<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1999
REGISTRATION NO. 333-70073
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THERMWOOD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
INDIANA 3550 35-1169185
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
THERMWOOD CORPORATION
OLD BUFFALOVILLE ROAD
P.O. BOX 436
DALE, INDIANA 47523
(812) 937-4476
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KENNETH J. SUSNJARA
CHAIRMAN OF THE BOARD AND PRESIDENT
THERMWOOD CORPORATION
OLD BUFFALOVILLE ROAD
P.O. BOX 436
DALE, INDIANA 47523
(812) 937-4476
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BARRY B. FEINER, ESQUIRE
190 WILLIS AVENUE
MINEOLA, NEW YORK 11501
(516) 873-8426
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration number for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier, effective registration statement
for the same offering. [ ]
- ---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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 SEC 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.
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<PAGE> 2
Subject to Completion, Dated March 12, 1999
THERMWOOD CORPORATION
is offering to issue up to $8,250,000 12% junior debentures due 2014
in exchange for shares of its outstanding common stock
TERMS OF THE EXCHANGE OFFER
- - The exchange offer expires at 5:00 P.M., New York time on April 21, 1999,
unless extended.
- - You may withdraw your tender of shares at any time prior to the expiration of
this exchange offer.
- - We will exchange up to 750,000 shares that are validly tendered and not
validly withdrawn. If we receive tenders for more than 750,000 shares, we will
pro-rate the number of tendered shares that we will exchange from each
tendering shareholder.
- - We will not receive any proceeds from the exchange offer.
- - Depending upon the facts of your situation, you may realize a taxable gain on
the exchange for U.S. federal income tax purposes. This means that you may owe
taxes on the exchange even though you will not have received cash in the
exchange to pay such taxes.
Investing in the debentures issued in exchange for your common shares involves
certain risks.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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 SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE DEBENTURES OR THE EXCHANGE OFFER OR PASSED UPON THE ADEQUACY OR ACCURACY OF
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dirks & Company, Inc. 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. However, Dirks will not receive a fee for debentures issued to
shareholders whose total holdings are more than 10% of our outstanding common
stock.
In addition, Dirks will receive reasonable accountable expenses, which shall
not exceed $25,000. In the event the exchange offer is not consummated, Dirks
may be entitled to receive reasonable accountable expenses, which shall not
exceed $50,000.
There is no public trading market for the debentures. We anticipate, but we
cannot assure you, that the debentures will be tradable in the over-the-counter
market.
The date of this prospectus is March , 1999
<PAGE> 3
HOW TO OBTAIN COPIES OF DOCUMENTS THAT ARE
SUMMARIZED IN THIS PROSPECTUS
We filed a registration statement on Form S-4 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 the registration statement
and the exhibits thereto.
We will provide upon request at no cost to each person to whom this
prospectus is delivered copies of any 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.
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<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. The prospectus contains
information on the exchange offer, the terms of the debentures, risk factors,
our business and our financial data. We encourage you to read the entire
prospectus carefully before you decide whether to exchange your shares for
debentures. On January 5, 1998, we effected a one-for-five reverse stock split
of our shares, and all related share and per share information has been adjusted
to give retroactive effect to this split, except where the text indicates
otherwise.
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 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 computer-controlled 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.
SUMMARY DESCRIPTION OF THE TERMS OF THE DEBENTURES
FACE AMOUNT OF DEBENTURE...... $11.00 times the number of shares that you
tender.
ANNUAL INTEREST RATE.......... 12% interest.
PAYMENT OF INTEREST........... Quarterly in cash on January 1, April 1, July 1
and October 1 of each year, commencing July 1,
1999.
MATURITY...................... 15 years after they have been issued.
REDEMPTION BY HOLDER.......... Up to $50,000 total value of the debentures of
any holder upon notice of the holder's death
and redemption election by his or her estate.
This right of redemption may only be exercised
by the estate of the original holder. It does
not pass to any transferee.
REDEMPTION BY US.............. We can redeem the debentures for $15.00 for
every $11.00 in face amount of the debentures
during the second year after their issuance.
During each subsequent year, the redemption
price will decrease by $0.30 for every $11.00
in face amount of the debentures.
RANKING....................... Second in right of repayment 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 de-
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<PAGE> 5
bentures and the debentures rank equally for
purposes of repayment.
TRANSFERABILITY............... There are no transfer restrictions on the
debentures. However, the right to redemption
upon death of the initial holder will terminate
on transfer.
INTENTIONS OF OUR AFFILIATES IN THE EXCHANGE OFFER
All of our executive officers and directors have indicated that they do not
intend to tender their shares for exchange because each is dedicated to
Thermwood and none of these individuals has a need for the interest payments
from the debentures.
Edgar Mulzer, a director and major shareholder of Thermwood who is not
active in our management, has given Thermwood an option to purchase his 209,000
shares at a price of $15.00 per share. We can exercise this option at any time
after January 1, 2002 and before January 1, 2004. Thermwood paid Mr. Mulzer
$5,000 for this option. We have secured this option to further our plans to
assure that control of Thermwood remains with Kenneth and Linda Susnjara.
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.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
Our consolidated financial information set forth below should be read
together 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 the exchange
of 750,000 shares for debentures as if this 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 "Exchange Offer -- Financial
Effect of the Exchange Offer."
STATEMENTS OF OPERATIONS DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED OCTOBER 31 YEAR ENDED JULY 31,
--------------------------- ----------------------------------------------------------
PRO FORMA PRO FORMA
1998 1998 1997 1998 1998 1997 1996 1995 1994
--------- ------ ------ --------- ------- ------- ------- ------- ------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $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
Earnings from continuing
operations............. 57 218 355 673 1,318 1,236 2,334 2,350 136
Net earnings............. 57 218 355 673 1,318 1,236 2,334 2,350 208
====== ====== ====== ======= ======= ======= ======= ======= ======
Earnings per share:
Basic.................. $ 0.08 $ 0.15 $ 0.22 $ 0.93 $ 0.89 $ 0.70 $ 1.63 $ 1.92 $ --
Diluted................ 0.08 0.15 0.21 0.86 0.86 0.69 1.45 1.49 --
====== ====== ====== ======= ======= ======= ======= ======= ======
Weighted average number
of shares:
Basic.................. 691 1,441 1,409 675 1,425 1,349 1,231 1,030 1,030
Diluted................ 730 1,481 1,535 767 1,517 1,446 1,437 1,451 1,030
Cash dividends declared
per common share....... -- -- -- -- -- -- -- -- --
</TABLE>
BALANCE SHEET DATA:
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
----------------------------- --------------------------------------------------------
PRO FORMA PRO FORMA
1998 1998 1997 1998 1998 1997 1996 1995 1994
--------- ------- ------- --------- ------- ------- ------ ------ ------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets............. $12,563 $12,083 $11,434 $11,804 $11,324 $11,273 $8,766 $7,527 $5,418
Working capital.......... 5,088 5,568 5,454 4,845 5,324 5,080 3,791 2,811 1,706
Long-term obligations.... 6,953 2,302 2,750 7,018 2,367 285 709 1,870 1,862
Shareholders' equity..... 1,580 6,231 4,950 1,297 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."
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<PAGE> 7
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 RISKS RELATED TO THE EXCHANGE OFFER AND THE ISSUANCE OF THE DEBENTURES
THE DECREASE IN FUNDS AVAILABLE FOR BUSINESS OPERATIONS DUE TO THE ADDED
FINANCIAL BURDEN OF PAYING INTEREST AND PRINCIPAL ON THE DEBENTURES COULD
ADVERSELY AFFECT OUR ABILITY TO COVER OPERATING EXPENSES, SHOULD OUR REVENUES
DECREASE SIGNIFICANTLY, OR EXPAND OUR BUSINESS.
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. As a result of this added financial burden:
(a) we might not have sufficient funds to cover operating expenses if our
operating revenues decrease significantly; and
(b) we might not have sufficient funds to expand our business if the
opportunity arises.
THE DEBT CREATED BY THE DEBENTURES MUST BE PAID PRIOR TO ANY DISTRIBUTIONS TO
SHAREHOLDERS UPON LIQUIDATION THEREBY DECREASING THE AMOUNT OF FUNDS AVAILABLE
TO DISTRIBUTE TO SHAREHOLDERS.
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.
As a result, we might not have sufficient funds to pay shareholders after paying
what is due to debenture holders.
IT WILL BE MORE DIFFICULT FOR OTHER SHAREHOLDERS TO REMOVE THE CURRENT BOARD AND
MANAGEMENT. CURRENT MANAGEMENT MAY BE ABLE TO MAKE ALL CORPORATE DECISIONS
WITHOUT THE CONSENT OF OTHER SHAREHOLDERS AND PREVENT HOSTILE TAKEOVERS.
Current management owns approximately 33% of our outstanding shares. This
provides them with significant influence over Thermwood's operations and
actions. If we acquire 750,000 shares in the exchange offer, Kenneth and Linda
Susnjara and Edgar Mulzer would own approximately 67.5% of our outstanding
stock. Since they would then own a majority of our stock:
- It would be extremely difficult for other shareholders to remove our
current board of directors and management;
- they would be able to make virtually all corporate decisions without the
consent of other shareholders; and
- they would be able to prevent hostile takeovers.
OUR EARNINGS AND OUR ASSETS COULD BE ADVERSELY AFFECTED BY THE EXPENSES THAT WE
WILL INCUR DEFENDING OUR POSITION IN A PENDING LAWSUIT AND BY ANY ADVERSE
JUDGEMENT IN THAT LAWSUIT
A lawsuit is currently pending which seeks to:
(a) enjoin the consummation of the exchange offer; or
(b) in the event the exchange offer is consummated, recover compensatory
damages.
See "Business -- Legal Proceedings" later in this prospectus for a more detailed
explanation of the litigation. While it is impossible to predict the course or
outcome of this lawsuit, we could incur expenses associated with the lawsuit
which could have a significant adverse effect on our earnings. In addition, any
material adverse judgment in the lawsuit could have a significant adverse effect
on our assets and our earnings.
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<PAGE> 8
RISKS RELATED TO ACQUISITION OF DEBENTURES
If you decide to acquire debentures in exchange for your shares, you should
consider the following factors:
SINCE THE DEBENTURES ARE NOT SECURED AND RANK BELOW MOST OF OUR OTHER DEBTS AND
THE DEBTS OF OUR SUBSIDIARIES, OUR ASSETS MAY BE INSUFFICIENT
TO PAY AMOUNTS DUE ON THE DEBENTURES.
If any of the following events occur, our assets may not be sufficient to
pay amounts due on any of the debentures:
(a) we or some of our subsidiaries enter into bankruptcy, liquidation,
reorganization, or some other winding-up transaction;
(b) we default in payment under our credit line or other senior debt; or
(c) there is an acceleration of any indebtedness under our credit line or
other senior debt.
This risk is due to the fact that
(a) the debentures will be unsecured obligations of Thermwood, while our
credit line is secured by all of our assets;
(b) our senior debt and any indebtedness of our subsidiaries, upon
liquidation or dissolution of the particular subsidiary, have a right
to be repayed prior to any payment under the debentures; and
(c) we and our subsidiaries may incur other senior debt, which may be
substantial in amount, including secured indebtedness.
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. As of March 11, 1999, such senior
debt and subsidiary debts aggregated approximately $2,196,320.
YOUR RIGHT TO PURSUE REMEDIES FOR DEFAULT UNDER THE DEBENTURES OR THE INDENTURE
WILL BE LIMITED BY THE TERMS OF THE INDENTURE.
The debentures will be issued under an indenture which governs the terms of
the debentures. As a debenture holder, your right to pursue any remedy due to
our breach of the terms of the debentures or the indenture are expressly limited
by the terms of the indenture. 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. We
suggest that you read the disclosure under the heading "Description of The
Debentures and the Indenture; Events of Default, Notice and Waiver" for more
information on limitations of remedies.
THERE IS NO PUBLIC MARKET FOR THE DEBENTURES. IF ONE DEVELOPS, IT MAY NOT BE
LIQUID AND YOU MAY HAVE DIFFICULTY RESELLING OR BE UNABLE TO
RESELL THE DEBENTURES.
The debentures will constitute a new class of securities with no
established trading market. 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. 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 Exchange Act of 1934 and NASD
rules, and will be limited during the exchange offer.
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<PAGE> 9
THE DEBENTURES MOST LIKELY WILL TRADE AT A DISCOUNT FROM THEIR FACE AMOUNT IF A
PUBLIC TRADING MARKET DEVELOPS FOR THE DEBENTURES.
If a public trading market develops for the debentures, the debentures most
likely will trade below their face value because, among other factors:
(a) the debentures are second in right of repayment, unsecured and have a
15 year term; and
(b) our industry and financial condition.
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.
YOU MAY REALIZE A TAXABLE GAIN WITHOUT RECEIVING FUNDS TO PAY THE TAXES.
Depending upon the facts of your situation, you may realize a taxable gain
on your acquisition of debentures in exchange for your shares. 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. We suggest
that you read the disclosure under the heading "Federal Income Tax Consequences"
for more information on the possible tax effects to you under the exchange
offer.
IF YOU EXCHANGE ALL OF YOUR SHARES, YOU WILL LOSE YOUR RIGHT TO SHARE IN ANY
INCREASE IN THE VALUE OF THERMWOOD THROUGH A RISE IN THE STOCK PRICE OR THE
DISTRIBUTION OF DIVIDENDS.
If you tender all of your shares, you no longer will have any equity
interest in Thermwood and, therefore, you will not participate in Thermwood's
future potential earnings or growth or receive future dividend payments, if any.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF FLUCTUATING OPERATING RESULTS WHICH COULD ADVERSELY AFFECT
OUR BUSINESS IF ACTUAL RESULTS DIFFER FROM PROJECTED RESULTS IN A MATERIAL AND
NEGATIVE MANNER.
We purchase raw materials, conduct research and development and otherwise
allocate funds to the various aspects of our business based upon our ability to
forecast sales within our industry. We have historically experienced
fluctuations in our operating results and our operating results may change
materially in the future. If actual operating results differ from projected
operating results in a material and negative manner our business could be
adversely affected.
THERE ARE A NUMBER OF REGULATORY, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH
OUR DOING BUSINESS OVERSEAS WHICH COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
There are serious risks in marketing products in foreign countries, some or
all of which could adversely affect our results of operations. 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.
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
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<PAGE> 10
fiscal year. We do not engage in hedging activities to offset our exposure to
currency fluctuations and devaluations. In addition, we may be unable to prevent
the unauthorized use of our technology in foreign countries.
WE ARE DEPENDENT ON A NETWORK OF DEALERS FOR OUR SALES. THE LOSS OF MAJOR
DEALERS WOULD ADVERSELY AFFECT OUR SALES AND RESULTS OF OPERATIONS.
We market our products primarily through a number of dealers. We are
substantially dependent upon our agreements with these third parties, as well as
their viability and financial stability, to generate sales. Because our
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 sales and our results of
operations 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, 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. We suggest that you read the
disclosure under the headings "Business -- Marketing" and "Certain Relationships
and Related Transactions" for more information on our arrangements with dealers,
including those owned and operated by our affiliates.
A MATERIAL DECREASE IN SALES OF ONE PRODUCT THAT ACCOUNTS FOR A MAJOR PORTION OF
OUR REVENUES WOULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
We are significantly dependent upon sales of our computer-controlled router
systems. In fiscal year 1998, computer-controlled router systems sales
represented approximately 79.5% of our sales. If our sales of
computer-controlled router systems were to decrease significantly, our business
and results of operations would be materially and adversely affected.
LOSS OF OUR CHIEF EXECUTIVE OFFICER OR OTHER KEY EMPLOYEES WHO HAVE SIGNIFICANT
EXPERIENCE IN OUR OPERATIONS AND OUR INDUSTRY WOULD ADVERSELY AFFECT OUR
BUSINESS.
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. 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.
OUR INABILITY TO COMPETE WITH OUR COMPETITORS WOULD ADVERSELY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.
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.
OUR INABILITY TO PROTECT PROPRIETARY INFORMATION VALUABLE TO THE MANUFACTURE OF
OUR PRODUCTS COULD MATERIALLY AND ADVERSELY AFFECT OUR SALES AND OUR BUSINESS.
SIMILARLY, IF WE INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS, OUR RESULTS OF
OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED.
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. If our competitors were to obtain and utilize material information
proprietary to Thermwood that is valuable to the manufacture of our products,
our sales and results of operations could be materially and adversely affected.
There can be no assurance that we can
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<PAGE> 11
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. In addition, 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."
FAILURE TO ADEQUATELY PREPARE OUR COMPUTERS AND SOFTWARE TO BE YEAR 2000
COMPLIANT COULD DISRUPT OUR BUSINESS AND MATERIALLY AND ADVERSELY AFFECT OUR
OPERATIONS.
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, including all information technology and
non-information technology 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.
As a precaution, we plan to stock up additional inventory from our non-U.S.
vendors prior to the beginning of the year 2000.
We know of one mission-critical system, the inventory shop floor control
software, that is not Year 2000 compliant. This software tracks incoming orders,
inventory levels, material requirements planning, shop floor control, labor
tracking, shipping and administrative and financial tracking functions.
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 July 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 beginning of July 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.
10
<PAGE> 12
We estimate that the worst case Year 2000 issue scenario would occur if the
new inventory shop floor control software is not Year 2000 compliant. In such an
event, we would revert to manual methods of tracking inventory and purchasing
raw materials while we looked to alternative vendors. We believe that there are
a number of alternate vendors that claim to have year 2000 compliant software.
We feel that we could implement this contingency plan within a short period of
time. However, until such time as this contingency plan took effect, our ability
to manufacture might be materially disrupted due to administrative delays or,
possibly, lack of raw materials. A return to manual methods would require us to
hire additional staff and would result in:
- increased administrative expense; and
- higher raw materials inventory levels that would be needed to assure that
we have sufficient raw materials to avoid disruption of production.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth:
- our capitalization as of October 31, 1998; and
- such capitalization adjusted to give pro forma effect to the exchange of
750,000 shares for debentures.
You should read the information set forth below together with the
information contained in the "Summary Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections and our consolidated financial statements.
<TABLE>
<CAPTION>
AT OCTOBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank........................................ $ 2,196 $ 2,196
Bonds payable, net.......................................... 106 4,757
------- -------
Total long-term liabilities....................... 2,302 6,953
------- -------
Shareholders' equity
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 6,155
Accumulated deficit....................................... (4,540) (4,540)
Subscriptions receivable.................................. (35) (35)
------- -------
Total shareholders' equity........................ 6,231 1,580
------- -------
Total capitalization........................................ $ 8,533 $ 8,533
======= =======
</TABLE>
MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 our fiscal years ended July 31, 1998 and July 31,
1997, and for the interim periods indicated:
<TABLE>
<CAPTION>
PERIOD LOW SALES PRICE HIGH SALES PRICE
------ --------------- ----------------
<S> <C> <C>
1999
Second Quarter........................................... $5.625 $ 8.125
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
</TABLE>
As of March 10, 1999, there were approximately 267 holders of record of our
common stock which includes brokerage firms and/or clearing houses holding our
shares for their clientele. Although each of these brokerage houses and/or
clearing houses hold the shares for a number of their clients, each such firm is
considered as only one holder. However, based on the results of a brokers'
search conducted for our 1998
12
<PAGE> 14
annual shareholders meeting, the number of beneficial holders was approximately
2,100 at that time. As of March 10, 1999, there were 1,444,709 shares
outstanding.
On March 10, 1999, the closing price for these shares, as reported on the
AMEX, was $5.09375 per share.
EXCHANGE OFFER
The terms and conditions of the exchange offer are set forth in this
prospectus and in the letter of transmittal. The letter of transmittal is the
document that you must complete and deliver to us if you decide to tender your
shares for exchange. It also tells you how to exchange your shares for
debentures. You are encouraged to review the letter of transmittal that you
received with this prospectus for more detailed information. If you did not
receive a copy of the letter of transmittal, you should request one from us by
following the instructions set forth under the heading "Where You Can Find More
Information."
HOW MANY SHARES WE WILL ACCEPT AND DEBENTURES WE WILL ISSUE
We will accept up to 750,000 shares that are validly tendered and not
withdrawn prior to 5:00 P.M., New York City time, on the expiration date. If we
receive tenders for more than 750,000 shares, we will pro-rate the number of
tendered shares that we will exchange from each tendering shareholder. However,
before we prorate the tendered shares, we may accept tenders for shares from
shareholders who own less than 100 shares and who have tendered all of their
shares.
If you tender your shares and we accept your tender, we will issue to you a
debenture in the face amount equal to $11.00 times the number of shares that we
accept. You may tender some or all of your shares. You are encouraged to review
the section entitled "Description of The Debentures And The Indenture" for more
detailed information about the terms of the debentures.
Please note that if you acquired your shares prior to January 5, 1998, the
date that we reverse split our common stock on a one-for-five basis, and you
never exchanged your old stock certificates for new stock certificates, your
stock certificates represent only one fifth of the number of shares after the
reverse stock split. This means that the face amount of the debenture that you
will be entitled to receive in exchange for these shares will be one-fifth of
the amount you would receive if you were exchanging shares issued after the
reverse stock split.
We will retire all of the shares that we receive in the exchange offer.
This means that the shares no longer will be issued or outstanding.
We will pay all charges and expenses, other than certain applicable taxes,
in connection with the exchange offer. You will not be required to pay brokerage
commissions or fees with respect to your exchange of shares.
WHEN THE EXCHANGE OFFER WILL EXPIRE AND HOW WE CAN EXTEND OR AMEND THE
EXCHANGE OFFER
The exchange offer will expire at 5:00 P.M., New York City time, on April
21, 1999, unless we extend it. If we extend the exchange offer, we will notify
the exchange agent and we will make a public announcement of the extension. The
announcement will be made prior to 9:00 A.M., New York City time, on the next
business day after the previously scheduled expiration date, unless another time
and date are required by applicable law or regulation.
We can, in our reasonable discretion:
- terminate the exchange offer if any of the conditions set forth below
under "Conditions" exist; or
- amend the terms of the exchange offer in any manner.
In either event, we will promptly publicly announce that we have taken such
action. If we amend the exchange offer in a manner that we believe constitutes a
material change, we promptly will disclose such
13
<PAGE> 15
amendment in a supplement to this prospectus that we will distribute to you. We
also will extend the exchange offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner in which we
disclose it to you, if the exchange offer would otherwise expire during such
five to ten business day period.
We anticipate that we will make any required public announcement through
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 must complete the letter of transmittal
as instructed in the letter and deliver to 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" ALL of the following:
- Completed letter of transmittal OR an agent's message;
- the shares OR confirmation of a book-entry transfer; and
- any other required documents.
Book-Entry Transfers. If your shares are held at a financial institution
that participates in Depository Trust Company, you may deliver the shares by
book-entry transfer. The exchange agent has established an account for the
shares at Depository Trust Company. Any financial institution which is a
participant in Depository Trust Company may make book-entry delivery of the
shares by
- causing Depository Trust Company to transfer such shares into the
exchange agent's account; or
- following the guaranteed delivery procedure described below.
DELIVERY OF DOCUMENTS TO DEPOSITORY TRUST COMPANY WITHOUT TRANSFER TO THE
EXCHANGE AGENT BY ONE OF THE ABOVE MEANS DOES NOT CONSTITUTE VALID DELIVERY TO
THE EXCHANGE AGENT.
Agent's Message. The term agent's message means a message transmitted by
Depository Trust Company to the exchange agent which is received by the exchange
agent and which states that Depository Trust Company has received an express
acknowledgment from one of its participants tendering shares stating:
- the aggregate number of shares which have been tendered by such
participant;
- that such participant has received and agrees to be bound by the terms of
the letter of transmittal; and
- that Thermwood may enforce such agreement against the participant.
The agent's message is a part of a book-entry confirmation.
THE METHOD OF DELIVERY OF SHARES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT, INCLUDING DELIVERY THROUGH
DEPOSITORY TRUST COMPANY, IS AT THE ELECTION AND RISK OF THE HOLDER. WE
RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND DELIVERY SERVICE INSTEAD OF DELIVERY
BY MAIL. IF YOU SEND YOUR SHARES BY MAIL, WE SUGGEST THAT YOU SEND THEM BY
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED. IN ALL CASES,
YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE
THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SHARES SHOULD BE SENT TO US.
If your shares are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to tender them, you should
contact the registered holder promptly and instruct it to tender the shares on
your behalf. If you decide to tender your shares on your own behalf, you must
make appropriate arrangements to register ownership of the shares in your name
or obtain a properly completed stock power from the registered holder. YOU MUST
DO THIS BEFORE COMPLETING AND DELIVERING THE LETTER OF TRANSMITTAL, THE SHARES
AND ANY OTHER REQUIRED DOCUMENTS. THE TRANSFER OF REGISTERED OWNERSHIP MAY TAKE
CONSIDERABLE TIME.
14
<PAGE> 16
Your Signature May Be Required To Be Guaranteed. Signatures on a letter of
transmittal or a notice of withdrawal of tender must be guaranteed by an
eligible institution, except as described below. An eligible institution is:
- 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 as that term is defined under the
Exchange Act.
Your signature need not be guaranteed if your shares are tendered:
(a) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
(b) for the account of an eligible institution.
If a trustee or other person acting in a fiduciary or representative
capacity signs the letter of transmittal or any stock powers or other document
required by the letter of transmittal, such person must
- indicate the capacity in which it is signing; and
- provide proper evidence satisfactory to us of its authority to so act
with regard to the letter of transmittal.
We will determine, in our sole discretion, all questions as to the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered shares. Our determination is final and binding. We
reserve the absolute right to reject any 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.
You must cure any defects or irregularities in connection with tenders of
shares within such time as we shall determine, unless we waive such defect.
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 holder, 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:
(a) terminate the exchange offer as set forth below under "Conditions;" and
(b) 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.
ACCEPTANCE OF SHARES AND DELIVERY OF DEBENTURES
All conditions to the exchange offer must be satisfied or waived prior to
the expiration date. After the expiration date, we will accept all shares
properly tendered and, thereafter, we will issue the debentures. We shall be
deemed to have accepted the shares tendered for exchange when we notify the
exchange agent of our acceptance. The exchange agent will act as agent for the
tendering holders of the shares for the purpose of receiving the debentures from
us. The exchange agent will deliver the debentures to the tendering
shareholders.
15
<PAGE> 17
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your shares but:
- your shares are not immediately available;
- you cannot deliver your shares or a confirmation of book-entry transfer,
the letter of transmittal or any other required documents to the exchange
agent prior to the expiration date; or
- you cannot complete the procedure for book-entry transfer on a timely
basis,
you may effect a tender if:
(a) the tender is made by or through an eligible institution as that term
is defined above in "Your Signature May Be Required To Be Guaranteed;"
(b) prior to the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery
- stating the name and address of the holder of such shares;
- stating 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 together with the shares
or a confirmation of book-entry transfer of such shares, and any other
documents required by the letter of transmittal will be deposited by
the eligible institution with the exchange agent; and
(c) such properly completed and executed letter of transmittal, and all
tendered shares in proper form for transfer, or a confirmation of
book-entry transfer of such shares, 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 these guaranteed
delivery procedures.
WITHDRAWAL OF TENDERS
You may withdraw your tender of shares at any time prior to 5:00 P.M., New
York City time, on the expiration date, except as otherwise provided herein.
To withdraw a tender of shares in the exchange offer, the exchange agent
must receive a written or facsimile notice of withdrawal at its address set
forth below under "-- Exchange Agent" prior to 5:00 P.M., New York City time, on
the expiration date.
Any notice of withdrawal must:
- specify the name of the person having deposited the shares to be
withdrawn;
- identify the shares to be withdrawn, including the certificate number(s)
and amount of such shares;
- 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 register
the transfer of such shares back into the name of the person withdrawing
the tender; and
- 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 Depository Trust Company to be credited
with the withdrawn shares.
16
<PAGE> 18
We will determine, in our sole discretion, all questions as to the
validity, form and eligibility, including time of receipt, of such notices. Our
determination is final and binding. If you withdraw your shares, they will be
deemed not to have been validly tendered for purposes of the exchange offer and
no debentures will be issued with respect to that tender unless you validly
retender the shares that you withdrew. You may retender properly withdrawn
shares by following one of the procedures described above under '-- Procedures
for Tendering" at any time prior to the expiration date.
The exchange agent will return to you any shares which you tendered but
which we did not accept due to withdrawal, rejection of tender or termination of
the exchange offer, as soon as practicable without cost to you. However, in the
case of shares tendered by book-entry transfer, such shares will be credited to
an account maintained with Depository Trust Company for the shares.
CONDITIONS
Regardless of any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange debentures for, any shares, and we
may terminate the exchange offer before the expiration date, if:
(a) any action or proceeding is instituted or threatened with respect to
the exchange offer which, in our reasonable judgment,
- might materially impair our ability to proceed with the exchange
offer; or
- might materially impair the contemplated benefits of the exchange
offer to us;
(b) any material adverse development has occurred in any existing action or
proceeding with respect to us or any of our subsidiaries;
(c) any change, or any development involving a prospective change, in our
business or financial affairs, including those of any of our
subsidiaries, has occurred which, in our reasonable judgment, might
materially impair our ability to proceed with the exchange offer or
materially impair the contemplated benefits of the exchange offer to
us;
(d) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in our reasonable judgment, might materially impair our ability
to proceed with the exchange offer or materially impair the
contemplated benefits of the exchange offer to us;
(e) there shall have occurred
- any general suspension of trading in, or general limitation on prices
for, securities on the AMEX;
- 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 us; or
- 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
(f) we have not obtained any governmental approval which we believe, in our
reasonable judgment, is necessary for the consummation of the exchange
offer as contemplated in this prospectus.
The foregoing conditions are for our sole benefit and we may assert them or
waive them regardless of the circumstances giving rise to any such condition. If
we fail at any time to exercise any of the foregoing rights, we shall not be
deemed to have waived such right and each such right shall be deemed an ongoing
right which may be asserted at any time and from time to time.
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<PAGE> 19
If we determine, in our sole reasonable judgment, that any of the
conditions are not satisfied, we may:
(a) refuse to accept any shares and return all tendered shares to the
tendering holders or, in the case of shares delivered by book-entry
transfer, credit such shares to the account maintained within
Depository Trust Company by the participant in Depository Trust Company
which delivered such shares;
(b) 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; or
(c) 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, we will
disclose such waiver promptly by means of a supplement to this prospectus that
will be distributed to you, and we 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 is the exchange agent for the
exchange offer. You should direct all executed letters of transmittal and
notices of guaranteed delivery to the exchange agent at the address set forth
below. If you have questions or you need
- assistance,
- additional copies of this prospectus or of the letter of transmittal, or
- notices of guaranteed delivery,
you should direct such requests to the exchange agent as follows:
American Stock Transfer and Trust Company, Exchange Agent
<TABLE>
<S> <C>
By Mail, Hand or Overnight Courier: Facsimile Transmission Number
40 Wall Street eligible institutions only:
New York, New York 10005 (718) 234-5001
If by Mail, Registered or To Confirm Facsimile
Certified Mail Recommended or for Information Call
(718) 921-8200
</TABLE>
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.
YOUR RIGHTS UNDER INDIANA LAW
You do not have any appraisal or dissenters' rights under Indiana law or
the indenture, the agreement between Thermwood 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.
18
<PAGE> 20
WHY WE ARE MAKING THE EXCHANGE OFFER
I. TO PRESERVE CONTROL BY CURRENT MANAGEMENT AND PREVENT HOSTILE TAKEOVER.
We are conducting the exchange offer to prevent the possibility of a
hostile takeover and preserve current management's control over our operations.
We believe that our ability to generate profits year after year is directly
related to:
1. Kenneth Susnjara's direct management of our operations and his knowledge
of our industry including his view of future markets;
2. our management incentive program which compensates managerial employees
primarily as a function of our results of operations; and
3. our management structure which is less structured and more participatory
than that of most other public companies.
We further believe that a change in executive management as a result of a
hostile takeover would jeopardize these managerial techniques and our on-going
profitability.
II. TO PROVIDE OUR SHAREHOLDERS WITH AN ALTERNATE FORM OF INVESTMENT.
We also are conducting the exchange offer to provide our shareholders with
an alternate form of investment in Thermwood. We have not declared any dividends
on our common stock and we have no current intention of declaring any such
dividends. The debentures offer a consistent long-term rate of return.
OUR PRIOR ATTEMPT TO PURCHASE ALL COMMON STOCK THAT WAS NOT OWNED BY MAJOR
SHAREHOLDERS
In March 1998, we began to explore methods for consolidating control of
Thermwood and preventing hostile takeovers. In September 1998, we sought to
repurchase all of our common shares that were not owned by our major affiliates
by effecting a reverse stock split of our common stock at a high enough ratio to
require all but a few shareholders to return there shares to us for cash. This
would have forced all but a select few major shareholders to return their shares
to Thermwood. Although our primary goal was to preserve control by Kenneth and
Linda Susnjara and prevent any attempted hostile takeover, the reverse stock
split also would have resulted in our becoming a private company, with no public
market for our common shares and no requirement to prepare or file annual
reports or other disclosure documents with the SEC.
We negotiated with LaSalle Bank to provide the financing for the repurchase
of our common stock. However, the bank began to add additional substantive
requirements to the loan that were not acceptable to us. We are not sure why,
but we believe that it was consistent with a tightening up of the credit market
for this type of loan at the time. As a result, we did not go forward with the
forced repurchase of our common stock and we began exploring other strategies
for effecting our goals.
Although our management will own a majority of our outstanding shares if
materially all of the 750,000 shares sought in this exchange offer are acquired
by us, this exchange offer is not a first step in a plan to become a private
company. In this regard, we have no intention of reducing the number of
beneficial holders of our shares below 300 or delisting our shares from the
American Stock Exchange.
WHY WE BELIEVE THAT THE EXCHANGE OFFER IS A VIABLE MEANS FOR MEETING OUR
OBJECTIVES
We commenced this exchange offer because we believe that it is a viable
alternative to the stock repurchase by reverse stock split. Originally, we were
going to attempt to exchange all of the outstanding common stock that was not
owned by Kenneth and Linda Susnjara and Mr. Mulzer, another major shareholder.
However, we changed the terms of the exchange offer to limit the number of
shares that we will acquire to 750,000 or less. Limiting the number of shares
that we purchase for debentures adds the following dimensions to the exchange
offer:
1. PRESERVATION OF A PUBLIC MARKET FOR OUR COMMON STOCK. The exchange
offer should not result in the delisting of our common stock from the American
or Pacific Stock Exchanges or the total cessation of a
19
<PAGE> 21
public market for our common stock, thereby retaining a market for those
shareholders who decide not to tender their shares.
2. INCREASED PER SHARE EARNINGS ASSUMING CONTINUED
PROFITABILITY. Following the completion of the exchange offer, there will be
fewer outstanding shares. Assuming that we continue to generate profits, this
reduction in outstanding shares will increase earnings per share and, possibly,
the market value of such shares.
3. LOWER DEBT SERVICE ON THE DEBENTURES. Although our debt service will
increase as a result of the issuance of the debentures, we will be issuing fewer
debentures than we anticipated under the original terms of the exchange offer.
This means that the amount of debt service on the debentures will be less than
would have been incurred under the exchange offer as originally contemplated.
Lower debt service will increase liquidity and increase profits or decrease
losses.
FINANCIAL EFFECT OF THE EXCHANGE OFFER
The following pro forma financial information presents the effect on our
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.
You should be aware that the unaudited pro forma balance sheets are not
necessarily indicative of what our financial position would have been if the
exchange offer had been effected on the dates indicated, or will be in the
future. You should not infer that the information shown in the unaudited pro
forma statements of operations is indicative of the results of future
operations.
20
<PAGE> 22
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET -- PRO FORMA (UNAUDITED)
JULY 31, 1998
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PROFORMA
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current assets.............................................. $ 8,334 -- 8,334
Net property and equipment.................................. 2,647 -- 2,647
Other assets................................................ 343 480(a) 823
------- ------ ------
Total assets................................................ $11,324 480 11,804
======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................................... $ 3,009 480(a) 3,489
Long-term liabilities....................................... 2,367 4,651(b) 7,018
------- ------ ------
5,376 5,131 10,507
Shareholders' equity........................................ 5,948 (4,651)(c) 1,297
------- ------ ------
Total liabilities and shareholders' equity.................. $11,324 480 11,804
======= ====== ======
Book value per share........................................ $ 4.16 1.90
Ratio of earnings to fixed charges.......................... 10.16 1.91
</TABLE>
See "Explanation Of Pro Forma Adjustments" below.
21
<PAGE> 23
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET -- PRO FORMA (UNAUDITED)
OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets............................................. $ 9,118 -- 9,118
Net property and equipment................................. 2,626 -- 2,626
Other assets............................................... 339 480(a) 819
------- ------ ------
Total assets............................................... $12,083 480 12,563
======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities........................................ $ 3,550 480(a) 4,030
Long-term liabilities...................................... 2,302 4,651(b) 6,953
------- ------ ------
5,852 5,131 10,983
Shareholders' equity....................................... 6,231 (4,651)(c) 1,580
------- ------ ------
Total liabilities and shareholders' equity................. $12,083 480 12,563
======= ====== ======
Book value per share....................................... $ 4.31 2.27
Ratio of earnings to fixed charges......................... 8.03 1.49
</TABLE>
See "Explanation Of Pro Forma Adjustments" below.
22
<PAGE> 24
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET -- PRO FORMA (UNAUDITED)
FOR THE YEAR ENDED JULY 31, 1998
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
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 -- 6,413
------- ------ ------
OPERATING INCOME....................................... 2,429 -- 2,429
------- ------ ------
Other income (expense):
Interest expense.......................................... (232) (1,023)(d) (1,255)
Other..................................................... (31) -- (31)
------- ------ ------
Other expense, net........................................ (263) (1,023) (1,286)
------- ------ ------
EARNINGS BEFORE INCOME TAXES................................ 2,166 (1,023) 1,143
Income taxes................................................ (848) 379(e) (469)
------- ------ ------
NET EARNINGS........................................... $ 1,318 (645) 673
======= ====== ======
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic..................................................... 1,425 (750) 675(f)
Diluted................................................... 1,517 (750) 767(f)
EARNINGS PER SHARE:
Basic..................................................... $ 0.89 0.93
Diluted................................................... 0.86 0.86
</TABLE>
See "Explanation Of Pro Forma Adjustments" below.
23
<PAGE> 25
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET -- PRO FORMA (UNAUDITED)
FOR THE THREE-MONTHS ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
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 -- 1,928
------ ---- -----
OPERATING INCOME...................................... 461 -- 461
------ ---- -----
Other income (expense):
Interest expense......................................... (57) (256)(d) (313)
Other.................................................... 6 -- 6
------ ---- -----
Other expense, net....................................... (51) (256) (307)
------ ---- -----
EARNINGS BEFORE INCOME TAXES............................... 410 (256) 154
Income taxes............................................... (192) 95(e) (97)
------ ---- -----
NET EARNINGS.......................................... $ 218 (161) 57
====== ==== =====
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic.................................................... $1,441 (750) 691(f)
Diluted.................................................. 1,481 (751) 730(f)
EARNINGS PER SHARE:
Basic.................................................... $ 0.15 0.08
Diluted.................................................. 0.15 0.08
</TABLE>
See "Explanation Of Pro Forma Adjustments" below.
24
<PAGE> 26
EXPLANATION OF PRO FORMA ADJUSTMENTS
(UNAUDITED)
(Dollars and shares in thousands)
(a) Increase in other assets and current liabilities relating to
solicitation agent, accounting and legal fees ($480) 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, determined as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1998 JULY 31, 1998
---------------- -------------
<S> <C> <C>
Debentures issued upon exchange of outstanding
common shares.................................. $8,250 8,250
Less: discount................................... (3,599) (3,599)
------ ------
$4,651 4,651
====== ======
</TABLE>
(c) Decrease in shareholders' equity as a result of exchange of common
stock for debentures.
(d) 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%, determined as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1998 JULY 31, 1998
---------------- -------------
<S> <C> <C>
Bonds payable, net............................... $4,651 $4,651
Effective interest rate.......................... 22% 22%
------ ------
$1,023 $1,023
Portion of year.................................. 25% 100%
====== ======
Adjustment to interest expense................... $ 256 $1,023
====== ======
</TABLE>
(e) Decrease in income taxes, 37% effective rate, based on pro forma
adjustments to earnings before income taxes.
25
<PAGE> 27
(f) A reconciliation of the numerator and denominator for the basic and
diluted historical and pro forma earnings per share calculation
follows:
<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
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net earnings.............. $1,318 $1,318 $ 673 $ 673 $ 218 $ 218 $ 57 $ 57
Less preferred stock
dividends............... (43) (43) (43) (43) -- -- -- --
Add interest expense on
convertible bonds
payable................. -- 47 -- 47 -- 4 -- 4
Add amortization of bond
discount and issuance
costs................... -- 5 -- 5 -- 1 -- 1
Income tax effects of
earnings adjustments.... -- (19) -- (19) -- (2) -- (2)
------ ------ ------ ------ ------ ------ ------ ------
Total earnings..... $1,275 $1,308 $ 630 $ 663 $ 218 $ 221 $ 57 $ 60
====== ====== ====== ====== ====== ====== ====== ======
Weighted average shares:
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....... -- -- (750) (750) -- -- (750) (750)
------ ------ ------ ------ ------ ------ ------ ------
Adjusted.................... 1,425 1,425 675 675 1,441 1,441 691 691
Incremental shares from
assumed:
Exercise of dilutive stock
options................. -- 56 -- 56 -- 17 -- 17
Conversion of convertible
bonds................... -- 36 -- 36 -- 23 -- 23
------ ------ ------ ------ ------ ------ ------ ------
Total weighted
average shares... 1,425 1,517 675 767 1,441 1,481 691 730
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
ACCOUNTING TREATMENT
We will record the debentures 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. We will amortize the costs incurred in
connection with the issuance of the debentures over the term of the debentures.
HOW OUTSTANDING OPTIONS WILL BE TREATED IN THE EXCHANGE OFFER
The exchange offer will have no effect on our Qualified and Non-Qualified
options.
26
<PAGE> 28
FEDERAL INCOME TAX CONSEQUENCES
THE EXCHANGE OF STOCK FOR DEBENTURES IS A REDEMPTION AND IS A TAXABLE EVENT
The following summary of the Federal income tax consequences to a
shareholder who exchanges his shares for debentures is taken from the opinion of
Richard Reichler, Esq., our special tax counsel, and does not restate the
opinion in its entirety. A copy of the opinion is filed as an exhibit to the
registration statement of which this prospectus is a part. To obtain a copy of
the opinion see "Where You Can Find More Information."
General
In general, the acquisition of our common stock in exchange for debentures
is a redemption of those shares for Federal income tax purposes. 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 and includes our debentures. If the redemption terminates
the shareholders interest or causes a meaningful reduction in that interest, the
exchange will be treated in the same manner as a sale of the stock; which is a
taxable event. In the usual case, the shareholder's proceeds in computing his or
her tax on the exchange will be the market value of the debentures received and
the shareholder will recognize capital gain or loss depending on the difference
between his or her basis in the stock surrendered and the amount of the
proceeds. If a shareholder does not qualify for exchange treatment, his or her
receipt of the debenture is expected to be taxed as a dividend. As we discuss in
"Exchange Offer -- Accounting Treatment" and "Risk Factors; Risks Related to
Acquisition of Debentures -- The Debentures Most Likely Will Trade At A Discount
From Their Face Amount If A Public Trading Market Develops For The Debentures,"
we believe that the market value of the debentures will be well below the face
amount of the debentures and that, in the usual case, such value should be used
in determining the proceeds of the redemption. If the shareholder recognizes a
gain, he or she will owe taxes on the exchange even though he or she will not
receive cash from the exchange to pay these taxes. If, as may be the case, the
fair market value of the debenture is less than its redemption price at
maturity, the shareholder acquiring the debenture will incur tax on the
difference between the fair market value and the redemption price at maturity.
The IRS deems this difference to be income under the original issue discount tax
rules. Under these rules, the shareholder will be required to include in income
the amount of the original issue discount on our debenture over the term of the
debenture in addition to the cash interest payment he or she receives under the
debenture.
How A Redemption Transaction Will Be Taxed
How the Internal Revenue Service will treat the exchange for each
shareholder will depend upon the facts which are specific to that shareholder's
circumstances. The exchange will be treated as either a distribution in exchange
for stock or a dividend.
I. Treatment As A Distribution In Exchange For Stock. 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 exchange for the stock, i.e., as
a sale transaction. As discussed in more detail below, if you exchange more than
80% of your Thermwood shares, your exchange will be treated as a distribution in
exchange for stock. In the usual case in which the stock was held as a capital
asset on the date of the exchange, the provisions relating to capital gains and
losses will apply.
The four tests for distribution in exchange for stock treatment are
contained in section 302(b) of the Code and are not mutually exclusive -- it is
possible to satisfy one or more simultaneously. Moreover, the tests must be
applied separately 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 distribution in exchange for
stock 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;
27
<PAGE> 29
(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 be treated as a
distribution in exchange for stock 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 IRS upon which taxpayers can rely.
Essentially Equivalent To A Dividend Test. The major Supreme Court case
interpreting whether a distribution is essentially equivalent to a dividend is
U.S. v. Davis, 397 U.S. 301 rehearing 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. 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 IRS or the courts that there has been a
meaningful reduction in his stock ownership. Clearly, if you exchange all or
substantially all of your stock, your exchange will not be deemed to be
equivalent to a dividend and will be treated as a distribution in exchange for
stock.
Substantially Disproportionate Test. Under the substantially
disproportionate redemption rule, a redemption will be treated as an amount in
exchange for the stock you surrender if three conditions are satisfied:
(1) Your percentage ownership of our outstanding voting stock is reduced
immediately after the redemption to less than 80% of your percentage
interest in our stock immediately before the transaction;
(2) Your percentage ownership of our outstanding common stock, both voting
and non-voting, is reduced to less than 80 percent of your percentage
ownership before the redemption. This test is applied immediately
before and immediately after the redemption; and
(3) You own, 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. We have no
outstanding non-voting stock. Accordingly, if you exchange more than 80% of your
stock, your exchange will be treated as a distribution in exchange for stock.
Complete Termination Of Shareholder's Interest. A redemption will be
treated as a distribution in exchange for stock "if the redemption is in
complete redemption of all of the stock of the corporation owned by the
shareholder." Under this test, all of your Thermwood stock must be exchanged.
II. Treatment As A Dividend. If none of the four tests are satisfied, the
redemption will be treated as a distribution which is a dividend to the extent
of our 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.
Recognition of Income
Ordinarily, under the general rule of section 1001(b) of the Code, where
the redemption qualifies as a distribution in exchange for stock, the amount
received for the stock is equal to the fair market value of the debenture,
rather than its face amount. This general rule applies to both corporate and
non-corporate
28
<PAGE> 30
shareholders. A different measurement of amount realized applies, according to
the IRS, 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
amount rather than at its fair market value. This rule also applies to determine
an accrual method shareholder's gain or loss on a redemption of stock where the
redemption qualifies for distribution in exchange for stock treatment.
Our distribution of the debentures in part or full payment of the
redemption price is not eligible for installment sale reporting because our
stock is publicly traded. Accordingly, shareholders will be required to report
any income from the exchange prior to the receipt of payments of the principal
of the debentures.
Original Issue Discount
Our debentures are expected to sell at a discount from the amount payable
at maturity. This means that the issue price, as determined by the initial
trading price of our debentures, will be less than the stated redemption price
at maturity for each debenture. This difference is called original issue
discount. Under the tax law rules, original issue discount is allocated on a
yield-to-maturity basis over the life of the debt instrument and it is included
in the holder's income. That is, the holder of the debt instrument is required
to include the original issue discount in income over the term of our debenture
spread on a yield-to-maturity basis even though the amount of such interest is
not received until the maturity of the debenture. Thus, the holder of our
debenture can be expected to include in income that is taxable as interest an
amount in excess of the interest paid in cash each year.
The amount of original issue discount will depend upon the issue price.
Since the debenture is expected to be publicly traded for Federal income tax
purposes, the issue price will be the value of our debenture determined by its
initial trading price. In effect, the nearer to the face value the debenture
trades at the time it is issued, the less the amount of original issue discount.
The lower the initial trading price, the greater the amount of original issue
discount.
The presence of original issue discount may have an impact on the
marketability of the debenture, since generally only tax exempt purchasers will
be indifferent to the inclusion of imputed interest in income. Moreover, if the
amount of original issue discount is significant, the debenture may be subject
to treatment as an applicable high yield debt obligation which could require us
to defer deduction for certain amounts of original issue discount prior to
maturity of the debenture or result in nondeductibility of a portion of the
original issue discount. These tax consequences to us would not change the
requirement that the holder include original issue discount income as it
accrues.
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 in connection with the exchange to avoid backup withholding
requirements that might otherwise apply. The letter of
29
<PAGE> 31
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.
30
<PAGE> 32
DESCRIPTION OF THE DEBENTURES AND THE INDENTURE
GENERAL
The debentures will be issued under an indenture to be dated as of March
, 1999, between Thermwood and American Stock Transfer and Trust Company as
trustee. The terms of the debentures include those stated in the indenture and
those made part of the indenture by reference to the Trust Indenture Act of
1939. The following summary of material provisions of the indenture and the
debentures does not restate those documents in their entirety. A copy of the
indenture, which includes the debenture, is filed as an exhibit to the
registration statement of which this prospectus is a part. To obtain a copy of
the indenture see "Where You Can Find More Information."
FACE AMOUNT OF DEBENTURE
The face amount of each debenture will equal $11.00 times the number of
shares that we acquire from the tendering shareholder.
QUARTERLY PAYMENT OF INTEREST AND PAYMENT OF PRINCIPAL AT MATURITY
We will pay interest on the debentures from the date of their delivery at
the rate of 12% per annum. We will make interest payments quarterly on January
1, April 1, July 1 and October 1 of each year, commencing July 1, 1999.
We will repay the face amount of the debentures 15 years after the date of
their issuance, unless the debentures are redeemed prior to their maturity.
We will make all payments of principal and interest on the debentures at
the offices of the trustee in New York City located at 40 Wall Street, New York,
New York 10005. However, we may pay interest by check mailed to the holder at
the holder's address listed with the trustee in the debenture register.
We will not withhold interest payments from any investor who provides us
with the proper withholding form, either Form W-8 or W-9. If an investor does
not provide us with such a form, we will withhold 31% of any interest paid. It
is our policy that no sale will be made to anyone refusing to provide a fully
executed Form W-8 or Form W-9.
REPAYMENT OF DEBENTURES BEFORE MATURITY
Redemption by Holder's Estate. Upon the death of a debenture holder, the
holder's estate may require us to repay a maximum of $50,000 in face amount of
and accrued interest on the debentures owned by the deceased holder. This right
to require repayment is known as a right of redemption. This right of redemption
is limited to the estate of the initial holder. If a holder transfers the
debentures, the subsequent holder of the debentures is not entitled to 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 jointly held, the election will not apply.
Redemption by Us. We can redeem the debentures at a price of $15.00 for every
$11.00 of face value of the debentures during the second year after their
issuance. By way of illustration, if you own a debenture with a face amount of
$110,000, we can redeem your debenture for $150,000; $110,000 divided by $11.00
31
<PAGE> 33
multiplied by $15.00. During each subsequent year, the price at which we can
redeem the debentures will decrease as follows:
<TABLE>
<CAPTION>
12 MONTH PERIOD REDEMPTION PRICE
AFTER THE ISSUANCE PER $11.00 OF FACE
OF THE DEBENTURES AMOUNT OF DEBENTURE
- ------------------ -------------------
<S> <C>
Third...................................... $14.70
Fourth..................................... $14.40
Fifth...................................... $14.10
Sixth...................................... $13.80
Seventh.................................... $13.50
Eight...................................... $13.20
Ninth...................................... $12.90
Tenth...................................... $12.60
Eleventh................................... $12.30
Twelfth.................................... $12.00
Thirteenth................................. $11.70
Fourteenth................................. $11.40
Fifteenth.................................. $11.10
</TABLE>
We may not redeem the debentures within the first year after they have been
issued. If we decide to redeem the debentures, we are required to provide the
holder with written notice of such intention at least 30 days before we redeem
the debentures.
If we redeem less than all of the outstanding debentures, the trustee will
determine which debentures will be redeemed either by pro rating or choosing by
lot.
RANKING OF DEBENTURES
The debentures rank below our senior debt and rank equal with our existing
convertible debentures. This means that we are required to make payments of
principal, premiums, if any, and interest on our senior debt before we make such
payments on the debentures. Senior debt includes indebtedness for money that we
borrowed that is outstanding on the day that we execute the indenture and money
that we borrow after we execute the indenture, where we borrow the funds from
banks or other traditional long-term institutional lenders such as insurance
companies and pension funds. Such debts will rank below the debentures only if
the note or other document that creates the debt provides that such debt is not
senior in right of payment to the debentures. At March 11, 1999, senior debt
aggregated $2,196,320.
We expect that from time to time we will borrow additional funds that will
rank senior to the debentures. We are not limited in the amount of additional
indebtedness that we can borrow. The more that we borrow, the greater our debt
service. If we are unable to meet our debt service and we are required to pay or
distribute our assets to creditors due to our dissolution, winding up of
affairs, liquidation, bankruptcy or other similar event, we will be required to
make all payments due upon all senior debt before we can make payments to the
debenture holders or the trustee.
MODIFICATION OF THE INDENTURE
With the consent of the holders of not less than a majority in principal
amount of outstanding debentures, Thermwood and the trustee may modify the
indenture by:
- adding, changing or eliminating any provisions of the indenture; or
- modifying the rights of the debenture holders under the indenture.
32
<PAGE> 34
However, no modification may be made without the consent of the debenture
holders affected to:
(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) alter the manner in which the indenture may be amended in such a way
that it adversely affects the rights of holders; or
(g) alter the provisions of the indenture so as to adversely affect the
junior ranking of the debentures to senior debt.
Thermwood and the trustee do not require the consent of any holders to amend the
indenture to:
- fix any ambiguity, omission, defect or inconsistency;
- provide for the assumption by a successor corporation of our obligations
under the indenture;
- add guarantees to the debentures;
- secure the debentures;
- add to our covenants for the benefit of the holders of the debentures or
to surrender any right or power conferred upon us;
- make any other change that does not adversely affect the rights of any
holder of the debentures; or
- comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
We are required to mail to all holders a notice briefly describing any
amendment to the indenture promptly after the amendment is effected. However,
our failure to give such notice to all holders or any defect in such notice will
not impair the validity of the amendment.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each of the following constitutes an event of default under the indenture:
- If we fail to pay interest within 45 days of any interest due date or
fail to pay the principal or any premium when due;
- If we fail to comply with any other obligation in the indenture and such
failure continues for at least 60 days after we have received written
notice of such failure from the trustee or the holders of at least 25% in
face amount of the outstanding debentures;
- If we become subject to certain events of bankruptcy, insolvency or
reorganization.
If the trustee knows that an event of default has occurred and has not been
rectified, it is required to mail to each debenture holder a notice of the event
of default within 90 days after it occurs. However, except for an event of
default in the payment of principal or accrued interest on any debenture, the
trustee need not send such notice if and for as long as a committee of its trust
officers determines that withholding notice is not against the interest of the
debenture holders.
We are required to deliver to the trustee, within 120 days after the end of
each fiscal year, a certificate indicating whether we know of any event of
default that has occurred during the previous year.
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<PAGE> 35
If an event of default occurs and has not been rectified, either the
trustee or the holders of 25% of the face amount of the outstanding debentures,
by giving us notice, may declare the principal and any accrued interest on the
principal of all of the debentures to be due and payable.
Holders of at least a majority of the face amount of all outstanding
debentures may:
- rescind any acceleration of payment due to an event of default provided
that all existing events of default have been cured or waived; and
- 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.
A holder may bring an action to collect any interest or principal under the
debenture that has come due but not been paid. A holder's right to institute a
proceeding with respect to any other matter under the indenture is limited. A
debenture holder may institute such a proceeding only if:
- he notifies the trustee in writing of a continuing event of default;
- holders of at least 25% in face amount of the outstanding debentures
deliver a written request to the trustee to pursue a remedy;
- one or more holders provide the trustee with indemnification that the
trustee deems satisfactory against any loss, liability or expense;
- the trustee fails to comply with the request to institute proceedings
within 60 days of receiving the request; and
- the trustee does not receive written instructions that are inconsistent
with the request from the holders of at least a majority in face amount
of the outstanding debentures during the 60 day period.
COVENANTS OF THERMWOOD
In the indenture, we agree to abide by certain covenants while the
debentures are outstanding. These covenants include our obligation to:
- pay all interest and principal when due;
- deliver to the trustee copies of all of our filings with the SEC;
- certify in writing to the trustee within 120 days after the end of each
fiscal year whether we were in default under the indenture and, if so,
the status of such default and our efforts to correct it;
- not declare or pay any cash dividend on outstanding stock or purchase or
otherwise acquire any of our stock during any period in which an event of
default exists; and
- refrain from entering into certain transactions with our affiliates,
unless our board of directors determines in good faith that the terms of
such transactions are at least as good as we could have obtained had we
entered into such transactions with non-affiliated persons.
THE TRUSTEE
American Stock Transfer and Trust Company will be the trustee under the
indenture. The trustee is the transfer agent and registrar for our common stock.
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 as trustee
or resign.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
None of our directors, officers, employees or shareholders, acting in such
capacities, shall have any liability for any of our obligations under the
indenture or the debenture. Each debenture holder waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the debentures.
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<PAGE> 36
Such waiver might not be effective to waive liabilities under the Federal
securities laws because 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 Thermwood issued 12% junior convertible debentures due February 25,
2003. The terms of the convertible debentures are substantially the same as
those of the debentures offered in this exchange offer, except that the
convertible debentures are convertible into shares at the rate of one share for
$5.00 principal amount of convertible debentures. As of March 11, 1999, there
were 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.
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<PAGE> 37
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain historical consolidated financial
data which has been derived from our 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 our 1-for-5 reverse stock split which took effect
on January 5, 1998. For additional information, see "Consolidated Financial
Statements of Thermwood," commencing on page F-1. The pro forma financial
information illustrates the effect of the exchange of 750,000 shares for
debentures as if this had occurred as of the dates and for the periods listed in
the following tables.
For more detailed information on the pro forma effect of the exchange
offer, see the pro forma financial information and the "Explanation Of Pro Forma
Adjustments" in "Exchange Offer -- Financial Effect of the Exchange Offer."
SELECTED STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED OCTOBER 31, FISCAL YEAR ENDED JULY 31,
--------------------------- --------------------------------------------------------
PRO PRO
FORMA FORMA
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 $21,840 $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
Earnings before income
taxes...................... 154 410 558 1,143 2,166 2,055 1,174 1,140 136
Earnings from continuing
operations................. 57 218 355 673 1,318 1,236 2,334 2,350 136
Net earnings................. 57 218 355 673 1,318 1,236 2,334 2,350 208
====== ====== ====== ======= ======= ======= ======= ======= ======
Earnings per share:
Basic...................... $ 0.08 $ 0.15 $ 0.22 $ 0.93 $ 0.89 $ 0.70 $ 1.63 $ 1.92 $ --
Diluted.................... 0.08 0.15 0.21 0.86 0.86 0.69 1.45 1.49 --
====== ====== ====== ======= ======= ======= ======= ======= ======
Weighted average number of
shares:
Basic...................... 691 1,441 1,409 675 1,425 1,349 1,231 1,030 1,030
Diluted.................... 730 1,481 1,535 767 1,517 1,446 1,437 1,451 1,030
Cash dividends declared per
common share............... -- -- -- -- -- -- -- -- --
</TABLE>
SELECTED BALANCE SHEET DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
--------------------------- ------------------------------------------------------
PRO PRO
FORMA FORMA
1998 1998 1997 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets................ $12,563 $12,083 $11,434 $11,804 $11,324 $11,273 $8,766 $7,527 $5,418
Working capital............. 5,088 5,568 5,454 4,845 5,324 5,080 3,791 2,811 1,706
Long-term obligations....... 6,953 2,302 2,750 7,018 2,367 285 709 1,870 1,862
Shareholders' equity........ 1,580 6,231 4,950 1,297 5,948 7,087 6,275 3,437 1,456
Book value per share........ $ 2.27 $ 4.31 $ 3.49 $ 1.90 $ 4.16 $ 5.06 $ 4.80 $ 3.37 $ 1.41
Ratio of earnings to fixed
charges................... 1.49 8.03 20.61 1.91 9.73 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."
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<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this section, we explain the financial condition and results of
operations of Thermwood and its subsidiaries for the years ended July 31, 1998
and 1997, and for the three month periods ended October 31, 1998 and 1997. As
you read this section, you may find it helpful to refer to our Consolidated
Financial Statements at the end of this prospectus and the information contained
is the section entitled "Selected Consolidated Financial Data."
FORWARD-LOOKING STATEMENTS
Certain information contained in this prospectus, including information
about:
- our future financial position;
- our business strategy;
- our projected costs and plans;
- objectives of management for future operations; and
- anticipated effects of the exchange offer,
are forward-looking statements. Important factors that could cause actual
results to differ materially from our expectations are disclosed under "Risk
Factors" and elsewhere in this prospectus.
RESULTS OF OPERATION
In this section, we discuss our earnings for the periods indicated and the
factors affecting them that resulted in changes from one period to the other.
Quarter ended October 31, 1998 Compared to Quarter ended October 31, 1997
Sales
Revenues during these periods consisted of:
<TABLE>
<CAPTION>
SOURCE 1998 1997
- ------ ---- ----
<S> <C> <C>
Machine Sales.......................................... 79.1% 83.3%
Technical Sales........................................ 20.9% 16.7%
</TABLE>
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. These increases were due primarily to increased
orders and shipments of product. Backlog decreased from approximately $3,200,000
at October 31, 1997 to $2,521,000 at October 31, 1998. During the quarter ended
October 31, 1998, cost of sales as a percentage of net sales was 57.5%,
approximately the same as for the quarter ended October 31, 1997.
Research And Development, Marketing, General And Administrative Expenses
Research and development, marketing, general and administrative 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, general and administrative expenses were 34% of net sales for the
quarter ended October 31, 1998 compared to 31% for the same period of fiscal
year 1998.
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<PAGE> 39
These expenses were composed of the following:
<TABLE>
<CAPTION>
PERCENTAGE
EXPENSE OF INCREASE
- ------- -----------
<S> <C>
European Operations............................... 35%
Research and Development.......................... 16%
Marketing......................................... 41%
General and Administrative........................ 8%
</TABLE>
European Operations. Expenses related to European operations were $341,000 in
the quarter ended October 31, 1998 compared to $182,000 in the quarter ended
October 31, 1997. This $159,000 increase was due primarily to increased
marketing efforts and the hiring of additional personnel.
Research and Development Expenses. Research and development expenses were
$156,000 in the quarter ended October 31, 1998 compared to $81,000 in the
quarter ended October 31, 1997. This $75,000 increase was due primarily to
increased salaries and benefits and the purchase of experimental parts and
supplies.
Marketing Expenses. Marketing expenses were $739,000 in the quarter ended
October 31, 1998 compared to $550,000 in the quarter ended October 31, 1997.
This $189,000 increase was due primarily to trade show expenses and advertising
costs.
General and Administrative Expenses. General and Administrative expenses were
$692,000 in the quarter ended October 31, 1998 compared to $655,000 in the
quarter ended October 31, 1997. This $37,000 increase was due primarily to
increased legal and professional fees incurred by us with regard to the
attempted reverse stock split.
Interest Expense
Interest expense in the quarter ended October 31, 1998 was $56,921, an
increase of approximately $31,000 from the quarter ended October 31, 1997. This
increase was due to interest on a $3.5 million line of credit from DuBois County
Bank. We used a major portion of the proceeds from this line of credit to
repurchase preferred stock in the amount of $2,546,320 from Edgar Mulzer, a
director and principal shareholder of Thermwood. The credit line is discussed in
more detail below in "Liquidity and Capital Resources" and the transactions with
Mr. Mulzer are discussed in more detail below in "Certain Relationships and
Related Transactions -- Transactions with Edgar Mulzer."
Operating Income
Earnings from continuing operations before income taxes in the quarter
ended October 31, 1998 were $410,721 compared to $557,665 in the quarter ended
October 31, 1997, 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 quarter ended October 31, 1997.
Fiscal Year ended July 31, 1998 Compared to Fiscal Year ended July 31, 1997
Sales
Revenues during these periods consisted of:
<TABLE>
<CAPTION>
SOURCE 1998 1997
- ------ ---- ----
<S> <C> <C>
Machine Sales.......................................... 81.3% 81.8%
Technical Sales........................................ 18.7% 18.2%
</TABLE>
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 year 1998, the first full year of European operations, were $1,734,716 or
approximately 8% of total gross sales. Backlog decreased approximately 25.8%
from $4,080,000 at July 31, 1997 to $3,029,000 at
38
<PAGE> 40
July 31, 1998 due to a reduction in orders. Management attributes the decreased
level of orders at July 31, 1998 to a slowdown in capital purchasing because of
a slower economy.
Gross profit for fiscal year 1998 was $8,841,623. The percentage of current
year gross profit to net sales increased from 38.8% in fiscal year 1997 to 40.5%
in fiscal year 1998. Gross profit for the European operations for fiscal year
1998 was $695,121 compared to $374,021 for fiscal year 1997. The percentage of
current year gross European profit to net sales increased from 36.1% in fiscal
year 1997 to 40.1% 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
Thermwood. 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.
Research And Development, Marketing, General And Administrative Expenses
Research and development, marketing and general and administrative expenses
were $6,413,160 in fiscal year 1998, compared to $4,794,563 in fiscal year 1997,
an increase of approximately 33.8%.
These expenses were composed of the following:
<TABLE>
<CAPTION>
PERCENTAGE
EXPENSE OF INCREASE
- ------- -----------
<S> <C>
European Operations............................. 29.8%
Research and Development........................ 6.2%
Marketing....................................... 15.0%
General and Administrative...................... 49.0%
</TABLE>
European Operations. A major portion of increased expenses 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 year 1998 compared to
$570,000, or approximately 12% of total expenses in fiscal year 1997.
Approximately $100,000 of the European expense was due to the operations of an
office in Vienna which management closed in September 1998.
Research and Development Expenses. Research and development expenses were
$314,000 in fiscal year 1998 compared to $216,000 in fiscal year 1997. This
$98,000 increase was due primarily to increased salaries and benefits and
experimental parts and supplies.
Marketing Expenses. Marketing expenses were $1,443,910 in fiscal year 1998
compared to $1,200,910 in fiscal year 1997. Almost 49% of this $243,000 increase
was due to expenses related to our printing of ads, brochures and catalogs.
Approximately 23% of the increase was due to increased advertising expenses and
the balance of the increase was split primarily between increased telephone and
show expenses.
Administrative Expenses. Administrative expenses were $3,603,250 in fiscal year
1998 compared to $2,807,653 in fiscal year 1997. Approximately 61.4% of this
$796,000 increase was due to increases in personnel, salaries, bonuses and
related benefits and taxes.
Interest Expense
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 DuBois County Bank. We used a major portion of the proceeds from this line
of credit to repurchase preferred stock in the amount of $2,546,320. This credit
line is discussed in more detail below in "Liquidity and Capital Resources."
Operating Income
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
39
<PAGE> 41
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.
We have income tax net operating loss carryforwards of approximately
$529,000, which expire in the years 2008 and 2009. In addition, we have other
tax credits of lesser value which appear in Note I to our Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, our 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.
We 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, we 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 for increases in accounts receivable and $271,803 for
increases in inventories.
During the 1998 fiscal year, our 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. We anticipate 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 $5.00 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.
During fiscal year 1998, cash flows from financing activities included
$43,255 for dividend payments on preferred stock and redemption of $2,546,320 of
preferred stock.
We have a $3,500,000 revolving secured line of credit with DuBois County
Bank that expires on January 1, 2000. We entered into this line of credit in
October 1997 and used proceeds from this line to redeem our preferred stock from
Edgar Mulzer. For a description of this transaction, see "Certain Relationships
and Related Transactions -- Transactions with Edgar Mulzer." The outstanding
balance on this credit 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, 2000. We anticipate, but
cannot assure, that, at the end of the term, we will enter into a new credit
line with the bank and transfer any outstanding loan balance to the new credit
line. The credit line is secured by our assets. In the event of a
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<PAGE> 42
default, as defined in the credit line, the bank has the right to accelerate
payments under the credit line and take possession and sell the collateral.
Events of default under the credit line include:
- our failure to make any payments under the line when due;
- our failure to comply with conditions in the line;
- false or misleading representations by us in the line;
- our insolvency or certain other events related to insolvency or
bankruptcy; and
- materially adverse changes in our financial condition.
As of March 11, 1999, our outstanding principal balance under the credit line
was approximately $2,196,320.
ASSESSMENT OF THE ADEQUACY OF OUR CAPITAL RESOURCES
If sales and backlog continue at the present rate, there could be
significant decreases in working capital over the next 12 months. Although we
are in the process of completing our financial statements for the second quarter
of fiscal year 1999, we have noticed a general slow down. We cannot predict
whether this slow down will continue. At January 1, 1999, inventory had
decreased by approximately $400,000 from July 31, 1998. However, accounts
payable had increased by approximately $400,000, primarily due to slower
payments made on accounts. While this results in an $800,000 increase to cash
flow, there is an $800,000 decrease in working capital. Additional interest as a
result of the issuance of the debentures would result in an extra $156,000, net
of 37% tax rate, decrease in cash flow and working capital per
quarter -- $600,000 per year.
We believe that we will be able to meet our cash flow requirements,
including debt service on the debentures, if our operations continue at current
levels. However, in the event that there is a downturn in our business, we
believe that we will be able to meet our needs by taking one or more of the
following measures:
- decreasing the amount of funds allocated to research and development;
- cutting back on our European operations; or
- lowering management compensation in accordance with our bonus
compensation program, pursuant to which a major component of management
compensation is directly a function of how well we do.
If one or more of these measures was insufficient, we would seek to borrow
additional funds or raise capital through the sale of additional equity or debt
securities.
EFFECTS OF THE EXCHANGE OFFER
Assuming we acquire 750,000 shares and issue approximately $8,250,000
aggregate face amount of debentures, on a pro forma basis as of October 31,
1998, we would realize increases in current liabilities of approximately
$480,000 and in long-term liabilities of approximately $4,651,000, due to the
issuance of the debentures. This estimate assumes 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 $4,651,000 and the per share book value would decrease
from $4.31 per share to approximately $2.27 per share. Interest expense for the
quarter ended October 31, 1998 would increase by approximately $256,000 and net
earnings would decrease by approximately $161,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards, No. 130, Reporting Comprehensive Income, and
No. 131, Disclosures About Segments of an Enterprise and Related Information,
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, 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
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<PAGE> 43
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, we adopted FAS 130, FAS 131 and FAS 132; however, the
adoption has not had a material effect on our consolidated financial statements.
YEAR 2000 ISSUES.
Our failure to adequately prepare our computers and software to be year
2000 compliant could disrupt our business and materially and adversely affect
our operations. 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, including all information technology and
non-information technology 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.
As a precaution, we plan to stock up additional inventory from our non-U.S.
vendors prior to the beginning of the year 2000.
We know of one mission-critical system, the inventory shop floor control
software, that is not Year 2000 compliant. This software tracks incoming orders,
inventory levels, material requirements planning, shop floor control, labor
tracking, shipping and administrative an financial tracking functions. 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 March 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 upgrades by the beginning
of July 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
new inventory shop floor control software is not Year 2000 compliant. In such an
event, we would revert to manual methods of tracking inventory and purchasing
raw materials while we looked to alternative vendors. We believe that there are
a number of alternate vendors that claim to have year 2000 compliant software.
We feel that we could
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<PAGE> 44
implement this contingency plan within a short period of time. However, until
such time as this contingency plan took effect, our ability to manufacture might
be materially disrupted due to administrative delays or, possibly, lack of raw
materials. A return to manual methods would require us to hire additional staff
and would result in:
- increased administrative expense; and
- higher raw materials inventory levels that would be needed to assure that
we have sufficient raw materials to avoid disruption of production.
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<PAGE> 45
BUSINESS
GENERAL
We manufacture computer-based systems and equipment for the woodworking and
plastics industries. We have developed and produce, market and service the
following systems and equipment:
- computer-controlled 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; and
- 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 computer-controlled 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 Thermwood, 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
Computer-Controlled Routers
Our computer-controlled 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,
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- machining of aluminum honeycomb,
- drilling and high speed machining of aluminum both vertically and
horizontally,
- mortising, which is cutting square holes in furniture, and
- sawing and squaring, which is 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.
These systems utilize our 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 we market six standard computer-controlled 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 computer-controlled 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
computer-controlled router systems were approximately 79% of our total net sales
in fiscal year 1998.
Robotics Systems
During fiscal year 1996, we 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 net sales for the 1998 fiscal year.
Probe
During fiscal year ended July 31, 1996, we introduced a new five-axis probe
system which significantly reduces the time required to program machining of
three-dimensional plastic parts. We have obtained patents involving the
technology underlying this new probe system. This product is also being offered
for use on machines built by our competitors, provided their control systems are
upgraded to our 91000 SuperControl. The probe sells for approximately $15,000.
During fiscal 1998, we sold 63 probe units, most of which were sold in a package
of products rather than as a separate item. The average sales price for a probe
is $15,000. If the probes had been sold separately, probe sales would have
totaled approximately $945,000, or 4% of net sales.
Tooling
During fiscal year 1997, we introduced new tooling for our woodworking line
of computer-controlled 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, inclusive of tooling sold in a package of products, in fiscal
year 1998 were approximately $570,000 or
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2.6% of net sales. We hope that these new offerings will allow our machines to
penetrate new markets, however, no assurance to this effect can be given.
SuperControl Systems
We design and manufacture our own computer-controlled systems that we use
for sale with our own automated industrial equipment. We currently manufacture
and sell version 91000 of the SuperControl computer-controlled system. The
SuperControl computer-controlled system operates the various movements of the
equipment in response to programs developed by the operator.
Marketing
The market for computer-controlled routers can be divided into a large
number of applications in a variety of industries. We seek to produce industrial
products that address specific applications in a variety of industries. We also
attempt 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.
Our systems are currently designed to operate at higher quality and
reliability levels than earlier versions of these products. In addition, we
strive to support these systems with improved technical services and assistance.
Although our marketing strategy has involved emphasis on small to medium-sized
companies, we also have received orders from larger companies.
We generally sell our products through the assistance of dealer networks
established throughout North America and Europe. Dealers assist us in making
sales and are paid on a commission basis for this service. Commissions generally
range from 15% to 20% of our published retail prices. As of March 11, 1999 we
had 15 authorized dealers marketing our industrial products. We usually require
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 our product lines. However, some market and sell products
to more than one industry and sell both the computer-controlled router systems
and our line of wood carving routers.
One dealer, Automation Associates Incorporated, accounted for approximately
21% of our sales for the fiscal year ended July 31, 1998. See "Certain
Relationships and Related Transactions" for information relating to our
agreement with Automation Associates Incorporated, a corporation owned by
Kenneth and Linda Susnjara, two of our executive officers, directors and
principal shareholders. This dealer sold to 39 different customers, none of
which accounted for 10% or more of our sales in the fiscal year ended July 31,
1998. Automation Associates Incorporated sold to seven customers for a total of
13% of our sales during the first quarter of fiscal 1999.
One other dealer, CNC Automation, accounted for approximately 11% of our
business during the 1998 fiscal year. This dealer sold to 19 different
customers, none of which accounted for 10% or more of our sales in the fiscal
year ended July 31, 1998. No other dealer accounted for 10% or more of our
business for the fiscal year. The loss of any large dealer could have a
materially adverse effect on our business. Three dealers accounted for more than
10% each of our sales during the quarter ended October 31, 1998. CNC Automation
accounted for 15% of our business during this quarter while Index, Inc. and
Programmed Productivity, Inc. each accounted for 16% of our sales. CNC
Automation sold seven machines, Index sold five and Programmed Productivity sold
eight machines during this time.
We have a wholly-owned subsidiary, Carolina CNC, Inc., a North Carolina
corporation, which conducts sales in the southeastern region of the United
States.
We also have a wholly-owned subsidiary, Thermwood (Europe) Limited, a
United Kingdom company, which operates a sales office in England for conducting
sales to the European Community. We had an office in Vienna which we closed in
September 1998. During the 1998 fiscal year, we had an operating loss of
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$356,644 in connection with our European operations. Neither of the foreign
sales offices generated a profit. Sales of machines and services in fiscal year
1998 were approximately $1,735,000, or 8% of total sales.
Typically, we seek to develop sales leads through advertising in trade
magazines and product exhibitions at selected trade shows. We then furnish such
leads to dealers in the geographic area where the potential customer is located.
We also supply 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. We assist our dealers by providing training for them and
their customers. We encourage trainees and potential customers to visit our
manufacturing facilities where we maintain areas and machinery to demonstrate
the operation and use of our products.
TECHNICAL SERVICES
We believe that providing extensive and ongoing technical services to
customers is essential for the success of small and medium-sized companies.
Accordingly, we offer a variety of technical services through our 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 our 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 our equipment.
The Technical Services Division offers customers an Advanced Support
Program for our computer-controlled routers. Under this program, in exchange for
a monthly fee, customers receive an ongoing labor warranty, a 20% discount on
spare parts and upgrades, an ongoing material warranty on control system
components and annual software updates. As of March 11, 1999, there were 15
customers participating in this program. We have incurred no significant
expenses or problems in servicing our products.
PRODUCT DEVELOPMENT
Much of our product development effort during the last two years has been
directed toward developing a variety of cutting and machining heads for use on
our computer-controlled router line of equipment. Cutting and machining heads
are rotating motors that drive different types of tools, bits and blades that
machine and cut the products. By broadening the capability of the equipment, we
hope to increase the size of our market. In addition, we have an ongoing program
to reduce the manufacturing costs of or products and pass these reductions on to
customers in the form of price decreases.
Our entire computer-controlled router line now has the capability of
performing three-dimensional woodcarving. The resulting system produces carved
wood components at a three to ten times faster production rate than our
previously marketed carving robot product. Sales of the three-dimensional
carving robot in fiscal year ended July 31, 1998 amounted to approximately
$540,000 or 3% of machine sales. Sales of the three-dimensional carving robot
amounted to approximately $333,000 or 7% of machine sales during the first
quarter of fiscal 1999.
We have continued development on our 91000 SuperControl, an updated version
of the computer-controlled control systems formerly used on our equipment. We
have completed the basic system development and are now selling and shipping
this control on our equipment. Current efforts are being directed toward adding
certain high-end features and capabilities, including:
] a service guide, which keeps track of the operation of the machines and
notifies the user when maintenance is required;
- manual with a searchmode which allows the user to quickly find
information on any subject;
- maintenance videos; and
- a VHS player and a close up camera to permit customers to record their
set up and operations.
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In the first quarter of fiscal 1999, we added a 4 foot by 8 foot table
version of our Model 40 computer-controlled router. The Model 40 is a single
moving table, low cost system. The new table size offers customers that require
a longer table a lower cost alternative to either our Model 53, a single fixed
table computer-controlled router, or certain competitive machines. We also added
a single 5 foot by 10 foot table version of our Model 42 router, which normally
has two five foot by five foot tables.
We are conducting ongoing research to improve the speed at which the
machines operate and the qualify of the products that it makes.
At a trade show in August 1998, we introduced the woodworking industry to
the concept of manufacturing an entire piece of furniture using a single
machine. Although this concept generated strong interest, we have yet to sell a
system for this application . We believe that it may require several years for
this concept to become accepted, if ever.
CUSTOMERS
Although we have sold our industrial products to large corporations which
have annual sales approximating or exceeding $1 billion, our primary customer
base is composed of small to medium-sized manufacturers that have annual sales
ranging from approximately $10 million to approximately $500 million located
throughout the United States. No customer accounted for more than 10% of our
sales in the fiscal year ended July 31, 1998 or the first quarter of fiscal
1999.
We generally require 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.
We offer our 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, we also offers an Advanced Support Program for our products.
We also provide training and installation services. See "-- Technical Services"
above.
BACKLOG
As of July 31, 1998, our backlog was approximately $3,029,000 compared with
a backlog of $4,080,000 as of July 31, 1997. Substantially all of this backlog
was 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
we believe 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, we have 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, our backlog as of any particular date may not be
indicative of actual revenues for any subsequent period.
MANUFACTURING AND PRODUCTION
We maintain our manufacturing facilities in Dale, Indiana. See "-- Property
and Facilities" below. We manufacture our products on a batch rather than a
continuous flow or conventional production line basis. Except for demonstration
models, we generally do not 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.
We design, develop and engineer all of our industrial products. Components
contained in these products are either purchased from outside suppliers or
fabricated by our personnel. We fabricate such components as computer-based
electronic control systems and the steel structure of the computer-controlled
router systems.
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Where possible, we utilize our computer-controlled router systems and 91000
Control systems operating conventional metalworking machine tools to fabricate
components.
During fiscal year 1997, we purchased two used pieces of equipment which we
retrofitted with the 91000 Control system for use in fabricating components
which were previously custom made for us. These purchases saved us approximately
$250,000 during fiscal year 1998 in labor and material costs.
We purchase raw materials from third party sources. Most raw materials and
components, including those that are custom made for us, are either purchased or
available from several sources. One supplier accounted for approximately 19% of
total components purchased by us 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 of fiscal year 1999.
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 computer-controlled 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
Thermwood.
Our 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 our
opinion that the market cannot support all of them. We believe, however, that
our ability to offer products that perform a variety of functions and sell at
low prices provides us with a competitive advantage.
Competition in computer-controlled routers is based upon real and perceived
differences in equipment features, price, performance, reliability, service,
marketing, financial strength and product development capability. We may be at a
competitive disadvantage with those manufacturers that offer a broader line of
equipment or related supplies.
RESEARCH AND DEVELOPMENT
We plan to continue our research and development efforts primarily directed
toward the improvement of existing products, development of new products or
product enhancements and reduction in manufacturing costs. We utilize a variety
of sources in our 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 our current development efforts.
We have spent the following amounts on research and development during the
periods indicated:
<TABLE>
<S> <C>
Fiscal ended July 31, 1998...................... $314,000
Fiscal ended July 31, 1997...................... $216,000
Quarter ended October 31, 1998.................. $155,676
Quarter ended October 31, 1997.................. $ 81,060
</TABLE>
There was no customer-sponsored research and development during the 1998
fiscal year. We believe that expenditures need to be increased for us to
maintain a competitive position in the immediate future. To this end, research
and development expenditures increased by approximately 45% from fiscal year
1997 to fiscal year 1998, and by approximately 92% from the first quarter of
fiscal year 1998 to the first quarter of fiscal year 1999. However, we
eventually may be at a competitive disadvantage with respect to firms that spend
significantly more on research and development efforts than we do.
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PATENTS, TRADE SECRETS AND TRADEMARKS
We currently hold 25 domestic patents which expire at various times between
2000 and 2016 and have applications pending in the United States for 14
additional patents. There is no assurance that any additional patents will be
granted. We do not believe that major reliance can be placed on patents for the
protection of our products although patent protection for our newly developed
products is increasing. Similarly, we do not believe that the loss of our
patents would have a materially adverse effect on our business.
We rely primarily upon trade secret laws, internal non-disclosure
safeguards and restrictions incorporated into our dealership, sales, employment
and other agreements to protect our proprietary property and information. In
addition, we have proprietary rights arrangements with our employees that
provide for the disclosure and assignment by any of our employees of any
discovery, invention or improvement relating to our business. While we are
unaware of any breach of our security, competitors may develop similar products
outside the protection of any measures that we take. In addition, policing
unauthorized use of our technology, particularly in foreign countries, may be
difficult. We have been unsuccessful in prosecuting two claims in the United
States for what we believed were prospective unauthorized use of proprietary
rights. We have not been involved in any claims concerning patent infringement.
We market our products under various trademarks, including THERMWOOD,
CARTESIAN 5, 91000 SUPERCONTROL, ROUTER ART and PANEL-CAD. We have three
trademark registrations and one application for registration in the United
States. We also have two foreign trademark registrations and applications for
seven foreign registrations.
EMPLOYEES
As of March 11, 1999, we had approximately 139 full time employees, of whom
76 were engaged in manufacturing, 16 in marketing, 14 in administration, ten in
engineering, seven in research and development, and 16 in technical services.
None of our employees is a member of any union or collective bargaining
organization. We consider our relationship with our employees to be
satisfactory.
Designing and manufacturing our industrial equipment requires substantial
technical capabilities in many varied disciplines, ranging from mechanics and
computer sciences to mathematics. Although we believe that the capability and
experience of our technical staff compare favorably with other similar
manufacturers, there is no assurance that we can retain existing employees or
attract and hire the type of skilled employees we may need in the future.
PROPERTIES
Our 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 Thermwood. In November 1993, we 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 our series A
preferred stock. In fiscal year 1998, we 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 Thermwood. 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. We believe that these facilities are in good
condition and adequately satisfy our current requirements. See "Certain
Relationships and Related Transactions."
LEGAL PROCEEDINGS
On January 21, 1999, one of our shareholders filed a class action lawsuit
against Thermwood and its directors. The suit seeks to enjoin the consummation
of the exchange offer or, alternatively, in the event the exchange offer is
consummated, to recover compensatory damages. The complaint alleges that the
original terms of our exchange offer, which included a plan to eventually delist
our shares from the American and Pacific Stock Exchanges are unfair to the
shareholders and that the directors of Thermwood have violated their fiduciary
duty in the course of pursuing those transactions. We plan vigorously to defend
the action and
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to proceed with the exchange offer. However, if we determine that the proceeding
might materially impair our ability to proceed with the exchange offer or
materially impair the contemplated benefits of the exchange offer to us, then we
may terminate the exchange offer. It is impossible at this time for us to
predict the outcome of this pending litigation or its impact on our operations
or financial condition.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement on Form S-4 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 Thermwood, 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 the 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. 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 which is
http://www.sec.gov.
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.
The information in this prospectus is accurate as of the date on the front
cover. You should not assume that the information contained in this prospectus
is accurate as of any other date.
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MANAGEMENT
INFORMATION ABOUT MANAGEMENT
Current Management of Thermwood is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
</TABLE>
- ---------------
(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 our shareholders
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 Thermwood 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 Thermwood's business except for a brief
period in 1985 when he acted as a distributor for Thermwood. See "Certain
Relationships and Related Transactions."
Mrs. Susnjara has been a director of Thermwood since 1985 and Secretary
since 1989. She is and has been since 1985 the President of Automation
Associates Incorporated, a dealer of our industrial products. See "Certain
Relationships and Related Transactions." Mrs. Susnjara is not active in
Thermwood's business.
Mr. Hardesty has been our Vice President of Engineering since August 1988.
He joined us 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 us in 1981 and was promoted to accounting manager in
1983 and controller in 1985. She assumed her current position as Treasurer in
July 1993.
Mr. Hildenbrand became a Vice President of Thermwood in August, 1988.
Previously, we had employed him in various technician and sales manager
positions since 1977. He has also been a director of Thermwood Europe Ltd., one
of our wholly owned subsidiaries, since July 1996.
Mr. Uebelhor became Vice-President of Manufacturing in August 1997.
Previously, he had been our Production Manager since 1993.
Mr. Kasten became a Vice President in December 1993. Previously, we had
employed him as a manager of applications since 1990.
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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 Thermwood 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 Thermwood in September 1974 and has served continuously in
that capacity to the present. See "Certain Relationships and Related
Transactions" for information relating to loan and lease transactions between us
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 our Chief Executive Officer
and to each of our executive officers whose total fiscal year 1998 remuneration
exceeded $100,000 and to all of our officers as a group.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
OTHER ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1)
- --------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(1) Other annual compensation represents directors' fees paid to Mr. Susnjara.
Stock options for an additional 4,000 shares were issued to an officer of
Thermwood under the Qualified Stock Option Plan in fiscal year 1998. At March
11, 1999, the exercise prices of some of the unexercised options were less than
the market price of our 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 our common stock under our
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 our pre-tax profits as set forth below. See "-- Profit Sharing
Plan" below.
Certain other officers may be entitled to participate in Thermwood's profit
sharing plan. See "-- Profit Sharing Plan" below.
Profit Sharing Plan.
In 1985, we 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
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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 our Employee Incentive Stock Option 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 Thermwood. 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 us, he has the right to exercise his accrued
options within 30 days after such termination. However, we 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 Thermwood's shares on the date the option is granted. However,
options granted to persons owning more than 10% of our voting shares 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, which is
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 may not exceed $100,000. Options must be
granted within ten years from the effective date of the Qualified Plan.
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 or
decreasing the number of shares issuable thereunder and reducing or increasing
the exercise price of such options, under certain conditions. The life term of
the Qualified Plan extends to December 3, 2000, or such earlier date as the
Board of Directors may determine. Any option outstanding at the termination date
will remain outstanding thereafter until it expires or is exercised in full,
whichever occurs first.
Between December 1991 and August 1997, we granted ten year options to
acquire 50,600 shares of our common stock at exercisable prices ranging from
$5.00 to $10.66 under the Qualified Plan to 20 of our employees. All of these
options are exercisable as of the date hereof.
Non-Qualified Stock Option Plan.
Under our Non-qualified Stock Option Plan , options to purchase a maximum
of 70,000 shares of our common stock may be granted to officers, directors, and
other key employees.
54
<PAGE> 56
The Non-qualified Stock Option 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 our consent or his employment or tenure is terminated by us 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, the optionee's estate or heirs
have one year to exercise his or her accrued options.
The Committee may grant an optionee the right to surrender all or a portion
of his or her accrued options to us 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 our employ for at least one year from the date of its grant. Under
the Non-qualified Stock Option 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 current 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 we will not be entitled to any deduction at that time.
When an optionee exercises his or her option, ordinary income will be realized
by him or her, measured by the excess of the fair market value of the shares
over the price paid for the shares. We 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 or her option for a cash or common stock payment,
he or she will realize ordinary income in the amount of cash or fair market
value of stock received. We 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 our common stock at
exercisable prices between $5.63 and $10.00 per share have been granted under
the Non-qualified Stock Option Plan to four of our directors and officers.
Currently, all of these options are exercisable.
Other Options
There are options to purchase an additional 120,000 shares held by our
President. These option extend through October 18, 2005 and permit the purchase
of 60,000 shares at $15.00 per share and 60,000 shares at $30.00 per share.
Effect of Exchange Offer on Outstanding Options
The exchange offer will have no effect on our Qualified and Non-Qualified
options.
55
<PAGE> 57
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding our common
stock ownership, including shares issuable upon conversion of outstanding
debentures and upon exercise of options owned as of March 11, 1999 by
(a) each person known by us to own beneficially more than 5% of our
outstanding common stock,
(b) each director, and
(c) all officers and directors as a group.
Percentages before tender are based upon 1,444,709 shares issued and
outstanding as of March 11, 1999. Percentages after tender assume that we
received 750,000 shares in the exchange offer. We do not know how many shares
actually will be tendered. Accordingly, percentages after tender may differ.
Except as set forth in footnote 2, the person indicated in the table
beneficially owns all of the shares listed and has the sole voting and
investment power with regard to such shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES TOTAL
OWNED OUTSTANDING
PERCENTAGE OF INCLUDING SHARES OWNED
TOTAL THOSE INCLUDING SUCH
OUTSTANDING UNDERLYING UNDERLYING
SHARES OWNED EXERCISABLE SHARES
---------------- OPTIONS AND ----------------
NAMES AND ADDRESSES SHARES BEFORE AFTER CONVERTIBLE BEFORE AFTER
OF BENEFICIAL OWNERS OWNED TENDER TENDER DEBENTURES TENDER TENDER
- -------------------- ------------ ------ ------ --------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Kenneth J. Susnjara And Linda
Susnjara(1)............................ 261,420(2) 18.1% 37.6% 411,420(2) 25.8% 48.7%
Edgar Mulzer............................. 208,052(3) 14.4% 29.9% 218,052 15.0% 30.9%
401 10th Street
Tell City, Indiana 47586
Peter N. Lalos........................... 8,000 * 1.2% 22,000 1.5% 3.1%
14312 Darnstown Rd
Gaithersburg, MD 20878
Lee Ray Olinger.......................... 400 * * 400 * *
c/o First Bank of Huntingburg
4th and Main Street
Huntingburg, IN 47542
Rebecca F. Fuller(1)..................... 600 * * 2,600 * *
Michael P. Hardesty(1)................... 400 * * 8,400 * *
David J. Hildenbrand (1)................. 1,200 * * 6,600 * *
Richard Kasten (1)....................... 950 * * 950 * *
Donald L. Uebelhor (1)................... 400 * * 6,000 * *
All Officers and Directors As a Group (10
persons)............................... 481,422 33.3% 69.3% 676,422 41.3% 76.0%
</TABLE>
- ---------------
* Less than one percent.
(1) The address of these shareholders is care of Thermwood, Old Buffaloville
Road, PO. Box 436, Dale, Indiana 47523.
(2) These shares are owned jointly by Mr. and Mrs. Susnjara who are husband and
wife. Accordingly, each may be deemed to be a beneficial owner of the
securities owned by the other.
(3) Mr. Mulzer has given us an option to purchase all of these shares during the
two year period commencing on January 1, 2002. Please read the information
under the heading "Certain Relationships and Related Transactions" for an
illustration of how exercise of that option would affect ownership and
control of Thermwood.
56
<PAGE> 58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH EDGAR MULZER
On February 4, 1999, Edgar Mulzer, a director and major shareholder of
Thermwood who is not active in our management, gave us an option to purchase his
209,000 shares at a price of $15.00 per share. We can exercise this option at
any time after January 1, 2002 and before January 1, 2004. We paid Mr. Mulzer
$5,000 for this option. We have secured this option to further our plans to
assure that control of Thermwood remains with Kenneth and Linda Susnjara. The
following chart illustrates our ownership, assuming that
- we acquire 750,000 shares in this exchange offer;
- None of the 210,600 outstanding options to purchase common stock,
including options held by the Susnjaras to purchase up to 150,000 shares,
are exercised; and
- None of the outstanding debentures which are convertible into an
aggregate of 22,600 shares are converted:
PERCENTAGE OF OWNERSHIP OF OUR VOTING STOCK
<TABLE>
<CAPTION>
BEFORE EXERCISE AFTER EXERCISE
SHAREHOLDER OF MULZER OPTION OF MULZER OPTION
- ----------- ---------------- ----------------
<S> <C> <C>
Kenneth and Linda Susnjara.................................. 37.6% 53.7%
Edgar Mulzer................................................ 29.9% 0
All Other Shareholders...................................... 32.5% 46.3%
</TABLE>
In February 1987, we purchased our premises from an independent third party
for $1,000,636 and simultaneously resold it to Mr. Mulzer for $1,800,000. At the
same time, we 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 us to pay all maintenance, taxes,
assessments, insurance premiums and utilities incurred in connection with the
operation of the premises. Pursuant to a related agreement, we had an option to
repurchase the premises from Mr. Mulzer, exercisable through February 2007, at
prices descending on an annual basis from $1,786,781 in 1987 to $240,000 in the
last year of the option.
In November 1993, an aggregate of $3,437,120 of debt, including the lease
payment obligation in the amount of $1,608,629, together with accrued interest
in the amount of $122,491, owed to him by us was converted into an aggregate of
1,000,000 shares of preferred stock. We acquired the right to title to our
premises upon this conversion and acquired title in October 1997.
The holder of the preferred stock was entitled to receive cumulative cash
dividends out of our net profits at the rate of $0.34 per share per annum,
payable monthly in equal installments within the first 15 days of each month for
the preceding month as directed by our Board of Directors. We had the right in
its sole discretion to redeem the stock at any time at $3.40 per share. We
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.
We redeemed all of the preferred stock in October 1997 and no further
dividends will be paid. We redeemed the stock with proceeds from a $3.5 million
line of credit with DuBois County Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
57
<PAGE> 59
TRANSACTIONS WITH THE SUSNJARAS
Mr. and Mrs. Susnjara are the owners of Automation Associates Incorporated,
a dealer of our industrial products. The distribution agreement between us and
Automated Associates contains the same terms and conditions as our agreements
with our other dealers. We sold no products to Automated Associates during
fiscal year 1998, but paid Automated Associates $627,816 in commissions during
the year for assisting in effecting sales of approximately $3,800,000. This
amount represents approximately 19% of our gross machine sales for fiscal year
1998. Automated Associates also leases space from us at what we believe is a
fair market rate. Rental payments were $2,400 during the 1998 fiscal year.
TRANSACTIONS WITH PETER LALOS
Lalos & Keegan, a law firm in which Mr. Lalos is the senior partner,
accrued fees of $95,000, $77,000 and $103,000, for the fiscal years 1998, 1997,
and 1996, respectively. All of these fees have been paid.
We believe that the terms of the transactions between us and our affiliated
parties as described in this section are as fair as those which we would have
obtained if these transactions had been effected with independent third parties.
Each transaction was approved by a majority of our disinterested directors. In
the future, all such transactions will continue to be approved by a majority of
our disinterested directors.
RECENT STOCK TRANSACTIONS BY AFFILIATES
We have not purchased any shares of our common stock since August 1, 1996.
Since August 1, 1996, Edgar Mulzer purchased on the open market 340 shares 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 our shares effected
by such individuals since August 1, 1996.
To our knowledge, neither Thermwood nor any of its affiliates, directors or
executive officers has purchased or sold any common stock in the last sixty
days.
DESCRIPTION OF SECURITIES
The following statements are brief summaries of certain provisions of our
Articles of Incorporation, By-Laws and other documents. Copies of these
corporate documents are incorporated by reference as exhibits to the
registration statement of which this prospectus is a part. To obtain copies of
these documents see "Where You Can Find More Information." These summaries are
qualified in their entirety by reference to documents filed as exhibits to the
registration statement.
COMMON STOCK
Description of General Terms
We are 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 our assets 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.
58
<PAGE> 60
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 Thermwood. In such event, the
holders of the remaining shares will not be able to elect any of the Directors.
Reserved Shares
As of March 11, 1999, we have reserved up to:
(a) 22,600 shares of common stock for issuance upon conversion of the
previously issued convertible debentures;
(b) 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;
(c) 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
(d) 120,000 shares for issuance upon exercise of options granted to Mr.
Susnjara, all of which are currently exercisable.
PREFERRED STOCK
We are 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 us as a means of resisting a change of control of
Thermwood and, therefore, could be considered an anti-takeover device. Our 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 is intended to
discourage abusive hostile tender offers for control of an Indiana corporation.
Because our common stock is registered under Section 12 of the Exchange Act, we
are 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.
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. We have not adopted
such a charter amendment.
59
<PAGE> 61
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
We have never paid any dividends on our common stock. The current policy of
the Board of Directors is to retain earnings, if any, to finance the operation
of our business. Accordingly, we do not anticipate that we will pay cash
dividends to the holders of our common stock in the foreseeable future.
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.
60
<PAGE> 62
PLAN OF DISTRIBUTION
Each broker-dealer that receives debentures for its own account in exchange
for shares 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. We have agreed that for a period of 90 days after
the expiration date, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resales.
We 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.
The debentures may be resold, at:
- market prices prevailing at the time of resale;
- 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 as that term is defined under the Securities Act. In addition, 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 a broker-dealer, by
acknowledging that it will deliver and by delivering a prospectus, will not be
deemed to admit that it is an underwriter within the meaning of the Securities
Act.
We 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 for a period of 90 days after the
expiration date.
We have agreed to pay all expenses incident to the exchange offer other
than commissions or concessions of any brokers or dealers and we will indemnify
debenture holders, including any broker-dealer, against certain liabilities,
including liabilities under the Securities Act.
Dirks & Company, Inc. 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. However, Dirks will not receive a fee for debentures issued
to shareholders whose total holdings are more than 10% of our outstanding
common stock. In addition, Dirks will receive reasonable accountable expenses,
which shall not exceed $25,000. In the event the exchange offer is not
consummated, Dirks may be entitled to receive reasonable accountable expenses,
which shall not exceed $50,000.
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 -- Risks Related to Acquisition of Debentures; There Is No Public
Market For The Debentures. If One Develops, It May Not Be Liquid."
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
61
<PAGE> 63
Thermwood. Richard Reichler, Esq., 190 Willis Avenue, Mineola, New York 11501,
will deliver an opinion as to the Federal income tax consequences of the
exchange offer to shareholders.
EXPERTS
The Consolidated Financial Statements of Thermwood 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 LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
62
<PAGE> 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF THERMWOOD CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C>
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 -- Three
Months ended October 31 1998 and 1997 (Unaudited)......... F-17
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-18
</TABLE>
63
<PAGE> 65
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> 66
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
F-2
<PAGE> 67
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
JULY 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 68
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> 69
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED 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> 70
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
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> 71
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 years 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> 72
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The carrying value of property and equipment is assessed when factors
indicating an impairment are present. If an impairment is present, the assets
are reported at the lower of carrying value of fair value. Depreciation and
amortization are computed by the straight-line method over the estimated useful
lives of the assets, as shown below:
<TABLE>
<S> <C>
Buildings and improvements.......................... 10 to 30 years
Equipment........................................... 3 to 10 years
</TABLE>
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
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
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>
F-8
<PAGE> 73
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE B -- INVENTORIES:
Inventories at July 31 consist of:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
NOTE C -- LEASES:
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:
<TABLE>
<CAPTION>
YEARS ENDING JULY 31:
---------------------
<S> <C>
1999.................................................... $118,700
2000.................................................... 118,700
2001.................................................... 118,700
2002.................................................... 1,200
2003.................................................... 1,200
</TABLE>
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.
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
F-9
<PAGE> 74
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
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.
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
F-10
<PAGE> 75
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES 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
H). 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 15 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.
NOTE H -- RELATED PARTY TRANSACTIONS:
Director and shareholder -- The Company leased land, building and
improvements under a capital lease from a director/shareholder and a leasing
company owned by this director with an original 20 year term through February
2007. 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. Upon conversion, the Company acquired
the right to clear title to the property, and in October 1997, title was
transferred. 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.
F-11
<PAGE> 76
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 77
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of significant temporary differences represented by
deferred tax assets and deferred tax liabilities at July 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C> <C>
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
========= ==========
</TABLE>
At July 31, 1998, the Company had the following carryforwards for tax
purposes:
<TABLE>
<S> <C>
Net operating loss carryforwards expiring in
2008-2009............................................. $529,000
General business credits expiring in 1998-2001.......... $ 14,000
</TABLE>
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.
NOTE J -- ADDITIONAL INFORMATION:
Other accrued liabilities at July 31 consist of:
<TABLE>
<CAPTION>
1998 1997
-------- ----------
<S> <C> <C>
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
======== ==========
</TABLE>
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.
F-13
<PAGE> 78
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 79
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31 JULY 31
1998 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-15
<PAGE> 80
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
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
</TABLE>
See notes to condensed consolidated financial statements.
F-16
<PAGE> 81
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
-----------------------
1998 1997
-------- -----------
<S> <C> <C>
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
======== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE> 82
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, which consist 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 our 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.
Components of inventories:
<TABLE>
<CAPTION>
OCTOBER 31 JULY 31
1998 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
NOTE C -- RECLASSIFICATIONS
Certain amounts presented in the prior year condensed consolidated
financial statements have been reclassified to conform to the current year
presentation.
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
F-18
<PAGE> 83
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings:
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> 84
- ------------------------------------------------------
- ------------------------------------------------------
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
How To Obtain Copies of Documents That
Are Summarized In This Prospectus... 2
Prospectus Summary.................... 3
Summary Consolidated Financial Data... 5
Risk Factors.......................... 6
Capitalization........................ 12
Market for Our Common Equity and
Related Shareholder Matters......... 12
Exchange Offer........................ 13
Federal Income Tax Consequences....... 27
Description of the Debenture And the
Indenture........................... 31
Selected Consolidated Financial
Data................................ 36
Management's Discussion and Analysis
Of Financial Condition and Results
Of Operations....................... 37
Business.............................. 44
Where You Can Find More Information... 51
Management............................ 52
Principal Shareholders and Ownership
Of Management....................... 56
Certain Relationships and Related
Transactions........................ 57
Description of Securities............. 58
Plan of Distribution.................. 61
Legal Matters......................... 61
Experts............................... 62
Financial Statements.................. F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
THERMWOOD
CORPORATION
$8,250,000
12% JUNIOR DEBENTURES
DUE 2014
PROSPECTUS
THE SOLICITATION AGENT
FOR THE OFFER IS
DIRKS & COMPANY, INC
MARCH , 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 37 of the Indiana Business Corporation Law provides for
indemnification by an Indiana corporation of an individual made a party to a
proceeding because the individual was or is a director or officer of that
corporation if:
(1) the individual's conduct was in good faith; and
(2) the individual reasonably believed:
(A) in the case of conduct in the individual's official capacity with
the corporation, that the individual's conduct was in the corporation's
best interest; and
(B) in all other cases, that the individual's conduct was at least not
opposed to the corporation's best interest; and
(3) in the case of any criminal proceeding, the individual either:
(A) had reasonable cause to believe that the individual's conduct was
lawful; or
(B) had no reasonable cause to believe that the individual's conduct was
unlawful.
The Company maintains insurance to cover the Company's directors and
executive officers for liabilities which may be incurred by the Company's
directors and executive officers in the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
1 Revised Proposed Solicitation Agent Agreement with Dirks &
Company, Inc.*
3.1 Articles of Incorporation of Registrant, as amended through
December 15, 1993.(1)
3.2 Amendment to Articles of Incorporation of Registrant dated
December 16, 1993.(1)
3.3 Restated and amended By-Laws of Registrant as amended
through October 21, 1992.(1)
4.1 12% Convertible Debenture Due February 25, 2003.(1)
4.2 Indenture with American Stock Transfer and Trust Company
concerning the 12% Convertible Debentures Due February 25,
2003.(1)
4.3 12% Debenture Due 2014 (contained in Exhibit 4.4).
4.4 Revised Indenture with American Stock Transfer and Trust
Company concerning the 12% Debentures Due 2014.*
5.1 Opinion Re legality.*
8.1 Opinion Re tax matters.
10.1 DuBois County Bank $3,500,000 credit documents.*
10.2 Form of Amended Authorized Dealer Agreement between the
Registrant and its dealers.*
10.3 Form of Amended Distributor Sales Agreement between the
Registrant and its distributors.*
10.4 Copy of Dealer/Distribution Agreement between the Registrant
and Automation Associates, Inc. dated May 21, 1985.*
10.5 Form of quotation and Purchase Agreement between the
Registrant and its customers.*
10.6 Form of Extended Parts Warranty Agreement Terms and
Conditions between the Registrant and its customers.*
10.7 Form of quotation and Lease Agreement between the Registrant
and its lessees.*
10.8 Registrant's Qualified Incentive Stock Option Plan.(2)
10.9 Registrant's Non-Qualified Stock Option Plan.(2)
10.10 Lease Agreement between the Registrant and Edgar Mulzer
dated February 13, 1987.*
10.11 Letter from Edgar Mulzer to the Registrant offering to
purchase premises dated February 6, 1987.*
10.12 Letter from the Registrant to Edgar Mulzer accepting such
offer dated February 13, 1987.*
</TABLE>
II-1
<PAGE> 86
<TABLE>
<S> <C>
10.13 Land Contract between Edgar Mulzer and the Registrant dated
February 13, 1987.*
10.14 Lease Agreement between the Huntingburg Townhouses, Inc. and
the Registrant dated March 27, 1989.*
10.15 Lease Agreements between the Huntingburg Townhouses, Inc.
and the Registrant dated December 18, 1990.*
10.16 Agreement between the Registrant and Edgar Mulzer dated
October 23, 1992 relating to the Premises Lease.*
10.17 Agreement between the Registrant and Huntingburg Townhouses,
Inc. dated October 23, 1992 relating to certain equipment
leases.*
10.18 Agreement between Registrant and Edgar Mulzer dated November
18, 1993 related to conversion of debt and lease obligation
to preferred stock.*
10.19 Thermwood Option to Purchase Edgar Mulzer's shares.*
21.1 List of Subsidiaries of Thermwood.*
22.1 Consent of Barry Feiner, Esq. (filed as part of Exhibit
5.1).
22.1 Consent of Richard Reichler, Esq. (filed as part of Exhibit
8.1).
22.3 Consent of KPMG LLP.
24.1 Power of Attorney (included after signature page).*
25.1 Statement of Eligibility of Trustee on Form T-1 related to
the Debentures.*
27.1 Financial Data Schedule.*
99.1 Revised Form of Letter of Transmittal.
99.2 Intentionally omitted.
99.3 Revised Exchange Agreement with American Stock Transfer.*
</TABLE>
- ---------------
* Previously filed.
(1) Previously filed as an Exhibit to the Registrant's Registration Statement on
Form SB-2, SEC file No. 33-54756 filed with the SEC on or about November 20,
1992, as amended, and incorporated by this reference herein.
(2) Previously filed as an exhibit to the Registrant's prior Schedule 13E-3
filed with the SEC on September 4, 1998, and incorporated herein by this
reference.
(3) Previously filed as an Exhibit to the Registrant's Form 10-K for the fiscal
year ended July 31, 1998, SEC file No. 0-12195, filed with the SEC on
October 29, 1998, and incorporated by this reference herein.
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B for a Registration Statement on Form S-4.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
II-2
<PAGE> 87
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrants pursuant to the provisions described under Item 20 or
otherwise, the registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the
registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrants
will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue; and
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of
this form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
II-3
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Dale
and the State of Indiana on March 11, 1999.
<TABLE>
<S> <C>
THERMWOOD CORPORATION
Date: March 11, 1999 /s/ KENNETH J. SUSNJARA
-----------------------------------------------------
Kenneth J. Susnjara, Chairman of the Board
and President (Principle Executive Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 2 to the registration statement has been signed by the following persons on
behalf of Thermwood and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 11, 1999 /s/ KENNETH J. SUSNJARA
-----------------------------------------------------
Kenneth J. Susnjara, Chairman of the Board
and President (Principal Executive Officer)
Date: March 11, 1999 /s/ REBECCA F. FULLER
-----------------------------------------------------
Rebecca F. Fuller, Treasurer (Principal Financial
and Accounting Officer)
Date: March 11, 1999 /s/ LINDA S. SUSNJARA
-----------------------------------------------------
Linda S. Susnjara, Secretary and Director
Date: March 11, 1999 *
-----------------------------------------------------
Peter N. Lalos, Director
Date: March 11, 1999 *
-----------------------------------------------------
Edgar Mulzer, Director
Date: March 11, 1999 *
-----------------------------------------------------
Lee Ray Olinger, Director
* By: /s/ KENNETH J. SUSNJARA
---------------------------------------------------------------------
Kenneth J. Susnjara
Attorney-in-Fact, pursuant to the
Power of attorney previously filed as
Part of this registration statement
</TABLE>
II-4
<PAGE> 1
[LETTERHEAD OF
MELTZER, LIPPE, GOLDSTEIN, WOLF & SCHLISSEL, P.C.]
March 12, 1999
Thermwood
Old Buffaloville Road
Dale, Indiana 47523
Gentlemen:
You have asked for my opinion regarding the principal Federal income
tax consequences to shareholders who participate in the exchange offer by
Thermwood Corporation. My opinion deals with the salient Federal income tax
issues with respect to individuals who are citizens and residents of the United
States. My opinion does not deal with State tax law consequences. Also, my
opinion does not deal with the tax treatment of employee stock option holders
who tender their options or stock acquired by reason of the exercise of employee
stock options, it being my understanding that this will not occur.
Pursuant to the prospectus describing the exchange offer, Thermwood
intends to issue 15-year debentures to each tendering shareholder in the
principal amount of $11.00, times the number of shares that Thermwood will
acquire from each such shareholder. Thermwood intends to acquire all shares
tendered unless it receives valid tenders for more than 750,000 shares. If
Thermwood receives tenders for more than 750,000 shares, after accepting tenders
from shareholders who own less than 100 shares and tender all of their shares,
it will pro rate the number of tendered shares it will exchange from each
tendering shareholder. Thus, it is possible for shareholders to transfer some or
all of their stock pursuant to the offer and it is also possible that,
notwithstanding a shareholders desire to sell all of his or her shares,
Thermwood will only purchase a pro rata portion of such shares.
When a shareholder transfers stock to the issuing corporation in
exchange for money or other property, depending on the facts and circumstances
of each case, the transaction may resemble either an ordinary sale of stock to
an outsider at arm's-length or the receipt by the shareholder of a distribution
from the corporation that may be a dividend depending on corporate current and
accumulated earnings and profits. In determining whether the transaction is a
redemption or a distribution, the rules of Section 302 of the Code apply.
(Unless otherwise specified, any
<PAGE> 2
section referred to in this opinion is a section of the Internal Revenue Code of
1986, as amended.)
Section 302(a) provides that if the redemption satisfies any one of the
four tests contained in section 302(b), the redemption will be treated as a
distribution in part or full payment in exchange for the stock (i.e., as a sale
transaction). If none of the Section 302(b) tests are satisfied, section 302(d)
provides that the redemption will be treated as a distribution of property to
which Section 301 applies. The four tests of Section 302(b) for exchange
treatment are:
1. A redemption that is not essentially equivalent to a dividend under
Section 302(b)(1);
2. A substantially disproportionate redemption under Section 302(b)(2);
3. A redemption of all the shareholder's stock under Section 302(b)(3);
4. A partial liquidation for non-corporate shareholders described in
Section 302(b)(4). Based on the facts in the proposed transaction, the
redemption will not be a partial liquidation since the change in share ownership
is not related to a contraction of the business.
The four tests 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.
The tests of Section 302 are applied at the time "the redemption"
occurs. The time that a redemption occurs is not always easy to pinpoint and the
case law has not yet produced consistently applied rules for determining such
time. However, based on the facts in the instant case, it would appear that the
surrender by a shareholder owning less than 100 shares of his stock will be the
time the redemption takes place with respect to them and for other shareholders
it will be the time that Thermwood determines the number of shares it will
redeem. Cf. Lisle v. Comma'r. TC Memo 1976-140.
Attribution Rules
In determining whether a redemption qualifies as an exchange under
Sections 302(b)(1) through 302(b)(3), which are concerned with the degree of
decrease in the shareholder's voting control of the corporation, the
constructive ownership rules of Section 318(a) must be taken into account. These
rules attribute stock
2
<PAGE> 3
owned by one person to another on the basis of various relationships. By virtue
of Section 318(a), a taxpayer is considered to own stock owned by various other
persons or entities. The types of attribution prescribed by Section 318 may be
divided into attribution (1) from one member of a family to another; (2) from an
entity, such as a trust or corporation, to persons beneficially interested in
such entity or vice versa; and (3) from an entity to its owners or beneficiaries
and from them to members of their family (or, conversely, from family members to
beneficiaries and thence up to the entity). There are also rules which determine
when options to acquire stock will be treated as ownership of the stock subject
to the option.
In general, the constructive ownership rules have a material impact on
redemptions from members of the family that own closely held businesses and,
therefore, should not be expected to have an impact on transactions involving
non-family owners of a company, whose stock is publicly traded, such as
Thermwood.
Redemption with Debentures
In certain cases in which debentures or other credit instruments are
exchanged for stock, the Internal Revenue Service has been reluctant to approve
such redemptions if there is either a possibility of recapture of the redeemed
stock upon default by the corporation or where the payout term is unreasonably
long. See, e.g., Rev. Proc. 93-3 1993-1 IRB 71. However, the courts have held
even under those circumstances that a shareholder's proprietary interest is
terminated. See, for example, Estate of Mathis, 47 T.C. 248 (1966) (acq); see,
also, Gordon Erickson, 56 T.C. 1112 (1971) (Acq.). It is my opinion, based on
the facts of the exchange of Thermwood stock for the debentures to be issued by
Thermwood, that the transaction will be treated as a reduction in the stock
ownership of the exchanging shareholders.
Substantially Disproportionate Redemptions -- Section 302(b)(2)
Section 302(b)(2) treats a "substantially disproportionate" redemption
as a sale of stock rather than as a Section 301 ordinary dividend distribution.
In order to qualify as substantially disproportionate, the redemption must
satisfy three requirements:
1. Immediately after the redemption, the shareholder must own less than
50 percent of the total combined voting power of all classes of outstanding
stock entitled to vote;
2. The shareholder's percentage of the total outstanding voting stock
immediately after the redemption must be less than 80 percent of his percentage
of ownership of such stock immediately before the redemption; and
3
<PAGE> 4
3. The shareholder's percentage of outstanding common stock (voting or
non-voting) after the redemption must be less than 80 percent of the
shareholder's percentage of ownership before the redemption.
Based on the anticipated share ownership after the redemption, the test
described in 1 above will be met as to all tendering shareholders. However,
tests 2 and 3 above are applied on a shareholder-by-shareholder basis. In making
the calculation, Section 302(b)(2) is applied by reference to the total shares
left outstanding after all shares exchanged in the redemption are taken into
account. Therefore, depending upon the number of shares tendered and redeemed by
Thermwood, the redemption may be substantially disproportionate as to one
shareholder but not to others. As noted above, the constructive ownership rules
of Section 318 are applicable in determining whether a redemption is
substantially disproportionate under Section 302(b)(2). Assuming that the
constructive ownership rules do not apply to a particular shareholder, the
shareholder can readily calculate whether the reduction in his or her ownership
meets the mathematical tests of Section 302(b)(2) after determining the numbers
of Thermwood shares remaining outstanding after the transaction. In addition,
assuming the constructive ownership rules do not apply, any shareholder who owns
less than 100 shares and tenders all of their shares, the redemption will be
treated as a sale or exchange under both Section 302(b)(2) and Section 302(b)(3)
discussed below.
Termination of Shareholders Entire Interest Under Section 302(b)(3)
Section 302(b)(3) provides that a redemption must be treated as a sale
if it "is in complete redemption of all of the stock of the corporation owned by
the shareholder." If unrelated persons own the stock which is being redeemed, a
redemption of all of the voting stock of such a shareholder will qualify under
Section 302(b)(2) described hereinbefore and should also qualify under Section
302(b)(3). However, in order to qualify under Section 302(b)(3), a redemption
must completely terminate the shareholder's proprietary interest in the
corporation. Thus, if a shareholder does not tender all of his or her shares, or
if Thermwood pro rates its acquisition of such shareholders shares because more
than 750,000 shares are tendered, Section 302(b)(3) would not apply to the
exchange.
Redemptions Not Essentially Equivalent to Dividends under Section
302(b)(1)
Section 302(b)(1) provides that a redemption will be treated as a sale
of the redeemed stock if it is not "essentially equivalent to a dividend." Under
this provision, a redemption
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<PAGE> 5
that fails to qualify for exchange treatment under Section 302(b)(2)
(substantially disproportionate redemption or Section 302(b)(3) (complete
termination of shareholder's interest) can qualify by satisfying the standards
of Section 302(b)(1). The major Supreme Court case in the area of Section
302(b)(1) redemptions is U.S. v. Davis 397 U.S. 301 reg'g denied 392 U.S. 1021
(1970). The Court stated that the basic test under Section 302(b)(1) is whether
the redemption results "in a meaningful reduction of the shareholder's
proportionate interest in the corporation." No guidelines were furnished,
however as to when a reduction in interest is "meaningful."
A redemption is tested under Section 302(b)(1) solely by reference to
the shareholder's stock ownership, and the attributes of such ownership, before
and after the exchange. A redemption can be described in Section 302(b)(1), even
if the shareholder retains an interest in the corporation, either directly or by
attribution. The only requirement under Section 302(b)(1) 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
interest.
Consequences of Section 301 Treatment
If none of the tests of Section 302(b) are satisfied, Section 302(d)
provides that the redemption will be treated as a distribution to which Section
301 applies. A Section 301 distribution is a "dividend" if made by a corporation
"out of" earnings and profits (E&P) accumulated after February 13, 1913 (or such
fewer years as a company has been in business), or "out of" E&P of the taxable
year. See Sections 301(c)(1) and 316(a). To the extent the amount of the
distribution exceeds E&P, Section 301(c)(2) provides that the balance of the
distribution "shall be applied against and reduce the adjusted basis of the
stock." Next, under Section 301(c)(3)(A), the portion of the distribution "which
is a dividend, to the extent that it exceeds the adjusted basis of the stock,
shall be treated as gain from the sale or exchange of property." In most
situations, if the stock is a capital asset in the shareholder's hands and if
the required holding period is satisfied, any gain under Section 301(c)(3)(A)
will be long-term capital gain.
The language of Section 301(c) does not make clear whether, before
reporting capital gain, the shareholder can "recover' tax free his aggregate
basis in all the stock he owns in the corporation, or whether he must apply the
basis recovery rule share-by-share on block-by-block in situations where the
shareholder acquired his shares at different cost bases. The weight of authority
appears to require the recipient of a Section 301 distribution first to apply it
against his ratable share of E&P (determined by reference to the shareholder's
total percentage
5
<PAGE> 6
interest in the corporation); then, to apply the balance of the distribution as
a non-taxable "recovery" of his cost basis in his stock -- for this purpose,
allocating the distribution between or among different blocks acquired at
different bases; and, finally, to report any unabsorbed balance as a gain from
the sale or exchange of property. See, e.g., Johnson v. U.S., 435 F.2d 1257 (4th
Cir. 1971) rev'g 303 F.Supp 1 (E.D. Va. 1969).
Some commentators believe, however, that "plausible" arguments could be
advanced for allowing a shareholder to recover his aggregate basis under Section
301(c)(2) before capital gain must be reported under Section 301(c)(3). See,
Bittker J. Eustice, Federal Income Taxation of Corporations and Shareholders, P.
7.02 (6th Ed. 1994)
In summary, shareholders of Thermwood tendering their shares in
exchange for its debentures will be able to determine whether the transaction
will be treated as a sale or exchange of their shares by determining whether
they satisfy the mathematical test of Section 302(b)(2). If they do not, they
will still qualify for sale or exchange treatment under Section 302(b)(1) if
they have reduced their stock interest sufficiently to persuade the Service that
there has been a "meaningful reduction" with such interest.
As a statutorily deemed "exchange" transaction, the redemption is
subject to the provisions of Section 1001 of the Code. The shareholder's gain or
loss is computed as if the stock were sold to a third party. Thus, the amount
received for the stock in the case of a cash basis taxpayer will be equal to the
fair market value of the debenture, rather than its face amount. A different
measurement amount realized applies, according to the IRS, to shareholders,
individual or corporate, using the accrual method of accounting. Accrual method
taxpayers who sell property and receive a debt instrument of the acquirer must
take the obligation into account at its face amount rather than at its fair
market value whether the transaction is treated as an exchange or a
distribution.
Section 483 of the Code denies installment reporting treatment, among
other things, to the purchase of publicly traded stock. See, Section
453(k)(2)(A). Accordingly, shareholders will be required to report income from
the exchange prior to the receipt of payments of the principal of the
debentures.
Capital Gains, etc.
As a statutorily deemed "exchange" transaction a redemption is subject
to the provisions of Section 1001. Under 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
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<PAGE> 7
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, 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 Opinion and should be discussed with a personal tax advisor.
Original Issues Discount
The debentures can be expected to be subject to the original issue
discount tax rules, since there is an expectation that the debentures will sell
at a discount to their face amount. The effect of the OID rules is to treat the
borrower (Thermwood) as having paid semi-annually to the lender (the debenture
holder) the interest accruing on the outstanding principal balance of the loan.
In general, the effect of OID is to permit the borrower to deduct as interest
expense and to require the lender (the debenture holder) to include in income as
interest, amounts of OID which have accrued but which have not been paid. Thus,
the holder of the debt instrument if taxable may have to include in income for
tax purposes interest in excess of the cash interest payment payable under the
debenture.
The debenture is subject to the operative rules of Section 1272 and
163(e)(1) only if there is OID on the instrument. There is OID on the instrument
if its "stated redemption price at maturity" exceeds its "issue price." A de
minimus exception provides that OID is deemed to be zero if this excess is less
than one quarter of one percent, multiplied by the number of complete years from
issue to maturity.
The regulations define the "stated redemption price at maturity" as the
sum of all payments provided by the debt instrument other than qualified stated
interest payments. Regs. Section 11273-1(b). Thus, the issue price of the
debentures can
7
<PAGE> 8
be expected to be eleven dollars multiplied by the number of shares redeemed.
It is expected that both the Thermwood stock and the Thermwood
debentures will be traded on an established market as that term is defined in
Section 1.1273-2(f)(3) of the Income Tax Regulations. In such a case, Regulation
Sections 1.1273-2(f) and 1.1273-2(b)(1), provide that the issue price for the
purpose of determining OID of a debenture is the fair market value of the debt
instrument, determined as of the date the debentures are issued.
Under Sections 163(e)(1) and 1726(a), original issue discount ("OID")
is allocated on a constant - interest or economic yield basis over the life of
the debt instrument (i.e., the Thermwood debenture). The premise of the OID
rules is that, for Federal income tax purposes, an obligation issued at a
discount should be treated like an obligation issued at par requiring the
current payments of interest. Accordingly, the effect of the OID rules is to
treat the borrower as having paid semi-annually to the lender the interest
accruing on the outstanding principal balance of the loan, thereby permitting
the borrower to deduct as interest expense and requiring the lender to include
in income such interest which has accrued but is unpaid. The lender is then
deemed to have lent the accrued interest back to the borrower, who in subsequent
periods is deemed to pay interest on this amount as well as the principal
balance.
If there is a difference between the issue price and the stated
redemption price at maturity of the debentures and the difference is not de
minimus, the total OID is first allocated among accrual periods and then is
prorated on a daily basis within each period. For each taxable year, a holder
usually must include in gross income the OID assigned to those days within the
taxable year on which the instrument was held.
A holder's basis for a debt instrument is increased under Section
1272(d)(2) by all OID included in the holder's gross income under these rules.
Thus, a holder who buys at original issue and holds to maturity has no gain or
loss when the instrument is paid, since the OID will already have been taken
into account. The holder similarly has no gain or loss on a sale before
maturity, provided the sale price equals the issue price of the bonds plus the
accrued OID. Otherwise, the holder will ordinarily realize capital gain or loss
on the sale.
If an OID instrument is transferred by the original holder during its
term, the OID is not recomputed to reflect the premium paid by the buyer for the
increase in the bonds value. Instead, the transferee steps into the original
holder's shoes and continues to report the OID as originally determined.
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<PAGE> 9
Accordingly, the presence of OID in a debt instrument could have an impact on
its marketability.
Congress has singled out certain high yield OID debt obligations for
special adverse tax treatment to the issuer. These debt obligations are called
"applicable high yield discount obligations." (AHYDO). Section 163(e)(5)(ii)
provides that the corporate issuer must defer the deductibility of its interest
on the obligation until actual payment. Section 163(e)(5)(A)(i) also treats
"excessive" OID (i.e., OID in excess of six points over the applicable federal
rate on these obligations as a nondeductible dividend equivalent amount, but
allows corporate holders to claim the Section 243 dividends - received deduction
on such amounts under Section 163(e)(5)(B). These changes do not change the
requirement that the holder include OID income as it accrues as discussed
hereinbefore.
The general rule is that an "applicable high yield debt instrument" is
one which:
(1) has a maturity date more than five (5) years from the date of
issue;
(2) The yield to maturity on the instrument must equal or exceed the
sum of the applicable Federal rate for the calendar month in which the
obligation is issued plus five percentage points, and
(3) has significant OID. An instrument has significant OID if the
aggregate amount that would be includible in gross income with respect to the
instrument before the close of any accrual period ending more than five years
after the date of issue exceeds the sum of (a) the aggregate amount of interest
not be paid under the instrument before the close of such accrual period and (2)
the product of the issue price of such instrument and its yield to maturity.
Market Discount
In 1984, Congress enacted Sections 1276 and 1278 which require gain on
the disposition of market discount bonds to be reported as ordinary income to
the extent of the accrued market discount. Sections 1276 and 1278 apply to any
"market discount bond" defined to include debentures if its stated redemption
price at maturity exceeds its basis immediately after acquisition by more than a
de minimus amount. In computing market discount Section 1278(a)(2)(B) makes an
adjustment for any OID that accrues (and hence, is taxable) between the
taxpayer's acquisition of the instrument and the instruments maturity.
Section 1278(a)(1)(D) generally excludes bonds acquired at original
issue from the market discount rules described above and
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<PAGE> 10
that exclusion will apply to the acquisition of Thermwood debentures by
tendering shareholders at the initial issuance of such debentures.
I hereby consent to the filing of this Opinion as an exhibit to the
Registration Statement and to the reference to me under the heading "Legal
Matters" in the Prospectus included in the Registration Statement. In giving
such consent, I do not thereby admit that I am an "expert" within the meaning of
the Act or the rules and regulations of the Securities and Exchange Commission
issued thereunder with respect to any part of the Registration Statement,
including this exhibit.
Very truly yours,
/s/Richard Reichler
RR/sbk
10
<PAGE> 1
[KPMG LETTERHEAD]
Consent of KPMG LLP
The Board of Directors
Thermwood Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Indianapolis, Indiana
March 12, 1999
<PAGE> 1
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL 21,
1999 UNLESS EXTENDED OR TERMINATED (THE "EXPIRATION DATE").
LETTER OF TRANSMITTAL
THERMWOOD CORPORATION
OFFER TO EXCHANGE
UP TO $8,250,000 AGGREGATE PRINCIPAL AMOUNT OF ITS 12% SUBORDINATED DEBENTURES
DUE 2014 FOR UP TO 750,000 SHARES OF ITS OUTSTANDING COMMON STOCK, NO PAR VALUE
PURSUANT TO THE PROSPECTUS DATED MARCH 16, 1999
The Exchange Agent for the Exchange Offer is:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
<TABLE>
<S> <C>
By Mail, Hand or Overnight Courier: Facsimile Transmission Number
40 Wall Street (Eligible Institutions only):
New York, New York 10005 (718) 234-5001
(If by Mail, Registered or To Confirm Facsimile
Certified Mail Recommended) or for Information Call:
(718) 921-8200
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL (THE "LETTER OF TRANSMITTAL") TO AN
ADDRESS, OR TRANSMISSION VIA FACSIMILE TO A NUMBER, OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID TENDER OF THE THERMWOOD CORPORATION SHARES OF
COMMON STOCK, NO PAR VALUE (THE "SHARES").
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED AND SIGNED.
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CERTIFICATE(S) TENDERED
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (ATTACH ADDITIONAL SIGNED LIST IF NECESSARY)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NUMBER
OF SHARES NUMBER
CERTIFICATE REPRESENTED OF SHARES
NUMBER(S)* BY CERTIFICATE(S) TENDERED**
<S> <C> <C> <C>
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Please indicate in this column the certificate number(s) for each
certificate representing Shares you desire to tender.
** Please indicate in this column the number of Shares you wish to tender. If
nothing is indicated in this column, the total number of Shares evidenced
by each certificate delivered with this Letter of Transmittal will be
deemed to have been tendered.
- --------------------------------------------------------------------------------
5
<PAGE> 2
All capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Prospectus (as defined below).
This Letter of Transmittal is to be used by registered holders of Shares
("Holders") if: (i) certificates representing Shares are to be physically
delivered to the Exchange Agent by such Holders; (ii) tender of Shares is to be
made by book-entry transfer to the Exchange Agent's account at The Depository
Trust Company ("DTC" or the "Book-Entry Transfer Facility") pursuant to the
procedures set forth in the Prospectus, dated March 16, 1999 (as the same may be
amended from time to time, the "Prospectus") under the caption "The Exchange
Offer -- Procedures For Tendering -- Book-Entry Transfers" by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Shares or (iii) delivery of Shares is to be
made according to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer -- Guaranteed Delivery Procedures," and,
in each case, instructions are not being transmitted through the DTC.
Automated Tender Program. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER
FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned acknowledges receipt of the
Prospectus, dated March 16, 1999 (as the same may be amended from time to time,
the "Prospectus"), of Thermwood Corporation, an Indiana corporation (the
"Company"), and this Letter of Transmittal and the instructions hereto. The
Company is offering to exchange (the "Exchange Offer") for each Share tendered
to the Company in the Exchange Offer $11.00 principal amount of its 12%
Subordinated Debentures due 2014 (the "Debentures"), upon the terms and subject
to the conditions set forth in the Prospectus.
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the Shares indicated above. Subject
to, and effective upon, the acceptance for exchange of the Shares tendered
herewith, the undersigned hereby exchanges, assigns and transfers to, or upon
the order of, the Company all right, title and interest in and to such Shares.
The undersigned hereby irrevocably constitutes and appoints (the "power of
attorney") the Exchange Agent as the true and lawful agent and attorney-in-fact
of the undersigned (with full knowledge that the Exchange Agent also acts as the
agent of the Company) with respect to such Shares with full power of
substitution to (i) present such Shares and all evidences of transfer and
authenticity to, or transfer ownership of, such Shares on the account books
maintained by the Book-Entry Transfer Facility to, or upon the order of, the
Company; (ii) present such Shares for transfer of ownership on the books of the
Company; (iii) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Shares; and (iv) receive Debentures on behalf of
the undersigned and deliver the Debentures to the undersigned or pursuant to the
instructions of the undersigned as directed herein, all in accordance with the
terms and conditions of the Exchange Offer as described in the Prospectus.
The undersigned further authorizes and directs the Exchange Agent (i) to
determine, in its sole and absolute discretion, whether and the time and times
when, the purpose for and manner in which, any power conferred herein shall be
exercised and the conditions, provisions and covenants of any instrument or
document which may be executed by the Exchange Agent pursuant hereto and (ii) to
do all things and perform all acts pursuant to the terms of this Exchange Offer
as it may, in its sole and absolute discretion, deem appropriate, including,
without limitation, to execute and deliver all certificates, receipts,
instruments, letters of transmittal and other documents and papers required,
contemplated by, or deemed by it appropriate in connection with this Exchange
Offer to the Company, or to any other person as the Exchange Agent in its sole
and absolute discretion, shall deem necessary.
6
<PAGE> 3
The undersigned grants the power of attorney to the Exchange Agent subject
to and in consideration of the interests of the Company and Dirks & Company,
Inc. (the "Solicitation Agent") and acknowledges that the power of attorney is
an agency coupled with an interest and is irrevocable and not subject to
termination by the undersigned or by operation of law, whether by the death or
incapacity of the undersigned (or either or any of them) or by the occurrence of
any other event or events (including, without limitation, the termination of any
trust or estate for which the undersigned is acting as a fiduciary or
fiduciaries or the dissolution or liquidation of any corporation or
partnership), and the obligations of the undersigned pursuant to the Exchange
Offer are similarly not subject to termination and shall remain in full force
and effect during the period of the Exchange Offer and, to the extent provided
in the terms of the Exchange Offer, after such period. If the undersigned should
die or become incapacitated, if any such trust or estate should be terminated,
if any corporation or partnership should be dissolved or liquidated, or if any
other such event should occur, before the completion of the transactions
contemplated by the Exchange Offer and this Letter of Transmittal, certificates
representing the Shares to be exchanged by the undersigned shall be delivered by
the Exchange Agent on behalf of the undersigned in accordance with the terms and
conditions of the Exchange Offer and this Letter of Transmittal, and actions
taken by the Exchange Agent pursuant to this Letter of Transmittal shall be as
valid as if such death or incapacity, termination, dissolution, liquidation or
other event had not occurred, regardless of whether or not the Exchange Agent,
the Company, the Solicitation Agent, or any one of them, shall have received
notice of such death, incapacity, termination, dissolution, liquidation or other
event. Barry Feiner, Esq., counsel to the Company, has authority to instruct the
Exchange Agent on irregularities or discrepancies in Letters of Transmittal and
accompanying documents and the Exchange Agent is entitled to rely in good faith
on the advice of any such person in taking actions pursuant to such
instructions.
The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Shares tendered hereby
and to acquire Debentures issuable upon the exchange of such tendered Shares,
and that, when the same are accepted for exchange, the Company will acquire good
and unencumbered title to the tendered Shares, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim or
right. The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company to
be necessary or desirable to complete the exchange, assignment and transfer of
the Shares tendered hereby or transfer ownership of such Shares on the account
books maintained by the Book-Entry Transfer Facility.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer -- Conditions." The undersigned
recognizes that as a result of these conditions (which may be waived by the
Company, in whole or in part, in the reasonable discretion of the Company), as
more particularly set forth in the Prospectus, the Company may not be required
to exchange any of the Shares tendered hereby and, in such event, the Shares not
exchanged will be returned to the undersigned at the address shown above.
The undersigned, if the undersigned is a beneficial holder, represents (or,
if the undersigned is a broker, dealer, commercial bank, trust company or other
nominee, represents) that it has received representations from the beneficial
owners of the Shares (the "Beneficial Owner") stating that, if the Holder is a
broker-dealer that acquired Shares as a result of market-making activities or
other trading activities, it will deliver a Prospectus in connection with any
resale of Debentures acquired in the Exchange Offer (but by so acknowledging and
by delivering a Prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act).
7
<PAGE> 4
EACH BROKER-DEALER WHO ACQUIRED SHARES FOR ITS OWN ACCOUNT AS A RESULT OF
MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-
DEALER"), BY TENDERING SUCH SHARES AND EXECUTING THIS LETTER OF TRANSMITTAL,
AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY
EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR
INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR
WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER
TO MAKE THE STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE THEREIN, IN LIGHT
OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING, SUCH
PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF DEBENTURES PURSUANT TO THE
PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO
CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE DEBENTURES MAY BE RESUMED, AS THE CASE MAY BE.
EACH PARTICIPATING BROKER-DEALER SHOULD CHECK THE BOX HEREIN UNDER THE
CAPTION "FOR PARTICIPATING BROKER-DEALERS ONLY" IN ORDER TO RECEIVE ADDITIONAL
COPIES OF THE PROSPECTUS, AND ANY AMENDMENTS AND SUPPLEMENTS THERETO, FOR USE IN
CONNECTION WITH RESALES OF THE DEBENTURES, AS WELL AS ANY NOTICES FROM THE
COMPANY TO SUSPEND AND RESUME USE OF THE PROSPECTUS. BY TENDERING ITS SHARES AND
EXECUTING THIS LETTER OF TRANSMITTAL, EACH PARTICIPATING BROKER-DEALER AGREES TO
USE ITS REASONABLE BEST EFFORTS TO NOTIFY THE COMPANY OR THE EXCHANGE AGENT WHEN
IT HAS SOLD ALL OF ITS DEBENTURES. IF NO PARTICIPATING BROKER-DEALERS CHECK SUCH
BOX, OR IF ALL PARTICIPATING BROKER-DEALERS WHO HAVE CHECKED SUCH BOX
SUBSEQUENTLY NOTIFY THE COMPANY OR THE EXCHANGE AGENT THAT ALL THEIR DEBENTURES
HAVE BEEN SOLD, THE COMPANY WILL NOT BE REQUIRED TO MAINTAIN THE EFFECTIVENESS
OF THE EXCHANGE OFFER REGISTRATION STATEMENT OR TO UPDATE THE PROSPECTUS AND
WILL NOT PROVIDE ANY HOLDERS WITH ANY NOTICES TO SUSPEND OR RESUME USE OF THE
PROSPECTUS.
The undersigned understands that tenders of the Shares pursuant to any one
of the procedures described under "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company in accordance with the
terms and subject to the conditions of the Exchange Offer. All authority herein
conferred or agreed to be conferred by this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the heirs, legal
representatives, successors and assigns, executors, administrators and trustees
in bankruptcy of the undersigned and shall survive the death or incapacity of
the undersigned. Tendered Shares may be withdrawn at any time prior to 5:00 p.m.
on the Expiration Date in accordance with the terms of the Exchange Offer.
The undersigned understands that the Company will accept up to a maximum of
750,000 shares and that if tenders for more than 750,000 shares are received by
the Company, the Company, after purchasing shares from Odd Lot Owners, will pro
rate the number of Shares that it will acquire.
The undersigned understands and acknowledges that the Company reserves the
right in its sole discretion to purchase or make offers for any Shares that
remain outstanding subsequent to the Expiration Date in the open market, in
privately negotiated transactions, through subsequent exchange offers or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
The undersigned understands that the delivery and surrender of the Shares
is not effective, and the risk of loss of the Shares does not pass to the
Exchange Agent, until receipt by the Exchange Agent of this Letter of
Transmittal, or a manually signed facsimile hereof, properly completed and duly
executed, with any required signature guarantees, together with all accompanying
evidences of authority and any other required documents in form satisfactory to
the Company. All questions as to form of all documents and the validity
(including time of receipt) and acceptance of tenders and withdrawals of Shares
will be determined by the Company, in its sole discretion, which determination
shall be final and binding.
8
<PAGE> 5
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions," the undersigned hereby requests that any Shares not tendered or
not accepted for exchange be issued in the name(s) of the undersigned and that
Debentures be issued in the name(s) of the undersigned (or, in the case of
Shares delivered by book-entry transfer, by credit to the account at the
Book-Entry Transfer Facility). Similarly, unless otherwise indicated herein in
the box entitled "Special Delivery Instructions," the undersigned hereby
requests that any Shares not tendered or not accepted for exchange and
Debentures be delivered to the undersigned at the address(es) shown above. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" box or "Special Delivery Instructions" box to
transfer any Shares from the name of the registered Holder(s) thereof if the
Company does not accept for exchange any of such Shares so tendered.
IN ORDER TO PROPERLY COMPLETE THIS LETTER OF TRANSMITTAL, A HOLDER MUST:
1. COMPLETE THE BOX ENTITLED "METHOD OF DELIVERY" BY CHECKING ONE OF
THE THREE BOXES THEREIN AND SUPPLYING THE APPROPRIATE INFORMATION;
2. COMPLETE THE BOX ENTITLED "DESCRIPTION OF SHARES TENDERED;"
3. IF SUCH HOLDER IS A PARTICIPATING BROKER-DEALER AND WISHES TO
RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS FOR DELIVERY IN
CONNECTION WITH RESALES OF DEBENTURES (AS DEFINED BELOW), CHECK THE
APPLICABLE BOX;
4. IF SUCH HOLDER OWNS LESS THAN 100 SHARES AND TENDERS ALL OF HIS OR
HER SHARES, COMPLETE THE PAGE ENTITLED "ODD LOTS;"
5. SIGN THIS LETTER OF TRANSMITTAL BY COMPLETING THE BOX ENTITLED
"PLEASE SIGN BELOW;"
6. IF APPROPRIATE, CHECK AND COMPLETE THE BOXES RELATING TO THE
"SPECIAL ISSUANCE INSTRUCTIONS" AND "SPECIAL DELIVERY
INSTRUCTIONS;" AND
7. COMPLETE THE SUBSTITUTE FORM W-9.
Each Holder should carefully read the detailed Instructions below prior to
the completing this Letter of Transmittal. See "The Exchange Offer -- Procedures
For Tendering" in the Prospectus.
Holders of Shares that are tendering by book-entry transfer to the Exchange
Agent's account at DTC can execute the tender through the Automated Tender
Program ("ATOP"), for which the transaction will be eligible. DTC participants
that are accepting the Exchange Offer should transmit their acceptance to DTC,
which will edit and verify the acceptance and execute a book-entry delivery to
the Exchange Agent's account at DTC. DTC will then send an Agent's message to
the Exchange Agent for its acceptance. Delivery of the Agent's Message by DTC
will satisfy the terms of the Exchange Offer as to execution and delivery of a
Letter of Transmittal by the participant identified in the Agent's Message. DTC
participants may also accept the Exchange Offer by submitting a Notice of
Guaranteed Delivery through ATOP.
If Holders desire to tender Shares pursuant to the Exchange Offer and (i)
certificates representing such Shares are not lost but are not immediately
available, (ii) time will not permit this Letter of Transmittal, certificates
representing such Holder's Shares and all other required documents to reach the
Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date, such
Holders may effect a tender of such Shares in accordance with the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures." See Instruction 2 below.
A Holder having Shares registered in the name of a broker, dealer,
commercial bank, trust company or other nominee must contact such broker,
dealer, commercial bank, trust company or other nominee if they desire to accept
the Exchange Offer with respect to the Shares so registered.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF SHARES BE
ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING
OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF
SUCH JURISDICTION.
Your bank or broker can assist you in completing this form. The
instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent, whose address and telephone number appear on
the front cover of this Letter of Transmittal. See Instruction 11 below.
9
<PAGE> 6
METHOD OF DELIVERY
[ ] CHECK HERE IF CERTIFICATES FOR TENDERED SHARES ARE BEING DELIVERED
HEREWITH.
[ ] CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
----------------------------------------------------------------------------
Account Number:
------------------------------ Transaction Code Number:
-----------------------------------------
[ ] CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT PURSUANT TO
INSTRUCTION 2 BELOW AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s):
----------------------------------------------------------------------------
Window ticket No. (if any):
----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
--------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
------------------------------------------------------------
If Delivered by Book-Entry Transfer (yes or no):
------------------------------------------------------------------
Account Number:
------------------------------ Transaction Code Number:
-------------------------------------------
FOR PARTICIPATING BROKER-DEALERS ONLY
[ ] CHECK HERE AND PROVIDE THE INFORMATION REQUESTED BELOW IF YOU ARE A
PARTICIPATING BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE
PROSPECTUS AND, DURING THE NINE-MONTH PERIOD FOLLOWING THE CONSUMMATION OF
THE EXCHANGE OFFER, 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO, AS
WELL AS ANY NOTICES FROM THE COMPANY TO SUSPEND AND RESUME USE OF THE
PROSPECTUS. BY TENDERING ITS SHARES AND EXECUTING THIS LETTER OF
TRANSMITTAL, EACH PARTICIPATING BROKER-DEALER AGREES TO USE ITS REASONABLE
BEST EFFORTS TO NOTIFY THE COMPANY OR THE EXCHANGE AGENT WHEN IT HAS SOLD
ALL OF ITS DEBENTURES. (IF NO PARTICIPATING BROKER-DEALERS CHECK THIS BOX,
OR IF ALL PARTICIPATING BROKER-DEALERS WHO HAVE CHECKED THIS BOX
SUBSEQUENTLY NOTIFY THE COMPANY OR THE EXCHANGE AGENT THAT ALL THEIR
DEBENTURES HAVE BEEN SOLD, THE COMPANY WILL NOT BE REQUIRED TO MAINTAIN THE
EFFECTIVENESS OF THE EXCHANGE OFFER REGISTRATION STATEMENT OR TO UPDATE THE
PROSPECTUS AND WILL NOT PROVIDE ANY NOTICES TO ANY HOLDERS TO SUSPEND OR
RESUME USE OF THE PROSPECTUS.)
10
<PAGE> 7
PROVIDE THE NAME OF THE INDIVIDUAL WHO SHOULD RECEIVE, ON BEHALF OF THE HOLDER,
ADDITIONAL COPIES OF THE PROSPECTUS, AND AMENDMENTS AND SUPPLEMENTS THERETO, AND
ANY NOTICES TO SUSPEND AND RESUME USE OF THE PROSPECTUS:
NAME:
- --------------------------------------------------------------------------------
ADDRESS:
- --------------------------------------------------------------------------------
TELEPHONE NO.:
- --------------------------------------------------------------------------------
FACSIMILE NO.:
- --------------------------------------------------------------------------------
PLEASE SIGN BELOW
(TO BE COMPLETED BY ALL HOLDERS OF SHARES REGARDLESS OF WHETHER SHARES ARE
BEING PHYSICALLY DELIVERED HEREWITH)
This Letter of Transmittal must be signed by the Holder(s) of Shares
exactly as their name(s) appear(s) on certificate(s) for Shares or, if delivered
by a participant in the Book-Entry Transfer Facility, exactly as such
participant's name appears on a security position listing as the owner of
Shares, or by person(s) authorized to become Holder(s) by endorsements and
documents transmitted with this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must set
forth his or her full title below under "Capacity" and submit evidence
satisfactory to the Company of such person's authority to so act. See
Instruction 4 below.
If the signature appearing below is not of the record holder(s) of the
Shares, then the record holder(s) must sign a valid Stock power.
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATORY
DATE:
- --------------------------------------------------------------------------------
NAME:
- --------------------------------------------------------------------------------
CAPACITY:
- --------------------------------------------------------------------------------
ADDRESS:
- --------------------------------------------------------------------------------
-----------------------------------------------------------------------
(INCLUDING ZIP CODE)
AREA CODE AND TELEPHONE NO.:
- -------------------------------------------------------------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
11
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE SHARES FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES AND WISH
TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS
OR SUPPLEMENTS THERETO.
NAME:
----------------------------------------------------------------------------
ADDRESS:
----------------------------------------------------------------------------
12
<PAGE> 8
MEDALLION SIGNATURE GUARANTEE (SEE INSTRUCTION 4 BELOW)
(CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION)
- --------------------------------------------------------------------------------
Name of Eligible Institution Guaranteeing Signatures
- --------------------------------------------------------------------------------
Address (Including Zip Code) and Telephone Number (Including Area Code) of Firm
AUTHORIZED SIGNATURE:
- --------------------------------------------------------------------------------
PRINTED NAME:
- --------------------------------------------------------------------------------
TITLE:
- --------------------------------------------------------------------------------
DATE:
- --------------------------------------------------------------------------------
<PAGE> 9
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4, 5 and 7)
To be completed ONLY if Shares not tendered or not
accepted for exchange are to be issued in the name of,
or Debentures are to be issued in the name of, someone
other than the person or persons whose signature(s)
appear(s) within this Letter of Transmittal.
Issue [ ] Shares
[ ] Debentures
(check as applicable)
Name: --------------------------------------------------
(Please Print)
Address:
------------------------------------------------
------------------------------------------------
(Include Zip Code)
--------------------------------------------------------
(Tax Identification or Social Security Number)
(SEE SUBSTITUTE FORM W-9 HEREIN)
Credit Shares not tendered or not exchanged by book-
entry transfer to the Book-Entry Transfer Facility
account set below:
--------------------------------------------------------
(Book-Entry Transfer Facility Account Number)
Credit Debentures to the Book-Entry Transfer Facility
account set below:
--------------------------------------------------------
(Book-Entry Transfer Facility Account Number)
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 9)
To be completed ONLY if Shares not tendered or not
accepted for exchange or Debentures are to be sent to
someone other than the persons whose signature(s)
appear(s) within this Letter of Transmittal or to an
address different from that shown in the box entitled
"Description of Shares" within this Letter of
Transmittal.
Issue [ ] Shares
[ ] Debentures
(check as applicable)
Name: --------------------------------------------------
(Please Print)
Address:
------------------------------------------------
------------------------------------------------
(Include Zip Code)
- ----------------------------------------------------------------
</TABLE>
<PAGE> 10
ODD LOTS
(SEE INSTRUCTION 12)
To be completed ONLY if Shares are being tendered by or on behalf of a
person who owned beneficially, as of the close of business on March 16, 1999, an
aggregate of fewer than 100 shares, and who continues to own all of such Shares
beneficially as of the Expiration Date.
The undersigned either (check one box)
[ ] Was the beneficial owner, as of the close of business on March 16,
1999 of an aggregate of fewer than 100 Shares, all of which are being
tendered, or
[ ] Is a broker, dealer, commercial bank, trust company or other nominee
which:
(a) is tendering for the beneficial owners thereof, Shares with
respect to which it is the record owner, and
(b) believes, based on representations made to it by such beneficial
owners, that each such person was the beneficial owner, as of the
close of business on March 16, 1999 of an aggregate of fewer than
100 Shares and is tendering all such Shares.
<PAGE> 11
INSTRUCTIONS TO LETTER OF TRANSMITTAL FORMING PART
OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR SHARES OR
BOOK-ENTRY CONFIRMATION; WITHDRAWAL OF TENDERS.
To tender Shares in the Exchange Offer, physical delivery of certificates
for Shares or confirmation of a book-entry transfer into the Exchange Agent's
account with a Book-Entry Transfer Facility of Shares tendered electronically,
as well as a properly completed and duly executed copy or manually signed
facsimile of this Letter of Transmittal, or in the case of a book-entry
transfer, an Agent's Message, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m. New York time on the Expiration Date. Tenders of
Shares in the Exchange Offer may be made prior to the Expiration Date in the
manner described in the preceding sentence and otherwise in compliance with this
Letter of Transmittal.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, CERTIFICATES FOR
SHARES AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT, INCLUDING
DELIVERY THROUGH DTC AND ANY ACCEPTANCE OF AN AGENT'S MESSAGE TRANSMITTED
THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE HOLDER TENDERING SHARES. IF
SUCH DELIVERY IS MADE BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY
INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED AND THAT SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO ALTERNATIVE, CONDITIONAL OR
CONTINGENT TENDERS OF SHARES WILL BE ACCEPTED. EXCEPT AS OTHERWISE PROVIDED
BELOW, THE DELIVERY WILL BE MADE WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
THIS LETTER OF TRANSMITTAL, CERTIFICATES FOR THE SHARES AND ANY OTHER REQUIRED
DOCUMENTS SHOULD BE SENT ONLY TO THE EXCHANGE AGENT, NOT TO THE COMPANY OR DTC.
Shares tendered pursuant to the Exchange Offer may be withdrawn at any time
prior to 5:00 p.m. New York time on the Expiration Date. In order to be valid,
notice of withdrawal of tendered Shares must comply with the requirements set
forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal of
Tenders."
2. GUARANTEED DELIVERY PROCEDURES.
If Holders desire to tender Shares pursuant to the Exchange Offer and (i)
certificates representing such Shares are not lost but are not immediately
available, (ii) time will not permit this Letter of Transmittal, certificates
representing such Holder's Shares and all other required documents to reach the
Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date, such
Holders may effect a tender of Shares in accordance with the guaranteed delivery
procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures."
<PAGE> 12
Pursuant to the guaranteed delivery procedures:
(i) such tender must be made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent must have
received from such Eligible Institution at one of the addresses set forth
on the cover of this Letter of Transmittal a properly completed and validly
executed Notice of Guaranteed Delivery (by manually signed facsimile
transmission, mail or hand delivery) in substantially the form provided
with the Exchange Agent, setting forth the name(s) and address(es) of the
registered Holder(s) and the Shares being tendered and stating that the
tender is being made thereby and guaranteeing that, within three American
Stock Exchange ("AMEX") trading days from the Expiration Date, the Letter
of Transmittal (or a manually signed facsimile thereof) properly completed
and duly executed, or, in the case of a book-entry transfer an Agent's
Message together with certificates representing the Shares (or confirmation
of book-entry transfer of such Shares into the Exchange Agent's account at
a Book-Entry Transfer Facility), and any other documents required by this
Letter of Transmittal and the instructions thereto, will be deposited by
such Eligible Institution with the Exchange Agent; and
(iii) this Letter of Transmittal (or a manually signed facsimile
thereof), properly completed and validly executed with any required
signature guarantees, or, in the case of a book-entry transfer, an Agent's
Message, together with certificates for all Shares in proper form for
transfer (or a Book-Entry Confirmation with respect to all tendered
Shares), and any other required documents must be received by the Exchange
Agent within three AMEX trading days after the Expiration Date.
3. PARTIAL TENDERS.
If less than the all of the Shares evidenced by a submitted certificate is
tendered, the tendering Holder must fill in the number tendered in the last
column of the box entitled "Description of Shares" herein. All of the Shares
represented by the certificates delivered to the Exchange Agent will be deemed
to have been tendered, unless otherwise indicated. All Shares not tendered or
not accepted for exchange will be sent (or, if tendered by book-entry transfer,
returned by credit to the account at the Book-Entry Transfer Facility designated
herein) to the Holder unless otherwise provided in the "Special Issuance
Instructions" or "Special Delivery Instructions" boxes of this Letter of
Transmittal.
4. SIGNATURES ON THIS LETTER OF TRANSMITTAL, STOCK POWERS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the Holder(s) of the Shares
tendered hereby the signature(s) must correspond with the name(s) as written on
the face of the certificate(s) without alteration, enlargement or any change
whatsoever. If this Letter of Transmittal is signed by a participant in one of
the Book-Entry Transfer Facilities whose name is shown as the owner of the
Shares tendered hereby, the signature must correspond with the name shown on the
security position listing as the owner of the Shares.
If any of the Shares tendered hereby are registered in the name of two or
more Holders, all such Holders must sign this Letter of Transmittal.
If any tendered Shares are registered in client names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal and any necessary accompanying documents as
there are different names in which certificates are held.
If this Letter of Transmittal or any certificates for Shares or Stock
powers 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 so to act must be submitted with this Letter of Transmittal.
<PAGE> 13
IF THIS LETTER OF TRANSMITTAL IS EXECUTED BY A PERSON OR ENTITY WHO IS NOT
THE REGISTERED HOLDER, THEN THE REGISTERED HOLDER MUST SIGN A VALID STOCK POWER
WITH THE SIGNATURE OF SUCH REGISTERED HOLDER GUARANTEED BY A PARTICIPANT IN A
RECOGNIZED MEDALLION SIGNATURE PROGRAM (A "MEDALLION SIGNATURE GUARANTOR").
No signature guarantee is required if (i) this Letter of Transmittal is
signed by the registered Holder(s) of the Shares tendered herewith (or by a
participant in one of the Book-Entry Transfer Facilities whose name appears on a
security position listing as the owner of Shares) and certificates for
Debentures or for any Shares not tendered or not accepted for exchange are to be
issued directly to such Holder(s) or, if tendered by a participant in one of the
Book-Entry Transfer Facilities, any Shares not tendered or not accepted for
exchange are to be credited to such participant's account at such Book-Entry
Transfer Facility and neither the "Special Issuance Instructions" box nor the
"Special Delivery Instructions" box of this Letter of Transmittal has been
completed or (ii) such Shares are tendered for the account of an Eligible
Institution.
IN ALL OTHER CASES ALL SIGNATURES ON LETTERS OF TRANSMITTAL ACCOMPANYING
SHARES MUST BE GUARANTEED BY A MEDALLION SIGNATURE GUARANTOR. In all such other
cases (including if this Letter of Transmittal is not signed by the Holder), the
Holder must either properly endorse the certificates for Shares tendered or
transmit a separate, properly completed Stock power with this Letter of
Transmittal (in either case, executed exactly as the name(s) of the registered
Holder(s) appear(s) on such Shares, and, with respect to a participant in a
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of Shares, exactly as the name(s) of the participant(s) appear(s)
on such security position listing), with the signature on the endorsement or
Stock power guaranteed by a Medallion Signature Guarantor, unless such
certificates or Stock powers are executed by an Eligible Institution.
Endorsements on certificates for Shares and signatures on Stock powers
provided in accordance with this Instruction 4 by registered Holders not
executing this Letter of Transmittal must be guaranteed by a Medallion Signature
Guarantor.
5. SPECIAL ISSUANCE AND SPECIAL DELIVERY INSTRUCTIONS.
Tendering Holders should indicate in the applicable box or boxes the name
and address to which Shares not tendered or not accepted for exchange or
certificates for Debentures, if applicable, are to be issued or sent, if
different from the name and address of the Holder signing this Letter of
Transmittal. In the case of payment to a different name, the taxpayer
identification or social security number of the person named must also be
indicated.
6. TAXPAYER IDENTIFICATION NUMBER.
Each tendering Holder is required to provide the Exchange Agent with the
Holder's social security or Federal employer identification number, on
Substitute Form W-9 which is provided under "Important Tax Information" below,
or alternatively to establish another basis for exemption from backup
withholding. A Holder must cross out Item (2) in the Certification box in Part
III of Substitute Form W-9 if such Holder is subject to backup withholding.
Failure to provide the information on the form may subject such Holder to
31% Federal backup withholding tax on any payment made to the Holder with
respect to the Exchange Offer. The appropriate box in Part I of Substitute Form
W-9 should be checked if the tendering or consenting Holder has not been issued
a Taxpayer Identification Number ("TIN") and has either applied for a TIN or
intends to apply for a TIN in the near future. If the box in Part I of
Substitute Form W-9 is checked, the Holder should also sign the attached
Certification of Awaiting Taxpayer Identification Number. If the Exchange Agent
is not provided with a TIN within 60 days thereafter, the Exchange Agent will
withhold 31% on all such payments of the Debentures until a TIN is provided to
the Exchange Agent.
<PAGE> 14
7. TRANSFER TAXES.
The Company will pay all transfer taxes applicable to the exchange and
transfer of Shares pursuant to the Exchange Offer, except if (i) deliveries of
certificates for Shares not tendered or not accepted for exchange are registered
or issued in the name of any person other than the Holder of Shares tendered
thereby, (ii) tendered certificates are registered in the name of any person
other than the person signing this Letter of Transmittal or (iii) a transfer tax
is imposed for any reason other than the exchange of Shares pursuant to the
Exchange Offer, in which case the amount of any 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 herewith the amount of taxes will be billed directly to such
tendering Holder.
8. IRREGULARITIES.
All questions as to the form of all documents and the validity (including
time of receipt) and acceptance of all tenders and withdrawals of Shares will be
determined by the Company, in its sole discretion which determination shall be
final and binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF SHARES WILL
NOT BE CONSIDERED VALID. The Company reserves the absolute right to reject any
and all tenders of Shares that are not in proper form or the acceptance of
which, in the Company's opinion, would be unlawful. The Company also reserves
the right to waive any defects, irregularities or conditions of tender as to
particular Shares. The Company's interpretations of the terms and conditions of
the Exchange Offer (including the instructions in this Letter of Transmittal)
will be final and binding. Any defect or irregularity in connection with tenders
of Shares must be cured within such time as the Company determines, unless
waived by the Company. Tenders of Shares shall not be deemed to have been made
until all defects or irregularities have been waived by the Company or cured. A
defective tender (which defect is not waived by the Company or cured by the
Holder) will not constitute a valid tender of Shares and will not entitle the
Holder to Debentures. None of the Company, the Exchange Agent or any other
person will be under any duty to give notice of any defect or irregularity in
any tender or withdrawal of any Shares, or incur any liability to Holders for
failure to give any such notice.
9. WAIVER OF CONDITIONS.
The Company reserves the right, in its reasonable discretion, to amend or
waive any of the conditions to the Exchange Offer.
10. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES FOR SHARES.
Any Holder whose certificates for Shares have been mutilated, lost, stolen
or destroyed should write to or telephone the Exchange Agent (who is also the
Company's transfer agent) at the address or telephone number set forth on the
cover of this Letter of Transmittal for the Exchange Agent.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering Shares and requests for
assistance or additional copies of the Prospectus, this Letter of Transmittal,
the Notice of Guaranteed Delivery or other documents may be directed to the
Exchange Agent, whose address and telephone number appear on the cover of this
Letter of Transmittal.
12. ODD LOTS.
If the Company purchase less than all Shares tendered before the Expiration
Date because more than 750,000 Shares are tendered, the Shares purchased first
will consist of shares tendered by any stockholder who owned beneficially, as of
the close of business on March 16, 1999 and continues to own beneficially as of
the Expiration Date, an aggregate of fewer than 100 Shares and who tenders all
of his or her Shares. This preference will not be available unless the box
captioned "Odd Lots" is completed.
<PAGE> 15
IMPORTANT TAX INFORMATION
Under Federal income tax laws, a Holder who tenders Shares prior to receipt
of the Debentures is required to provide the Exchange Agent with such Holder's
correct TIN on the Substitute Form W-9 below or otherwise establish a basis for
exemption from backup withholding. If such Holder is an individual, the TIN is
his or her social security number. If the Exchange Agent is not provided with
the correct TIN, a $50 penalty may be imposed by the Internal Revenue Service
("IRS") and payments, including any Debentures, made to such Holder with respect
to Shares exchanged pursuant to the Exchange Offer may be subject to backup
withholding.
Certain Holders (including among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on the
Substitute Form W-9. A foreign person may qualify as an exempt recipient by
submitting to the Exchange Agent a properly completed IRS Form W-8 signed under
penalties of perjury, attesting to that Holder's exempt status. A Form W-8 can
be obtained from the Exchange Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions. Holders are urged to consult their own tax advisors to
determine whether they are exempt.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any payments made to the Holder or other payee. Backup withholding is not
an additional Federal income tax. Rather, the Federal income tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments, including any Debentures, made
with respect to Shares exchanged pursuant to the Exchange Offer, the Holder is
required to provide the Exchange Agent with (i) the Holder's correct TIN by
completing the form below, certifying that the TIN provided on the Substitute
Form W-9 is correct (or that such Holder is awaiting a TIN) and that (A) such
Holder is exempt from backup withholding, (B) the Holder has not been notified
by the IRS that the Holder is subject to backup withholding as a result of
failure to report all interest or dividends or (C) the IRS has notified the
Holder that the Holder is no longer subject to backup withholding, and (ii) if
applicable, an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered Holder. If
the Shares are held in more than one name or are held not in the name of the
actual owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
PAYOR'S NAME: THERMWOOD CORPORATION.
<PAGE> 16
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
PAYEE INFORMATION (PLEASE PRINT OR TYPE):
- ----------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE INDIVIDUAL OR BUSINESS NAME (IF JOINT ACCOUNT LIST FIRST AND CIRCLE THE NAME OF PERSON
FORM W-9 OR ENTITY WHOSE NUMBER YOU FURNISH IN PART 1 BELOW):
-----------------------------------------------------------------------------------------
CHECK APPROPRIATE BOX: [ ] Individual/Sole proprietor [ ] Corporation [ ] Partnership
[ ] Other
----------------------------------------- _____________
-----------------------------------------------------------------------------------------
Address (number, street, and apt. or suite no.)
-----------------------------------------------------------------------------------------
City, state, and ZIP code
-----------------------------------------------------------------------------------------
PART I -- TAXPAYER IDENTIFICATION NUMBER ("TIN")
Enter your TIN in the box at right. For individuals ---------------------------------
this is your social security number; for other Social Security Number OR
entities it is your employer identification number. Employer Identification Number
Refer to the chart in Item A on page 1 of the
Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 (the
"Guidelines") for further clarification. If you do
not have a TIN, see instructions on how to obtain a
TIN in Item C of the Guidelines, check the
appropriate box below indicating that you have
applied for a TIN and, in addition to the Part III
Certification, sign the attached Certification of
Awaiting Taxpayer Identification Number.
Applied for TIN [ ]
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PART II -- PAYEES EXEMPT FROM BACKUP WITHHOLDING:
Check box. (See Item B of the Guidelines for further clarification. Even if you are
exempt from backup withholding, you should still complete and sign the certification
below):
Exempt [ ]
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REQUEST FOR CERTIFICATION -- YOU MUST CROSS OUT ITEM 2 BELOW IF YOU HAVE BEEN NOTIFIED BY THE
TAXPAYER IDENTIFICATION INTERNAL REVENUE SERVICE (THE "IRS") THAT YOU ARE CURRENTLY SUBJECT TO BACKUP
NUMBER AND CERTIFICATION WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURNS (SEE THE
GUIDELINES FOR FURTHER CLARIFICATION).
DEPARTMENT OF THE
TREASURY INTERNAL REVENUE Under penalties of perjury, I certify that:
SERVICE
(1) The number shown on this form is my correct taxpayer identification number (or I am
waiting for a number to be issued to me) and
(2) I am not subject to backup withholding because (a) I am exempt from backup
withholding or (b) I have not been notified by the IRS that I am subject to backup
withholding as a result of a failure to report all interest or dividends or (c) the
IRS has notified me that I am no longer subject to backup withholding.
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Signature
--------------------------------------------------------------------------------------------------------------------------- Date
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- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 17
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under, penalties of perjury that a TIN has not been issued to me,
and either (a) I have mailed or delivered an application to receive a TIN to the
appropriate IRS Service Center or Social Security Administration Office or (b) I
intend to mail or deliver an application in the near future. I understand that I
must provide a TIN to the payor within 60 days of submitting this Substitute
Form W-9 and that if I do not provide a TIN to the payor within 60 days, the
payor is required to withhold 31% of all reportable payments thereafter to me
until I furnish the payor with a TIN.
- ---------------------------------------------------------
---------------------------------------------------------
Signature Date
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL
DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED THE
BOX "APPLIED FOR TIN" IN PART I OF SUBSTITUTE FORM W-9 CERTIFICATION OF
AWAITING TAXPAYER IDENTIFICATION NUMBER.
<PAGE> 18
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN -- The Taxpayer Identification Number for most individuals is their
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<C> <S> <C>
- ------------------------------------------------------------
EMPLOYER
GIVE THE SOCIAL SECURITY OR FOR THIS IDENTIFICATION
TYPE OF ACCOUNT: NUMBER OF:
- ------------------------------------------------------------
1. Individual The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, the
first individual on
the account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. a. Revocable savings trust The grantor-
(grantor is also trustee) trustee(1)
b. So-called trust account that is The actual owner(1)
not a legal or valid trust
under State law
5. Sole proprietorship The owner(3)
- ------------------------------------------------------------
- ------------------------------------------------------------
EMPLOYER
GIVE THE SOCIAL SECURITY OR FOR THIS IDENTIFICATION
TYPE OF ACCOUNT: NUMBER OF:
- ------------------------------------------------------------
6. A valid trust, estate or pension Legal entity(4)
trust
7. Corporate The corporation
8. Association, club, religious, The organization
charitable, educational or other
tax exempt organization
9. Partnership The partnership
10. A broker or registered nominee The broker or
nominee
11. Account with the Department of The public entity
Agriculture
- ------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
B. EXEMPT PAYEES -- The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to establish
that you are exempt. Check the box in Part II of the form, sign and date the
form.
For this purpose, Exempt Payees include: (1) a corporation; (2) an organization
exempt from tax under section 501(a), or an individual retirement plan (IRA) or
a custodial account under section 403(b)(7); (3) the United States or any of its
agencies or instrumentalities; (4) a state, the District of Columbia, a
possession of the United States, or any of their political subdivisions or
instrumentalities; (5) a foreign government or any of its political
subdivisions, agencies or instrumentalities; (6) an international organization
or any of its agencies or instrumentalities; (7) a foreign central bank of
issue; (8) a dealer in securities or commodities required to register in the
U.S. or a possession of the U.S.; (9) a real estate investment trust; (10) an
entity or person registered at all times during the tax year under the
Investment Company Act of 1940; (11) a common trust fund operated by a bank
under section 584(a); and (12) a financial institution.
C. OBTAINING A NUMBER -- If you do not have a taxpayer identification number or
you do not know your number, obtain Form SS-5, application for a Social Security
Number, or Form SS-4, Application for Employer Identification Number, at the
local office of the Social Security Administration or the Internal Revenue
Service and apply for a number.
D. PRIVACY ACT NOTICE -- Section 6109 requires most recipients of dividend,
interest or other payments to give taxpayer identification numbers to payers who
must report the payments to the IRS. The IRS uses the numbers for identification
purposes.
<PAGE> 19
Payers must be given the numbers whether or not payees are required to file tax
returns. Payers must generally withhold 31% of taxable interest, dividend and
certain other payments to a payee who does not furnish a taxpayer identification
number. Certain penalties may also apply.
E. PENALTIES --
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail to
include any portion of an includable payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you make
a false statement with no reasonable basis which results in no imposition of
backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
