -- Lack of Public Information. We intend to terminate the registration of our
Common Stock under the Securities Exchange Act of 1934 (the "1934 Act"). As
a result of such termination, we will no longer be required to file certain
disclosure documents (e.g., proxy statements) with the SEC. Although we
will be required to continue to file certain reports (annual, quarterly and
current reports) until the number of Debenture Holders drops below 300,
less information will be available than if we had a class of securities
registered under the 1934 Act. Specifically, we would no longer be required
to file proxy materials and affiliates would no longer be required to file
any individual reports.
- -- Lack of a Trading Market. We will no longer meet the requirements for
listing on the American Stock Exchange ("AMEX") or the Pacific Stock
Exchange ("PSEX") and we intend to delist our Shares of Common Stock. The
termination of our 1934 Act registration and our delisting from AMEX and
PSEX will cause the public trading market for our Shares to disappear.
- -- Ongoing Expenses Related to the Debentures. We will incur additional
expense regardless of the number of Shareholders that remain after the
Exchange Offer. We will be required to make quarterly interest payments on
the Debentures issued pursuant to the Exchange Offer, redeem Debentures
when an initial Holder dies and, eventually, payoff or refinance the
Debentures when they become due in 15 years.
- -- Additional Debt With a Priority of Repayment Upon Liquidation. In the event
that we were to liquidate, the Holders of the Debentures would be entitled
to receive the principal and accrued interest on the Debentures out of the
proceeds of the liquidation, before Shareholders would receive anything.
Risks Related to Acquisition of Debentures
If you decide to exchange your Shares for Debentures, you should
consider the following factors:
- -- Subordination of Debt Represented by the Debentures. The Debentures will be
second in right of repayment (i.e., subordinated) to all of our Senior
Debt. There is no limitation on the amount of Senior Debt we can incur.
Senior Debt is any indebtedness incurred in connection with borrowings by
us (including our subsidiaries) from a bank, trust company, insurance
company, or from any other institutional lender, whether or not such
indebtedness is specifically designated as being "Senior Debt." If we were
to become insolvent, such Senior Debt would have a priority of right to
repayment in connection with our liquidation. In addition, any indebtedness
of our subsidiaries, other than the Senior Debt, will have rights upon
liquidation or dissolution of the particular subsidiary prior to payment
being made to the Holders of the Debentures. As of November 30, 1998, such
Senior Debt and subsidiary debts aggregated $2,196,320. As a result, there
is no guarantee of repayment of the Debentures in the event of our
liquidation. See "Description of The Debentures and the Indenture."
- -- Absence of Sinking Fund/No Security. The Debentures are not secured by any
of our assets. In addition, we do not contribute funds on a regular basis
to a separate account called a sinking fund to repay the Debentures upon
maturity. Since no funds are set aside periodically for the repayment of
the Debentures over their term, Holders of the Debentures must rely on our
revenues from operations and other sources for repayment. See "Description
of The Debentures and the Indenture."
- -- Limitation on Right to Pursue Remedies. The Debentures will be issued under
an Indenture which governs the terms of the Debentures. The Indenture
provides, among other things, that in the event we should commit a default,
unless the Holders of 25% of the principal amount of the Debentures elect
to declare a default, no individual Debenture Holder will have the right to
pursue his remedies against us thereunder. See "Description of The
Debentures and the Indenture; Events of Default, Notice and Waiver.
6
<PAGE>
- -- Lack Of Public Market For The Debentures; Trading at a Discount. The
Debentures will constitute a new class of securities with no established
trading market. We do not intend to list the Debentures on the AMEX, the
PSEX or any other national securities exchange. We understand that Dirks
currently intends to make a market in the Debentures. However, they are not
obligated to do so. If Dirks does make a market in the Debentures, it may
discontinue such activities at any time without notice. In addition, Dirks'
ability to conduct market-making activity will be subject to the limits
imposed by the Securities Act of 1933 (the "Securities Act"), the Exchange
Act and NASD rules, and will be limited during the Exchange Offer.
Accordingly, we cannot assure you that an active public or other market
will develop for the Debentures. This means that if a trading market does
not develop or is not maintained, you may experience difficulty in
reselling the Debentures or you may be unable to sell them at all. If a
market for the Debentures develops, any such market may be discontinued at
any time.
- -- The Debentures most likely will trade at a discount from their principal
amount if a public trading market develops for the Debentures. The discount
will be due, among other factors, to (i) the fact that the Debentures are
subordinated, unsecured and have a 15 year term and (ii) our industry and
financial condition. In addition, future trading prices of the Debentures
will depend on many factors, including among other things, prevailing
interest rates, our financial condition and results of operations, and the
market for similar notes. See the next Risk Factor.
- -- Possible Restrictions On Resale Of The Debentures. If we delist our
securities from the AMEX and the PSEX and we terminate our status as an
issuer required to file reports under the Federal securities laws, the
securities laws of certain jurisdictions may prohibit you from offering or
reselling your Debentures unless the Debentures have been registered or
qualified for sale in such jurisdictions or an exemption from registration
or qualification is available and the requirements of such exemption have
been satisfied. We do not intend to register or qualify the resale of the
Debentures under the Securities Act or in any such jurisdictions if our
securities are delisted from the AMEX and the PSEX .
- -- Possible Taxable Event Without Receipt of Funds To Pay Taxes. Your exchange
of Shares for Debentures should be treated as a redemption for Federal
income tax purposes. Depending upon the facts of your situation, you may
realize a taxable gain on the exchange. This means that, as a result of the
exchange you may owe taxes on the transaction even though you will not have
received cash in the transaction to pay such taxes. See "Federal Income Tax
Consequences."
- -- Loss of Shareholder Status. If you tender all of your Shares, you no longer
will have any equity interest in the Company and, therefore, you will not
participate in the Company's future potential earnings or growth.
Risks Related to Our Business
- -- Fluctuation in Operating Results. We have historically experienced
fluctuations in our operating results arising from, among other things,
changes in economic conditions, the market and competition. If we or our
competitors should introduce new products or develop enhancements to
existing products, this could also affect these fluctuations. There is no
assurance that these fluctuations will not continue in which event our
business could be adversely affected.
- -- Risks of International Market Factors. Approximately 20% of our sales
during the 1998 fiscal year were made outside of the United States and we
estimate that such non-domestic sales were approximately 5% during the
first three months of our current fiscal year. There are serious risks in
marketing products in foreign countries. These include, among others, the
difficulty of administering business abroad, exposure to currency
fluctuations and devaluations or restrictions on money supplies, foreign
and domestic export laws and regulations, taxation, tariffs, import quotas
and restrictions, shipping interruptions, and other economic and political
events totally beyond our control. In addition, our ability to prevent the
unauthorized use of our technology in foreign countries may be difficult.
7
<PAGE>
- -- Dependence on Dealer Network. We market our products primarily through a
number of dealers. Because of that, we are substantially dependent upon our
agreements with these third parties, as well as their viability and
financial stability, to generate sales. Because the agreements are not
exclusive, the dealers are permitted to sell products that compete with our
products. If we were to lose any of our major dealers, in the absence of
similar replacement arrangements, our business could be materially
adversely affected. We made approximately 21% of our sales during our
fiscal year ended July 31, 1998 through a dealer owned by our president and
his wife, and 11% of our sales through another dealer. For the first
quarter of fiscal 1999, the sales made through the dealership owned by the
president and his wife amounted to 13% of sales while two other dealers
sold 16% and another sold 15%. There were no other dealers who sold more
than 10% of machinery sales during the first quarter. See "Business --
Marketing" and "Certain Transactions."
- -- Dependence on Major Product. We are significantly dependent upon sales of
our CNC router systems. In fiscal 1998, CNC router systems sales
represented approximately 79.5% of our sales. If our sales of CNC router
systems were to decrease significantly, our operations and revenues would
be materially and adversely affected.
- -- Dependence on and Intense Competition for Key Personnel. Kenneth J.
Susnjara, our President and Chief Executive and Operating Officer, is
primarily responsible for the conduct of our business. If we should lose
his services, there can be no assurance that we could obtain a qualified
replacement. We do not have an employment agreement with Mr. Susnjara. See
"Management -- Executive Compensation." Our future success also depends in
large part on the continued service of our key management, manufacturing
and marketing personnel and on our ability to attract and retain qualified
employees. The competition for such personnel is intense and the loss of
key employees could have a materially adverse impact on our business. See
"Management -- Information About Management."
- -- Competition. There are many manufacturers of automated machining systems in
the United States and abroad, particularly in Japan and Europe. Our primary
competitors in the high speed machining market are a number of major
domestic, Japanese and European firms such as Shoda Iron Works, Heian,
Shinks Machinery Works, Accurouter, Motionmaster and Komo Machine. A number
of these manufacturers are larger, better financed and have more resources
than we do. Furthermore, the number of companies offering routing equipment
has increased and it is our opinion that the market cannot support all of
them. Although we believe that only a limited number of companies currently
offer multiple task equipment of the type marketed by us, other companies
with significantly greater financial resources and product recognition
could enter this market, in which event our ability to compete could be
materially adversely affected. See "Business -- Competition."
- -- Rapid Technological Change and Risk of Obsolescence. Automated industrial
equipment is subject to rapid and often unexpected technological changes.
Our ability to market our products will depend in large part upon our
anticipating and adapting to such changes. If we fail to respond to
technological advances, our products may become obsolete. Furthermore, even
if we meet such technological advances, there is no assurance that our
products will continue to be competitive. See "Business -- Industry
Background, -- Products, -- Research and Development and -- Patents, Trade
Secrets and Trademarks."
- -- Possible Product Liability Which Could Be Significant. The risk of
accidents involving automated industrial equipment is significant. Physical
damage to industrial property and workers can be extensive and serious when
such machinery malfunctions or is improperly operated. We, as a
manufacturer of this equipment, may be subject to claims if our products
should malfunction. Although we have not been subject to significant claims
in the past and we maintain insurance covering liability up to a general
aggregate limit of $5,000,000, which we believe is adequate to cover these
risks, no assurance can be given that if claims are asserted, such coverage
will be adequate to satisfy any liability that we may sustain. Such claims
could include personal injury and punitive damages. In addition, in the
event that we should lose our insurance, there is no assurance that we will
be able to obtain new coverage at acceptable costs, if at all. If we fail
to maintain product liability insurance coverage, it could have a
materially adverse affect on our business. We have maintained liability
insurance for over 15 years for annual periods commencing on the first day
of May each year.
- -- Patents and Proprietary Rights. Although we own a number of patents on our
products, we rely primarily on trade secret laws to protect our
technologies, innovations and other proprietary property. There can be no
assurance that we can establish trade secrets, that secrecy obligations in
effect for our employees, distributors, suppliers and customers will be
honored or that others will not independently develop similar or superior
technology. To the extent that key employees or other third parties apply
technological information independently developed by them or by others to
our products, disputes may arise as to the proprietary rights to such
information which may not be resolved in our favor. There is no assurance
that our products will not infringe patents or other rights owned by
others, licenses to which may not be available on commercially reasonable
terms to us, if at all. Moreover, there can be no assurance that we will
have the financial or other resources necessary to enforce or defend a
patent infringement or proprietary rights violation which may be protracted
as well as costly. In addition, if our products are deemed to infringe upon
the patents or proprietary rights of others, we could, under certain
circumstances, become liable for damages, which could also have a
materially adverse effect on us. We have not been involved in any claims
concerning patent infringement. See "Business -- Patents, Trade Secrets and
Trademarks."
8
<PAGE>
- -- Year 2000 Compliance. Many currently installed computer systems and
software products use two digits rather than four to define the applicable
year. In other words, date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to track inventory,
issue purchase orders, write checks or engage in similar normal business
activities.
During the fiscal year ended July 31, 1998, we began a risk evaluation
of potential Year 2000 issues and formed a Year 2000 Committee which
consists of the Chief Executive Officer, Vice-President of Engineering,
Information Systems Manager and two other employees. The committee's
purpose is to assess all risks, analyze current systems, coordinate
upgrades and replacements and report the current and projected status of
all known Year 2000 compliance issues.
During the assessment phase, we identified computer-related systems
and software vendors with potential Year 2000 problems. In the first
quarter of fiscal 1999, we began corresponding with the vendors that had
not supplied Year 2000 statements, requesting the Year 2000 compliance
status of their products. Responses received to date from vendors have not
indicated any Year 2000 problems. We know of alternative vendors should our
current vendors fail to perform due to Year 2000 problems; however, use of
some of these vendors would be inconvenient and could be costly. Moreover,
we have not contacted these alternate vendors to determine whether they are
Year 2000 compliant.
We know of one mission-critical system, the inventory shop floor
control software, that is not Year 2000 compliant. Although, this system
has a Year 2000 certified replacement product, implementation of this
replacement product would require us to re-input all current data. As a
result, we have decided to purchase a different system that is Year 2000
compliant and, in our judgment, superior to the current system we are
using. We anticipate that the new system will arrive during the second
quarter of fiscal 1999, at which time we will begin to input current data.
We are currently installing upgrades to the non-mission critical systems
and should complete the upgrade by the end of the second quarter of fiscal
1999.
We estimate that the replacement or remedial costs for our Year 2000
compliance issues will be less than $150,000 and will consist of software
and hardware upgrades that include new features which are combined with
Year 2000 corrections. These costs will be expensed as incurred or
capitalized and depreciated, as appropriate.
We have tested the machine control systems and related computer
software, which we sell and we believe that such equipment is Year 2000
compliant.
We estimate that the worst case Year 2000 issue scenario would occur
if the current software vendors would be unable to deliver upgrades, At
that point, we would look to alternative vendors. We have not established a
formal contingency plan should we fail to become Year 2000 compliant. We
will continue, however, to evaluate our status and will plan additional
activity as it appears warranted.
9
<PAGE>
CAPITALIZATION
The following table sets forth (i) our capitalization as of October 31,
1998, and(ii) such capitalization adjusted to give pro forma effect to the
exchange of Shares for Debentures, settlement of certain outstanding options,
and exchange of shares issuable upon conversion of convertible debentures
outstanding as of October 31, 1998. The information set forth below should be
read in conjunction with the "Summary Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes thereto
included elsewhere in this Prospectus.
At October 31, 1998
-------------------------------------------
Actual As Adjusted
------------------- ---------------------
(in thousands)
Note payable to bank $ 2,196 2,196
Bonds payable, net 106 7,527
-------- --------
Total long-term liabilities 2,302 9,723
-------- --------
Shareholders' equity (deficit):
Common stock, no par value,
4,000,000 shares Authorized,
1,444,709 shares issued and
outstanding (actual), 261,400
shares issued and outstanding
(as adjusted) 10,806 3,272
Accumulated deficit (4,540) (4,462)
Subscriptions receivable (35) -
--------- --------
Total shareholders' equity (deficit) 6,231 (1,190)
--------- --------
Total capitalization $ 8,533 8,533
========= ========
10
<PAGE>
MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the American Stock
Exchange since 1989 and on the Pacific Stock Exchange since 1987. The following
table sets forth the high and low per Share sales prices for the Common Stock as
reported on the American Stock Exchange for the Company's fiscal years ended
July 31, 1998 and July 31, 1997, and for the interim periods indicated:
Period Low Sales Price High Sales Price
------ --------------- ----------------
1999
Second Quarter
(through December __, 1998) $ _.__ $ _._ _
First Quarter $ 6.06 $ 10.38
1998
Fourth Quarter $ 7.50 $ 10.06
Third Quarter $ 7.50 $ 9.12
Second Quarter $ 9.05 $ 13.10
First Quarter $ 9.70 $ 14.05
1997
Fourth Quarter $ 7.50 $ 10.00
Third Quarter $ 7.50 $ 10.00
Second Quarter $ 6.90 $ 10.60
First Quarter $ 9.70 $ 11.90
As of December 11, 1998, there were approximately 279 Holders of record
of the Common Stock inclusive of those brokerage firms and/or clearing houses
holding the Company's securities for their clientele (with each such brokerage
house and/or clearing house being considered as one Holder). However, based on
the results of a brokers' search conducted with regard to the Company's 1998
annual shareholders meeting, the number of beneficial Holders is approximately
2,000. As of December 22, 1998, there were 1,444,709 Shares outstanding .
On December 22, 1998, the closing price for these Shares, as reported
on the AMEX, was $6.125 per Share.
11
<PAGE>
SPECIAL FACTORS
Purpose And Effect Of The Exchange Offer
Commencing in March 1998, we explored the possibility of effecting a
reverse stock split (the "Reverse Stock Split") of our Common Stock (initially
at a ratio of 38,000-to-1, subsequently reduced to 37,000-to-1) and, in
connection therewith, repurchase our stock with cash, in order to (i) eliminate
the cost of maintaining small Shareholder accounts, (ii) permit small
Shareholders to receive a fair price for their Shares without having to pay
brokerage commissions, (iii) determine a set monetary value for the Shares of
most lost Shareholders, whose interests may eventually have to be turned over to
the states under abandoned property laws, and (iv) relieve us and our affiliates
of the administrative burden and cost and competitive disadvantages associated
with filing reports and otherwise complying with the requirements of 1934 Act
registration. We believe that we derive no benefit from the continued
registration of the Common Stock under the 1934 Act and that the monetary
expense and burden to us of continued registration and the threat of a hostile
acquisition of the Company while it is publicly traded significantly outweigh
any material benefit that we or our Shareholders may receive as a result of such
registration. We entered into negotiations with a bank (the "Bank") to provide
the financing for the repurchase of our Common Stock (the "Cash Repurchase
Plan").
We determined to proceed with the Reverse Stock Split and Cash
Repurchase Plan in August 1998 and filed the requisite disclosure documents
(proxy materials and Schedule 13E-3 Transactional Statement) with the SEC in
September 1998. However, in October 1998, the Bank determined not to proceed
with us. As a result, in October 1998, we stopped our plans to proceed with the
Reverse Stock Split and Cash Repurchase Plan and began exploring the possibility
of conducting this Exchange Offer as a viable alternative.
We still believe that the disadvantages to being a public company
outweigh any advantages. We have no current intention to raise capital through
sales of equity securities in a public offering in the future or to acquire
other business entities using stock as the consideration for any such
acquisition. Accordingly, we are 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.
We incur direct and indirect costs associated with compliance with the
SEC filing and reporting requirements imposed on public companies. The direct
costs approximate $260,000 annually. We incur substantial indirect costs as a
result of, among other things, the executive time expended to prepare and review
such filings. This expended time is substantial in relation to our resources,
because we have relatively few executive personnel. In light of our size and
resources, we do not believe such costs are justified.
In addition, to our knowledge, none of our competitors are publicly
held. We suffer a competitive disadvantage from being required to disclose
certain information that privately held companies do not disclose.
Moreover, because of our status as a publicly-traded company with
numerous small Shareholders, we believe that our business strategy could be
interfered with by a hostile takeover or similar acquisition that we believe
might not be in the best interests of our Shareholders or our employees.
Our current long-term plans are to remain independent. We believe that
it is in our best interests to continue our current operations, marketing
strategy, development plans and management structure and not to merge with or
sell to another person or entity. Obligations imposed on management of public
companies may eventually prevent us from remaining independent if we become the
subject of a hostile takeover bid.
We have determined that the Exchange Offer is a viable alternative to
the aborted Reverse Stock Split and Cash Repurchase Plan. The Exchange Offer may
not be sufficient to reduce the number of our Shareholders below 300 and, even
if it does, we would still be required to file certain reports (annual,
quarterly and current reports) until the number of Debenture Holders drops below
300. However, we believe that the more Common Stock that is exchanged, the
lesser the chance of a hostile takeover.
12
<PAGE>
Fairness of the Exchange Offer
Goelzer & Co. Inc. ("Goelzer"), the investment banking firm engaged by
us to provide its opinion with respect to the fairness from a financial point of
view of the aborted Reverse Stock Split, estimated the reasonable intrinsic
value for the Shares on a minority basis to be $10.22 per Share. We estimate
that the present value of the Debentures is approximately $6.20 per Debenture.
Although the present value of the Debentures is significantly less than the
estimated reasonable intrinsic value of the Shares on a minority basis, we
believe that the fair market value of the Shares in light of the relative
illiquidity of that market is comparable to the calculated present value of the
Debentures and that the Exchange Offer, taken as a whole, is fair to our
Shareholders (see "Factors Considered By the Board" below). -
We note however, that we did not retain Goelzer or any other
independent party to estimate the current value of the Debentures or opine as to
the fairness of the Exchange Offer. Accordingly, it is conceivable that an
independent party might not determine that the Exchange Offer is fair.
Shareholders should take this into consideration when deciding whether or not to
exchange their Shares for Debentures.
We have considered, among other things:
(i) the analysis and opinion of Goelzer concerning the aborted
Reverse Stock Split (see "Opinion of Goelzer");
(ii) the historical public trading prices of the Shares and the
illiquidity of the Shares in the public trading market place;
(iii)each of the director's knowledge of and familiarity with our
business prospects, financial condition and current business
strategy;
(iv) information with respect to our financial condition, results of
operations, assets, liabilities, business and prospects, and
current industry, economic and market conditions; and
(v) the future cost savings and competitive advantages that will
inure to our benefit and the benefit of our continuing
Shareholders as a result of the eventual deregistration of our
Common Stock under the 1934 Act.
We appointed a Special Committee to engage an independent appraiser to
assist in evaluating the fairness of the Reverse Stock Split. The Special
Committee was composed of two outside directors, Lee Ray Olinger and Peter N.
Lalos, neither of whom would have continued to be Shareholders after the Reverse
Stock Split and Cash Repurchase Plan. The Special Committee and Goelzer
independently considered the fairness of the Reverse Stock Split to Shareholders
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.
After the Reverse Stock Split and Cash Repurchase Plan was aborted, the
Special Committee met and determined that an Exchange Offer was a viable
alternative even though it would not produce all of the results anticipated from
the Reverse Stock Split and Cash Repurchase Plan. The use of long-term
debentures solved the problem of obtaining financing from external sources and
the Committee determined that the added expense of servicing the Debentures was
within our means and did not outweigh the possible benefits to us from the
Exchange Offer.
The Special Committee determined that updating of the Goelzer valuation
report for the Exchange Offer would not be required because:
(1) the Goelzer report provided a valuation of the Company regardless
of whether the Reverse Stock Split was consummated;
(2) the Goelzer report was completed in August 1998, and Goelzer had
internal unaudited fiscal 1998 year end numbers which did not
vary materially from the numbers in the audited financial
statements recently filed as part of our annual report on Form
10-K, except that operating income was approximately $200,000
less than anticipated in the internal numbers (the Board took
this decrease into account when determining the fairness of the
Exchange Offer);
13
<PAGE>
(3) unlike the Reverse Stock Split, the Exchange Offer does not
require Shareholders to cash in their Shares; Shareholders, given
the facts, can make their own determination as to the fairness of
the Exchange Offer in determining whether or not to exchange
their Shares for Debentures.
The Company did not retain Goelzer or any other independent party to
estimate the current value of the Debentures or opine as to the fairness of the
Exchange Offer. The Company will carry the Debentures in its consolidated
financial statements at a discounted amount to represent their present value,
assuming a 22% effective yield. The effective yield of 22% is an estimate of the
interest rate that the Company would have to pay if it sought to borrow the
aggregate principal amount of the Debentures from other sources. This discounted
amount will represent approximately $6.20 per Debenture.
All of the members (including all of the non-employee members) of the
Company's Board of Directors approved the Exchange Offer. For all of the reasons
discussed above neither the Board of Directors nor the Special Committee deemed
it necessary to retain an unaffiliated representative to act solely on behalf of
unaffiliated Shareholders with regard to structuring the Exchange Offer. The two
members of the Special Committee have indicated that they will exchange their
Shares for Debentures only if at least 95% of the currently 963,307 issued and
outstanding Shares owned by non-affiliates are tendered and exchanged in the
Exchange Offering (see "Conduct of the Company's Business After the Exchange
Offer" below).
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 our
Common Stock on a going concern basis. The Board has given 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 "Opinion of Goelzer."
In conjunction with the opinion of Goelzer, the Board gave considerable
weight to the current market prices of our stock, insofar as open market prices
are presumptively an accurate determination of the fair value of any stock. The
Board took into account the following (1998) market statistics provided by the
AMEX and PSEX:
AMEX
Trading Prices Share Volume
-------------------------------------------- ------------------
Approx.
Average
Month Open High Low Close Average Per Month Daily
- --------- ---- ---- --- ----- ------- --------- -------
January 2 9 1/4 1 13/16 8 13/16 $8.35 85,500 4,275
February 8 11/16 9 1/4 8 5/8 9 $8.96 59,200 3,116
March 9 9 8 8 $8.46 78,700 3,748
April 7 1/8 8 1/8 7 1/2 7 9/16 $7.68 31,200 1,560
May 7 5/8 8 7 1/2 7 3/4 $7.73 39,500 2,195
June 8 10 1/2 8 8 13/16 $9.66 185,100 8,814
July 8 13/16 9 1/16 8 3/8 8 3/8 $8.72 32,900 1,732
August 8 5/8 10 3/4 8 3/8 9 3/4 $9.71 107,000 5,095
September 9 5/8 10 9 5/8 9 13/16 $9.82 50,800 2,540
October 10 10 5 7/8 6 1/16 $7.62 105,500 6,205
November 6 1/16 8 1/8 5 7/8 7 7/16 $6.94 90,200 4,750
14
<PAGE>
PSEX
Trading Prices Share Volume
------------------------------------ ------------------
Approx.
Average
Month Open High Low Close Per Month Daily
- --------- ---- ---- --- ----- --------- -------
January 1 7/8 9 1/4 1 7/8 8 1/2 6,784 340
February 8 5/8 9 1/8 8 5/8 9 1/8 5,232 276
March 9 9 8 8 9,225 420
April 8 8 7 1/2 7 9/16 5,780 263
May 7 5/8 7 3/4 7 1/2 7 9/16 1,840 88
June 9 1/8 10 3/8 8 13/16 8 13/16 19,081 868
July 0 0 0 0 190 9
August 8 5/8 10 3/8 8 3/8 9 3/4 9,980 475
September 9 5/8 10 9 5/8 10 1,450 69
October 8 3/4 8 3/4 6 1/4 6 1/4 1,180 54
November 6 1/16 7 1/2 6 1/16 7 5/16 12,466 623
In addition, although we anticipate that our financial statements will
reflect that the Debentures have an estimated present value of $6.20, as
discounted, the Debentures provide for a 22% rate of return (12% rate of return
without discount) compared to the Shares which provide no current rate of
return. In this regard, the Company has never declared dividends on the Shares.
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 our
assets. Based on our audited balance sheet at July 31, 1998 and our unaudited
balance sheet at October 31, 1998, the book value of the Shares would be only
$4.16 and $4.31 per Share, respectively. The Board believes we are more valuable
as a going concern.
In addition to the factors enumerated by Goelzer, the Board considered
our business, our current business strategy and our 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 our competitors are publicly held,
and that we suffer 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 while we are publicly traded. We
believe that the more Shares exchanged, the lesser the threat of a hostile
takeover.
Because of its expertise and independence, the Board has placed
particular weight on the Goelzer valuation report. However, after considering
the factors discussed above and, in particular, the historical market price and
illiquidity of the Shares in the public market place, management believes that
the terms of the Exchange Offer are fair to exchanging Shareholders.
Opinion of Goelzer
The Special Committee originally engaged Goelzer 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 and Cash Repurchase Plan. We
imposed no limitations on Goelzer with respect to the scope of its investigation
of us, the preparation of its valuation report or its opinion as to the fairness
of the amount of consideration to be paid to Shareholders in the Reverse Stock
Split. Goelzer has not been asked to determine the fairness of the Debentures as
consideration for the Common Stock in the Exchange Offer.
15
<PAGE>
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 our management concerning our history
and operating record, the nature of the markets served, competitive
situation, financial condition, recent performance and current outlook;
(ii) Inspected our corporate offices and manufacturing facilities in Dale,
Indiana;
(iii)Analyzed trading data and market capitalization of our Common Stock for a
period of five years as provided by Bloomberg Analytics;
(iv) Analyzed our financial statements and studied our filings under the 1934
Act including the Form 10-K and annual reports for the five full fiscal
years ended July 31, 1997, as well as the latest available Form 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 our fair
value. 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.
The following discussion describes the methodologies utilized by
Goelzer and, where applicable, updates factual information relied upon by
Goelzer in its report and opinion.
Goelzer utilized a number of methodologies in determining a range of
fair value. First, Goelzer completed a discounted cash flow ("DCF") analysis of
us 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 us 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 us 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 our 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%.
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. However, the
high and low price for the Shares, as reported on AMEX, on November 5, 1998, the
day prior to the announcement that the Company would be conducting this Exchange
Offer were $8.12 and $6.25. This represents a decrease in the high and low
prices for the Shares compared to prices as of August 7, 1998 of 1.6% and 24.2%,
respectively.
16
<PAGE>
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 re manufacturing
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 us 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 ours.
Furthermore, the mean of the sample companies' TIC/EBITDA ratio was within 3% of
ours 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 ours 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 our diversified
customer base, recent earnings growth and competitive position within our
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.
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 us, the price of the transaction
before any minority or lack of marketability discount has occurred in the range
of 3.0x to 7.0x TIC/EBITDA. Our DCF analysis produced a TIC/EBITDA of 5.6x.
Again, considering our competitive position and recent growth, our 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 would borrow 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 us 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 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 standard
industrial 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. The average trading price for the five day period
prior to November 5, 1998 was approximately $6.36, 23% less than the $8.25 price
used by Goelzer.
17
<PAGE>
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 our Common Stock 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 and Cash Repurchase Plan.
A copy of Goelzer's fairness opinion, dated September 2, 1998, is
included as Exhibit B to our Proxy Statement concerning the aborted Reverse
Stock Split filed with the SEC on October 9, 1998. A copy of Goelzer's valuation
report to our Board of Directors, dated August 20, 1998, has been filed as an
exhibit to our prior Schedule 13E-3 filed by us with the SEC on September 4,
1998. Copies will be made available for inspection and copying at our principal
executive offices during regular business hours by any interested Shareholder or
his or her 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.
For its services, including rendering its opinion, we paid a fee of
$28,000.
Neither Goelzer nor, to the best knowledge of Goelzer, any affiliate of
Goelzer has had any material relationship in the past five years with us or any
of our affiliates, nor is any material relationship contemplated.
Effect on Common Stock, Stock Options and Convertible Debentures
We have a Non-Qualified Stock Option Plan, an Incentive Stock Option
Plan and Convertible Debentures (convertible into Shares). Issuance of the
Debentures will have the following effects on the Holders of Shares and the
Holders of Shares issuable upon exercise of the options or conversion of the
Convertible Debentures:
- -- Lack of Public Information. We may terminate the registration of our Shares
under the 1934 Act. As a result of such termination, we will no longer be
required to file certain disclosure documents (e.g., proxy statements) with
the SEC. Although we will be required to continue to file certain reports
(annual, quarterly and current reports) until the number of Debenture
Holders drops below 300, less information will be available than if we
continued to have a class of securities registered under the 1934 Act.
Specifically, we would no longer be required to file proxy materials and
affiliates would no longer be required to file any individual reports.
- -- Lack of a Trading Market. We no longer will meet the requirements for
listing on the American Stock Exchange ("AMEX") or the Pacific Stock
Exchange ("PSEX") and we intend to delist our Shares. The termination of
our 1934 Act registration and our delisting from AMEX and PSEX will cause
the public trading market for the Company's stock to disappear.
- -- Ongoing Expenses Related to the Debentures. We will incur additional
expenses regardless of the number of Shareholders that remain after the
Exchange Offer. We will be required to make quarterly interest payments on
the Debentures issued pursuant to the Exchange Offer, redeem Debentures
when an initial Holder dies and, eventually, payoff or refinance the
Debentures when they become due in 15 years.
- -- Additional Debt With a Priority of Repayment Upon Liquidation. In the event
that we were to liquidate, the Holders of the Debentures would be entitled
to receive out of the proceeds of the liquidation, the principal and
accrued interest on the Debentures before Shareholders would receive
anything.
As part of this Exchange Offer, we will negotiate with each Holder of
our Qualified and Non-Qualified options (other than Kenneth and Linda Susnjara)
and offer him or her the right to exchange his or her options for Debentures.
The principal amount of Debentures issuable in exchange for the options will
equal $11.00 minus the per Share exercise price of the options, multiplied by
the number of Shares that would have been issuable upon exercise of the options.
See "Risk Factors - Possible Adverse Effects if You Remain a
Shareholder."
18
<PAGE>
Conduct of the Company's Business After the Exchange Offer
The Company expects its business and operations to continue as they are
currently being conducted and, except as disclosed below, the Exchange Offer is
not anticipated to have any effect upon the conduct of such business. All
persons exchanging their Common Shares 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.
Kenneth J. and Linda S. Susnjara, two of the Company's principal
Shareholders, do not intend to exchange their Shares or their Qualified and
Non-Qualified options and, accordingly, will continue to be Shareholders after
completion of the Exchange Offer. Pursuant to an arrangement with Mr. Susnjara,
Edgar Mulzer, the other principal Shareholder of the Company, and Peter N. Lalos
and Lee Ray Olinger, two Directors of the Company that own Shares, have agreed
that they will exchange all of their Shares for Debentures if at least 95% of
the approximately 963,307 currently issued and outstanding Shares owned by
non-affiliates are tendered and exchanged in the Exchange Offering. All of the
other Executive Officers intend to exchange their Shares and their options for
Debentures. The primary purpose for structuring the foregoing parameters is to
maximize the number of Shares owned by Kenneth and Linda Susnjara after the
Exchange Offer. If 95% of the Shares owned by non-affiliates and all of the
Shares owned by Messrs. Mulzer, Lalos and Olinger are exchanged, the Shares
owned by Kenneth and Linda Susnjara would represent approximately 84% of the
then issued and outstanding Shares.
Ultimately, the Company's plan is to become a privately held company.
To this end, if and when a sufficient number of Shares are exchanged to drop the
number of Shareholders below 300, the Company intends to terminate the
registration of the Shares under the 1934 Act and the Company's securities 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. However,
the Company will be required to continue to file certain reports (annual,
quarterly and periodic reports) under the 1934 Act until such time as the number
of Debenture Holders drops below 300. At that time, the Company will cease
filing information with the SEC ("Go Private"). 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.
If and when the Company Goes Private, it expects that it will elect (if
it qualifies) to have special tax treatment as an S corporation under the
Internal Revenue Code of 1986 (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 expects that it will eliminate the payment
of income taxes on its earnings. However, the Company's earnings will be taxed
directly to its Shareholders whether or not such earnings are distributed. S
corporation election will also result in restrictions on the number and types of
persons to whom Shareholders can sell or transfer their Shares.
The Company has never declared a dividend. As an S corporation, the
Company anticipates that it will change its dividend policy. The Company would
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 after it
Goes Private which would 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. Payment of
cash bonuses would most likely affect the Company's earnings.
Finally, the Company anticipates that, after it Goes Private, it will
reduce the size of its Board of Directors, over time, to three directors.
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 August 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. Currently, management does not 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 greater than the current value of the
Debentures.
19
<PAGE>
Other than as described above, 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.
Financial Effect of the Exchange Offer
The following pro forma financial information presents the effect on
the Company's historical financial position and results of operations assuming
completion of the Exchange Offer. The unaudited pro forma balance sheets reflect
the transaction as if it occurred on the condensed 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 unaudited pro forma balance sheets are not necessarily indicative
of what the Company's financial position would have been if the Exchange Offer
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.
20
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET - PRO FORMA (UNAUDITED)
July 31, 1998
(In thousands, except ratios and per share data)
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
Current assets $ 8,334 -- 8,334
Net property and equipment 2,647 -- 2,647
Other assets 343 200 (a) 543
------- ------ -------
Total assets $11,324 200 11,524
======= ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 3,009 200 (a) 3,209
Long-term liabilities 2,367 7,397 (b) 9,764
------- ------ -------
5,376 7,597 12,973
Shareholders' equity 5,948 (7,397)(c) (1,449)
------- ------ -------
Total liabilities and
shareholders' equity $11,324 200 11,524
======= ====== =======
Book value per share $ 4.16 (5.76)
Ratio of earnings to fixed charges 9.73 1.22
See "Explanation Of Pro Forma Adjustments" below.
21
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET - PRO FORMA (UNAUDITED)
October 31, 1998
(In thousands, except ratios and per share data)
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
Current assets $ 9,118 - 9,118
Net property and equipment 2,626 - 2,626
Other assets 339 200 (a) 539
------- ------ ------
Total assets $12,083 200 12,283
======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 3,550 200 (a) 3,750
Long-term liabilities 2,302 7,421 (b) 9,723
------- ------ ------
5,852 7,621 13,473
Shareholders' equity 6,231 (7,421)(c) (1,190)
------- ------ ------
Total liabilities and
Shareholders' equity $12,083 200 12,283
======= ====== ======
Book value per share $ 4.31 (4.55)
Ratio of earnings to fixed charges 8.03 .71
See "Explanation Of Pro Forma Adjustments" below.
22
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS - PRO FORMA (UNAUDITED)
For the year ended July 31, 1998
(In thousands, except per share data)
Historical Adjustments Pro Forma
---------- ----------- ---------
Net sales $21,840 - 21,840
Cost of sales 12,998 - 12,998
------- ------- -------
Gross profit 8,842 - 8,842
Research and development, marketing,
administrative and general expenses 6,413 135 (d) 6,548
------- ------- -------
Operating income 2,429 (135) 2,294
------- ------- -------
Other income (expense):
Interest expense (232) (1,627)(e) (1,859)
Other (31) - (31)
------- ------- -------
Other expense, net (263) (1,627) (1,890)
------- ------- -------
Earnings before income taxes 2,166 (1,762) 404
Income taxes (848) 652 (f) (196)
------- ------- -------
Net earnings $ 1,318 (1,110) 208
======= ======= =======
Weighted average number of shares:
Basic 1,425 (1,180) 245 (g)
Diluted 1,517 (1,267) 249 (g)
Earnings per share:
Basic $ 0.89 .85
Diluted 0.86 .83
See "Explanation Of Pro Forma Adjustments" below.
23
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS - PRO FORMA (UNAUDITED)
For the three-months ended October 31, 1998
(In thousands, except per share data)
Historical Adjustments Pro Forma
---------- ----------- ---------
Net sales $ 5,625 - 5,625
Cost of sales 3,236 - 3,236
------- ------ ------
Gross profit 2,389 - 2,389
Research and development, marketing,
administrative and general expenses 1,928 135 (d) 2,063
------- ------ ------
Operating income 461 (135) 326
------- ------ ------
Other income (expense):
Interest expense (57) (408) (e) (465)
Other 6 - 6
------- ------ ------
Other expense, net (51) (408) (459)
------- ------ ------
Earnings before income taxes 410 (543) (133)
Income taxes (192) 201 (f) 9
------- ------ ------
Net earnings 218 (342) (124)
======= ====== ======
Weighted average number of shares:
Basic 1,441 (1,183) 258 (g)
Diluted 1,481 (1,219) 262 (g)
Earnings per share:
Basic $ 0.15 (.48)
Diluted 0.15 (.48)
See "Explanation Of Pro Forma Adjustments" below.
24
<PAGE>
EXPLANATION OF PRO FORMA ADJUSTMENTS
(Unaudited)
(Dollars in thousands, except share and per share data)
(a) Increase in other assets and current liabilities relating to solicitation
agent, accounting and legal fees ($200,000) incurred in connection with the
issuance of Debentures.
(b) Increase in long-term liabilities as a result of the issuance of 12%
Debentures, discounted using an effective rate of 22%, and related issuance
costs, and determined as follows:
October 31, 1998 July 31, 1998
---------------- -------------
Debenture issued:
In settlement of stock options $ 240 $ 240
Upon conversion of bonds payable 132 212
Upon exchange of outstanding common shares 12,980 12,941
------- -------
13,352 13,393
Reduction in bonds payable upon conversion
to common shares (106) (171)
------- -------
13,246 13,222
Less:discount (5,825) (5,825)
------- -------
$ 7,421 $ 7,397
======= =======
(c) Decrease in shareholders' equity as a result of exchange of Common Stock
for Debentures and settlement of stock options.
(d) Increase in compensation expense as a result of the issuance of Debentures
in settlement of the options to purchase 40,600 shares of Common Stock
under the Incentive Stock Option Plan at an average exercise price of
$7.748 per share and options to purchase 20,000 shares of Common Stock
under the Non-qualified Stock Option Plan at an exercise price of $5.625
per share. The increase in compensation expense represents the excess of
the $6.20 discounted value per Debenture over the exercise price of the
option being settled.
(e) Increase in interest expense resulting from the issuance of the Debentures
with a stated interest rate of 12%, discounted using an effective interest
rate of 22%.
(f) Decrease in income taxes (37% effective rate) based on pro forma
adjustments to earnings before income taxes.
(g) Total weighted average number of shares (in thousands) utilized in
calculating historical and pro forma earnings per share were determined as
follows:
25
<PAGE>
<TABLE>
<CAPTION>
Year ended July 31, 1998 Three-months ended October 31, 1998
------------------------------------------ ----------------------------------------
Historical Pro Forma Historical Pro Forma
------------------- ---------------- ---------------- ----------------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
------ ------- ----- ------- ----- ------- ----- -------
Weighted average shares:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding 1,425 1,425 1,425 1,425 1,441 1,441 1,441 1,441
Less pro forma shares
retired in connection
with the exchange - - (1,180) (1,180) - - (1,183) (1,183)
------ ------ ------ ------ ------ ------ ------ ------
Adjusted 1,425 1,425 245 245 1,441 1,441 258 258
Incremental shares from assumed:
Exercise of dilutive
stock options - 56 - 4 - 17 - 4
Conversion of convertible bonds - 36 - - - 23 - -
------ ------ ------ ------ ------ ------ ------ ------
Total weighted average shares 1,425 1,517 245 249 1,441 1,481 258 262
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
26
<PAGE>
EXCHANGE OFFER
Terms Of The Exchange Offer
The terms and the conditions of the Exchange Offer are set forth in
this Prospectus and in the Letter of Transmittal. Pursuant to these terms and
conditions, we will accept any and all Shares validly tendered and not withdrawn
prior to 5:00 P.M., New York City time, on the Expiration Date. As of the date
of this Prospectus, there were 1,444,709 Shares issued and outstanding. We will
issue to each tendering Shareholder one Debenture in the principal amount at
maturity equal to $11.00 times the number of Shares tendered by such Shareholder
and accepted by us. Holders may tender some or all of their Shares pursuant to
the Exchange Offer.
The terms of the Debentures are described below in "Description of The
Debentures And The Indenture."
Holders of the Shares do not have any appraisal or dissenters' rights
under Indiana law or the Indenture (the agreement between the Company and the
Trustee) in connection with the Exchange Offer. Generally, appraisal or
dissenters' rights are statutory rights that require a corporation to pay
shareholders who do not consent to certain major corporate transactions, the
fair value of their shares.
The Company intends to conduct the Exchange Offer in accordance with
the applicable requirements of the 1934 Act and the rules and regulations of the
SEC.
All Shares received by the Company in the Exchange Offer will be
retired and returned to the status of authorized but unissued shares.
We will have accepted validly tendered Shares when we have given oral
(promptly confirmed in writing) or written acceptance notice to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving the Debentures from the Company.
If any tendered Shares are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Shares will be returned, without
expense, to the tendering Holder as promptly as practicable after the Expiration
Date.
Holders who tender Shares in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Shares pursuant
to the Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes, in connection with the Exchange Offer. See "-- Fees
and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" means 5:00 P.M., New York City time, on
____________ __, 1999, unless we, in our sole discretion, extend the Exchange
Offer. If we extend the Exchange Offer, the term "Expiration Date" will mean the
latest date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, we will notify the Exchange Agent of any
extension by oral (promptly confirmed in writing) or written notice and we will
make a public announcement of the extension prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date
unless otherwise required by applicable law or regulation.
We reserve the right, in our reasonable discretion:
(i) to delay accepting any Shares, to extend the Exchange Offer or,
if any of the conditions set forth below under "Conditions"
exist, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange
Agent, or
(ii) to amend the terms of the Exchange Offer in any manner.
27
<PAGE>
Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by a public announcement thereof. If we
amend the Exchange Offer in a manner that we believe constitutes a material
change, we will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and we will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the amendment and the manner of disclosure to the
registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, we shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
Procedures For Tendering
Only a Holder of Shares may tender such Shares in the Exchange Offer.
To tender in the Exchange Offer, a Holder of Shares must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Shares
(or a confirmation of an appropriate book-entry transfer into the Exchange
Agent's account at DTC as described below) and any other required documents, to
the Exchange Agent prior to 5:00 P.M., New York City time, on the Expiration
Date. To be tendered effectively, the Shares (or a timely confirmation of a
book-entry transfer of such Shares into the Exchange Agent's account at DTC as
described below), Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent" prior to 5:00 P.M., New York City time, on the Expiration Date. The
tender by a Holder will constitute an agreement between such Holder and us in
accordance with the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal.
Book-Entry Transfers. The Exchange Agent has established an account
with respect to the Shares at DTC, and any financial institution which is a
participant in DTC may make book-entry delivery of the Shares by causing DTC to
transfer such Shares into the Exchange Agent's account in accordance with DTC's
procedure for such transfer. Although delivery of Shares may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or manually-signed facsimile thereof), properly completed and
validly executed with any required signature guarantees, or an Agent's Message
in lieu of the Letter of Transmittal, and any other required documents, must in
any case be transmitted to and received by the Exchange Agent prior to 5:00
P.M., New York City time, on the Expiration Date at one of its addresses set
forth below under "Exchange Agent," or the guaranteed delivery procedure
described below must be complied with. The confirmation of book-entry transfer
of Shares into the Exchange Agent's Account at DTC as described above is
referred to herein as a "Book-Entry Confirmation." Delivery of documents to DTC
in accordance with its procedures does not constitute delivery to the Exchange
Agent. All references in this Prospectus to deposit or delivery of Shares shall
be deemed to include DTC's book-entry delivery method.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering Shares stating (i) the aggregate number of Shares
which have been tendered by such participant, (ii) that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
(iii) that the Company may enforce such agreement against the participant.
THE METHOD OF DELIVERY OF SHARES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT, INCLUDING DELIVERY THROUGH DTC,
IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IF SHARES
ARE SENT BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR SHARES SHOULD BE SENT TO THE COMPANY.
Holders may request their respective brokers, dealers, commercial
banks, trust companies or nominees to effect the above transactions for such
Holders.
28
<PAGE>
Any beneficial owner whose Shares are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Shares, either make appropriate arrangements to register ownership of
the Shares in such owner's name or obtain a properly completed stock power from
the registered Holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Shares tendered pursuant thereto are tendered :
(i) by a registered Holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal; or
(ii) for the account of an Eligible Institution.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the 1934 Act (an
"Eligible Institution").
If the Letter of Transmittal, any Stock powers or other document
required by the Letter of Transmittal are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by the Company, proper evidence
satisfactory to the Company of their authority to so act must be submitted with
the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Shares will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all Shares not properly tendered or
any Shares our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular Shares. Our interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Shares must be cured
within such time as we shall determine. Although we intend to notify Holders of
defects or irregularities with respect to tenders of Shares, neither we, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Shares will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Shares
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned by
the Exchange Agent to the tendering Holders (or, in the case of Shares delivered
by book-entry transfer within DTC, will be credited to the account maintained
within DTC by the participant in DTC which delivered such Shares), unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, we reserve the right in our sole discretion to purchase or
make offers for any Shares that remain outstanding subsequent to the Expiration
Date or, as set forth below under "Conditions," to terminate the Exchange Offer
and, to the extent permitted by applicable law, purchase Shares in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
Procedure For Option Holders. Holders of the Company's outstanding
options (other than Kenneth and Linda Susnjara) who choose to exchange their
options for Debentures must complete, sign and date the Option Holder Letter of
Transmittal, or a facsimile thereof and mail or otherwise deliver such Letter of
Transmittal or such facsimile, together with the Options and any other required
documents, to the Exchange Agent prior to 5:00 P.M., New York City time, on the
Expiration Date. To be tendered effectively, the Options Letter of Transmittal
and other required documents must be received by the Exchange Agent at the
address set forth below under "Exchange Agent" prior to 5:00 P.M., New York City
time, on the Expiration Date. The tender by an Option Holder will constitute an
agreement between such Holder and us in accordance with the terms and subject to
the conditions set forth in this Prospectus and in the Option Holder Letter of
Transmittal.
29
<PAGE>
Acceptance of Shares; Delivery of Debentures
Upon satisfaction or waiver of all the conditions to the Exchange
Offer, the Company will, promptly after the Expiration Date, accept all Shares
properly tendered and will promptly thereafter issue the Debentures. See
"--Conditions." For purposes of the Exchange Offer, the Company shall be deemed
to have accepted the Shares tendered for exchange when, as and it the Company
has given oral or written notice thereof the Exchange Agent, with written
confirmation of any oral notice to be given promptly thereafter. The Exchange
Agent will act as agent for the tendering Holders of the Shares for the purposes
of receiving the Debentures from the Company and delivering them to such
Holders.
Guaranteed Delivery Procedures
Holders who wish to tender their Shares and:
(i) whose Shares are not immediately available; or
(ii) who cannot deliver their Shares (or a confirmation of book-entry
transfer of Shares into the Exchange Agent's account at DTC), the
Letter of Transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date; or
(iii)who cannot complete the procedure for book-entry transfer on a
timely basis, may effect a tender if:
(a) the tender is made by or through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name
and address of the Holder of such Shares and the principal
amount of Shares tendered, stating that the tender is being
made thereby and guaranteeing that, within three AMEX
trading days after the Expiration Date, a duly executed
Letter of Transmittal (or facsimile thereof) together with
the Shares (or a confirmation of book-entry transfer of such
Shares into the Exchange Agent's account at DTC), and any
other documents required by the Letter of Transmittal and
the instructions thereto, will be deposited by such Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal
(or facsimile thereof), and all tendered Shares in proper
form for transfer (or a confirmation of book-entry transfer
of such Shares into the Exchange Agent's account at DTC) and
all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three AMEX trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to Holders who wish to tender their Shares according to the
guaranteed delivery procedures set forth above.
Withdrawal Of Tenders
Except as otherwise provided herein, tenders of Shares may be withdrawn
at any time prior to 5:00 P.M., New York City time, on the Expiration Date.
To withdraw a tender of Shares in the Exchange Offer, the Exchange
Agent must receive a written or facsimile transmission notice of withdrawal at
its address set forth herein prior to 5:00 P.M.. New York City time, on the
Expiration Date. Any such notice of withdrawal must:
(i) specify the name of the person having deposited the Shares to be
withdrawn (the "Depositor");
30
<PAGE>
(ii) identify the Shares to be withdrawn (including the certificate
number or numbers and principal amount of such Shares);
(iii)be signed by the Holder of such Shares in the same manner as the
original signature on the Letter of Transmittal by which such
Shares were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient
to have the Exchange Agent with respect to the Shares register
the transfer of such Shares into the name of the person
withdrawing the tender; and
(iv) specify the name in which any such Shares are to be registered,
if different from that of the depositor. If the Shares have been
delivered pursuant to the book-entry procedure set forth above
under "-- Procedures for Tendering," any notice of withdrawal
must specify the name and number of the participant's account at
DTC to be credited with the withdrawn Shares.
All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Company in its sole
discretion, which determination shall be final and binding on all parties. Any
Shares so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Debentures will be issued with respect
thereto unless the Shares so withdrawn are validly retendered. Properly
withdrawn Shares may be retendered by following one of the procedures described
above under "-- Procedures for Tendering" at any time prior to the Expiration
Date.
Any Shares which are tendered but which are not accepted due to
withdrawal, rejection of tender or termination of the Exchange Offer will be
returned as soon as practicable to the Holder thereof without cost to such
Holder (or, in the case of Shares tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Shares will be credited to
an account maintained with such Book-Entry Transfer Facility for the Shares).
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or exchange Debentures for, any Shares,
and may terminate the Exchange Offer as provided herein before the acceptance of
such Shares, if:
(a) any action or proceeding is instituted or threatened in any court or by or
before any governmental agency with respect to the Exchange Offer which, in
the reasonable judgment of the Company, might materially impair the ability
of the Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company, or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the reasonable judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company; or
(d) there shall have occurred (i) any general suspension of trading in, or
general limitation on prices for, securities on the AMEX, (ii) a
declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States or any limitation by any governmental
agency or authority that adversely affects the extension of credit to the
Company or (iii) a commencement of war, armed hostilities or other similar
international calamity directly or indirectly involving the United States;
or, in the event that any of the foregoing exists at the time of
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or
(e) any governmental approval has not been obtained, which approval the Company
shall in its reasonable judgment deem necessary, for the consummation of
the Exchange Offer as contemplated hereby.
31
<PAGE>
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its reasonable discretion. The failure by the
Company at any time to exercise any of the foregoing rights shall not be deemed
a waiver of such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
If the Company determines in its sole reasonable judgment that any of
the conditions are not satisfied, the Company may:
(i) refuse to accept any Shares and return all tendered Shares to the
tendering Holders thereof (or, in the case of Shares delivered by
book-entry transfer within DTC, credit such Shares to the account
maintained within DTC by the participant in DTC which delivered
such Shares);
(ii) extend the Exchange Offer and retain all Shares tendered prior to
the expiration of the Exchange Offer, subject, however, to the
rights of Holders thereof to withdraw such tenders of Shares (see
"Withdrawal of Tenders" above); or
(iii)waive such unsatisfied conditions with respect to the Exchange
Offer and accept all properly tendered Shares which have not been
withdrawn.
If such waiver constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered Holders of its Common
Stock, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered Holders of Common Stock, if the Exchange Offer
would otherwise expire during such five to ten business day period.
Exchange Agent
American Stock Transfer and Trust Company has been appointed as
Exchange Agent for the Exchange Offer. All executed Letters of Transmittal and
Notices of Guaranteed Delivery should be directed to the Exchange Agent at the
address set forth below. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
American Stock Transfer and Trust Company, Exchange Agent
By Mail, Hand or Overnight Courier: Facsimile Transmission Number
40 Wall Street (Eligible Institutions only):
New York, New York 10005 (718) 234-5001
To Confirm Facsimile
(If by Mail, Registered or or for Information Call
Certified Mail Recommended) (718) 921-8200
Delivery of a the Letter of Transmittal and/or other requisite
documents to an address other than as set forth above does not constitute a
valid delivery.
Fees And Expenses
The Company will bear the expenses of soliciting tenders. The principal
solicitation is being made by Dirks, the Solicitation Agent. Dirks will receive
a fee of $100,000 plus a solicitation fee equal to 2% of the face value of all
Debentures issued in the Exchange Offer other than Debentures issued to
Shareholders whose total holdings are more than 10% of the Company's outstanding
Common Stock.
32
<PAGE>
The Company also will pay the Exchange Agent reasonable and customary
fees for services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith.
The Company will pay the cash expenses to be incurred in connection
with the Exchange Offer. Such expenses include brokerage (solicitation)
commissions, fees and expenses of the Exchange Agent and Trustee, accounting and
legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Shares pursuant to the Exchange Offer. If, however, Debentures or
Shares for principal amounts not tendered or accepted for exchange are to be
registered, or are to be issued in the name of, or delivered to, any person
other than the registered Holder, or if tendered Shares are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Shares
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
The Company estimates that it will incur the following costs in
connection with the Exchange Offer:
Filing fees $ ______
Legal fees ______
Accounting fees ______
Transfer and exchange agent fees ______
Trustee fees ______
Fees for valuation ______
Printing and mailing costs ______
Exchange solicitation costs ______
Total $ ______
Final costs of the transaction may be more or less than these
estimates. The Company plans to fund these costs from its cash reserves, cash
from operations and its line of credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." -
Accounting Treatment
The Debentures will be recorded at face value, discounted using an
appropriate market rate of interest, with a corresponding decrease in
shareholders' equity. Accordingly, no gain or loss will be recognized in
connection with the transaction. The costs incurred in connection with the
issuance of the Debentures will be amortized over the term of the Debentures.
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain historical consolidated
financial data which has been derived from the Company's unaudited condensed
consolidated financial statements for the quarters ended October 31, 1998 and
1997 and the audited consolidated financial statements for each of the years in
the five-year period ended July 31, 1998. Per Share numbers and weighted average
number of Shares have been adjusted to reflect the Company's 1-for-5 reverse
stock split which took effect on January 5, 1998. For additional information,
see "Consolidated Financial Statements of the Company," commencing on page F-1.
The pro forma financial information illustrates the effect of: (i) the exchange
of Shares for Debentures; (ii) settlement of certain outstanding options; and
(iii) exchange of Shares issuable upon conversion of convertible debentures
outstanding, as if these events had occurred as of the dates and for the periods
listed in the following tables. For more detailed information on the pro forma
effects of these events, see the pro forma financial information and the
"Explanation Of Pro Forma Adjustments" in "Special Factors -- Financial Effect
of the Exchange Offer."
<TABLE>
<CAPTION>
Selected Statement of Quarter ended October 31, Fiscal Year Ended July 31,
Operations Data: -------------------------- ----------------------------------------------------------
(in thousands except Proforma Proforma
per share date) 1998 1998 1997 1998 1998 1997 1996 1995 1994
------- ------ ------- -------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales, less commissions $ 5,625 $5,625 $ 4,805 $ 21,840 $ 21,840 $17,779 $12,636 $12,314 $9,985
Gross profit 2,389 2,389 2,043 8,842 8,842 6,906 4,925 4,786 3,579
Eamings before income taxes (133) 410 558 404 2,166 2,055 1,174 1,140 136
Earnings from continuing
operations (124) 218 355 208 1,318 1,236 2,334 2,350 136
Net earnings (124) 218 355 208 1,318 1,236 2,334 2,350 208
Earnings before interest
income taxes, deprecation
and amortization $ 437 $ 572 $ 688 $ 2,631 $ 2,766 $ 2,469 $ 1,589 $ 2,022 $ 922
======= ====== ======= ======== ======== ======= ======= ======= ======
Earnings per share:
Basic $ (0.48) $ 0.15 $ 0.22 $ 0.85 $ 0.89 $ 0.70 $ 1.63 $ 1.92 $ ---
Diluted $ (0.48) $ 0.15 0.21 $ 0.83 $ 0.68 $ 0.69 $ 1.45 $ 1.49 $ ---
======= ====== ======= ======== ======== ======= ======= ======= ======
Weighted average number
of shares:
Basic 258 1,441 1,409 245 1,425 1,349 1,231 1,030 1,030
Diluted 262 1,481 1,535 249 1,517 1,446 1,437 1,451 1,030
Cash dividends declared
per common share --- --- --- --- --- --- --- --- ---
October 31, July 31,
Selected Balance Sheet Data: -------------------------- ----------------------------------------------------------
(in thousands except Proforma Proforma
per share date) 1998 1998 1997 1998 1998 1997 1996 1995 1994
------- ------- ------- -------- -------- ------- ------- ------- ------
Total assets $12,283 $12,083 $11,434 $ 11,524 $ 11,325 $11,273 $ 8,766 $ 7,527 $5,418
Working capital 5,368 5,568 5,454 5,125 5,324 5,080 3,791 2,811 1,706
Long-term obligations 9,723 2,302 2,750 9,764 2,367 285 709 1,870 1,862
Shareholders' equity (deficit) (1,190) 6,231 4,950 (1,449) 5,948 7,087 6,275 3,437 1,456
Book value per share $ (4.55) $ 4.31 $ 3.49 $ (5.76) $ 4.16 $ 5.06 $ 4.80 $ 3.37 $ 1.41
Ratio of eamings to
fixed charges 0.71 8.03 20.61 1.22 10.16 24.14 9.44 4.53 1.30
</TABLE>
For a discussion of the tax consequences of exchanging Shares for
Debentures, see " Federal Income Tax Consequences."
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information is intended to assist you in understanding
and evaluating the financial condition and results of operations of the Company
for the years ended July 31, 1998 and 1997, and the three month periods ended
October 31, 1998 and 1997. The information in this section should be read in
conjunction with the Company's Consolidated Financial Statements and the
accompanying Notes thereto and the "Selected Consolidated Financial Data."
Results of Operation
Quarter ended October 31, 1998 Compared to Quarter ended October 31, 1997
Net sales for the quarter ended October 31, 1998 were $5,625,222, an
increase of 17% over the quarter ended October 31, 1997. Gross profit for the
quarter ended October 31, 1998 was $2,389,388, an increase of 17% over the
quarter ended October 31, 1997. This increase was due primarily to increased
orders and shipments of product. Cost of sales as a percentage of net sales was
57.52%, approximately the same as for the quarter ended October 31, 1997.
Research and development, marketing, administrative and general
expenses were $1,928,098 during the quarter ended October 31, 1998 compared with
$1,468,373 during the quarter ended October 31, 1997. These expenses were the
primary reason for the reduced operating profit of $461,290 compared to $574,479
for the same period in fiscal year 1998. The 31% increase in these expenses
resulted in a 20% decrease in operating profit. Research and development,
marketing, administrative and general expenses were 34% of net sales for the
quarter ended October 31, 1998 compared to 31% for the same period of fiscal
1998. Expenses for the first quarter of fiscal 1999 were at a higher level as a
percentage of sales as a result of increased European expenses, marketing
expenses and salary increases. Legal and professional fees were also higher due
to the attempted reverse stock split.
Interest expense in the first quarter of fiscal year 1999 was $56,921,
an increase of approximately $31,000 from the first quarter of fiscal 1998. This
increase in interest expense is due to interest on a $2,500,000 loan which was
entered into by the Company in October 1997.
Earnings from continuing operations before income taxes in the first
quarter of fiscal year 1999 were $410,721 compared to $557,665 in the first
quarter of fiscal year 1998, or a decrease of approximately 26%. Federal income
taxes were accrued in the amount of $192,026. Accrued taxes lowered earnings to
a net of $218,695 compared to $355,039 in the first quarter of fiscal 1998.
Fiscal Year ended July 31, 1998 Compared to Fiscal Year ended July 31, 1997
Net sales for fiscal year 1998 were $21,839,529, an increase of 23%
from fiscal year 1997. This increase was due primarily to increased orders and
shipments of product and a full year of European sales. European sales for
fiscal 1998 (the first full year of European operations) were $1,734,716 or
approximately 8% of total gross sales. Machine sales consisted of $20,199,191 or
81% of total gross sales. Technical services were $4,657,784, or 19% of total
gross sales. Backlog decreased from $4,080,000 at July 31, 1997 to $3,029,000 at
July 31, 1998. 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 1998.
Gross profit for fiscal year 1998 was $8,841,623. The percentage of
current year gross profit to net sales increased from 38.84% in fiscal year 1997
to 40.48% in fiscal year 1998. Gross profit for the European operations for
fiscal year 1998 was $695,121 compared to $374,021 for fiscal 1997. The
percentage of current year gross European profit to net sales increased from
36.12% in fiscal year 1997 to 40.07% in fiscal year 1998. For fiscal year 1998,
gross profit was positively affected by the continued use of more efficient
production methods, including in-house fabrication of components previously
purchased outside the Company. Improved efficiency also was attributed to an
addition to the production facility of approximately 20,000 square feet,
allowing better production flows, methods and processes including the purchasing
and storage of larger quantities of steel for fabrication at the Dale facility.
35
<PAGE>
Research and development, marketing, administrative and general
expenses were $6,413,160 in fiscal year 1998, compared to $4,794,563 in fiscal
year 1997. Research and development expenditures aggregating $314,000 in fiscal
year1998 compared to $216,000 in fiscal year 1997 are included in the foregoing
amounts. The major portion of the increased research and development, marketing
and administrative and general expenses from 1997 to 1998 was attributable to
European operations which commenced in fiscal year 1997. These expenses amounted
to $1,052,000, or 16% of total expenses in fiscal 1998 compared to $570,000, or
approximately 12% of total expenses in fiscal year 1997. A portion of the
increased European expense was approximately $100,000 due to the operations of
an office in Vienna which management closed in September 1998. An approximate
$650,000 increase in wages and benefits (due to additional personnel and salary
increases) and an approximate $300,000 increase in advertising and marketing
efforts also contributed to the higher level of expenses.
Interest expense for fiscal year 1998 was $231,747, an increase of
$156,061 from 1997. This increase is due to interest on a $3.5 million line of
credit from a bank. The Company used a major portion of the proceeds from this
line of credit to repurchase Preferred Stock in the amount of $2,546,320.
Operating income for fiscal year 1998 was $2,428,463 compared to
operating income of $2,111,353 in 1997. The increase in operating income in 1998
over 1997 resulted primarily from increased sales. The European operations had
an operating loss of $356,644 for fiscal year 1998 compared to $195,971 for
1997. Fiscal year 1998 net earnings were $1,317,886, compared to net earnings of
$1,235,824 in 1997. Income tax expense for fiscal year 1998 was $848,000
compared to $819,000 for fiscal year, 1997
The Company has income tax net operating loss carryforwards of
approximately $529,000, which expire in the years 2008 and 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 October 31, 1998 the Company's working capital was $5,567,615, as
compared to $5,324,458 at July 31, 1998 and $5,080,310 at July 31, 1997. The
increase in working capital from July 31, 1998 to October 31, 1998 was due to
cash generated from operations. Backlog at October 31, 1998 was approximately
$2,521,000 or $500,000 lower than the $3,029,000 backlog at July 31, 1998.
At July 31, 1998, inventories had increased approximately $800,000 as
compared to July 31, 1997, due to increased in-house processing of components;
however, accounts receivable decreased from July 31, 1997 primarily due to lower
sales in July 1998 compared to July 1997. Cash also decreased approximately
$400,000 and was used primarily to pay accounts payable and other liabilities.
The Company had a positive cash flow from operating activities for the
1998 fiscal year in the amount of $1,222,952. Net earnings of $1,317,886, along
with the add back of other non-cash expenses such as depreciation and
amortization of $368,261, and a decrease in accounts receivable contributed to a
positive cash flow for the 1998 year. However, an increase in inventories and
payments of accounts payable and other liabilities used cash resources. During
the first quarter of 1999, the Company had positive cash flow of $149,981. Net
earnings of $218,695 plus depreciation and amortization of $103,570 contributed
to the positive cash flow for the quarter. Cash used by operating activities
during this quarter increased by $373,098 in accounts receivable and $271,803 in
inventories.
During the 1998 fiscal year, the Company's investing activities
consisted primarily of a 20,000 square foot addition to the production area and
additional machinery purchased to increase efficiency and capacity. Expenditures
for fixed assets during the first quarter of fiscal 1999 consisted of normal
replacements and purchases of labor-saving equipment for production. Management
anticipates that expenditures for the remainder of the 1999 fiscal year will be
consistent with expenditures during the first quarter of fiscal 1999.
Shareholders' equity increased from $5,948,100 at July 31, 1998 to
$6,230,910 at October 31, 1998. A total of 13,600 shares of common stock at a
price of $5 per share were converted from the outstanding convertible debentures
during the quarter ended October 31, 1998 for an increase to shareholders'
equity in the amount of $63,758, net of discount and issuance costs. During
fiscal years 1998 and 1997, respectively, a total of 24,000 and 92,400 Shares at
a price of $5 per share were converted from the outstanding convertible
debentures to increase shareholders' equity by $108,351 and $408,881, net of
discount and issuance costs.
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During fiscal 1998, cash flows from financing activities included
$43,255 for dividend payments on Preferred Stock and redemption of $2,546,320 of
Preferred Stock. A line of credit in the amount of $3,500,000 was established at
a bank (see below). At July 31, 1998 and October 31, 1998, approximately
$2,196,320 had been utilized primarily for the redemption of the Preferred
Stock.
The Company has a one-year $3,500,000 revolving secured line of credit
(the "line") with DuBois County Bank that expired in October 1998, but has been
extended through January 1, 2002. The outstanding balance on the line bears
interest at a variable rate equal to the Money Market Prime index. Interest is
payable monthly. Principal and all unpaid and accrued interest is due and
payable on January 1, 2002. Management anticipates, but cannot assure, that, at
the end of the term, the Company and Bank will enter into a new line and
transfer any outstanding loan balance to the new line. The line is secured by
the Company's assets. In the event of a default, as defined in the line, the
Bank has the right to accelerate payments under the line and possess and sell
the collateral. Events of default under the line include: (i) failure of the
Company to make any payments under the line when due; (ii) failure of the
Company to comply with conditions in the line; (iii) false or misleading
representations by the Company in the line; (iv) the insolvency of the Company
or certain other events related to insolvency or bankruptcy; and (v) materially
adverse changes in the Company's financial condition. As of November 30, 1998,
the Company's outstanding principal balance under the line was approximately
$2,196,320.
Effects of the Exchange Offer
Assuming Shareholders exchange 1,183,309 Shares for approximately
$13,016,400 aggregate principal amount of Debentures, the Company exchanges
60,600 of its outstanding options for approximately $239,539 aggregate principal
amount of Debentures and Holders of the Company's existing convertible
debentures convert their debentures into 22,600 Shares and then exchange these
Shares for approximately $233,550 aggregate principal amount of Debentures, on a
pro forma basis as of October 31, 1998, the Company would realize increases in
current and long-term liabilities of approximately $200,000 and $7,421,000,
respectively, due to the increase in interest expense resulting from the
issuance of the Debentures, using a discounted effective interest rate of 22%
rather than the stated 12% interest rate, and the related increase in accrued
expenses, net of income taxes. Shareholders' equity would decrease by
approximately $7,313,000 and the per share book value would decrease from $4.31
per share to approximately $(4.14) per share. Interest expense for the quarter
ended October 31, 1998 would increase by approximately $402,000 and net earnings
would decrease by approximately $261,000.
Recent Accounting Pronouncements
In June of 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards, No. 130, Reporting Comprehensive
Income, (FAS 130), and No. 131, Disclosures About Segments of an Enterprise and
Related Information, (FAS 131), effective for years beginning after December 15,
1997. In February 1998, FASB issued Statement of Financial Accounting Standards,
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, (FAS 132), effective for years beginning after December 15, 1997. FAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. FAS 131
establishes standards for reporting information about operating segments and the
methods by which such segments were determined. FAS 132 establishes standards
for reporting disclosures about pensions and postretirement benefit plans.
In August, 1998, the Company adopted FAS 130, FAS 131 and FAS 132;
however, the adoption has not had a material effect on the consolidated
financial statements.
Year 2000 Issues.
Many currently installed computer systems and software products use two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to track inventory, issue purchase orders, write checks or engage in
similar normal business activities.
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During the fiscal year ended July 31, 1998, we began a risk evaluation
of potential Year 2000 issues and formed a Year 2000 Committee which consists of
the Chief Executive Officer, Vice-President of Engineering, Information Systems
Manager and two other employees. The committee's purpose is to assess all risks,
analyze current systems, coordinate upgrades and replacements and report the
current and projected status of all known Year 2000 compliance issues.
During the assessment phase, we identified computer-related systems and
software vendors with potential Year 2000 problems. In the first quarter of
fiscal 1999, we began corresponding with the vendors that had not supplied Year
2000 statements, requesting the Year 2000 compliance status of their products.
Responses received to date from vendors have not indicated any Year 2000
problems. We know of alternative vendors should our current vendors fail to
perform due to Year 2000 problems; however, use of some of these vendors would
be inconvenient and could be costly. Moreover, we have not contacted these
alternate vendors to determine whether they are Year 2000 compliant.
We know of one mission-critical system, the inventory shop floor
control software, that is not Year 2000 compliant. Although, this system has a
Year 2000 certified replacement product, implementation of this replacement
product would require us to re-input all current data. As a result, we have
decided to purchase a different system that is Year 2000 compliant and, in our
judgment, superior to the current system we are using. We anticipate that the
new system will arrive during the second quarter of fiscal 1999, at which time
we will begin to input current data. We are currently installing upgrades to the
non-mission critical systems and should complete the upgrade by the end of the
second quarter of fiscal 1999.
We estimate that the replacement or remedial costs for our Year 2000
compliance issues will be less than $150,000 and will consist of software and
hardware upgrades that include new features which are combined with Year 2000
corrections. These costs will be expensed as incurred or capitalized and
depreciated, as appropriate.
We have tested the machine control systems and related computer
software, which we sell and we believe that such equipment is Year 2000
compliant.
We estimate that the worst case Year 2000 issue scenario would occur if
the current software vendors would be unable to deliver upgrades, At that point,
we would look to alternative vendors. We have not established a formal
contingency plan should we fail to become Year 2000 compliant. We will continue,
however, to evaluate our status and will plan additional activity as it appears
warranted.
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BUSINESS
General
The Company manufactures computer-based systems and equipment for the
woodworking and plastics industries. It has developed and produces, markets and
services the following systems and equipment: (i) computer-controlled (CNC)
routing machines that perform high speed machining, trimming and routing
functions on wood, plastic and certain non-ferrous metals; (ii) wood carving
computer controlled routing systems; and (iii) products that support the above
machines including programming software and hardware, training tapes, tooling,
fixtures and other consumable items.
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. For instance, the CNC routing machines
are primarily employed to cut or machine materials such as wood, plastic and
non-ferrous metal into final shape. The wood carving computer controlled routing
systems carve wood components such as chair legs and bed posts used in furniture
manufacturing.
Industry Background
Flexible Automation
Prior to the availability of microprocessor-based machinery control
systems, there were only two alternatives to automating the industrial process:
a manual operation using humans to manipulate tools; or "hard automation"
employing dedicated automatic machinery. High initial cost and limited
flexibility have made hard automation suitable only for applications involving
large volumes of identical parts. Smaller volumes of parts were traditionally
produced by using human labor, hand tools or machine tools operated manually.
In today's marketplace, competitive pressures demand a greater variety
of products. Due to demographic and economic factors, neither hard automation
nor manual labor appears to be a feasible means of meeting this manufacturing
requirement.
The gap between hard automation and manual labor is currently being
filled by a variety of flexible automation equipment. This equipment is often
better suited to small and medium volumes of parts and is usually designed to
perform a number of tasks utilizing the same computer-controlled machine.
Flexible automation equipment is manufactured in a variety of forms and
addresses a number of applications. Specific markets have developed for certain
classes of equipment with a number of vendors offering products in each of these
niche markets. Many vendors, including the Company, build products that service
several of the markets.
Flexible automation equipment is more economically feasible during
times when increased production capacity is required or when older, obsolete or
otherwise less competitive equipment is being replaced. Accordingly, demand for
this equipment usually increases during periods of economic growth and decreases
during periods of economic recession.
Products
CNC Routers
The Company's CNC Routers are high-speed computer controlled, fully
automatic machining centers. These centers are designed to perform a variety of
tasks such as routing and shaping wood parts, trimming of three dimensional
plastic parts, machining of aluminum honeycomb, drilling and high speed
machining of aluminum both vertically and horizontally, mortising (i.e., cutting
square holes in furniture), and sawing and squaring (i.e., cutting inside square
corners). They generally operate over larger table areas and at higher speeds
than do conventional machine tools but cannot machine the heavy materials and
large cross sections that standard metalworking machine tools are capable of
doing.
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These systems utilize the Company's proprietary SuperControl system and
consist of one or more high speed cutting, drilling or machining heads and
related tooling which move around a table under computer control to perform
programmed operations. There are two basic types of systems, one where the table
is fixed and the cutting heads move both left and right and back and forth, and
the other where the table moves back and forth and the cutting heads move only
left and right. Both systems permit the heads to reach all points on the table.
Cutting is accomplished by metal bits, drills and blades. Additional motions or
axes, which permit the head to both pivot and rotate, can be installed, thereby
making three-dimensional cuts. Multiple and varying cutting and drilling heads
can be added, allowing a number of different machining operations to be
accomplished in a single cycle or multiple parts to be machined simultaneously.
Currently the Company markets six standard CNC router systems of
varying sizes and capabilities that are generally offered as standard designs.
Because a number of table sizes, configurations, tooling and other options are
available, most of these designs are combinations of standard components rather
than totally new designs.
The CNC router systems are utilized principally in the woodworking,
plastics, boating and automotive industries. Current prices to end users range
from approximately $39,000 to over $200,000 per system. The average price of a
standard system is approximately $100,000. Sales of the CNC router systems were
approximately 79% of total sales of the Company in fiscal year 1998.
Robotics Systems
During fiscal year 1996 the Company developed a wood carving routing
system which has replaced the older Wood Carving Robot. The new system uses
automatic tracers to create the carving program, eliminating the need for an
experienced wood carver. In addition, the new system is faster and automatically
changes tools. The old system required manual changing and adjustment of tools.
Retail prices for the Wood Carving Router are approximately $150,000. Sales of
the new system were approximately 3% of total machine sales for the 1998 fiscal
year.
Probe
During year ended July 31, 1996 the Company introduced a new five-axis
probe system which significantly reduces the time required to program machining
of three-dimensional plastic parts. The Company has obtained patents involving
the technology underlying this new probe system. This product is also being
offered for use on machines built by the Company's competitors, provided their
control system is upgraded to the Company's 91000 SuperControl. The probe sells
for approximately $15,000.
Tooling
During fiscal year 1997 the Company introduced new tooling for its
woodworking line of CNC routers. This new tooling includes a low-cost piggyback
router and a low-cost 8-position turret. These products are priced at
approximately $5,000 for the piggyback router and $12,000 for the turret. Sales
of these products in fiscal year 1998 were approximately $570,000. Management
hopes that these new offerings will allow the Company machines to penetrate new
markets, however, no assurance to this effect can be given.
SuperControl Systems
The Company designs and manufactures its own CNC systems that it uses
for sale with its own automated industrial equipment. It currently manufactures
version 91000 of the SuperControl CNC system. The SuperControl CNC system
operates the various movements of the equipment in response to programs
developed by the operator.
Marketing
The market for CNC routers can be divided into a large number of
applications in a variety of industries. The Company seeks to produce industrial
products that address specific applications in a variety of industries. It also
attempts to provide, standard systems that require little or no engineering
input from the end user. These 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.
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The Company's systems are currently designed to operate at higher
quality and reliability levels than earlier versions of these products. In
addition, the Company strives to support these systems with improved technical
services and assistance. Although the Company's marketing strategy has involved
emphasis on small to medium-sized companies, the Company has also received
orders from larger companies.
The Company generally sells its products through the assistance of
dealer networks established throughout North America and Europe. Dealers assist
the Company in making sales and are paid on a commission basis for this service.
Commissions generally range from 15% to 20% of the Company's published retail
prices. As of November 30 31, 1998 the Company had 14 authorized dealers
marketing its industrial products. The Company usually requires each dealer to
execute a non-exclusive written agreement. A dealer is required to sell one
machine within each six-month period in order to retain its dealership. Most
dealers concentrate their sales efforts in specific geographical areas and in
particular industries such as woodworking or plastics, and sell only one of the
Company's product lines. However, some market and sell products to more than one
industry and sell both the CNC router systems and the Company's line of Wood
Carving Routers.
One dealer, Automation Associates Incorporated, accounted for
approximately 21% of the Company's sales for the fiscal year ended July 31,
1998. See "Certain Transactions" for information relating to the Company's
agreement with Automation Associates Incorporated, a corporation owned by the
Company's president and his wife who is also an officer and director. This
dealer sold to 39 different customers, none of which accounted for 10% or more
of the Company's sales in the fiscal year ended July 31, 1998. Automation
Associates Incorporated sold to seven customers for a total of 13% of the
Company's sales during the first quarter of fiscal 1999.
One other dealer, CNC Automation, accounted for approximately 11% of
the Company's business during the 1998 fiscal year. This dealer sold to 19
different customers, none of which accounted for 10% or more of the Company's
sales in the fiscal year ended July 31, 1998. No other dealer accounted for 10%
or more of the Company's business for the fiscal year. The loss of any large
dealer could have a materially adverse effect on the Company's business. Three
dealers accounted for more than 10% each of the Company's sales during the
quarter ended October 31, 1998. CNC Automation accounted for 15% of the
Company's business during this quarter while Index, Inc. and Programmed
Productivity, Inc. each accounted for 16% of the Company's sales. CNC sold seven
machines, Index sold five and PPI sold eight machines during this time.
The Company 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 also has a wholly-owned subsidiary, Thermwood (Europe)
Limited, a United Kingdom company, which operates a sales offices in England for
conducting sales to the European Community. During the 1998 fiscal year, the
Company had an operating loss of $356,644 in connection with its European
operations. Neither of the foreign sales offices generated a profit. The Company
had an office in Vienna which it closed in September 1998. Sales of machines and
services in fiscal year 1998 were approximately $1,735,000, or 8% of total
sales.
Typically, the Company seeks to develop sales leads through advertising
in trade magazines and product exhibitions at selected trade shows. The Company
then furnishes such leads to dealers in the geographic area where the potential
customer is located. It also supplies the dealers with promotional materials and
sales aids, including product literature, a dealer's manual, news letters, press
releases and advertising, technical briefs, sales incentive programs and video
tapes of product demonstrations. The Company assists its dealers by providing
training for them and their customers. The Company encourages trainees and
potential customers to visit its manufacturing facilities where it maintains
areas and machinery to demonstrate the operation and use of its products.
Technical Services
Management believes that providing extensive and ongoing technical
services to customers is essential for the success of small and medium-sized
companies. Accordingly, the Company offers a variety of technical services
through its Technical Services Division. These services include training,
installation assistance, preventive maintenance and upgrading and enhancement of
installed products as technology advances. Technical services are marketed to
current customers as well as to companies that purchase the Company's equipment
in the used market. Sales and service by the Technical Services Division in
fiscal year 1998 and the first quarter of fiscal year 1999 accounted for
approximately 19% and 21%, respectively, of total sales. A toll-free service
line is maintained for the use of all owners of the Company's equipment.
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The Technical Services Division offers customers an Advanced Support
Program for the Company's CNC routers. Under this program, in exchange for a
monthly fee, customers receive an ongoing labor warranty (customer pays travel
and expenses), a 20% discount on spare parts and upgrades, an ongoing material
warranty on control system components and annual software updates. As of
October, 1998 there were 18 customers participating in this program. The Company
has incurred no significant expenses or problems in servicing its products.
Product Development
Much of the Company's product development effort during the last two
years has been directed toward development of a variety of cutting and machining
heads for use on the CNC router line of equipment. This development is
continuing in an effort to broaden the capability of the equipment and thus
increase market size for these products. In addition, the Company has an ongoing
program to reduce the manufacturing costs of its products and pass these
reductions on to customers in the form of price decreases.
The Company has completed efforts to add the capability of performing
three-dimensional woodcarving to its entire CNC router line. The resulting
system produces carved wood components at a three to ten times faster production
rate than the Company's previously marketed carving robot product. Management is
now offering these new capabilities and expects sales of these new products to
replace sales of the current two-dimensional carving robot product. For the
fiscal year ended July 31, 1996, the two-dimensional carving robot accounted for
approximately $182,000 or 1% of machine sales while sales of the
three-dimensional carving robot in fiscal year ended July 31, 1998 amounted to
approximately $540,000 or 3% of machine sales. There were no sales of the
two-dimensional robot in fiscal years ended July 31, 1997 or 1998. Sales of the
three-dimensional carving robot amounted to approximately $333,000 or 7% of
machine sales during the first quarter of fiscal 1999.
Development efforts have been continuing on the 91000 SuperControl that
is an updated version of the CNC control systems formerly used on the Company's
equipment. The basic system development is complete and this control is
currently being sold and shipped on the Company's equipment. Current efforts are
being directed toward adding certain high-end features and capabilities.
Some of the high-end features being added to the 91000 SuperControl
include: a service guide and manual and a Searchmode, maintenance videos and a
service clock for improved guidance in customer maintenance. In addition, the
Company is adding a VHS player and a close up camera to permit customers to
record their set up and operations. The Company is developing a 12' Model 53
because of increased popularity of 12' stock.
In the first quarter of fiscal 1999, the Company added a 4 foot by 8
foot table version of its Model 40 CNC router. The Model 40 is a low cost
system. The new table size offers customers that require a longer table a lower
cost alternative to either the Company's Model 53 or certain competitive
machines. The Company also added a single 5 foot by 10 foot table version of its
Model 42 as a lower cost alternative to the standard dual 5 foot by 5 foot table
machine.
At a trade show in August 1998, the Company introduced the woodworking
industry to the concept of manufacturing an entire piece of furniture using a
single machine. Although this concept generated strong interest, the Company has
yet to sell a system for this application. Management believes that it may
require several years for this concept to become accepted, if ever.
Customers
Although the Company has sold its industrial products to large
corporations (i.e., companies with annual sales approximating or exceeding $1
billion), its primary customer base is composed of small to medium-sized
manufacturers (i.e., companies with annual sales ranging from approximately $10
million to approximately $500 million) located throughout the United States. No
customer accounted for more than 10% of the Company's sales in the fiscal year
ended July 31, 1998 or the first quarter of fiscal 1999.
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The Company generally requires a purchaser of industrial products to
pay 30% of the sales price when placing the order, an additional 40% prior to
shipment and the balance within 30 days after date of invoice. Charges for
technical services and spare parts are due within 30 days after billing.
The Company offers its customers a limited warranty, of one year for
parts and labor. Under the warranty, the customer must pay travel costs and
expenses for labor. As described above, the Company also offers an Advanced
Support Program for its products. The Company also provides training and
installation services. See "Technical Services" above.
Backlog
As of July 31, 1998, the Company's backlog was approximately $3,029,000
compared with a backlog of $4,080,000 as of July 31, 1997. Substantially all of
this backlog will be manufactured and delivered prior to January 31, 1999.
Backlog at October 31, 1998 was $2,521,000, a decrease of approximately $500,000
from July 31, 1998.
Backlog figures generally include only written orders from customers
which management believes are firm and will be shipped within eight to 12 weeks.
Approximately 90% of the backlog is covered by down payments from customers
ranging from 25% to 30%. On orders where down payments have not been required,
the Company has obtained irrevocable letters of credit for payment upon proof of
shipment.
Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of actual revenues for any subsequent period.
Manufacturing and Production
The Company maintains its manufacturing facilities in Dale, Indiana.
See "Property and Facilities" below. It manufactures its products on a batch
rather than a continuous flow or conventional production line basis. Except for
demonstration models, the Company does not generally manufacture products
without a purchase order although, in order to expedite the manufacturing
process, certain basic parts of machines may be fabricated before purchase
orders are received. The major portion of inventory is purchased to satisfy
specific customer orders with the balance acquired from one to four months in
advance of projected orders.
The Company designs, develops and engineers all of its industrial
products. Components contained in these products are either purchased from
outside suppliers or fabricated by Company personnel. The Company fabricates
such components as computer-based electronic control systems and the steel
structure of the CNC router systems. Where possible, the Company utilizes its
CNC router systems and 91000 Control systems operating conventional metalworking
machine tools to fabricate components.
During fiscal year 1997 the Company purchased two used pieces of
equipment which it retrofitted with the 91000 Control system for use in
fabricating components which were previously custom made for the Company. These
purchases saved the Company approximately $250,000 during fiscal year 1998 in
labor and material costs.
Raw materials are purchased from third party sources. Most raw
materials and components, including those that are custom made for the Company,
are either purchased or available from several sources. One supplier accounted
for approximately 19% of total components purchased by the Company for the
fiscal year ended July 31, 1998. The materials purchased from this supplier are
available from several other sources. There has been no material change during
the first quarter. The raw materials purchased from the above mentioned supplier
are expected to continue at approximately the same rate for the 1999 fiscal
year, and purchases made during the first quarter were consistent with the 1998
numbers.
Competition
There are many manufacturers of CNC routers in the United States and
abroad, particularly in Japan and Europe. A number of these manufacturers are
larger, better financed and have more resources than the Company.
The Company's primary competitors in the high speed machining market
include a number of major domestic, Japanese and European firms such as Shoda
Iron Works, Heian, Shinks Machinery Works, Accurouter, Motionmaster and Komo
Machine. In addition, there are a large number of companies offering routing
equipment, and it is management's opinion that the market cannot support all of
them. Management believes, however, that the ability of the Company to offer
products that perform a variety of functions and sell at low prices provides the
Company with a competitive advantage.
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Competition in CNC routers is based upon real and perceived differences
in equipment features, price, performance, reliability, service, marketing,
financial strength and product development capability. The Company may be at a
competitive disadvantage with those manufacturers that offer a broader line of
equipment or related supplies.
Research and Development
The Company plans to continue its research and development efforts
primarily directed toward the improvement of existing products, development of
new products or product enhancements and reduction in manufacturing costs. The
Company utilizes a variety of sources in its research and development efforts,
including employees, vendor-engineering staffs, contract employees who are
retained solely for specific projects, consultants and independent design firms.
See "Product Development" above for information relating to the Company's
current development efforts.
For the fiscal years ended July 31, 1998 and 1997, the Company spent
$314,000 and $216,000, respectively, for research and development. There was no
customer-sponsored research and development during the 1998 fiscal year.
Management believes that expenditures need to be increased for the Company to
maintain a competitive position in the immediate future. However, the Company
may eventually be at a competitive disadvantage with respect to firms that spend
significantly more on research and development efforts than it does. During the
quarters ended October 31, 1998 and 1997, the Company spent $155,627 and
$81,060, respectively. The increase was primarily due to salaries and benefits
of research and development personnel.
Patents, Trade Secrets and Trademarks
The Company currently holds 26 domestic patents and has applications
pending in the United States for 14 additional patents. There is no assurance
that any additional patents will be granted. Management does not believe that
major reliance can be placed on patents for the protection of its products
although patent protection for the Company's newly developed products is
increasing.
The Company relies primarily upon trade secret laws, internal
non-disclosure safeguards and restrictions incorporated into its dealership,
sales, employment and other agreements to protect its proprietary property and
information. In addition, the Company has proprietary rights arrangements with
its employees that provide for the disclosure and assignment by the employee to
the Company of any discovery, invention or improvement relating to its business.
While management is unaware of any breach of the Company's security, competitors
may develop similar products outside the protection of any measures that the
Company takes. In addition, policing unauthorized use of the Company's
technology, particularly in foreign countries, may be difficult. The Company has
been unsuccessful in prosecuting two claims in the United States for what it
believed were prospective unauthorized use of proprietary rights. The Company
has not been involved in any claims concerning patent infringement.
The Company markets its products under various trademarks, including
THERMWOOD, CARTESIAN 5, 91000 SUPERCONTROL, ROUTER ART and PANEL-CAD. It has
three trademark registrations and one application for registration in the United
States. The Company also has two foreign trademark registrations and
applications for seven foreign registrations.
Employees
As of December 1, 1998, the Company had approximately 145 full time
employees, of whom 82 were engaged in manufacturing, 14 in marketing, 14 in
administration, ten in engineering, seven in research and development, and 18 in
technical services. None of the Company's employees is a member of any union or
collective bargaining organization. The Company considers its relationship with
its employees to be satisfactory.
Designing and manufacturing the Company's industrial equipment requires
substantial technical capabilities in many varied disciplines, ranging from
mechanics and computer sciences to mathematics. Although management believes
that the capability and experience of the Company's technical staff compare
favorably with other similar manufacturers, there is no assurance that the
Company can retain existing employees or attract and hire the type of skilled
employees it may need in the future.
44
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Properties
The Company's manufacturing facilities and executive offices are
located in a 100,000 square foot building in Dale, Indiana which had been leased
from Edgar Mulzer, a director and major shareholder of the Company. In November
1993 the Company entered into an agreement with Mr. Mulzer to convert the
obligation under the lease, as well as other long-term debt amounts owed to Mr.
Mulzer, into Shares of the Company's Series A Preferred Stock. In fiscal year
1998, the Company repurchased the Preferred Stock with proceeds from a line of
credit from a bank resulting in transfer of ownership of the land and building
to the Company. This line of credit also made it possible to increase the
original approximately 75,000 square feet of the building to the current 100,000
square feet. Management believes that these facilities are in good condition and
adequately satisfy the Company's current requirements. See "Certain
Transactions."
Legal Proceedings
There are no known pending or threatened litigation, claims or
assessments which management believes could have a material effect on the
Company.
45
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WHERE YOU CAN FIND MORE INFORMATION
We filed a Registration Statement on Form S-4 (together with all
exhibits and schedules thereto, the "Registration Statement") with the SEC, with
respect to the registration of the Debentures offered by this Prospectus. This
Prospectus does not contain all of the information set forth in such
Registration Statement and the exhibits thereto. For further information
pertaining to the Company, the Exchange Offer, the Debentures offered by this
Prospectus and related matters, you should review the Registration Statement,
including the exhibits filed as a part thereof. Each statement in this
Prospectus referring to a document filed as an exhibit to such Registration
Statement is qualified by reference to the exhibit for a complete statement of
its terms and conditions.
We file annual, quarterly, and special reports, proxy statements, and
other information with the SEC. In the event that the numbers of our
Shareholders and Debenture Holders each drops below 300 in a fiscal year (which
ends each July 31), we will not be required to continue to file this
information.
You may read and copy any reports, statements and other information we
file at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operations of the Public Reference Room. Our SEC filings are also available on
the SEC's Internet site (http://www.sec.gov).
Our Shares are traded on the American and Pacific Stock Exchanges under
the symbol "THM."
We will provide, at no cost, to each person to whom this Prospectus is
delivered, upon written or oral request, copies of any or all of the information
included in the Registration Statement which is not included in this Prospectus.
Requests should be directed to Rebecca Fuller, Treasurer, at:
THERMWOOD CORPORATION
Old Buffaloville Road
P.O. Box 436
Dale, Indiana 47523
Telephone: (812) 937-4476.
To receive these documents in a timely manner, you should
request that we send you the information no later than five business days before
you make your decision to accept or reject the Exchange Offer.
46
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MANAGEMENT
Information About Management
Current Management of the Company is as follows:
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 L. Uebelhor 41 Vice-President of Manufacturing
Peter N. Lalos (2) 64 Director
Edgar Mulzer (2) 80 Director
Lee Ray Olinger (2) 71 Director
- -----------------------
(1) Mr. and Mrs. Susnjara are husband and wife.
(2) Member of the Incentive Stock Option Committee, Non-Qualified Stock Option
Committee, Audit Committee, Nominating Committee and Compensation Committee
of the Board of Directors.
All directors hold office until the next annual meeting of Shareholders
of the Company or until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors. Each director
receives compensation in the amount of $1,000 plus $100 for each $100,000 in
profit for the previous quarter for attending each of the four directors'
meetings and is reimbursed for all related expenses.
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. See
"Certain Transactions."
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 Automation
Associates Incorporated, a dealer of the Company's industrial products. See
"Certain Transactions." 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.
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Mr. Hildenbrand became a Vice President of the Company in August, 1988.
Previously, the Company had employed him in various technician and sales manager
positions since 1977. He has also been a director of Thermwood Europe Ltd., the
Company's wholly owned subsidiary, since July 1996.
Mr. Uebelhor became Vice-President of Manufacturing in August 1997.
Previously, he had been the Company's Production Manager since 1993.
Mr. Kasten became a Vice President in December 1993. Previously, the
Company had employed him as a manager of applications since 1990.
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. He is currently
retired. He became a director of the Company in September 1974 and has served
continuously in that capacity to the present. See "Certain Transactions" for
information relating to loan and lease transactions between the Company and Mr.
Mulzer and his affiliates.
Mr. Olinger has been a director since December 1989. He has been a
director of the First Bank of Huntingburg, a commercial bank in Huntingburg,
Indiana since 1949 and Chairman of the bank since 1986.
Executive Compensation
The following table sets forth the annual remuneration paid during the
fiscal years ended July 31, 1998, 1997 and 1996 to the Chief Executive Officer
and to each of the executive officers of the Company whose total fiscal 1998
remuneration exceeded $100,000 and to all officers of the Company as a group.
Summary Compensation Table
Annual compensation
------------------------------------
Other annual
Compensation
Name and principal position Year Salary Bonus (1)
- --------------------------- ---- -------- -------- ------------
Kenneth J. Susnjara, 1998 $108,000 $146,664 $6,400
Chairman of the Board, 1997 63,000 83,242 3,700
President and Director 1996 63,000 94,739 2,000
Michael Hardesty, 1998 48,000 100,565 ---
Vice-President Engineering 1997 48,000 102,165 ---
1996 48,000 58,269 ---
David Hildenbrand 1998 45,000 122,239 ---
Vice-President Sales 1997 45,000 116,779 ---
1996 45,000 56,818 ---
Rebecca Fuller, Treasurer 1998 40,000 86,199 ---
1997 40,000 87,570
- -----------------------
(1) Other annual compensation represents directors' fees paid to Mr. Susnjara.
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Stock options for an additional 4,000 Shares were issued to an officer
of the Company under the Qualified Stock Option Plan in fiscal year 1998. At
December 1, 1998, the exercise prices of some of the unexercised options were
less than the market price of the Company's Common Stock. On September 6, 1994,
registration statements on Form S-8 were filed with the SEC under the Securities
Act in connection with the registration of Shares of the Company's Common Stock
under the Company's
Employee Incentive Stock Option Plan and Non-Qualified Stock Option Plan.
In 1985 the Board of Directors appointed Mr. Susnjara to the position
of President and Chief Executive Officer. In this position, he is to receive a
bonus based on the pre-tax profits of the Company as set forth below. See
"Profit Sharing Plan" below.
Certain other officers may be entitled to participate in the Company's
profit sharing plan. See "Profit Sharing Plan" below.
Profit Sharing Plan.
In 1985, the Company instituted a management profit sharing plan. This
plan has been operative since fiscal 1987, and was continued in an amended form
for fiscal year 1998. Covered under the plan are the Chairman of its Board of
Directors, the President, Vice President of Engineering, Vice President of
Sales, Vice President of Technical Services, the Treasurer and various
departmental managers.
Under the plan, the Chairman is entitled to 5% of corporate operating
income. The Vice President of Sales and Vice President of Technical Services
each are entitled to 5% of the divisional operating income. The Vice-President
of Manufacturing and the Treasurer are each entitled to receive 2% and 3%,
respectively, of the corporate operating income. Any divisional losses are to be
subtracted from these amounts so that the total bonus paid does not exceed 25%
of operating income.
Department managers are entitled to various bonuses based upon
productivity of their departments. Payments due under the plan accrue for each
six-month period and are thereafter paid in six monthly installments. Vesting of
rights under the plan requires eligible participants to be continually employed
through the payment dates. Divisional losses of the fiscal year must be recouped
in the succeeding year, or years, in order to be eligible for profit sharing
earnings in the succeeding year(s).
Incentive Stock Option Plan.
Under the Company's Employee Incentive Stock Option Qualified Plan (the
"Qualified Plan"), options to purchase a maximum of 80,000 Shares of its Common
Stock may be granted to officers and other key employees of the Company. Options
granted under the Qualified Plan are intended to qualify as incentive stock
options as defined in Section 422A of the Code.
The Qualified Plan is administered by the Board of Directors and a
Committee currently consisting of three members of the Board which determines
which persons are to receive options, the number of Shares that may be purchased
under each option and the exercise price. In the event an optionee voluntarily
terminates his employment with the Company, he has the right to exercise his
accrued options within 30 days after such termination. However, the Company may
redeem any accrued options held by each optionee by paying him the difference
between the option price and the then fair market value. If an optionee's
employment is involuntarily terminated, other than because of death, his/her
right to exercise accrued options expires on such termination. Upon death,
his/her estate or heirs have one year to exercise his/her accrued options. The
maximum term of any option is ten years and the option price per Share may not
be less than the fair market value of the Company's Shares on the date the
option is granted. However, options granted to persons owning more than 10% of
the voting Shares of the Company may not have a term in excess of five years and
the option price per Share may not be less than 110% of fair market value at the
date the option is granted.
The aggregate fair market value of the Shares of Common Stock
(determined at the time the options are granted) with respect to which incentive
stock options are exercisable for the first time by such optionee during any
calendar year (under all such plans) shall not exceed $100,000. Options must be
granted within ten years from the effective date of this Qualified Plan.
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Options granted under the Qualified Plan are not transferable other
than by will or the laws of descent and distribution. Options granted under the
Qualified Plan are protected by anti-dilution provisions increasing the number
of Shares issuable thereunder and reducing the exercise price of such options,
under certain conditions. The life term of the Qualified Plan extends to
December 3, 2000, or on such earlier date as the Board of Directors may
determine. Any option outstanding at the termination date will remain
outstanding at the termination date until it expires or is exercised in full,
whichever occurs first.
Between December 1991 and August 1997, the Company granted ten year
options to acquire 50,600 Shares of the Company's Common Stock at exercisable
prices ranging from $5.00 to $10.66 under the Qualified Plan to 20 employees of
the Company. All of these options are exercisable as of the date hereof.
Non-Qualified Stock Option Plan.
Under the Company's Non-qualified Stock Option Plan ("NSO Plan"),
options to purchase a maximum of 70,000 Shares of its Common Stock may be
granted to officers, directors, and other key employees.
The NSO Plan is administered by the Board of Directors and a committee
of three members of the Board which determines which persons are to receive such
options, the number of Shares that may be purchased under the option, the
exercise prices, the time and manner of exercise and other related matters.
In the event an optionee voluntarily terminates his employment or
tenure with the Company's consent or his employment or tenure is terminated by
the Company without cause, he generally has the right to exercise his accrued
options within 30 days after such termination unless the Committee elects other
time periods. In all other cases of termination of the optionee's employment or
tenure other than death, said options shall cease immediately. Upon death, his
estate or heirs have one year to exercise his accrued options.
The Committee may grant an optionee the right to surrender all or a
portion of his accrued options to the Company and receive from it the difference
between the option price and the then fair market value. Options become
exercisable in 25% installments each year beginning in the second year through
the fifth year. Options are generally not transferable and are conditioned upon
the optionee remaining in the Company's employ for at least one year from the
date of its grant. Under the NSO Plan, no option may be granted after January 1,
2005 and the exercise price of such options may not be less than the then fair
market value. It is within the Committee's discretion to grant anti-dilution
provisions to each optionee. Under present federal income tax law, an employee,
officer or director who is granted an option will not have any income upon the
grant of an option and the Company will not be entitled to any deduction at that
time. When an optionee exercises his option, ordinary income will be realized by
him, measured by the excess of the fair market value of the Shares over the
price paid for the Shares. The Company will be entitled to a deduction equal to
the amount of income realized by the Holder of the option. If the optionee
surrenders all or part of his option for a cash or common stock payment, he will
realize ordinary income in the amount of cash or fair market value of stock
received. The Company will be entitled to a deduction equal to the amount of
income realized by the optionee.
Options to acquire an aggregate of 40,000 Shares of the Company's
Common Stock at exercisable prices between $5.63 and $10.00 per Share have been
granted under the NSO Plan to four directors and officers of the Company,.
Currently, all of these options are exercisable.
Other options
There are options to purchase an additional 120,000 Shares held by the
President of the Company. These option extends through October 18, 2005 and
permits the purchase of 60,000 Shares at $15.00 per Share and 60,000 at $30.00
per Share.
Effect of Exchange Offer on outstanding Options
As part of this Exchange Offer, the Company will offer each Holders of
Company Qualified and Non-Qualified options the right to exchange his or her
options for Debentures. The principal amount of Debentures issuable in exchange
for the options will equal $11.00 minus the per Share exercise price of the
options, multiplied by the number of Shares that would have been issuable upon
exercise of the options.
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PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the
Company's Common Stock, including Shares underlying the convertible debentures
and exercisable Common Stock options owned as of December 22, 1998 by (i) each
person known by the Company to own beneficially more than 5% of its outstanding
Common Stock, (ii) each director, and (iii) all officers and directors as a
group. Management believes that all of the following Shareholders, other than
Mr. and Mrs. Susnjara, will tender their Shares for exchange. If all other
Shareholders tender their Shares, Mr. and Mrs. Susnjara would be the only
remaining Shareholders of the Company.
Percentage of
Names and Addresses Shares Beneficially Total Outstanding
Of Beneficial Owners Owned(1)(2) Shares Owned
- ----------------------------- ------------------- -----------------
Kenneth J. Susnjara (3,4)
And Linda Susnjara 411,420 (5) 25.8%(5)
Edgar Mulzer
401 10th Street
Tell City, Indiana 47586 218,052 (6) 15.0%(6)
Peter N. Lalos
14312 Darnstown Road
Gaithersburg, Maryland 20878 22,000 (7) 1.5%(7)
Lee Ray Olinger
C/o First Bank of Huntingburg
4th and Main Street
Huntingburg, IN 47542 400 *
Rebecca F. Fuller (3) 2,600 (8) *
Michael P. Hardesty (3) 8,400 (9) *
David J. Hildenbrand (3) 6,600 (10) *
Richard Kasten (3) 950 *
Donald L. Uebelhor (3) 6,000 (11) *
All Officers and Directors
As a Group (10 persons) 676,422 (12) 41.3%(12)
- ------------------
* Less than one percent.
(1) Except as indicated in footnote 4, all Shares are beneficially owned and
the sole voting and investment power is held by the person indicated.
(2) Based upon 1,444,709 Shares issued and outstanding as of December 1, 1998.
(3) The address of these Shareholders is care of the Company, Old Buffaloville
Road, PO. Box 436, Dale, Indiana 47523.
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<PAGE>
(4) These Shares are owned jointly by Mr. and Mrs. Susnjara. Accordingly, each
may each be deemed to be a beneficial owner of the Company's securities
owned by the other because of their marital relationship.
(5) Includes (i) 10,000 Shares issuable upon the exercise of options granted to
Mr. Susnjara under the Company's Non-Qualified Stock Option Plan; (ii)
10,000 Shares issuable upon the exercise of options granted to him under
the Company's Qualified Stock Option Plan and (iii) 120,000 Shares issuable
upon the exercise of other options granted to him. Also includes 10,000
Shares issuable upon the exercise of options granted to Mrs. Susnjara under
the Company's Non-Qualified Stock Option Plan.
(6) Includes 10,000 Shares issuable upon the exercise of options granted to Mr.
Mulzer under the Company's Non-Qualified Stock Option Plan.
(7) Includes (i) an aggregate of 4,000 Shares issuable upon conversion of
convertible debentures owned by Mr. Lalos; and (ii) 10,000 Shares issuable
upon the exercise of options granted to Mr. Lalos under the Company's
Non-Qualified Stock Option Plan.
(8) Includes 2,000 Shares issuable upon the exercise of options granted to Ms.
Fuller under the Company's Qualified Stock Option Plan.
(9) Includes 8,000 Shares issuable upon the exercise of options granted to Mr.
Hardesty under the Company's Qualified Stock Option Plan.
(10) Includes 5,400 Shares issuable upon the exercise of options granted to Mr.
Hildenbrand under the Company's Qualified Stock Option Plan.
(11) Includes 5,600 Shares issuable upon the exercise of options granted to Mr.
Uebelhor under the Company's Qualified Stock Option Plan.
(12) Includes Shares issuable to all persons listed in the table upon exercise
of options granted under the Company's Qualified and Non-Qualified Stock
Option Plans and upon conversion of convertible debentures as discussed in
footnotes five through 11 above.
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CERTAIN TRANSACTIONS
In February 1987, the Company purchased its premises from an
independent third party for $1,000,636 and simultaneously resold it to Mr.
Mulzer, a director and principal shareholder of the Company for $1,800,000. At
the same time the Company leased the premises back from Mr. Mulzer for a 20-year
period at a monthly rental of $19,353 or approximately $232,000 on an annual
basis.
The lease agreement, which was treated as a capitalized lease for
financial reporting purposes, also obligated the Company to pay all maintenance,
taxes, assessments, insurance premiums and utilities incurred in connection with
the operation of the premises. Pursuant to a related agreement, the Company had
an option to repurchase the premises from Mr. Mulzer, exercisable through 2006,
at prices descending on an annual basis from $1,786,781 in 1987 to $240,000 in
the last year of the option.
On November 18, 1993, this lease payment obligation in the amount of
$1,608,629, together with accrued interest in the amount of $122,491 was
converted to Preferred Stock. Upon the issuance of the Preferred Stock, the
Company no longer had any lease payments. The liability for all accrued and
future lease payments was converted to Preferred Stock.
On November 18, 1993, Mr. Mulzer converted debt owed to him by the
Company in the aggregate of $3,437,120 to an aggregate of 1,000,000 Shares of
Preferred Stock. The Holder of the Preferred Stock was 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 had the right
in its sole discretion to redeem the stock at any time at $3.40 per Share. The
Company redeemed 738,000 and 162,000 Shares of the Preferred Stock for a total
of $2,546,320 and $550,800 during fiscal years 1998 and 1997, respectively.
Dividends were paid in the amount of $43,255 and $285,204 for the fiscal years
1998 and 1997, respectively. The balance of the Shares had been previously
repurchased. The Preferred Stock was fully redeemed in October 1997 and no
further dividends will be paid.
On October 7, 1997, the Company entered into an agreement for a $3.5
million line of credit with a bank. The Company used the proceeds from this
credit line to repurchase the Preferred Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Mr. and Mrs. Susnjara are the owners of Automation Associates
Incorporated ("AAI"), a dealer of the Company's industrial products. The
distribution agreement between the Company and AAI contains the same terms and
conditions as the Company's agreements with its other dealers. The Company sold
no products to AAI during fiscal year 1998, but paid AAI $627,816 in commissions
during the year for assisting in effecting sales of approximately $3,800,000.
This amount represents approximately 21% of the Company's gross sales for fiscal
year 1998. AAI also leases space from the Company at what management believes is
a fair market rate. Rental payments were $2,400 during the 1998 fiscal year.
Lalos & Keegan, a law firm in which Mr. Lalos is the senior partner,
accrued fees of $95,000, $77,000, $103,000, for the fiscal years 1998, 1997, and
1996, respectively. As of October 31, 1998, all of these fees have been paid.
Management believes that the terms of the transactions between the
Company and its affiliated parties as described in this section are as fair as
those which the Company would have obtained if these transactions had been
effected with independent third parties. Each transaction was approved by a
majority of the disinterested directors. In the future, all such transactions
will continue to be approved by a majority of the disinterested directors.
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The Company has not purchased any Shares of Common Stock since August
1, 1996. Since August 1, 1996, Edgar Mulzer purchased on the open market
340Shares at $7.81 per Share and 2,000 Shares at $7.20 per Share in December
1996. Since August 1, 1996, 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. Peter Lalos purchased 620 Shares at $7.80 and 40 shares at
$8.80 per Share in May 1997 and 200 Shares at $12.35 per Share and 140 Shares at
$12.40 per Share in November 1997. These are the only transactions in Shares of
the Company effected by such individuals since August 1, 1996.
To our knowledge, neither the Company nor any of its affiliates,
directors or executive officers has purchased or sold any Common Stock in the
last sixty days.
54
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DESCRIPTION OF THE DEBENTURES AND THE INDENTURE
General
The Debentures will be issued under an indenture (the "Indenture") to
be dated as of ____, 1999, between the Company and the American Stock Transfer
and Trust Company (the "Trustee"). A copy of the Indenture is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. See
"Where You Can Find More Information." The following summaries of what
management believes are all of the material provisions of the Indenture and the
Debentures do not purport to be complete and are subject to and qualified in
their entirety by reference to all of the provisions of the Indenture, including
the definitions therein of certain terms and those terms made a part thereof by
the Trust Indenture Act of 1939. Whenever particular provisions or defined terms
of the Indenture are referred to, such provisions or defined terms are
incorporated herein by reference.
Principal Amount of Debenture. Each Debenture has a principal amount
equal to $11.00 times the number of Shares tendered by a Shareholder.
Interest. The Debentures bear simple interest from the date of their
delivery at the rate of 12% per annum. Interest is payable quarterly on January
1, April 1, September 1 and December 1 of each year, commencing April 1, 1999.
Maturity. The Debentures mature fifteen years after the date of their issuance.
Redemption by Holder. Up to a maximum of $50,000 in principal amount
and accrued interest thereon of the Debentures owned by any Holder may be
redeemed at the election of the Holder's estate following his/her death. The
right of redemption is limited to the estate of the initial Holder. No
subsequent Debenture Holder will have this right of redemption. If spouses are
joint record owners of Debentures, the election to redeem will apply when either
record owner dies. In other cases of Debentures held, the election will not
apply.
Redemption by the Company. The Company can redeem the Debentures for
$15.00 per Debenture during the second year after their issuance. During each
subsequent year, the redemption price will decrease by $0.30 per Debenture. The
Debentures are not redeemable within the first year after they have been issued.
The Company is required to provide the Holder with written notice of its
intention to redeem the Debentures at least 30 days before the Debentures are
redeemed.
Form and Denominations/Transfers. The Debentures will be issued only in
fully registered form in denominations of $11.00 or an integral multiple
thereof. The Debentures are exchangeable and transfers thereof will be
registrable without charge therefor, but the Company may require payment of a
sum sufficient to cover tax or other governmental charge payable in connection
therewith.
Interest Withholding. With respect to those investors who do not provide the
Company with a fully executed Form W-8 or Form W-9, as the case may be, the
Company will withhold 31% of any interest paid. Otherwise, no interest will be
withheld, except on the Debentures held by foreign business entities. It is the
Company's policy that no sale will be made to anyone refusing to provide a fully
executed Form W-8 or Form W-9.
Place and Method of Payment. Principal and interest on the Debentures
will be payable at the offices or agencies of the Company maintained for such
purposes in the Borough of Manhattan, City and State of New York, initially to
American Stock Transfer and Trust Company, 40 Wall Street, New York, New York
10005, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto as it
appears in the Debenture register.
Subordination of Debentures. The payment of the principal of (and
premiums, if any) and interest on the Debentures will be subordinated in right
of payment to the extent set forth in the Indenture to the prior payment in full
of the principal of (and premiums, if any) and interest on all Senior Debt of
the Company. Senior Debt is defined to include indebtedness for money borrowed
outstanding on the day of execution of the Indenture or thereafter, created for
money borrowed from banks, or other traditional long-term institutional lenders
such as insurance companies and pension funds, unless in the instrument creating
or evidencing such indebtedness it is provided that such debt is not senior in
right of payment to the Debentures. At December 1, 1998, Senior Debt aggregated
$2,316,280. The Company expects from time to time to make additional borrowings
which will constitute Senior Debt.
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<PAGE>
The Company is not limited in the amount of additional indebtedness,
including Senior Debt, which it can create, incur, assume or guarantee.
Accordingly, the Debenture Holders are not protected against highly leveraged or
other transactions involving the Company that may adversely affect them.
Upon any payment or distribution of the Company's assets to creditors
on any dissolution, winding up, total or partial liquidation, reorganization or
readjustment of the Company, whether voluntary or involuntary, or bankruptcy,
insolvency, receivership or other proceedings all principal of (and premiums, if
any) and interest due upon all Senior Debt must be paid in full before the
Debenture Holders or the Trustee are entitled to receive or retain any assets so
paid or distributed in respect of the Debentures. The Debentures and the
existing convertible debentures rank equally with regard to distributions.
Modification of the Indenture. With the consent of the Holders of not less than
a majority in principal amount of outstanding Debentures, the Company and the
Trustee may enter into an indenture or indentures supplemental to the Indenture
for the purpose of adding any provisions to or changing in any manner or
eliminating any provisions of the Indenture or modifying in any manner the
rights of the Debenture Holders under the Indenture, provided that no such
supplemental indenture shall, without the consent of the Debenture Holders
affected:
(a) reduce the amount of Debentures whose Holders must consent to an
amendment;
(b) reduce the rate of or change the time for payment of interest on
any Debenture;
(c) reduce the principal of or change the fixed maturity of any
Debenture;
(d) make any Debenture payable in money other than that stated in the
Debenture;
(e) make any change in the provisions related to waiving past
defaults, receiving payments under the Debentures or bringing
suit to enforce such payments;
(f) reduce the above stated percentage of outstanding Debentures;
(g) alter the provisions of the Indenture related to amending the
Indenture so as to adversely affect the rights of Holders; or
(h) alter the provisions of the Indenture so as to adversely affect
the subordination of the Debentures to Senior Debt.
Without the consent of any Holder of the Debentures, the Company and
the Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Debentures in addition to or in place of certificated Debentures (provided that
the uncertificated Debentures are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated
Debentures are described in Section 163(f)(2)(B) of the Code), to add guarantees
with respect to the Debentures, to secure the Debentures, to add to the
covenants of the Company for the benefit of the Holders of the Debentures or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder of the Debentures or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the Trust Indenture Act.
The consent of the Holders of the Debentures is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company
is required to mail to Holders of the Debentures a notice briefly describing
such amendment. However, the failure to give such notice to all Holders of the
Debentures, or any defect therein, will not impair or affect the validity of the
amendment.
56
<PAGE>
Events of Default, Notice and Waiver. Events of Default are defined in
the Indenture as being:
(a) a default for 45 days in payment of any interest installment when
due, and default in payment of principal (or premium, if any)
when due;
(b) a default for 60 days after written notice to the Company by the
Trustee or by the Holders of at least 25% in principal amount of
the outstanding Debentures in the performance of any other
covenant of the Company in the Indenture; and
(c) certain events of bankruptcy, insolvency and reorganization of
the Company. If an Event of Default shall occur and be
continuing, either the Trustee or the Holders of 25% in principal
amount of the outstanding Debentures may declare the principal of
all of the Debentures to be due and payable.
The Indenture provides that if an Event of Default occurs and is
continuing and is known to the Trustee, the Trustee must mail to each Holder of
the Debentures notice of the Event of Default within 90 days after it occurs.
Except in the case of an Event of Default in the payment of principal of or
interest on any Debenture, the Trustee may withhold notice if and so long as a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the Holders of the Debentures. In addition, the
Company is required to deliver to the Trustee, within 120 days after the end of
each fiscal year, a certificate indicating whether the signers thereof know of
any Event of Default that occurred during the previous year.
The Holders of a majority in principal amount of the outstanding
Debentures may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any power of trust
conferred on the Trustee. The right of a Debenture Holder to institute a
proceeding with respect to the Indenture is subject to certain conditions
precedent, including the provision of notice and indemnification for the
Trustee. The Holders of a majority in principal amount of the outstanding
Debentures may, on behalf of the Debenture Holders, waive any past default and
its consequences under the Indenture, except a default in the payment of the
principal of (or premium, if any) or interest on any Debenture.
The Trustee. American Stock Transfer and Trust Company will be the
Trustee under the Indenture. The Trustee is the transfer agent and registrar for
the Common Stock. The Indenture contains certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; provided, however, if it acquires any conflicting
interest it must either eliminate such conflict within 90 days, apply to the SEC
for permission to continue or resign.
No Personal Liability of Directors, Officers, Employees and
Shareholders. No director, officer, employee, incorporator or shareholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Debentures, the Indenture or for any claim based on, in respect to, or
by reason of, such obligations or their creation. Each Holder of the Debentures
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Debentures. Such waiver may not be effective
to waive liabilities under the Federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
Governing Law. The Indenture provides that it and the Debentures will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
Outstanding Convertible Debentures
In 1993 the Company issued 12% subordinated convertible debentures due
February 25, 2003. The terms of the convertible debentures are substantially the
same as those of the Debentures, except that the convertible debentures are
convertible into Shares at the rate of one Share per $5.00 principal amount of
convertible debentures. As of December 1, 1998, there was an aggregate of
$113,000 principal amount of convertible debentures issued and outstanding.
The convertible debentures rank equally with the Debentures for
purposes of distributions.
57
<PAGE>
DESCRIPTION OF SECURITIES
The following statements are brief summaries of certain provisions of
the Company's Articles of Incorporation, By-Laws and other documents. These
summaries are qualified in their entirety by reference to documents filed as
exhibits to the Registration Statement.
Common Stock
Description of General Terms
The Company is authorized to issue 4,000,000 Shares of Common Stock, no
par value, of which 1,444,709 Shares are currently issued and outstanding.
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. They
have no preemptive or other rights to subscribe for additional Shares and the
Common Stock has no redemption, sinking fund or conversion provisions. Each
Share of Common Stock is entitled to one vote on any matter submitted to the
Holders thereof and to equal rights in the assets of the Company upon
liquidation subject to the prior rights on liquidation of creditors and any
Preferred Stock Holders. The outstanding Shares of Common Stock are fully paid
and non-assessable.
The Shares of Common Stock have non-cumulative voting rights, which
means that the Holders of more than 50% of the Shares voting for the election of
Directors can elect all of the Directors of the Company. In such event, the
Holders of the remaining Shares will not be able to elect any of the Directors.
Reserved Shares
As of December 1, 1998, the Company has reserved up to (i) 22,600
Shares of Common Stock for issuance upon conversion of the previously issued
Convertible Debentures; (ii) 80,000 Shares for issuance under the Qualified
Stock Option Plan of which options to purchase 50,600 Shares have been granted
and are currently exercisable; (iii) 70,000 Shares for issuance under the
Non-Qualified Stock Option Plan of which options to purchase 40,000 Shares have
been granted and are currently exercisable; and (iv) 120,000 Shares for issuance
upon exercise of options granted to Mr. Susnjara, all of which are currently
exercisable.
Preferred Stock
The Company is authorized to issue an aggregate of 2,000,000 Shares of
non-voting Preferred Stock, no par value. There are currently no Shares of
Preferred Stock outstanding. The Preferred Stock may be issued in series from
time to time with such designations, rights, preferences and limitations,
including but not limited to dividend rates and conversion features, as the
Board of Directors may determine. Accordingly, Preferred Stock may be issued
having dividend and liquidation preferences over the Common Stock without the
consent of the Common Stockholders. In addition, the ability of the Board to
issue Preferred Stock also could be used by the Company as a means of resisting
a change of control of the Company and, therefore, could be considered an
"anti-takeover" device. The Company's Board of Directors has no current plans to
issue any Preferred Stock.
Corporate Law Anti Takeover Provisions
Chapter 43 of the Indiana Business Corporation Law ("Chapter 43") is
intended to discourage abusive hostile tender offers for control of an Indiana
corporation. Because the Company's Common Stock is registered under Section 12
of the Exchange Act, the Company is subject to Chapter 43.
Chapter 43 provides that an Indiana corporation may not engage in any
of a broad range of business combinations with a person, or affiliate of such
person, who is an "interested Shareholder" for a period of five years from the
date that such person became an interested Shareholder and that such
transactions must satisfy certain other criteria, unless the transaction
resulting in a person becoming an interested Shareholder, or the business
combination, is approved by the board of directors of the corporation before the
person becomes an interested Shareholder. Under Chapter 43, an "interested
Shareholder" is defined as any person that is (i) the owner of 10% or more of
the outstanding voting stock of the corporation; or (ii) an affiliate or
associate of the corporation who was the owner, directly or indirectly, of 10%
or more of the outstanding voting stock of the corporation at any time within
the five-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested Shareholder. Chapter 43 is not
applicable to transactions involving Shareholders who became interested
Shareholders prior to 1986, when this law became effective.
58
<PAGE>
A corporation may, at its option, exclude itself from the coverage of
Chapter 43 by amending its articles of incorporation by action of a majority of
its shareholders unaffiliated with the interested Shareholder to exempt the
corporation from coverage, provided that such charter amendment shall not become
effective until 18 months after the date that it is adopted. The Company has not
adopted such a charter amendment.
The foregoing provisions could discourage or make more difficult a
merger or other type of corporate reorganization, whether or not such
transactions are favored by management, even if they could be favorable to the
interests of the shareholders.
Dividend Policy
The Company has never paid any 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. Accordingly, it is anticipated
that no cash dividends will be paid to the Holders of the Common Stock in the
foreseeable future.
If and when the Company Goes Private, it expects that it will elect (if
it qualifies) to have special tax treatment as an S corporation under the Code.
As an S corporation, the Company anticipates that it will change its dividend
policy. The Company would 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. See "Special
Factors -- Conduct Of The Company's Business After The Exchange Offer."
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.
59
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The Exchange Of Stock For Debentures Is A Redemption
Section 317(b) of the Code defines the phrase "redemption of stock" as
a corporate acquisition of "its stock from a shareholder in exchange for
property, whether or not the stock acquired is cancelled, retired, or held as
treasury stock." The definition of property includes everything other than stock
(or stock rights) in the redeeming corporation. Accordingly, the acquisition by
the Company of its Common Stock in exchange for its Debentures should be treated
as a redemption for Federal income tax purposes.
Taxation Of A Redemption Transaction
Section 302(a) of the Code provides that, if a redemption satisfies any
one of four tests, the redemption will be treated as a distribution in full
payment in exchange for the stock (i.e., as a sale transaction). In the usual
case in which the stock was held as a capital asset on the date of the exchange,
then the provisions relating to capital gains and losses will apply.
If none of the four tests are satisfied the redemption will be treated
as a distribution which is a dividend to the extent of the Company's earnings
and profits with any excess amount treated first as a return of capital and to
the extent that any portion of the distribution which is not a dividend exceeds
the shareholder's basis in the stock, as gain from the sale or exchange of
property.
The four tests for exchange treatment are contained in section 302(b)
and are not mutually exclusive -- it is possible to satisfy one or more
simultaneously. Moreover, the tests must be applied with respect to each
shareholder, so that it is possible that a redemption will qualify as a sale or
exchange as to certain shareholders, but not others. Those redemptions which
qualify for exchange treatment are as follows (with each test referring to the
redemption's effect on a specific shareholder).
(1) redemptions that are "not essentially equivalent to a dividend";
(2) redemptions that are "substantially disproportionate";
(3) redemptions that completely terminate the shareholder's equity
interest in the corporation; and
(4) redemptions from non-corporate shareholders in a partial
liquidation.
The determination as to whether a redemption will receive exchange
treatment requires an analysis of the facts and circumstances of each particular
case. However, based on the facts in the proposed transaction, the redemption
will not be a partial liquidation. With respect to the remaining three tests, a
number of safe havens have been established by the courts and the Internal
Revenue Service (the "Service") upon which taxpayers can rely.
The major Supreme Court case interpreting whether a distribution is
essentially equivalent to a dividend is U.S. v. Davis, 397 U.S. 301 reh'g
denied. In that case the Court stated that the basic test is whether the
redemption results in "a meaningful reduction of the shareholder's proportionate
interest in the corporation." No guidelines were furnished as to when a
reduction in interest is "meaningful."
Although the application of this rule depends on the facts and
circumstances of each case, the Service will issue advance private rulings on
this issue. However, the only requirement under this rule is that enough of a
reduction in the Shareholder's stock ownership occur so that his rights and his
influence as a Shareholder are reduced sufficiently to persuade the Service or
the courts that there has been a "meaningful" reduction in his stock ownership.
Under the substantially disproportionate redemption rule, redemption
will receive exchange treatment if three conditions are satisfied:
(1) The Shareholder's percentage ownership of the outstanding voting
stock is reduced immediately after the redemption to less than
80% of his percentage interest in the stock of the corporation
which the Shareholder owned immediately before the transaction;
60
<PAGE>
(2) The Shareholder's percentage ownership of the outstanding common
stock (both voting and non-voting) is reduced to less than 80
percent of such percentage ownership before the redemption. This
test is applied immediately before and immediately after the
redemption; and
(3) The Shareholder owns, immediately after the redemption, less than
50 percent of the total combined voting power of all classes of
stock entitled to vote.
In making the determination as to whether the ownership percentages are
satisfied, certain attribution rules are applicable. However, the requirements
of this rule are mechanical. If the specific percentage reduction is achieved by
a particular Shareholder, that Shareholder will receive exchange treatment,
regardless of the tax treatment accorded any other Shareholder.
Complete Termination Of Shareholder's Interest
Under a third principle, a redemption will be treated as an exchange
"if the redemption is in complete redemption of all of the stock of the
corporation owned by the Shareholder. Under this safe haven category, all the
stock in the corporation which the Shareholder owns must be redeemed (i.e.,
sold).
Recognition Of Income
Ordinarily, under the general rule of section 1001(b) of the Code,
where the redemption qualifies for exchange treatment, the amount received for
the stock is equal to the fair market value of the Debenture, rather than its
principal (face) amount. This general rule applies to both corporate and
non-corporate Shareholders. A different measurement of amount realized applies,
according to the Service, to Shareholders, individual or corporate, using the
accrual method of accounting. Accrual method taxpayers who sell property and
receive a debt obligation of the acquirer must take the obligation into account
at its face or principal amount (rather than at its fair market value). This
rule applies to determine an accrual method Shareholder's gain or loss on a
redemption of stock where the redemption qualifies for exchange treatment. The
distribution by the Company of its debt obligation in part or full payment of
the redemption price is not eligible for installment sale reporting because the
corporation's stock is publicly traded.
Capital Gain and Alternative Minimum Tax
As provided in Section 1001 of the Code, gain or loss will be
recognized by a Shareholder in an amount equal to the difference between the
amount 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 Shareholder, 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 redemption.
Long-term capital gain for non corporate 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 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 non-resident 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
exchange to avoid backup withholding requirements that might otherwise apply.
The Letter of Transmittal will require each Shareholder to deliver such
information. 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
TAX ADVISORS.
61
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Debentures for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such Debentures. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Debentures received in exchange for
Shares where such Shares were acquired as a result of market-making activities
or other trading activities. The Company has agreed that for a period of 90 days
after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resales.
The Company will not receive any proceeds from any sale of Debentures
by broker-dealers or any other Holder of Debentures. Debentures received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Debentures or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Debentures. Any broker-dealer that resells Debentures that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Debentures may be deemed to be an "
underwriter" within the meaning of the Securities Act and any profit on any such
resale of Debentures and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a Prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal.
The Company has agreed to pay all expenses incident to the Exchange
Offer other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Debentures (including any broker-dealer) against
certain liabilities, including liabilities under the Securities Act.
Following the Exchange Offer, Dirks intends to make a market in the
Debentures. There can be no assurance, however, that Dirks will make a market,
or for any period of time continue to make a market, in the Debentures. See
"Risk Factors -- Lack Of Public Market For The Debentures; Trading at a
Discount."
LEGAL MATTERS
Barry Feiner, Esq., 190 Willis Avenue, Mineola, New York 11501, will
deliver an opinion stating that the Debentures when issued as contemplated by
this Prospectus will be validly issued and binding obligations of the Company.
EXPERTS
The Consolidated Financial Statements of the Company and subsidiaries
as of July 31, 1998 and 1997 and for each of the years in the three year period
ended July 31, 1998 have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF THERMWOOD CORPORATION AND SUBSIDIARIES
Report of KPMG Peat Marwick LLP F-1
Consolidated Balance Sheets --
July 31 1998 and July 31, 1997 F-2
Consolidated Statements of Operations --
Years ended July 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity --
Years ended July 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows --
Years ended July 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
Condensed Consolidated Balance Sheets --
October 31, 1998 and July 31, 1998 (Unaudited) F-15
Condensed Consolidated Statements of Operations --
Three Months ended October 31, 1998 and 1997 (Unaudited) F-16
Condensed Consolidated Statements Of Cash Flows -- F-17
Three Months ended October 31 1998 and 1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) F-18
63
<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 subsidiaries as of July 31, 1998 and 1997, 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, 1998. 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 and subsidiaries as of July 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 31, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 4, 1998
F-1
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
--------------------------------
1998 1997
------------ -------------
Assets
Current Assets
Cash $ 115,937 $ 512,480
Accounts receivable, less
allowance for doubtful
accounts of $20,000
for 1998 and $25,000 for 1997 1,673,826 1,802,569
Inventories 5,359,182 4,618,001
Deferred income taxes 694,000 1,676,000
Prepaid expenses 491,209 372,287
----------- -------------
Total Current Assets 8,334,154 8,981,337
----------- -------------
Property and Equipment
Land 73,260 73,260
Buildings and improvements 1,977,659 1,352,059
Furniture and equipment 3,131,306 2,768,255
Construction in progress 6,257 6,257
Less accumulated depreciation (2,540,992) (2,375,826)
----------- ------------
Net Property and Equipment 2,647,490 1,824,005
----------- ------------
Other Assets
Patents, trademarks and other 139,933 133,026
Bond issuance costs less
accumulated amortization 4,089 8,665
Deferred income taxes 199,000 326,000
----------- ------------
Total Other Assets 343,022 467,691
----------- ------------
Total Assets $11,324,666 $ 11,273,033
=========== ============
F-2
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS, (continued)
July 31
---------------------------------
1998 1997
------------ -------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 1,136,896 $ 1,375,005
Accrued compensation
and payroll taxes 498,224 582,652
Customer deposits 816,315 907,110
Other accrued liabilities 552,066 1,028,505
Current portion of
capital lease obligations 6,195 7,755
------------ ------------
Total Current Liabilities 3,009,696 3,901,027
------------ ------------
Long-Term Liabilities, Less Current Portion
Capital lease obligations --- 5,918
Note payable to bank 2,196,320 ---
Bonds payable, net of unamortized
discount of $10,450 for 1998
and $22,225 for 1997 170,550 278,775
------------ ------------
Total Long-Term Liabilities 2,366,870 284,693
------------ ------------
Shareholders' Equity
Preferred stock, no par value,
2,000,000 shares authorized,
1,000,000 shares issued and
738,000 shares outstanding
for 1997 --- 2,546,320
Common stock, no par value,
4,000,000 shares authorized,
1,431,109 and 1,400,109 shares
issued and outstanding
for 1998 and 1997, respectively 10,742,636 10,599,285
Accumulated deficit (4,758,911) (6,033,542)
------------ ------------
5,983,725 7,112,063
Less subscriptions receivable (35,625) (24,750)
------------ ------------
Total Shareholders' Equity 5,948,100 7,087,313
------------ ------------
Total Liabilities and Shareholders' Equity $ 11,324,666 $ 11,273,033
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended July 31
---------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales
Machine sales $ 20,199,191 $ 16,420,313 $ 10,966,096
Technical services 4,657,784 3,660,548 3,298,567
------------ ------------ ------------
24,856,975 20,080,861 14,264,663
Less commissions 3,017,446 2,301,446 1,628,172
------------ ------------ ------------
Net Sales 21,839,529 17,779,415 12,636,491
Cost of Sales
Machines 9,981,401 8,841,911 5,577,272
Technical services 3,016,505 2,031,588 2,133,866
------------ ------------ ------------
Total Cost of Sales 12,997,906 10,873,499 7,711,138
------------ ------------ ------------
Gross Profit 8,841,623 6,905,916 4,925,353
Research and development, marketing,
administrative and general expenses 6,413,160 4,794,563 3,638,536
------------ ------------ -------------
Operating income 2,428,463 2,111,353 1,286,817
------------ ------------ -------------
Other income (expense):
Interest expense - related party --- --- (889)
Interest expense - other (231,747) (75,686) (117,710)
Other (30,830) 19,157 6,210
------------ ------------- -------------
Other expense, net (262,577) (56,529) (112,389)
------------ ------------- -------------
Earnings before income taxes 2,165,886 2,054,824 1,174,428
Income tax (expense) benefit (848,000) (819,000) 1,160,000
------------ ------------- -------------
Net earnings $ 1,317,886 $ 1,235,824 $ 2,334,428
============ ============ =============
Earnings applicable to common shareholders $ 1,274,631 $ 950,620 $ 2,004,373
============ ============ =============
Earnings per share:
Basic $ 0.89 $ 0.70 $ 1.63
============ ============ =============
Diluted $ 0.86 $ 0.69 $ 1.45
============ ============ =============
Weighted average number of shares:
Basic 1,424,676 1,349,143 1,231,146
Diluted 1,516,748 1,446,198 1,436,820
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------- -----------------------------------------------
Subscriptions Accumulated
Shares Amount Shares Amount Receivable (Deficit)
--------------- ------------ -------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 unamortized 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 1,307,709 $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
Unamortized 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)
Preferred dividends paid --- --- --- --- --- (43,255)
Redemption of preferred stock (738,000) (2,546,320) --- --- --- ---
Conversion of 12% debentures, net
of related bond issuance costs
and unamortized discount --- --- 24,000 108,351 --- ---
Exercise of qualified stock options --- --- 1,000 5,000 --- ---
Exercise of other stock options --- --- 6,000 30,000 (30,000) ---
Subscriptions received --- --- --- --- 19,125 ---
Net earnings --- --- --- --- --- 1,317,886
----------- ---------- ---------- ----------- -------- -----------
Balances at July 31, 1998 --- $ --- 1,431,109 $10,742,636 ($35,625) ($4,758,911)
========== ========== ========== =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended July 31
----------------------------------------------------------
1998 1997 1996
---------------- ----------------- ---------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net earnings $ 1,317,886 $ 1,235,824 $ 2,334,428
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 368,261 338,274 295,510
Provision for inventories 68,000 --- 21,012
Loss (gain) on disposal of equipment 48,936 --- (15,625)
Deferred income taxes 1,109,000 412,000 (1,178,000)
Changes in operating assets and liabilities:
Accounts receivable 128,743 (990,029) 369,060
Inventories (809,181) (1,288,664) (341,402)
Prepaid expenses and other assets (118,922) (32,864) 41,151
Accounts payable and other accrued expenses (798,976) 1,704,136 (263,205)
Customer deposits (90,795) 413,101 (148,350)
----------------- ----------------- ---------------
Net cash provided by operating activities 1,222,952 1,791,778 1,114,579
----------------- ----------------- ---------------
Cash Flows From Investing Activities:
Proceeds from sale of equipment --- --- 40,000
Purchases of patents, property and equipment (1,242,887) (457,599) (502,350)
----------------- ----------------- ---------------
Net cash used by investing activities (1,242,887) (457,599) (462,350)
----------------- ----------------- ---------------
Cash Flows From Financing Activities:
Principal payments on lease obligations (7,478) (8,065) (31,598)
Redemption of preferred stock (2,546,320) (550,800) (340,000)
Payment of dividends on preferred stock (43,255) (285,204) (330,055)
Note payable to bank 2,196,320 --- ---
Proceeds from subscriptions receivable 19,125 3,375 ---
Proceeds from exercise of stock options 5,000 --- 57,875
----------------- ----------------- ---------------
Net cash used by financing activities (376,608) (840,694) (643,778)
----------------- ----------------- ---------------
Increase (decrease) in cash (396,543) 493,485 8,451
Cash at beginning of year 512,480 18,995 10,544
----------------- ----------------- ---------------
Cash at end of year $ 115,937 $ 512,480 $ 18,995
================= ================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<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 subsidiaries, Thermwood Europe Limited, a
United Kingdom company, CNC Carolina, Inc., a dealer in North Carolina, and
Thermwood Capital Corporation, a leasing company. CNC Carolina, Inc. and
Thermwood Capital Corporation were established in 1998. The term "Company"
refers to the consolidated operations of Thermwood Corporation and its
subsidiaries.
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. Two dealers accounted for
approximately 32% of the Company's business; however, no customer accounted for
more than 10% of the Company's sales in fiscal 1998, 1997 or 1996. The loss of
any large dealer could have a material 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 1998 amounted to approximately 18.7% of total gross
sales. There was no revenue generated in 1998 by Thermwood Capital Corporation.
The Company's machining systems are utilized principally in the
woodworking, plastics, boating and automotive industries. The Company is not
dependent upon a single supplier or only a few suppliers.
Principles of Consolidation:
All significant inter-company 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.
Revenues and Warranties:
The manufacturing process may extend over several months and advance
cash deposits are normally required from customers. Sales are recorded when
machines are shipped. Technical services revenues are recognized when the
services are 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.
Research and Development:
Research and development costs are expensed as incurred. Expenditures
for research and development were approximately $314,000, $216,000 and $284,000
during 1998, 1997 and 1996, respectively.
F-7
<PAGE>
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 1998, 1997 and 1996 was $345,890, $304,716 and
$256,290, respectively.
Customer Deposits:
Customer deposits are recorded as a current liability with no offset
against costs incurred on work-in-process. As of July 31, 1998 and 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>
1998 1997 1996
-------------------------- ------------------------ ------------------------
Basic Diluted Basic Diluted Basic Diluted
---------- ---------- ---------- ---------- ---------- ----------
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Net earnings $1,317,886 $1,317,886 $1,235,824 $1,235,824 $2,334,428 $2,334,428
Less preferred stock dividends (43,255) (43,255) (285,204) (285,204) (330,055) (330,055)
Add interest expense on
convertible bonds payable --- 47,180 --- 62,580 --- 98,436
Add amortization of bond
discount and issuance costs --- 4,701 --- 13,120 --- 30,583
Income tax effects of earnings
adjustments --- (19,196) --- (28,009) --- (44,037)
---------- ---------- ---------- ---------- ---------- ----------
Total earnings $1,274,631 $1,307,316 $ 950,620 $ 998,311 $2,004,373 $2,079,355
========== ========== ========== ========== ========== ==========
Weighted average number of shares:
Common shares outstanding 1,424,676 1,424,676 1,349,143 1,349,143 1,231,146 1,231,146
Incremental shares related to
dilutive stock options --- 55,872 --- 36,255 --- 53,075
Incremental shares related to
convertible bonds --- 36,200 --- 60,200 --- 152,600
---------- ---------- ---------- ---------- ---------- ----------
Total weighted average
number of shares 1,424,676 1,516,748 1,349,143 1,446,198 1,231,146 1,436,820
========== ========== ========== ========== ========== ==========
Earnings per share $ 0.89 $ 0.86 $ 0.70 $ 0.69 $ 1.63 $ 1.45
========== ========== ========== ========== ========== ==========
</TABLE>
Income Taxes:
Deferred tax assets and liabilities are recognized for the future 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.
F-8
<PAGE>
NOTE B -- INVENTORIES:
Inventories at July 31 consist of:
1998 1997
------------- -------------
Finished goods $ 651,398 $ 644,477
Work-in-process 1,541,258 1,171,484
Raw materials 3,166,526 2,802,040
------------- -------------
$ 5,359,182 $ 4,618,001
============= =============
NOTE C -- LEASES :
The Company had leased its production facilities and certain equipment,
primarily from related parties. Amounts included in property and equipment at
July 31, 1997 relating to capital leases are as follows:
Land $ 73,260
Building and improvements 1,171,778
Furniture and equipment 266,929
------------
1,511,967
Less accumulated amortization (799,558)
------------
$ 712,409
============
Included in Land, Building and Improvements above are assets with a net
book value of $533,928 at July 31, 1997, 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 H). The
Company had 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
under the lease and for the redemption of the Series A Preferred Stock. The
Preferred Stock was fully redeemed during fiscal year 1998 enabling the Company
to take clear title to the land and building.
The Company leases certain office equipment under long-term operating
leases. Future minimum lease payments as of July 31, 1998 for operating leases
are as follows:
Years ending July 31:
1999 $118,700
2000 118,700
2001 118,700
2002 1,200
2003 1,200
Total operating lease expense for 1998, 1997 and 1996 was $118,670,
$44,390 and $18,130 respectively.
NOTE D - NOTES PAYABLE TO BANK
During 1998, the Company obtained a $3,500,000 line of credit with a
bank. At July 31, 1998 $2,196,320 was outstanding under the line of credit. The
line of credit bears interest payable monthly at the bank's money market prime
rate plus .5% (9.0% at July 31, 1998). The line is secured by the tangible
assets of the Company and expires in October 1998. Management expects to renew
the line under terms similar to the existing agreement.
F-9
<PAGE>
NOTE E - 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.
These 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, 1998 and 1997, holders tendered
$120,000 and $462,000 of the debentures for conversion into 24,000 and 92,400
common shares, respectively.
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.
NOTE F -- COMMON STOCK OPTIONS:
The Company has both a qualified and a non qualified 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:
1998 1997 1996
---------- ---------- ----------
Net Earnings
As Reported $1,317,886 $1,235,824 $2,334,428
Pro Forma 1,308,962 1,214,168 1,985,024
Basic Earnings Per Share
As Reported $0.89 $0.70 $1.63
Pro Forma 0.89 0.69 1.34
Diluted Earnings Per Share
As Reported 0.86 0.69 1.45
Pro Forma 0.86 0.68 1.20
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. 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 1998, 1997 and 1996: no dividend
yield for all years; expected volatility of 35 percent, 56 percent and 72
percent for 1998, 1997 and 1996, respectively; risk-free interest rates of 4.7
percent, 6.2 percent and 6.6 percent for 1998, 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 50,600 of the shares have been granted,
4,000 of which were granted during fiscal year 1998. None of these options were
exercised during fiscal year 1998. As of July 31, 1998, options for 50,600
shares were exercisable. These options must be exercised within ten years of the
grant date.
The non qualified 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, 1998.
F-10
<PAGE>
Other options to purchase 140,000 shares have been granted by the Board
of Directors, 124,000 of which were outstanding and exercisable as of July 31,
1998. An option to purchase 120,000 of these shares was granted to the President
of the Company. The option extends through October 18, 1998 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 granted to an employee at $5.00 per share was
exercised in 1998. 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. At July 31, 1998, the options were exercisable; however,
in August 1998, the Company and the option holder agreed to terminate the option
agreement in exchange for a cash payment to the option holder of $10,250. During
fiscal year 1997 options for 10,000 shares were granted to another public
relations firm. These options expired in February, 1998.
A summary of common stock options for the years ended July 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- -------- -------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 226,600 $ 15.90 211,600 $ 15.95 207,000 $ 24.25
Granted 4,000 10.63 15,000 14.75 151,000 19.30
Canceled/expired 10,000 9.38 --- --- 130,000 35.05
Exercised 6,000 5.00 --- --- 16,400 6.85
-------- ------- --------- ------- ------- -------
Outstanding at end of year 214,600 $ 9.15 226,600 $ 15.90 211,600 $ 15.95
======== ======= ========= ======= ======= =======
Exercisable at end of year 214,600 226,600 211,600
======== ========= =======
Weighted average fair value of
options granted during the year $ 3.66 $ 6.90 $ 3.75
======= ======= =======
</TABLE>
NOTE G -- SHAREHOLDERS' EQUITY:
On January 5, 1998, the Company completed a one for five reverse split
of its common stock. All common share and per share information in the
consolidated financial statements has been adjusted to reflect the reverse split
on a retroactive basis.
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 shares were outstanding at July 31, 1997. All of
these shares were issued to a director/shareholder in a conversion of debt
transaction (Note G). The holder of Series A Preferred Stock was 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 had the right
in its sole discretion to redeem the stock at any time at $3.40 per share.
During fiscal years 1998 and 1997, the Company redeemed 738,000 and 162,000
shares for $2,546,320 and $550,800, respectively. In the event of the
liquidation of the Company, the holders of the Series A Preferred Stock were
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.
F-11
<PAGE>
NOTE H -- 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. 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. The net book value of these leased
assets was $533,928 at July 31, 1997.
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 land and building and improvements.
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 $94,954, $76,699 and $103,180 for 1998, 1997 and
1996, respectively. The Company had accounts payable of $31,515 and $14,462 at
July 31, 1998 and 1997, respectively, 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 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 $2,400, $6,800 and $7,200 for 1998,
1997 and 1996, respectively. Sales commissions of $627,816, $447,667 and
$349,584 were paid to the dealership during 1998, 1997, and 1996, respectively,
for assisting in effecting sales.
NOTE I -- INCOME TAXES:
The provisions for income taxes for the years ended July 31 consist of:
<TABLE>
<CAPTION>
1998 1997 1996
------------ --------------- ------------
<S> <C> <C> <C>
Federal:
Current (expense) benefit $ 308,000 $ (407,000) $ (18,000)
Deferred (expense) benefit (1,019,000) (379,000) 1,082,000
------------- --------------- ------------
(711,000) (786,000) 1,064,000
------------- --------------- ------------
State:
Current expense (47,000) --- ---
Deferred (expense) benefit (90,000) (33,000) 96,000
------------- --------------- ------------
(137,000) (33,000) 96,000
------------- --------------- ------------
Total income tax (expense) benefit $ (848,000) $ (819,000) $ 1,160,000
============= =============== ============
</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>
1998 1997 1996
------------- --------------- ------------
<S> <C> <C> <C>
Net earnings before income taxes $ 2,165,886 $ 2,054,824 $ 1,174,428
============= =============== ============
Expected income tax expense $ (801,000) $ (760,000) $ (435,000)
Utilization of net operating loss carryforwards --- --- 119,000
Reduction in deferred tax asset valuation allowance --- --- 1,480,000
Effect of non-deductible items (19,000) (14,000) (11,000)
Other (28,000) (45,000) 7,000
------------- --------------- ------------
Total actual income tax (expense) benefit $ (848,000) $ (819,000) $ 1,160,000
============= =============== ============
</TABLE>
F-12
<PAGE>
The tax effects of significant temporary differences represented by
deferred tax assets and deferred tax liabilities at July 31 are as follows:
1998 1997
--------- ----------
Deferred tax assets attributable to:
Property and equipment $ 185,000 $ ---
Inventory valuation 245,000 246,000
Warranty reserves 79,000 73,000
Net operating loss carryforwards 351,000 1,812,000
Other 33,000 3,000
--------- ----------
Deferred tax assets 893,000 2,134,000
--------- ----------
Deferred tax liability attributable to:
Property and equipment --- 132,000
--------- ----------
Net deferred tax assets $ 893,000 $2,002,000
========= ==========
At July 31, 1998, the Company had the following carryforwards for tax purposes:
Net operating loss carryforwards expiring in 2008 - 2009 $529,000
General business credits expiring in 1998 - 2001 $ 14,000
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. Based upon the level of historical
taxable income and anticipated future taxable income, management believes it is
more likely than not that the Company will realize the benefits of the net
deferred tax assets.
F-13
<PAGE>
NOTE J -- ADDITIONAL INFORMATION:
Other accrued liabilities at July 31 consist of:
1998 1997
---------- ----------
Property taxes $ 79,282 $ 66,138
Income taxes 14,002 387,000
Accrued warranties 212,339 196,777
Other 246,443 378,590
---------- ----------
$552,066 $1,028,505
========== ==========
Cash Flow Information:
The Company paid cash for interest in the amount of $200,319, $69,739
and $146,810 during 1998, 1997 and 1996, respectively. The Company paid cash for
income taxes in the amount of $77,024, $30,000 and $9,000 during 1998, 1997 and
1996, respectively.
Non-cash Investing and Financing Activities:
During 1998 and 1997, bonds with face values of $120,000 and $462,000,
respectively, were converted to 24,000 and 92,400 shares of common stock.
NOTE K -- PENSION AND PROFIT SHARING PLAN:
The Company has a deferred income 40l(k) savings plan for its
employees. The Company makes a matching contribution of 25% of employees'
contributions up to 5% of their annual salaries and an additional match of 10%
of their contributions between 6% and 8% of employees' salaries.
Pension expense for 1998, 1997 and 1996 amounted to $48,759, $35,840
and $19,274, respectively. The Company also has a management profit sharing
plan. Profit sharing expense amounted to $603,978, $647,407 and $384,390 for
1998, 1997 and 1996, respectively.
F-14
<PAGE>
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31 July 31
1998 1998
----------- -----------
ASSETS
Current Assets
Cash $ 184,111 $ 115,937
Accounts receivable 2,046,924 1,673,826
Inventories 5,630,985 5,359,182
Deferred income taxes 694,000 694,000
Prepaid expenses 561,520 491,209
----------- -----------
Total Current Assets 9,117,540 8,334,154
Property and Equipment
(net of accumulated depreciation) 2,626,376 2,647,490
Other Assets
Patents, trademarks and other 137,721 139,933
Bond issuance costs net of
accumulated amortization 2,677 4,089
Deferred income taxes 199,000 199,000
----------- -----------
Total Other Assets 339,398 343,022
----------- -----------
Total Assets $12,083,314 $11,324,666
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable 1,613,400 1,136,896
Accrued liabilities 1,007,301 1,050,290
Customer deposits 924,591 816,315
Current portion of
long-term liabilities 4,632 6,195
------------ ------------
Total Current Liabilities 3,549,925 3,009,696
------------ ------------
Long-term Liabilities -
less current portion
Note payable to bank 2,196,320 2,196,320
Bonds payable, net of
unamortized discount 106,159 170,550
----------- -------------
Total Long-term Liabilities 2,302,479 2,366,870
----------- -------------
Shareholders' Equity
Common stock, no par value,
4,000,000 shares authorized
1,444,709 and 1,431,109 shares
issued and outstanding at
October 31, 1998 and July 31, 1998,
respectively 10,806,394 10,742,636
Accumulated deficit (4,539,859) (4,758,911)
----------- ------------
6,266,535 5,983,725
Less subscriptions receivable (35,625) (35,625)
----------- ------------
Total Shareholders' Equity 6,230,910 5,948,100
----------- ------------
Total Liabilities and
Shareholders' Equity $12,083,314 $11,324,666
=========== ===========
See notes to condensed consolidated financial statements.
F-15
<PAGE>
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
October 31
----------------------------
1998 1997
---------- ----------
SALES
Machine sales $5,097,403 $3,800,378
Technical sales 1,349,210 1,736,344
---------- ----------
6,446,613 5,536,722
Less commissions 821,391 732,027
---------- ----------
NET SALES 5,625,222 4,804,695
COST OF SALES
Machine sales 2,618,678 2,032,923
Technical sales 617,156 728,920
---------- ----------
3,235,834 2,761,843
GROSS PROFIT 2,389,388 2,042,852
RESEARCH AND DEVELOPMENT, MARKETING,
ADMINISTRATIVE AND GENERAL EXPENSES 1,928,098 1,468,373
---------- ----------
OPERATING PROFIT 461,290 574,479
Interest expense (56,921) (25,445)
Other income (expense) 6,352 8,631
---------- ----------
Net other income (expense) (50,569) (16,814)
---------- ----------
EARNINGS BEFORE INCOME TAXES 410,721 557,665
Income taxes 192,026 202,626
---------- ----------
NET EARNINGS $ 218,695 $ 355,039
========== ==========
Earnings per share:
Basic $ 0.15 $ 0.22
Diluted $ 0.15 $ 0.21
Weighted average number of shares:
Basic 1,440,976 1,408,909
Diluted 1,481,327 1,535,474
See notes to condensed consolidated financial statements.
F-16
<PAGE>
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
October 31
---------------------------
1998 1997
--------- ----------
Cash Flows From Operating Activities:
Net earnings $ 218,695 $ 355,039
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 103,570 103,619
Amortization of bond discount 1,137 2,601
Changes in operating assets and liabilities:
Accounts receivable (373,098) (121,480)
Inventories (271,803) (249,689)
Prepaid expenses and other assets (70,311) (12,078)
Accounts payable and other accrued expenses 433,515 (50,925)
Customer deposits 108,276 (108,625)
---------- ---------
Net cash provided (used) by operating activities 149,981 (81,538)
---------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment (80,244) (60,492)
---------- ---------
Net cash used by investing activities (80,244) (60,492)
---------- ---------
Cash Flows From Financing Activities:
Principal payments on notes payable, lease
obligations and long-term debt (1,563) (13,673)
Note payable to bank --- 2,546,320
Redemption of preferred stock --- (2,546,320)
Payment of dividends on preferred stock --- (42,190)
Payment received for subscriptions receivable --- 21,550
---------- ----------
Net cash used by financing activities (1,563) (34,313)
---------- ----------
Decrease in cash 68,174 (176,343)
Cash, beginning of period 115,937 512,480
---------- ----------
Cash, end of period $ 184,111 $ 336,137
========== ==========
ADDITIONAL INFORMATION:
Interest paid $ 54,588 $ 8,970
========== ==========
Conversion of bonds payable,
net of unamortized discount $ 64,391 $ 82,000
========== ==========
Subscriptions receivable for
common stock issued $ --- $ 3,200
========== ==========
See notes to condensed consolidated financial statements.
F-17
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Note A - Basis of Presentation
The unaudited condensed consolidated financial statements 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 management,
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 consolidated financial statements included
elsewhere herein for the year ended July 31, 1998.
Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the year ending July 31,
1999.
Note B - Inventories
Inventories are priced at the lower of cost (first-in, first-out
method) or market.
October 31 July 31
1998 1998
---------- ----------
Components of inventory:
Raw material $3,246,166 $3,166,526
Work in process 1,593,059 1,541,258
Finished goods 791,760 651,398
---------- ----------
Total $5,630,985 $5,359,182
========== ==========
Note C - Reclassifications
Certain amounts presented in the prior year condensed consolidated
financial statements have been reclassified to conform to the current year
presentation.
F-18
<PAGE>
Note D - 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>
Three Months Ended October 31
--------------------------------------------------------------
1998 1997
--------------------------- ---------------------------
Basic Diluted Basic Diluted
---------- ---------- ---------- ----------
Earnings:
<S> <C> <C> <C> <C>
Net earnings $ 218,695 $ 218,695 $ 355,039 $ 355,039
Less preferred stock dividend --- --- (43,255) (43,255)
Add interest expense on convertible bonds payable --- 3,840 --- 7,500
Add amortization of bond discount and issuance costs --- 1,495 --- 7,286
Income tax effects of earnings adjustments --- (2,134) --- (5,471)
---------- ---------- ---------- ----------
Total earnings $ 218,695 $ 221,896 $ 311,784 $ 321,099
========== ========== ========== ==========
Weighted average shares outstanding 1,440,976 1,440,976 1,408,909 1,408,909
Incremental shares from assumed:
Exercise of diluted stock options --- 17,751 --- 82,765
Conversion of convertible bonds --- 22,600 --- 43,800
---------- ---------- ---------- ----------
Total weighted average shares 1,440,976 1,481,327 1,408,909 1,535,474
========== ========== ========== ==========
Earnings per share $ 0.15 $ 0.15 $ 0.22 $ 0.21
========== ========== ========== ==========
</TABLE>
F-19
<PAGE>
You should rely only on the information contained in this Prospectus. We have
authorized no one to provide you with different information. You should not
assume that the information in this Prospectus is accurate as of any date other
than the date on the front of the Prospectus. We are not making an offer of
these Debentures in any location where the offer is not permitted.
TABLE OF CONTENTS
Item Page
Available Information............................... 1
Prospectus Summary.................................. 2
Summary Consolidated
Financial Data................................. 5
Risk Factors........................................ 6
Capitalization...................................... 10
Market for Company's Common
Equity and Related Shareholder
Matters......................................... 11
Special Factors..................................... 12
Exchange Offer...................................... 26
Selected Consolidated
Financial Data................................. 33
Management's Discussion and
Analysis Of Financial
Condition and Results
Of Operations.................................... 34
Business............................................ 38
Where You Can Find More
Information..................................... 45
Management.......................................... 46
Principal Shareholders and
Ownership Of Management......................... 50
Certain Transactions................................ 52
Description of the Debenture
And the Indenture.............................. 53
Description of Securities........................... 56
Federal Income
Tax Consequences.............................. 58
Plan of Distribution................................ 60
Legal Matters....................................... 60
Experts............................................. 60
Index to Financial Statements....................... 61
THERMWOOD CORPORATION
$13,351,978
12% Subordinated Debentures
Due 2014
PROSPECTUS
The Solicitation Agent
For the Offer is
Dirks & Company, Inc
____________, 1999
