THERMWOOD
1995 ANNUAL REPORT
"Our Unique Approach to Expanding Machine Tool Markets
is Yielding Growth and Profitability"
SELECTED FINANCIAL DATA
- -----------------------
Operations for the years ended July 31 (in thousands except per share data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales, less commissions $ 12,314 $ 9,985 $ 10,825 $ 7,508 $ 8,536
Gross Profit 4,786 3,579 2,173 1,592 3,103
Earnings (loss) from
continuing operations 2,350 136 (1,394) (1,768) (88)
Net earnings (loss) $ 2,350 $ 208 $ (1,360) $ (1,928) $ (151)
Net earnings (loss) per
common and common
equivalent share:
Primary $0.38 $ 0.00 $ (0.27) $ (0.40) $ (0.03)
Assuming full dilution $0.30 $ 0.00 $ (0.27) $ (0.40) $ (0.03)
Weighted average number
of shares:
Primary 5,187 5,150 5,054 4,862 4,862
Assuming full dilution 7,257 5,150 5,054 4,862 4,862
Cash dividends declared
per common share -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Financial position at July 31:
1995 1994 1993 1992 1991
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $7,527 $5,418 $6,928 $6,781 $7,363
Working capital 2,811 1,706 1,291 (939) 1,257
Long-term obligations 1,870 1,862 5,711 2,559 2,732
Shareholders' equity
(deficit) 3,437 1,456 (1,985) (912) 1,016
</TABLE>
Thermwood Corporation is...
- ---------------------------
a high technology manufacturing company that supplies a line of computer
controlled machine tools to the woodworking and plastics industries.
Thermwood machines produce door and drawer fronts, furniture parts, desk
and table tops, store fixture parts, van and motor home parts and a variety
of other components for the wood processing industry. Some plastic
processes require that parts be trimmed or machined after they are molded.
Thermwood machines automatically trim and machine these parts in three
dimensions.
Its primary competitive tool is...
- ----------------------------------
value. Thermwood strives to provide the highest level of technical
capability at the lowest possible price. Simultaneous programs are in place
to both increase product performance and reduce manufacturing costs over
time. Both programs have been successful over the past year with the
introduction of new technical features and reductions in base prices of its
machines. To achieve these goals, Thermwood designs and builds all major
components of its product including a highly advanced CNC (computer)
control system and patented high speed machining heads.
Sales and profits are both...
- -----------------------------
up. A restructured product line and aggressive marketing approach have
resulted in a 23% increase in net sales to $12.3 million this year.
Earnings, including certain tax benefits reached $2.3 million or $0.30 a
share this year, assuming full dilution. Gross profits rose 34%, operating
income increased 171% and earnings from continuing operations before income
taxes rose 737%.
Thermwood's stock price...
- --------------------------
has started to reflect this success. Investing in Thermwood is investing in
the philosophy of providing the customer with the best possible product at
the lowest possible price, of keeping costs low, and of rewarding employees
only when the company is profitable. Thermwood's top management are major
shareholders in the company.
REPORT BY THE CHAIRMAN AND CHIEF EXECUTIVE
- ------------------------------------------
Dear Fellow Shareholders:
I am happy to report that Fiscal 1995 produced record sales and earnings.
In 1994 we restructured both the company and the entire product line.
Fiscal 1994 proved to be a turnaround year and although revenue declined,
the year was profitable. During 1995, the new product line took root and
began to grow. Revenue increased 26% to $13,828,318 and net income before
income taxes increased 737% to $1,139,794. These are the best sales and
earnings in our 26 year history.
(revenue for quarter ended - bar graph)
A deferred tax benefit recognized in 1995 contributed to the increase. This
added an additional $1,210,000 to net income resulting in a total net
income, including tax benefits of $2,349,794.
(earnings for quarter ended - bar graph)
Primary earnings per share were 38 cents calculated on 5.2 million common
and common equivalent shares and were 30 cents, assuming full dilution.
Before distribution of the preferred dividend, primary earnings per share
for 1995 were 45 cents including tax benefit, and 22 cents not including
the tax benefits compared to 1994 earnings per share of 4 cents.
Shareholders' equity at July 31, 1995, was $3.4 million, compared with $1.5
million at July 31, 1994 and a shareholders' deficit of nearly $2 million
at the end of 1993.
(shareholder's equity - bar graph)
During the year we maintained two major programs within the company. The
first is an ongoing effort to reduce manufacturing costs. Production
methods were modernized and restructured. A large horizontal machining
center with a 52 position automatic tool changer was installed. Controlled
by a Thermwood 91000 SuperControl, this machine reduced component costs on
every machine produced. Other modern equipment was added to the factory and
when combined with a program to reduce labor costs through hundreds of
incremental improvements, productivity increased. By February, we were
able to reduce the base price of Thermwood machines by 5 to 10% while
maintaining profit margins. We believe that this is one of the major
reasons revenue increased during the year.
(operating margins for the quarter ended - bar graph)
As the year ended, we placed into service a large vertical machining center
built by Thermwood to aerospace standards. This machine is capable of
machining and grinding parts up to ten foot wide and twenty five foot long.
We believe it is the largest production machine in our industry and expect
it to contribute toward further reductions in manufacturing costs.
One indication of the success of this program is that we were able to
produce and ship 45% more machines in the fourth quarter versus the first
quarter with only three additional employees.
The second major program at Thermwood is a continuing effort to increase
the performance and technical capability of the product line. During 1995,
we introduced over a dozen new technical features and options for our
equipment.
Near the end of the year, we added the ability to perform three dimensional
wood carving to all woodworking machines. This technology included a new
method of developing the complex program needed for wood carving. This new
method allows anyone to create carving programs. The carving robots
currently offered by Thermwood require a skilled carver to program. We
expect that the new technology will replace the current carving robot and
may open up new markets for our equipment.
We are investigating the possibility of establishing a marketing and sales
effort in Europe. We believe that a market exists in Western Europe for our
products and that marketing tactics and strategies similar to those that
have been successful in the U.S. will also yield good results from Europe.
The exact structure of our European export effort has not been finalized,
however, it is hoped that shipments into Europe will begin during fiscal
1996.
We have reported the best profit year in our history on a 26% increase in
revenue. To continue this growth we are focusing on several areas. Lower
prices and more technical features should increase market share and provide
growth from current markets. The new wood carving technology should open up
new applications in our current markets, and finally, exports to Europe
should open up new markets for our current products.
At the end of 1996, I look forward to reporting to you even better results
than a very good 1995.
Sincerely yours,
/s/ K.J.Susnjara
OPERATIONS
- ----------
Helping Customers Become Productive
- -----------------------------------
Thermwood builds computer controlled machines which reduce labor and
increase productivity. They are used primarily in two industries,
woodworking and plastics.
In the woodworking industry, our machines are commonly used to route, shape
and drill wood panels. These parts are used as the sides and tops of
furniture, as doors, drawer fronts and internal parts. Other machines make
frames for upolstered furniture or parts for store fixtures and displays.
Machines are also used to make interior parts of motor homes and boats.
CNC machines, of the type Thermwood builds, are becoming the accepted way
of producing these parts. The alternative is to use single purpose manual
machines. Although these machines are very productive, they can take an
hour or more to set up and generally complete only a single job. In today's
competitive world, individual production runs have become very small. It is
not uncommon for up to 85% of a production day to be spent setting up
manual machines.
CNC machines, on the other hand, can change from job to job in a couple of
minutes. They result in increased production volume, lower overall cost and
in many cases they are the only way our customer can compete and survive.
In the plastics industry, the thermoforming process forms parts from heated
sheets of plastic material. The part must then be trimmed from the unformed
part of the sheet. Other holes or machining may also be required.
Thermwood's five axis trimming machines are commonly used to automatically
perform this three dimensional machining.
Without a computer controlled machine, this trimming job is generally done
manually using a knife or small hand router and guide fixtures. This is
generally slow, expensive and results in inconsistent quality. Add to this
injuries, including repetitive motion injury and you can see why most
thermoformers are rapidly adopting automated trimming machines.
Thermwood's five axis machines are also used to trim parts produced by
other plastic processes including laid up fiberglass and blow molding.
Within the last year or so, Thermwood machines have also been used to
produce wood patterns and molds for the plastics industry. Normally, these
are designed on a CAD/CAM system and a Thermwood machine executes the
resulting program to produce the pattern or mold.
The scanning technology which is used to create wood carving programs may
also find applications in producing molds or patterns from samples in the
plastics industry.
Our Approach to Technology
- --------------------------
Thermwood management believes that it is necessary to design and
manufacture all major components of its product including the computer
control system and router heads. This provides two major benefits. First,
costs are lower than comparable components purchased from third party
vendors. This can provide one cost advantage over competitors who purchase
rather than build major components. But, more important, technical features
important to our market, but not available from commercial components, can
be included.
In addition to major components, Thermwood attempts to use technical
innovation to improve performance and reduce costs in all areas of machine
design. It is policy to attempt to obtain patent protection on all
technical innovations which improve performance or reduce manufacturing
costs of our product line.
Our Product Line
- ----------------
The Model 40 is a low cost machine able to machine parts up to 5 foot by 5
foot. It is used for most wood applications and is popular with smaller
companies because it is a small size and low cost machine that is easy to
learn.
The Model 42 is similar to the Model 40 except it has two 5 foot by 5 foot
tables. It is commonly equipped with two or more heads and is used by
larger companies for more complex or higher volume production.
The Model 53 has a 5 foot by 10 foot table. Because the table doesn't move,
it is ideal for machining parts from large sheets of plywood. It can be
equipped with a system which automatically loads and unloads. It is
commonly used to machine parts for upholstered furniture, boats and
recreational vehicles.
The Model 67 is our most popular plastic trimming machine. Available in 5
foot by 5 foot, 5 foot by 10 foot and dual 5 foot by 5 foot tables, it is
used for trimming a wide variety of plastic parts from computer parts to
toys.
The Model 70 is intended for heavy duty plastic and aluminum machining.
Table sizes of 5 foot by 10 foot, 10 foot by 10 foot and 10 foot by 15 foot
are available. The Model 70 is commonly used to machine parts such as
pickup truck bed liners, recreational vehicle bodies, boat hulls and sports
equipment covers.
OUR MARKETING APPROACH
- ----------------------
Our approach to marketing is similar to the approach used to sell personal
computers. Unlike our competitors, our advertising and product literature
contains complete information on each machine and option, including price.
We focus on value, good performance and low price.
A separate product brochure, including available options and complete
pricing is printed for each machine model. Since conventional layout and
printing would be both price and time prohibitive, Thermwood makes
extensive use of internal desktop publishing.
Literature is developed or modified using advanced graphics software and
powerful computers. Masters are printed on a high quality photo realistic
printer and the final brochure is printed as needed on a high quality color
duplicator.
Costs are kept low, literature can be changed as needed, and the cost of
obsolete printed material has been all but eliminated.
Our Approach to Service
- -----------------------
Management believes that technical service and customer support are
essential in our markets. Thermwood operates a separate division, the
Technical Services Division, to provide these essential services. Services
available include customer training, installation assistance, production
assistance including custom programming, spare parts and field service. In
addition, the Technical Service Division operates a toll free "help line"
which provides free assistance to any company that owns a Thermwood
machine.
Management also believes that the best way to compete with used machines is
to keep the price of used machines as high as possible. For this reason,
Thermwood attempts to supply current capabilities and performance to older
machines through a series of upgrade, enhancement and modification
programs. A company that buys a used Thermwood machine can purchase full
Technical Service support including training, installation assistance and
spare parts. Thermwood even offers a service where a used machine is
upgraded and rebuilt in Thermwood's facility to near new condition,
including a warranty.
Extensive services help make Thermwood equipment more desirable, productive
and profitable for our customers and provide an ongoing source of revenue
and profits for Thermwood.
Our Corporate Structure
- -----------------------
Thermwood's corporate structure, management compensation and employee
incentive programs are all based on one word...profit.
The company is divided into two divisions, the Machining Products Division
and the Technical Services Division. Each is a profit center, responsible
for creating its own individual profit.
Management compensation consists of abnormally low base pay plus a generous
bonus based on profitability. If profits are not present, management
compensation is substantially less than the same positions in comparable
companies. If profits are good, compensation is more than the same
positions in comparable companies. We believe this focuses the management
team not only on current profits which determine current pay but also on
future profitability which will determine future pay.
On the downside, should the company lose money in any month, all salaried
employees receive a 20% reduction in base pay for the following month. Not
only does this provide a strong incentive but, it reduces operating
expenses should a slowdown occur.
Profit incentives also apply to hourly paid employees. Any month the
company makes $100,000 or more, all hourly paid employees receive a 5%
increase in base pay for the next month. Employees are concerned about
expenses because even a few dollars in added expenses may mean the
difference between achieving and not achieving the profit goal.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------
Results of Operations
- ---------------------
Net sales for fiscal year 1995 were $12,314,271, an increase of 23% from
fiscal year 1994, and a 14% increase from fiscal year 1993. Backlog
increased to $1,860,000 at July 31, 1995 from $1,280,000 at July 31, 1994
and $1,132,000 at July 31, 1993. Management attributes the increased level
of sales to lower prices and an increased market share.
Gross profit for fiscal year 1995 was $4,786,237, or 38.9% of net sales.
The percentage of current year gross profit to net sales has increased
from last year's 35.8% and 20.1% in fiscal year 1993. In the current year,
gross profit was positively affected by more efficient production methods
due to the discontinuance of building large custom machines. A charge
against cost of sales of approximately $130,000 in 1994 and $80,000 in 1995
for recognition of inventory obsolescence and valuation adjustments caused
gross profit to decrease by approximately 1.0% for 1994 and less than 1.0%
in 1995. Management expects the first quarter of fiscal year 1996 to also
reflect higher margins due to generally higher margins on newly designed
products and better production efficiency due to a more experienced work
force and manufacturing of standard machines. Although management
anticipates that gross profit percentages from operations should continue
to improve during 1996, no assurance to this effect can be given.
Research and development, marketing, administrative and general expenses
were $3,315,904 in fiscal year 1995, compared to $3,036,418 in 1994 and
$2,959,976 in 1993. Research and development expenditures aggregating
$246,000 in 1995, versus $244,000 in 1994 and $327,000 in 1993 are included
in the foregoing amounts. In management's opinion, with its new products
and experienced work force the Company can continue to take advantage of
the favorable economic conditions.
The major portion of the increased research and development, marketing and
administrative and general expenses from 1993 to 1995 was attributable to
profit-sharing bonuses paid to employees.
Interest expense for fiscal year 1995 was $294,925, a decrease of $125,800
from 1994 and a decrease of $299,760 from 1993. The current year decrease
from prior years is primarily due to the reduction of long-term debt during
fiscal year 1994 through conversion to preferred stock.
Fiscal year 1995 net earnings were $2,349,794, compared to net earnings of
$208,161 in 1994 and a net loss of $1,360,057 in 1993. A deferred tax
benefit of $1,236,000 recognized in 1995 contributed to the increase. This
benefit resulted from a reduction in a deferred tax asset valuation
allowance based on management's expectation that future earnings will more
likely than not allow for realization of deferred tax assets including at
least partial utilization of net operating loss carryforwards. Operating
income for fiscal year 1995 was $1,470,333 compared to operating income of
$542,133 in 1994 and an operating loss of $787,113 in 1993. The increase in
operating income in 1995 resulted primarily from increased sales and more
efficient production methods on standard machines when compared to the
larger custom machines produced in prior years. Additional expenses
related to a private financing contributed to the net loss in 1993.
Interest expenses were lowered in 1994 due to a reduction in long-term
notes payable and capital leases to a related party.
Because of loss carryforwards, there was no federal income tax expense in
1994 or 1993. The Company has federal income tax net operating loss
carryforwards of approximately $6,902,000 which expire in the years 1997
through 2008. It also has other tax credits of lesser value which appear
in Note I of Notes to Financial Statements.
Liquidity and Capital Resources
- -------------------------------
At July 31, 1995 the Company's working capital was $2,811,066 compared to
$1,706,268 at July 31, 1994. This increase was primarily due to increased
profitability including the effects of the deferred tax benefit discussed
above. As a result the Company has been able to pay its accounts payable
and accrued liabilities in a more timely manner.
Global demilitarization has not had a material impact on the Company's
sales of automated industrial equipment. Although the Company sells
machines to the aerospace industry, the percentage of the Company's overall
sales to this industry has declined over the past three years. During the
1995 fiscal year, the Company's percentage of revenues from sales to this
industry was approximately 3% compared with 5% and 12% in 1994 and 1993,
respectively.
Management believes that the focus on marketing, sale and manufacture of
standard machines has helped margins and profitability despite reduced
sales caused by the decision not to produce custom machines and the
withdrawal from the aerospace industry.
The Company had a positive cash flow from operating activities for the 1995
fiscal year in the amount of $793,775. Net earnings of $2,349,794, less
$1,236,000 of deferred tax benefits for the fiscal year, along with the add
back of non-cash expenses such as depreciation and amortization of
$329,012, and an increase in customer deposits contributed to a positive
cash flow. However, an increase in accounts receivable and payment of
accounts payable and other accrued liabilities decreased cash flow from
operating activities.
During the 1995 fiscal year, the Company's investing activities were
primarily for replacement of production and office equipment. Expenditures
for fixed assets in the 1996 fiscal year are also anticipated to be for
normal replacements and purchases of labor-saving equipment for production.
The Company has no plans for any significant capital expenditures in fiscal
year 1996.
Principal payments on lease obligations and long-term debt during the 1995
fiscal year were to a related party and to a leasing company owned by the
related party. Cash flows from financing activities included $367,910 of
dividend payments on preferred stock to a related party.
STATEMENTS OF OPERATIONS
- ------------------------
<TABLE>
<CAPTION>
Years Ended July 31
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Sales $13,828,318 $10,932,467 $11,890,207
Less commissions 1,514,047 947,126 1,065,204
----------- ----------- -----------
Net Sales 12,314,271 9,985,341 10,825,003
Cost of Sales 7,528,034 6,406,800 8,652,140
----------- ----------- -----------
Gross Profit 4,786,237 3,578,541 2,172,863
Research and development,
marketing, administrative
and general expenses 3,315,904 3,036,408 2,959,976
----------- ----------- -----------
Operating income (loss) 1,470,333 542,133 (787,113)
----------- ----------- -----------
Other income (expense):
Interest expense - related party (7,791) (130,277) (378,706)
Interest expense - other (287,134) (290,448) (215,979)
Other (35,614) 14,738 (12,440)
----------- ----------- -----------
Net other income (expense) (330,539) (405,987) (607,125)
----------- ----------- -----------
Earnings (loss) from continuing
operations, before income taxes
and extraordinary loss 1,139,794 136,146 (1,394,238)
Income tax benefit 1,210,000 -- --
----------- ----------- -----------
Earnings (loss) from continuing
operations before
extraordinary loss 2,349,794 136,146 (1,394,238)
----------- ----------- -----------
Discontinued operations:
Gain on sale -- -- 268,107
Earnings from operations, net -- 72,015 17,074
----------- ----------- -----------
Earnings from discontinued
operations -- 72,015 285,181
----------- ----------- -----------
Earnings (loss) before
extraordinary loss 2,349,794 208,161 (1,109,057)
Extraordinary loss on
extinguishment of debt -- -- (251,000)
----------- ----------- -----------
Net earnings (loss) $ 2,349,794 $ 208,161 $(1,360,057)
=========== =========== ===========
Earnings (loss) per common and
common equivalent share:
Primary:
Continuing operations $ 0.38 $ (0.01) $ (0.28)
Discontinued operations -- 0.01 0.06
Extraordinary loss -- -- (0.05)
----------- ----------- -----------
Net earnings (loss) per share $ 0.38 $ 0.00 $ (0.27)
=========== =========== ===========
Assuming full dilution:
Continuing operations $ 0.30 $ (0.01) $ (0.28)
Discontinued operations -- 0.01 0.06
Extraordinary loss -- -- (0.05)
----------- ----------- -----------
Net earnings (loss) per share $ 0.30 $ 0.00 $ (0.27)
=========== =========== ===========
Weighted average number of shares:
Primary 5,187,152 5,149,546 5,053,713
Assuming full dilution 7,257,152 5,149,546 5,053,713
</TABLE>
See accompanying notes to financial statements.
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
Assets
------
July 31
---------------------------
1995 1994
----------- ----------
Current Assets
- --------------
<S> <C> <C>
Cash $ 10,544 $ 9,707
Accounts receivable, less allowances
for doubtful accounts ($16,000 for
1995 and $25,000 for 1994) 1,181,599 681,347
Inventories 3,008,947 2,844,057
Deferred income taxes 454,000 --
Prepaid expenses 375,165 271,383
----------- ----------
Total Current Assets 5,030,255 3,806,494
-------------------- ----------- ----------
Property and Equipment
- ----------------------
Land 73,260 73,260
Buildings and improvements 1,171,778 1,151,101
Furniture and equipment 2,069,774 1,874,508
Construction in progress 121,535 --
Less accumulated depreciation and
amortization (1,933,370) (1,688,593)
----------- ----------
Net Property and Equipment 1,502,977 1,410,276
-------------------------- ----------- ----------
Other Assets
- ------------
Patents, trademarks and other 123,563 99,139
Bond issuance costs less
accumulated amortization 88,298 101,656
Deferred income taxes 782,000 --
----------- ----------
Total Other Assets 993,861 200,795
------------------ ----------- ----------
Total Assets $ 7,527,093 $ 5,417,565
- ------------ ============ ============
</TABLE>
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
July 31
---------------------------
1995 1994
---------- ----------
Current Liabilities
- -------------------
<S> <C> <C>
Accounts payable $ 792,544 $ 928,834
Accrued compensation and payroll taxes 379,839 257,812
Customer deposits 642,359 369,205
Other accrued liabilities 372,849 473,560
Current portions of:
Capital lease obligations 5,450 13,718
Capital lease obligations - related party 26,148 57,097
---------- -----------
Total Current Liabilities 2,219,189 2,100,226
------------------------- ---------- -----------
Long-Term Liabilities, Less Current Portion
- -------------------------------------------
Capital lease obligations 21,738 1,211
Capital lease obligations - related party -- 26,148
Bonds payable, net of unamortized discount
of $221,316 for 1995 and $235,618
for 1994 1,848,684 1,834,382
---------- -----------
Total Long-Term Liabilities 1,870,422 1,861,741
--------------------------- ---------- -----------
Shareholders' Equity
- --------------------
Preferred stock, no par value,
2,000,000 shares authorized,
1,000,000 shares issued and
outstanding 3,437,120 3,437,120
Common stock, no par value,
20,000,000 shares authorized,
5,149,546 shares issued and
outstanding 8,988,897 8,988,897
Accumulated deficit (8,988,535) (10,970,419)
---------- -----------
Total Shareholders' Equity 3,437,482 1,455,598
-------------------------- ---------- -----------
Total Liabilities and Shareholders'
Equity $7,527,093 $ 5,417,565
- ---------------------------------- ========== ===========
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------
<TABLE>
<CAPTION>
Years ended July 31, 1995, 1994 and 1993
Preferred Stock Common Stock
------------------- --------------------
Accumulated
Shares Amount Shares Amount (Deficit)
--------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balances at July 31,
1992 -- $ -- 4,862,046 $8,701,397 $(9,613,579)
Issuance of common
stock in connection
with private
placement -- -- 287,500 287,500 --
Net loss -- -- -- -- (1,360,057)
--------- ---------- --------- ---------- -----------
Balances at July 31,
1993 -- -- 5,149,546 8,988,897 (10,973,636)
Issuance of
preferred stock 1,000,000 3,437,120 -- -- --
Preferred dividends
paid -- -- -- -- (204,944)
Net earnings -- -- -- -- 208,161
--------- ---------- --------- ---------- -----------
Balances at July 31,
1994 1,000,000 3,437,120 5,149,546 8,988,897 (10,970,419)
Preferred dividends
paid -- -- -- -- (367,910)
Net earnings -- -- -- -- 2,349,794
--------- ---------- --------- ---------- -----------
Balances at July 31,
1995 1,000,000 $3,437,120 5,149,546 $8,988,897 $(8,988,535)
========= ========== ========= ========== ===========
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
Years Ended July 31
-------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net earnings (loss) $ 2,349,794 $ 208,161 $(1,360,057)
Adjustments to reconcile net
earnings (loss) to net cash
provided (used) by operating
activities:
Depreciation and amortization 329,012 292,727 263,071
Private placement discount -- -- 345,000
Provision for inventories 80,000 130,000 100,000
Gain on sale of discontinued
operations -- -- (268,107)
Gain on disposal of property
and equipment (1,850) (17,500) --
Deferred income taxes (1,236,000) -- --
Changes in operating assets
and liabilities:
Accounts receivable (500,252) 629,479 (186,325)
Inventories (244,890) (135,740) 189,723
Prepaid expenses and
other assets (140,219) 47,261 (129,016)
Accounts payable and other
accrued expenses (114,974) (724,399) 43,665
Accrued interest -
related party -- -- (74,288)
Customer deposits 273,154 (96,890) (388,885)
----------- ------------ -----------
Net cash provided (used) by
operating activities 793,775 333,099 (1,465,219)
----------- ------------ -----------
Cash Flows From Investing
Activities:
Proceeds from sale of equipment 1,850 45,985 --
Purchases of property and
equipment (350,111) (154,753) (187,565)
Proceeds from sale of
discontinued operations -- -- 495,000
----------- ------------ -----------
Net cash provided (used)
by investing activities (348,261) (108,768) 307,435
----------- ------------ -----------
Cash Flows From Financing
Activities:
Principal payments on
notes payable, lease
obligations and long-term debt (76,767) (86,760) (193,412)
Increase in related party debt -- 51,046 --
Net proceeds of private
placement -- -- 230,000
Payment of notes from private
placement -- -- (575,000)
Net proceeds from bonds issued -- -- 1,720,550
Payment of dividends on
preferred stock (367,910) (204,944) --
----------- ------------ -----------
Net cash provided (used) by
financing activities (444,677) (240,658) 1,182,138
----------- ------------ -----------
Increase (decrease) in cash 837 (16,327) 24,354
Cash at beginning of year 9,707 26,034 1,680
----------- ------------ -----------
Cash at end of year $ 10,544 $ 9,707 $ 26,034
=========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- -----------------------------------------------------
General:
- --------
The Company operates within a single business segment called industrial
automation equipment, and manufactures high technology machining systems
and industrial robots. The Company sells its products primarily through
the assistance of dealer networks established throughout the United States.
The Company's machining systems and industrial robots are utilized
principally in the woodworking, plastics and boating industries.
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 or when billed for inspected machines being held for
future delivery at a customer's request. Estimated costs of product
warranties are charged to cost of sales at the time of sale.
Inventories:
- ------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment:
- -----------------------
Property and equipment are recorded at cost for assets purchased and at the
present value of minimum lease payments for assets acquired under capital
leases. Depreciation and amortization are computed by the straight-line
method over the estimated useful lives of the assets, as shown below :
Buildings and improvements 10 to 30 years
Equipment 3 to 10 years
Depreciation expense for 1995, 1994 and 1993 was $289,339, $283,566, and
$277,735, respectively.
Research and Development:
- -------------------------
Research and development costs are expensed as incurred. Expenditures for
research and development were approximately $246,000, $244,000 and $327,000
during 1995, 1994 and 1993, 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, 1995,
substantially all of the deposits had no incurred work-in-process cost.
Earnings (Loss) Per Share:
- --------------------------
Primary earnings per common and common equivalent share is based on net
earnings less preferred stock dividend requirements and the weighted
average number of common shares outstanding adjusted for the incremental
shares attributed to dilutive stock options and warrants using the treasury
stock method.
Earnings per share assuming full dilution for 1995 is determined by
dividing net earnings attributable to common shareholders plus interest and
amortization expense (net of income taxes) related to convertible
debentures by the sum of the weighted average number of common shares
outstanding and the incremental shares attributed to dilutive common stock
equivalents and the assumed conversion of the convertible debentures.
In 1994 and 1993, shares contingently issuable in connection with the stock
options and warrants and convertible debentures have been excluded as their
impact on earnings (loss) per share would not be dilutive.
Discontinued Operations:
- ------------------------
During 1993 the Company sold its avionics equipment business known as
Digital Sky, including the related software, technical data, patents and
trademarks. Under the sale agreement, the Company was permitted to
continue to market products of the avionics equipment business through
January 1994, and thereafter may only service products which were
previously sold by the Company. In 1993 the Company recognized a gain of
$268,000 upon the sale of this segment. The results of the avionics
equipment business operations have been reported separately in the
accompanying statements of operations as a discontinued operation.
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.
Reclassifications:
- ------------------
Certain amounts presented in prior years' financial statements have been
reclassified to conform to the current year presentation.
NOTE B -- INVENTORIES:
- ----------------------
<TABLE>
<CAPTION>
Inventories at July 31 consist of:
1995 1994
---------- ----------
<S> <C> <C>
Finished goods $ 260,737 $ 72,368
Work-in-process 995,106 1,273,080
Raw materials 1,753,104 1,498,609
---------- ----------
$3,008,947 $2,844,057
========== ==========
</TABLE>
Inventories have been reduced by approximately $260,000 and $330,000 as of
July 31, 1995 and 1994, respectively, to reflect valuation and obsolescence
adjustments.
NOTE C -- LEASES:
- -----------------
The Company has leased its production facilities and certain equipment,
primarily from related parties. Amounts included in property and equipment
at July 31 relating to capital leases are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land $ 73,260 $ 73,260
Building and improvements 1,171,778 1,151,101
Furniture and equipment 266,929 359,318
---------- ----------
1,511,967 1,583,679
Less accumulated amortization (656,178) (658,139)
---------- ----------
$ 855,789 $ 925,540
========== ==========
</TABLE>
Future minimum lease payments as of July 31, 1995 for all capital leases
are as follows:
<TABLE>
<CAPTION>
Capital Operating
Years ending July 31: Leases Leases
------- ---------
<S> <C> <C>
1996 $35,954 $12,564
1997 8,916 12,564
1998 8,916 12,564
1999 8,916 12,564
------- -------
Total minimum lease payments 62,702 $50,256
=======
Less amount representing interest
(principally at 12% - 15%) (9,366)
-------
Present value of net minimum lease
payments $53,336
=======
</TABLE>
Total operating lease expense for 1995, 1994, and 1993 was $18,315, $5,216,
and $10,041, respectively.
NOTE D -- BONDS PAYABLE:
- ------------------------
In 1993 the Company completed a public offering of 2,070 units totaling
$2,070,000. Each unit consisted of one Convertible Debenture in the
principal amount of $1,000, bearing interest at 12% per year, and 500
Redeemable Warrants. The bonds were issued at a discount of $254,573 which
is being amortized using the interest method. The Debentures, which mature
in February 2003, are convertible, unless previously redeemed, into shares
of the Company's common stock at a price of $1.00 per share, subject to
anti-dilutive adjustments. Interest is payable quarterly. The Company
may, on 30 days written notice, and with the approval of the underwriter of
the public offering, redeem the Debentures, in whole or in part, if the
closing price of the Company's common stock for the immediately preceding
30 consecutive trading days equals or exceeds $2.50 per share. The
redemption price will be 105% plus accrued interest through the date of
redemption.
Each Warrant entitles the holder to purchase one share of common stock at a
price of $3.00 per share, subject to anti-dilutive adjustments, through
February 1996. The Company may, on 30 days notice, and with approval of
the Underwriter, redeem all of the Warrants for $0.05 per Warrant if the
per share closing price of the Company's common stock for the immediately
preceding 20 consecutive trading days equals or exceeds 150% of the then
Warrant exercise price.
NOTE E -- COMMON STOCK OPTIONS:
- --------------------------------
The Company has both a qualified and a nonqualified stock option plan. The
Company reserved 400,000 shares of common stock for issuance under the
qualified plan. Options to purchase 175,000 of the shares have been
granted, all of which were exercisable as of July 31, 1995. These options
must be exercised within ten years of the grant date.
The nonqualified plan provides for the issuance of options to purchase up
to 350,000 shares of common stock of which options to purchase 200,000
shares were outstanding and exercisable as of July 31, 1995.
Other options to purchase 660,000 shares have been granted by the Board of
Directors, all of which were exercisable as of July 31, 1995. An option to
purchase 600,000 of these shares was granted to the President of the
Company. The option extends through October 18, 1997 and permits the
purchase of 200,000 shares at $5.00 per share, 200,000 at $7.50 per share,
and 200,000 at $10.00 per share. An option for 30,000 shares was granted
to the law firm of Lalos and Keegan at $1.00 per share, is currently
exercisable and extends through May 22, 1996. A 30,000 share option was
granted to an employee at $1.00 per share and is exercisable through
October 1997.
A summary of common stock options for the years ended July 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------- ------------------- -------------------
Option Option Option
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 1,044,750 $ 1.00 to 1,076,750 $ 1.00 to 1,131,750 $ 1.00 to
$10.00 $10.00 $10.00
Granted -- -- 10,000 $ 1.00 -- --
Cancelled/
expired 9,750 $ 1.00 to 42,000 $ 1.00 to 55,000 $ 1.00 to
$ 5.00 $ 5.00 $ 5.00
Exercised -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Outstanding at $ 1.00 to $ 1.00 to $ 1.00 to
end of year 1,035,000 $10.00 1,044,750 $10.00 1,076,750 $10.00
========= ========= ========= ========= ========= =========
Exercisable at
end of year 1,035,000 1,034,750 1,056,750
========= ========= =========
Average
exercise price $ 4.84 $ 4.85 $ 4.79
========= ========= =========
</TABLE>
NOTE F -- SHAREHOLDERS' EQUITY:
- -------------------------------
The Company is authorized to issue 2,000,000 shares of non-voting preferred
stock, no par value, of which 1,000,000 shares were issued and outstanding
as Series A Preferred Stock at July 31, 1995. All of these shares were
issued to a director/shareholder in a conversion of debt transaction (Notes
G and H). The holders of Series A Preferred Stock are entitled to receive
cumulative cash dividends out of the net profits of the Company at the rate
of thirty-four cents ($0.34) per share per annum, payable monthly in equal
installments within the first fifteen days of each month for the preceding
month as directed by the Board of Directors of the Company. The Company
has the right in its sole discretion to redeem the stock at any time at
$3.40 per share. In the event of the liquidation of the Company, the
holders of the Series A Preferred Stock are entitled to receive $3.40 per
share plus any unpaid cumulative and current dividends before payment to
holders of shares of the Company's common stock.
On November 30, 1992, the Company entered into a private placement
financing arrangement wherein each unit issued consisted of one $10,000
note and 5,000 shares of restricted common stock. The notes were repaid on
March 1, 1993. As a result of this arrangement, the number of common
shares outstanding was increased by 287,500 shares. Proceeds from the
private placement, net of $57,500 underwriting costs, were allocated to
common stock ($287,500) and the notes ($230,000). The amount allocated to
common stock was based on the fair value of the common stock on the date of
issuance. Amounts allocated to common stock and underwriting costs were
reflected as a discount on the notes. Upon repayment of the notes on March
1, 1993, the unamortized discount of $251,000 was charged to operations as
an extraordinary loss.
NOTE G -- RELATED PARTY TRANSACTIONS:
- -------------------------------------
Interest expense incurred on debt represented by a line of credit payable
to a director/shareholder totaled $41,117 during 1994 and $127,278 during
1993. There was no interest expense incurred on this debt during 1995.
The Company also had an unsecured promissory note to this director and had
an unsecured promissory note to a leasing company owned by this director.
Interest expense incurred on the promissory notes totaled $9,256 during
1994 and $19,242 during 1993. There was no interest on this promissory
note during 1995. The line of credit and the promissory note were
converted to Series A Preferred Stock on November 18, 1993 (Note H).
The Company also has various capitalized lease agreements with this
director and a leasing company owned by this director. The Company leased
land, building and improvements from the director. Total payments made
during 1994 and 1993 relating to this lease amounted to $19,353 and
$290,310, respectively. Interest expense relating to this lease aggregated
$64,940 and $193,987 during 1994 and 1993, respectively. There were no
payments or interest relating to this lease during 1995. The net book
value of these leased assets was $749,830 and $778,830 at July 31, 1995 and
1994, respectively. During fiscal year 1994 the capital lease obligation
relating to land, building and improvements was converted to preferred
stock (Note H).
The Company additionally leases equipment, leasehold improvements and
demonstration and manufacturing equipment from the leasing company. In
fiscal year 1991 the Company sold and leased-back from the leasing company
a machine that it is using as demonstration equipment in its Dale, Indiana
plant. The selling price of the machine was $170,000. There was no gain
or loss recognized on this transaction because the machine was valued at
manufactured cost. Total payments made during 1995, 1994 and 1993 relating
to these leases amounted to $64,888, $89,442, and $70,748, respectively, of
which $7,791, $21,386, and $21,475, respectively, represent interest. The
lease obligation as of July 31, 1995 and 1994 was $26,148 and $83,245,
respectively.
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 $93,929, $101,599, and $76,694 for 1995,
1994, and 1993, respectively. The Company had $27,768 and $68,818 in
accounts payable at July 31, 1995 and 1994, respectively, relating to 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 the Company. The Company
primarily sells its machines directly to the purchaser within this dealer's
region; however, sales may also be made directly to the dealer who in turn
sells the machine to the purchaser. The agreement between the Company and
the dealer is a standard agreement similar to other dealer agreements
entered into by the Company.
Rent income from the dealership was $7,200 each year for 1995, 1994 and
1993. Sales commissions of $578,298, $309,509, and $301,114 were paid to
the dealership during 1995, 1994, and 1993, respectively, for assisting in
effecting sales. The Company had no sales to the dealership in 1995, 1994,
or 1993.
NOTE H -- RELATED PARTY - DEBT RESTRUCTURING:
- ---------------------------------------------
On November 18, 1993, the Company entered into an agreement with its major
creditor, who is also a director/shareholder, under which the creditor
converted approximately $3.4 million in long-term debt (including amounts
due under capital leases) to 1,000,000 shares of the Company's Series A
Preferred Stock (Note F).
NOTE I -- INCOME TAXES:
- -----------------------
The provisions for income taxes for the years ended July 31 consist of:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ------------
<S> <C> <C> <C>
Federal:
Currently payable $ (26,000) $ -- $ --
Deferred benefit 1,136,000 -- --
---------- ---------- ------------
1,110,000 -- --
---------- ---------- ------------
State:
Currently payable -- -- --
Deferred benefit 100,000 -- --
---------- ---------- ------------
100,000 -- --
---------- ---------- ------------
Total income tax benefit $1,210,000 $ -- $ --
---------- ---------- ------------
</TABLE>
A reconciliation of expected income taxes using an effective combined state
and federal income tax rate of 37% and actual income taxes for the years
ended July 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- -----------
<S> <C> <C> <C>
Net earnings (loss)
before income taxes $1,139,794 $ 208,161 $(1,360,057)
Expected income tax
(expense) benefit $ (422,000) $ (77,000) $ 503,000
Carryforward of net
operating loss -- -- (387,000)
Utilization of net operating
loss carryforward 474,000 90,000 --
Reduction in deferred tax
asset valuation allowance 1,163,000 -- --
Effect of non-deductible
items:
Loss on extinguishment
of debt and related
discount amortization -- -- (106,000)
Meals and entertainment (9,000) (5,000) (7,000)
Governmental assessments -- (8,000) (3,000)
Other 4,000 -- --
---------- --------- -----------
Totals $1,210,000 $ -- $ --
========== ========= ===========
</TABLE>
The tax effects of significant temporary differences represented by
deferred tax assets and deferred tax liabilities at July 31 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1995 1994
------------ -------------
<S> <C> <C>
Inventory valuation $ 204,000 $ 209,000
Warranty reserves 64,000 78,000
Other 89,000 32,000
Net operating loss carryforwards 2,554,000 3,028,000
------------ -------------
2,911,000 3,347,000
Less valuation allowance (1,480,000) (3,117,000)
------------ -------------
Deferred tax asset 1,431,000 230,000
------------ -------------
Deferred tax liability:
Property and equipment 195,000 230,000
------------ -------------
Net deferred tax asset $ 1,236,000 $ --
============ =============
</TABLE>
During the fourth quarter of the year ended July 31, 1995, management
determined that future earnings would more likely than not be sufficient
for realization of deferred tax assets including at least partial
utilization of net operating loss carryforwards based on the Company's
recent history of operating earnings and expectations for the future.
At July 31, 1995, the Company had the following carryforwards for tax
purposes:
Operating loss carryforwards expiring in 1997 - 2008 $6,902,000
General business credits expiring in 1995 - 2000 $ 183,000
The amount of such loss carryforwards and other credits available for
utilization in any future year could be limited in the event of a change in
ownership as defined by income tax laws.
NOTE J -- ADDITIONAL INFORMATION:
- ---------------------------------
Other accrued liabilities at July 31 consisted of:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Property and income taxes $ 39,646 $117,719
Accrued warranties 173,803 211,628
Other 159,400 144,213
-------- --------
Totals $372,849 $473,560
======== ========
</TABLE>
Cash Flow Information:
- ----------------------
The Company paid cash for interest in the amount of $280,123, $408,067 and
$536,606 during 1995, 1994 and 1993, respectively. There was no cash paid
for income taxes during 1994 and 1993. During 1995, $35,000 was paid for
income taxes.
Non-cash Investing and Financing Activities:
- --------------------------------------------
During 1994 the Company converted $3,437,120 of related party notes payable
and capital lease obligations to preferred stock (Notes G and H). During
1995 the Company entered into a lease for office equipment with an
unrelated party and incurred a capital lease obligation of $31,929. During
1993 the Company entered into a lease for computer equipment with an
unrelated party and incurred a capital lease obligation of $42,425.
NOTE K -- PENSION AND PROFIT SHARING PLAN:
- ------------------------------------------
The Company has a deferred income 40l(k) savings plan for its employees.
The Company matches 25% of employee contributions up to 3% of each
employee's wages. Pension expense for 1995, 1994 and 1993 amounted to
$18,588, $18,633 and $16,915, respectively. The Company also has a
management profit sharing plan. Profit sharing expense amounted to
$423,037 for 1995 and $139,012 for 1994. There was no profit sharing
expense in 1993.
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Shareholders and Board of Directors
Thermwood Corporation:
We have audited the accompanying balance sheets of Thermwood Corporation as
of July 31, 1995 and 1994, and the related statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended July 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in financial statements. An
audit also includes assessing the accounting principals used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Thermwood Corporation
as of July 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three-year period ended July 31,
1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 8, 1995
MANAGEMENT
- ----------
Directors
- ---------
Kenneth J. Susnjara
Chairman of the Board
Thermwood Corporation
Linda S. Susnjara
President, Automation Associates, Inc.
Machinery Distributor
Peter N. Lalos*
Senior Partner
Lalos & Keegan
Edgar C. Mulzer*
Chairman of the Board
Dale State Bank
Lee Ray Olinger*
Chairman of the Board
First Bank of Huntingburg
* Members of the Audit Committee,
Compensation Committee and
Incentive Stock Option Committee
Officers
- --------
Kenneth J. Susnjara
President
Linda S. Susnjara
Secretary
Rebecca F. Fuller
Treasurer
Michael P. Hardesty
Vice President of Engineering
David J. Hildenbrand
Vice President of Sales
Richard A. Kasten
Vice President of Technical Services
Stockholder Information
- -----------------------
Corporate Office
Thermwood Corporation
Old Buffaloville Road
P.O.Box 436
Dale, Indiana 47523
812 937-4476
Transfer Agent and Registrar
The American Stock Transfer & Trust Company
99 Wall Street
New York, New York 10005
Auditors
- --------
KPMG Peat Marwick LLP
Certified Public Accountants
2400 First Indiana Plaza
135 N. Pennsylvania St.
Indianapolis, Indiana 46204-2452
Legal Service
- -------------
Lalos & Keegan
1146 19th Street, N.W.
Washington, D.C. 20036-3703
Form 10-K
- ---------
Copies of Form 10-K, the Company's Annual Report to the Securities and
Exchange Commission, may be obtained without charge upon written request
from Thermwood at its corporate office. Requests should be directed to the
Treasurer's office.
Annual Meeting
- --------------
The Annual Meeting of Thermwood Corporation will be held on Thursday,
December 14, 1995 at 9:00 AM., Dale, Indiana Time, in the Company's
Corporate Office.
