SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15D
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1995
Commission file number 0-12195
THERMWOOD CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1169185
(State of incorporation) (IRS Employer Identification number)
Old Buffaloville Road
P.O. Box 436
Dale, Indiana 47523
(Address of principal executive offices) (Zip Code)
(812) 937-4476
(Registrant's telephone number including area code)
______________
Securities registered pursuant to Section 12 (b)
and 12 (g) of the Act:
Shares of Common Stock without par value
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained,
to the best of registrant's knowledge, in
definitive proxy or information statements
incorporated by reference in Part III of this form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock
held by non-affiliates of the Registrant at
October 25, 1995 based upon the closing price of
the Registrant's Common Stock as reported on the
American Stock Exchange was approximately
$12,795,144.
The number of the Registrant's shares of Common
Stock outstanding as of October 25, 1995 was
5,850,546 shares.
Documents Incorporated by Reference :
Exhibits to Registrant's Registration statement on
Form S-1 (No. 2-87641) filed under the Securities
Act of 1933 and effective April 12, 1984, its
Registration Statement on Form 8-A filed under
the Securities Act of 1934 and Current Reports
filed on form 8-K dated February and April, 1987,
and its Registration Statement on Form 8-A filed
under the Securities Act of 1934 dated November,
1989, its Registration Statement on Form SB-2 (No.
33-54756) which became effective on February 22,
1993, and amended as of July 14 1995, and its
Forms 10-K for the years ended July 31, 1991, July
31, 1992, July 31, 1993 and July 31, 1994.
PART I
Item 1. Business
General
The Company develops, manufactures and markets all
of its products. Its operations are divided into
a number of different areas. The production
organization, which is responsible for all
manufacturing, is directed by the Production
Manager. Product and production engineering is
directed by the Vice President of Engineering.
The Machining Products Division is responsible
for the sale of the Company's automated industrial
equipment which includes the CARTESIAN 5 System
and wood carving robots. This division is managed
by a Vice President. The Technical Services
Division is responsible for selling as well as
providing technical services and is managed by the
Vice President of that Division. In addition,
there is a marketing group which is managed by the
Company's President and a research and development
group which is supervised by the Vice President of
Engineering. Each sales division is treated as a
separate profit center and is generally charged
for the production, marketing, and research and
development resources it uses to support its
operations.
Industry Background
Flexible Automation
Prior to the availability of microprocessor-based
machinery control systems, there were only two
alternatives to automating the industrial process:
a manual operation using humans to manipulate
tools; or "hard automation" employing dedicated
automatic machinery. High initial cost and
limited flexibility have made hard automation
suitable only for applications involving large
volumes of identical parts. Smaller volumes of
parts were traditionally produced by using human
labor, hand tools or machine tools operated
manually.
In today's marketplace, competitive pressures
demand a greater variety of products. Due to
demographic and economic factors, neither hard
automation nor manual labor appears to be a
feasible means of meeting this manufacturing
requirement.
The gap between hard automation and manual labor
is currently being filled by a variety of flexible
automation equipment. This equipment is often
better suited to small and medium volumes of parts
and is usually designed to perform a number of
tasks utilizing the same computer-controlled
machine.
Flexible automation equipment is manufactured in a
variety of forms and addresses a number of
applications. Specific markets have developed for
certain classes of equipment with a number of
vendors offering products in each of these niche
markets. Many vendors, including the Company,
build products which 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.
Machine Control Systems
There are two types of control systems used to
program and operate industrial robot devices. One
uses a "lead through teach" method and stores the
information on a continuous path format. In this
method, the drive system is disconnected from the
movable parts of the machine. The machine is then
moved through the desired motions. The position
of the machine is sampled many times per second
and this information is recorded. During
operation, these motions are replayed.
The second type is the Computer Numerical Control
("CNC") system. This system uses sets of
instructions appearing in blocks, each containing
information concerning a particular movement of
the machine. In operation, the machine
sequentially executes each block of instructions.
For example, blocks can include movements such as
straight lines, arcs and circles, or can be used
to turn certain machine functions on or off.
CNC systems are also used to control the movements
of other automated industrial equipment. This
type of system differs from the older Numerical
Controls ("NC") in that a CNC system contains one
or more computers within the control mechanism
providing more capability than an NC control,
which lacks a computer and simply executes
instructions developed elsewhere.
Programming a CNC system can be accomplished in a
variety of ways. These include inputting the
block of information directly into a terminal,
generating programs using a computer and a
computer aided design/computer aided manufacturing
(CAD/CAM) system, and moving the machine to a
position and having the machine's controller
create the block of instructions.
Products
Automated Industrial Equipment
The CARTESIAN 5 machining systems are high speed
computer controlled, fully automatic machining
centers. These centers are designed to perform a
variety of tasks such as routing and shaping wood
parts, trimming of three dimensional plastic
parts, machining of aluminum honeycomb, drilling
and high speed machining of aluminum both
vertically and horizontally, mortising (i.e.,
cutting square holes in furniture), and sawing and
squaring (i.e., cutting inside square corners).
They generally operate over larger table areas and
at higher speeds than do conventional machine
tools but cannot machine the heavy materials and
large cross sections that standard machine tools
are capable of doing.
The CARTESIAN 5 systems utilize the Company's
proprietary SuperControl system and consist of one
or more high speed cutting, drilling or machining
heads and related tooling which move around a
table under computer control to perform programmed
operations. There are two basic types of systems,
one where the table is fixed and the cutting heads
move both left and right and back and forth, and
the other where the table moves back and forth and
the cutting heads move only left and right. Both
systems permit the heads to reach all points on
the table. Cutting is accomplished by metal bits,
drills, blades and water jets. Additional motions
or axes, which permit the head to both pivot and
rotate, can be installed, thereby making three
dimensional cuts. Multiple and varying cutting
and drilling heads can be added, allowing a number
of different machining operations to be
accomplished in a single cycle or multiple parts
to be machined simultaneously.
Currently the Company markets seven standard
CARTESIAN 5 systems of varying sizes and
capabilities which 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 CARTESIAN 5 systems are utilized principally
in the woodworking, plastics, boating and
automotive industries. In prior fiscal years the
Company has marketed large, completely customized
machines, primarily to the aerospace industry.
During the 1994 fiscal year the Company
discontinued marketing and building customized
machines. The Company currently focuses on
standard machines in an effort to produce these
products more efficiently and at lower cost.
Current prices to end users range from
approximately $49,000 to over $200,000 per system.
The average price of a standard system is
approximately $115,000.
Robotics Systems
Thermwood has developed a wood carving robot to
automate the operation of a multi-spindle carving
machine. This machine is used in the furniture
industry to manufacture carved wood parts. It is
moved manually by a highly skilled operator while
a number of cutting heads duplicate the motions in
a panagraph machine which records the motions of
the human carver as he operates the machine. It
then accurately replays these motions, duplicating
the operator's skill. Once programmed, the
Carving Robot can be operated by a lower cost,
less skilled worker.
Retail prices for the Carving Robot range from
approximately $85,000 to $100,000. Based on
current interest and activity, management
anticipates that sales of this product should
increase but no assurance to that effect can be
given.
SuperControl Systems
Thermwood designs and manufactures its own CNC
systems which it uses primarily for its own
automated industrial equipment. It had
manufactured two versions of the SuperControl CNC
system, the 9100A and the 91000. During the 1994
fiscal year, the more limited 9100A was
discontinued.
Marketing
The market for industrial automation equipment can
be divided into a large number of applications in
a variety of industries. Thermwood seeks to
produce industrial products which address specific
applications in a variety of industries. It also
attempts to provide complete, pre-engineered,
standard automation systems which 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.
Thermwood's systems are currently designed to
operate at higher quality and reliability levels
than earlier versions of these products. In
addition, the Company has striven to support these
systems with improved technical services and
assistance. Although Thermwood's marketing
strategy has involved emphasis on small to medium-
sized companies, the Company has also received
orders from larger companies.
The Company generally sells its products through a
network of dealers supervised by the Vice
President of Sales and the account managers of the
particular operating division responsible for each
product or service. Dealers assist the Company
in making sales and are paid on a commission basis
for this service. Commissions generally range
from 15% to 20% of the Company's published retail
prices. As of July 31, 1995 the Company had 14
authorized dealers marketing its industrial
products.
Thermwood usually requires each dealer to execute
a non-exclusive written agreement with it. A
dealer is required to sell one machine within each
six-month period in order to retain its
dealership. Most dealers concentrate their sales
efforts in specific geographical areas and in
particular industries such as woodworking or
plastics, and sell only one of the Company's
product lines. However, some market and sell
products to more than one industry and sell both
the CARTESIAN 5 systems and the Company's line of
industrial robots.
One dealer accounted for approximately 20% of the
Company's sales for the fiscal year ended July 31,
1995. See Item 13. "Certain Relationships and
Related Transactions" for information relating to
the Company's agreement with this dealer which is
owned by the Company's president and his wife who
is also an officer and director. One other dealer
accounted for approximately 12% of the Company's
business during the 1995 fiscal year. No other
dealer accounted for 10% or more of the Company's
business for the fiscal year. The loss of any
large dealer could have a materially adverse
effect on the Company's business. Thermwood's
business is not seasonal.
Typically, Thermwood seeks to develop sales leads
through advertising in trade magazines and product
exhibitions at selected trade shows. The Company
then furnishes such leads to dealers in the
geographic area where the potential customer is
located. It also supplies the dealers with
promotional materials and sales aids, including
product literature, a dealer's manual, news
letters, press releases and advertising, technical
briefs, sales incentive programs and video tapes
of product demonstrations. The Company assists
its dealers by providing training for them and
their customers. Thermwood encourages trainees
and potential customers to visit its manufacturing
facilities where it maintains areas and machinery
to demonstrate the operation and use of its
products.
Technical Services
Management believes that providing extensive and
ongoing technical services to customers is
essential for the success of small and medium-
sized companies. Accordingly, Thermwood offers a
variety of technical services through its
Technical Services Division. These services
include training, installation assistance,
preventive maintenance and upgrading and
enhancement of installed products as technology
advances. 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.
A toll-free service line is maintained for the use
of all owners of the Company's equipment.
Thermwood does not offer its customers written
service contracts. Although the Company does not
provide its customers with the right to return
products, this right may be implied. The Company
has incurred no significant expenses or problems
in servicing its products.
Product Development
Much of Thermwood's product development effort
during the last two years has been directed toward
development of a variety of cutting and machining
heads for use on the CARTESIAN 5 line of
equipment. This development is continuing in an
effort to broaden the capability of the equipment
and thus increase market size for these products.
In addition, the Company has an ongoing program
to reduce the manufacturing costs of its products
and pass these reductions on to customers in the
form of price decreases.
Thermwood is completing efforts to add the
capability of performing three-dimensional wood
carving to its entire CNC router line. The
resulting system is expected to produce carved
wood components at a three to ten times faster
production rate than the Company's current carving
robot product. Management expects to offer these
new capabilities within the next six months and
expects sales of these new products to replace
sales of the current two-dimensional carving robot
product. For the fiscal year ended July 31, 1995,
the two-dimensional carving robot accounted for
approximately $1,020,000 or 8% of machine sales.
Development efforts have been continuing on the
91000 SuperControl which is an updated version of
the CNC control systems formerly used on Thermwood
equipment. The basic system development is
complete and is currently being sold and shipped
on the Company's equipment. Current efforts are
being directed toward adding certain high-end
features and capabilities.
Customers
Although the Company has sold its industrial
products to large corporations (i.e., companies
with annual sales approximating or exceeding $1
billion), its primary customer base is comprised
of small to medium-sized manufacturers (i.e.,
companies with annual sales ranging from
approximately $10 million to approximately $500
million) located throughout the United States. No
customer accounted for more than 10% of the
Company's sales in the fiscal year ended July 31,
1995.
Thermwood generally requires a purchaser of
industrial products to pay 30% of the sales price
when placing the order, an additional 40% prior to
shipment and the balance within 30 days after date
of invoice. Charges for technical services and
spare parts are due within 30 days after billing.
Thermwood offers its customers a limited
warranty, ranging from 90 days for labor to one
year for parts. The Company also provides
training and installation. See "Technical
Services" above.
Backlog
As of July 31, 1995, the Company's backlog was
approximately $1,860,000 compared with a backlog
of $1,280,000 as of July 31, 1994. Substantially
all of this backlog will be manufactured and
delivered prior to October 31, 1995.
Backlog figures generally include only written
orders from customers which management believes
are firm and will be shipped within eight to 12
weeks. Approximately 90% of the backlog is
covered by down payments from customers ranging
from 25% to 30%. On orders where down payments
have not been required, the Company has obtained
irrevocable letters of credit for payment upon
proof of shipment.
Because of the possibility of customer changes in
delivery schedules or cancellation of orders, the
Company's backlog as of any particular date may
not be indicative of actual revenues for any
subsequent period.
Manufacturing and Production
The Company maintains its manufacturing facilities
in Dale, Indiana. See "Property and Facilities"
below. It manufactures its products on a batch
rather than a continuous flow or conventional
production line basis. Except for demonstration
models, the Company does not generally manufacture
products without a purchase order although, in
order to expedite the manufacturing process,
certain basic parts of machines may be fabricated
before purchase orders are received. The major
portion of inventory is purchased to satisfy
specific customer orders with the balance acquired
from one to four months in advance of projected
orders.
Thermwood designs, develops and engineers all of
its industrial products. Components contained in
these products are either purchased from outside
suppliers or fabricated by Company personnel. The
Company fabricates such components as computer-
based electronic control systems and the steel
structure of the CARTESIAN 5 systems. Where
possible, the Company utilizes its CARTESIAN 5
systems to fabricate components.
Raw materials are purchased from third party
sources. Most raw materials and components,
including those which are custom made for the
Company, are either purchased or available from
several sources. There are, however, a number of
components which can only be obtained from single
source suppliers. Management does not consider
this to be a problem because it believes that the
Company would be able to eliminate or replace
these components if required. One supplier
accounted for slightly more than 15% of total
components purchased by the Company for the fiscal
year ended July 31, 1995. The materials purchased
from this supplier are available from several
other sources.
Competition
There are many manufacturers of flexible
automation equipment and CNC machining systems 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 does the Company. Many of them
have been engaged in manufacturing and marketing
automated industrial equipment longer than
Thermwood.
The Company's 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,
Motion Master and Komo Machine In addition, the
number of companies offering routing equipment has
increased and it is management's opinion that the
market cannot support all of them. Management
believes, however, that the ability of the Company
to offer products which perform a variety of
functions and sell at low prices, provides
Thermwood with a competitive advantage, although
no assurance to this effect can be given.
Competition in flexible automation equipment is
based upon real and perceived differences in
equipment features, price, performance,
reliability, service, marketing, financial
strength and product development capability. The
Company may be at a competitive disadvantage with
those manufacturers that offer a broader line of
such equipment or related non-robotics equipment.
Thermwood seeks to design its products for high
levels of performance and reliability while
offering them at moderate prices.
Research and Development
Thermwood plans to continue its research and
development efforts primarily directed toward the
improvement of existing products and the
development of new, lower cost products. The
Company utilizes a variety of sources in its
research and development efforts, including
employees, vendor engineering staffs, contract
employees who are retained solely for specific
projects, consultants and independent design
firms. See "Product Development" above for
information relating to the Company's current
development efforts.
For the fiscal years ended July 31, 1995 and 1994,
the Company spent $246,000 and $244,000,
respectively, for research and development. There
was no customer sponsored research and development
during the 1995 fiscal year. Management believes
that expenditures need to be increased in order
for the Company to maintain a competitive position
in the immediate future. However, the Company may
eventually be at a competitive disadvantage with
respect to firms that spend significantly more on
research and development efforts.
Patents, Trade Secrets and Trademarks
Thermwood currently holds 11 domestic patents and
has applications pending in the United States for
11 additional patents. There is no assurance that
any additional patents will be granted.
Management does not believe that major reliance
can be placed on patents for the protection of its
products although patent protection for the
Company's newly developed products is increasing.
Thermwood relies primarily upon trade secret laws,
internal non-disclosure safeguards and
restrictions incorporated into its dealership,
sales, employment and other agreements to protect
its proprietary property and information. In
addition, the Company has proprietary rights
arrangements with its employees which provide for
the disclosure and assignment by the employee to
Thermwood of any discovery, invention or
improvement relating to its business. While
management is unaware of any breach of the
Company's security, competitors may develop
similar products outside the protection of any
measures that Thermwood takes. In addition,
policing unauthorized use of the Company's
technology, particularly in foreign countries, may
be difficult. The Company has been unsuccessful
in prosecuting two claims for what it believed
were prospective unauthorized use of proprietary
rights. The Company has not been involved in any
claims concerning patent infringement.
The Company markets its products under various
trademarks, including THERMWOOD, CARTESIAN 5,
91000 SUPERCONTROL, CARTESIAN EAGLE, ROUTER ART
and PANEL-CAD. It has several trademark
registrations and applications for registrations.
Employees
As of July 31, 1995, the Company had 92 full time
employees, of whom 48 were engaged in
manufacturing, nine in marketing, 12 in
administration, seven in engineering, three in
research and development, and 13 in technical
services. None of the Company's employees is a
member of any union or collective bargaining
organization. Thermwood considers its
relationship with its employees to be
satisfactory.
Designing and manufacturing the Company's
industrial equipment requires substantial
technical capabilities in many varied disciplines,
ranging from mechanics and computer sciences to
mathematics. Although management believes that
the capability and experience of Thermwood's
technical staff compare favorably with other
similar manufacturers, there is no assurance that
the Company can retain existing employees or
attract and hire the type of skilled employees it
may need in the future.
Property and Facilities
Thermwood's manufacturing facilities and executive
offices are located in a 73,000 square foot
building in Dale, Indiana which has been leased
from Edgar Mulzer, a director and major
stockholder of the Company. Management believes
that these facilities are in good condition and
adequately satisfy the Company's current
requirements.
The lease, which entitles the Company to utilize
the facilities and offices through February 14,
2007, required the Company to pay an annual base
rental of $232,000 as well as all taxes,
maintenance, repairs, utilities and insurance.
The lease, together with a related agreement which
contains a purchase option, is accounted for as a
capital lease. In November 1993 the Company
entered into an agreement with Mr. Mulzer to
convert the obligation under the lease, as well as
other long-term debt amounts owed to Mr. Mulzer,
into shares of the Company's Series A Preferred
Stock.
The Company also leases certain equipment at an
aggregate annual rental of approximately $65,000
from one of Mr. Mulzer's affiliated companies.
See Item 13. "Certain Relationships and Related
Transactions."
Item 3. Legal Proceedings
On or about September 24, 1994, a civil action
entitled Ronald L. Hughes and Laurene Hughes v.
Plastivax, Inc. and Thermwood Corporation and
Temporarily Yours Placement Services, Inc. and
John Doe, Cause No. 94C-VO0-1285 was filed in the
Court of Common Pleas in Lake County, Ohio,
seeking a judgment against Plastivax, Inc.,
Thermwood Corporation, and Temporarily Yours
Placement Services, Inc. for damages caused by an
injury Mr. Hughes received while cleaning a
machine Thermwood sold Plastivax. Mr. Hughes is
suing for damages in the amount of $500,000.
Thermwood's product liability insurance company,
U.S.F. & G., is representing the Company in this
matter. Thermwood's coverage on any single event
is $1,000,000 with a $5,000,000 umbrella which
exceeds the amount being sued for.
Item 4. Submission of Matters to a Vote of
Security Holders
None.
PART II
Item 5. Market for Company's Common Equity and
Related Stockholder Matters
The Common Stock has been traded on the American
Stock Exchange since 1989 and on the Pacific Stock
Exchange since 1987. The following table sets
forth the high and low per share sales prices for
the Common Stock as reported on the American Stock
Exchange for the Company's last two fiscal years
ended July 31, 1995 and July 31, 1994,
respectively, and for the interim periods
indicated:
<TABLE>
Common Stock
Low High
Sales Price Sales Price
----------- -----------
<S> <C> <C>
1995
Fourth Quarter $1.00 $1.63
Third Quarter $ .82 $1.44
Second Quarter $ .75 $1.12
First Quarter $ .75 $1.32
1994
Fourth Quarter $.50 $1.32
Third Quarter $.44 $ .82
Second Quarter $.50 $ .69
First Quarter $.31 $ .75
</TABLE>
As of October 25, 1995, there were approximately
1,200 holders of record of the Common Stock and
5,850,546 shares outstanding.
Thermwood has never paid any dividends on its
Common Stock. The current policy of the Board of
Directors is to retain earnings, if any, to
finance the operation of the Company's business.
Accordingly, it is anticipated that no cash
dividends will be paid to the holders of the
Common Stock in the foreseeable future.
The Company also has warrants which are listed for
trading on the Pacific Stock Exchange. There has
been no active market for these securities from
February 22, 1993, the date of issuance, through
the date hereof.
Item 6. Selected Financial Data
<TABLE>
Operations for the years ended July 31 (in thousands
except per share data)
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 --- --- --- --- ---
Financial position at July 31:
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>
Item 7. Management's 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.
Item 8. Financial Statements and Supplementary
Data
The information called for by this Item 8 is
included following the "Index to Financial
Statements and Schedules" appearing at the end of
this Form 10-K.
Item 9. Disagreements on Accounting and Financial
Disclosures
Not applicable.
PART III
Item 10. Directors and Executive Officers of the
Company
Certain information about the directors and
officers of the Company is contained in the
following table:
<TABLE>
<S> <C> <C>
Name Age Position
Kenneth J. Susnjara(1) 48 Chairman of the Board
President and Director
Linda S. Susnjara(1) 46 Secretary and Director
Michael P. Hardesty 41 Vice President of
Engineering
Rebecca F. Fuller 45 Treasurer
David J. Hildenbrand 38 Vice President of Sales
Richard Kasten 43 Vice President of
Technical Services
Peter N. Lalos (2) 61 Director
Edgar Mulzer (2) 77 Director
Lee Ray Olinger(2) 68 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 shareholders of the Company or until
their successors have been elected and qualified.
Officers serve at the discretion of the Board of
Directors. Each director receives compensation in
the amount of $500 for attending each directors'
meeting 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 the Company's business
except for a brief period in 1985 when he acted as
a distributor for the Company. Mr. Susnjara is
the author of a book on industrial robotics
entitled A Manager's Guide to Industrial Robotics
and lectures on robotics and automation to
business and university groups. See Item 13.
"Certain Relationships and Related Transactions."
Mrs. Susnjara has been a director of the Company
since 1985 and Secretary since 1989. She is and
has been since 1985 the President of Automation
Associates, Incorporated, a dealer of the
Company's industrial products. See Item 13.
"Certain Relationships and Related Transactions."
Mrs. Susnjara is not active in the Company's
business.
Mr. Hardesty has been the Company's Vice President
of Engineering since August 1988. He joined the
Company in 1975 and was employed first as a
project engineer, then project manager and then
general manager until July 1980 when he was
promoted to Vice President of Operations. He
served in that capacity until May 1985 when he
became Vice President of the Machining Products
Division, a position he held until assuming his
current position in 1988.
Mrs. Fuller joined Thermwood 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, he had
been employed by the Company in various technician
and sales manager positions since 1977.
Mr. Kasten became a Vice President in December,
1993. Previously, he had been employed by the
Company as a manager of applications since 1990.
Mr. Lalos has been engaged in the private practice
of law in Washington D.C. since 1961 and is the
senior partner in the law firm of Lalos & Keegan.
He served as Secretary of the Company from
September 1981 until December 1989 and as a
director from April 1981 until July 1986. He was
reelected to the Board of Directors in December,
1989. See Item 13. "Certain Relationships and
Related Transactions."
Mr. Mulzer was Chairman of the Board of The Dale
State Bank, a commercial bank in Dale, Indiana,
from 1970 through 1993. Mr. Mulzer is currently
retired. He became a director of the Company in
September 1974 and has served continuously in that
capacity to the present. See Item 13. "Certain
Relationships and Related Transactions" for
information relating to loan and lease
transactions between the Company and Mr. Mulzer
and his affiliates.
Mr. Olinger has been a director since December,
1989. He has been a director since 1949 and
Chairman of the Board since 1986 of First Bank of
Huntingburg, a commercial bank in Huntingburg,
Indiana.
Compliance with Section 16 (a) of the Securities
Exchange Act of 1934
To the Company's knowledge, based solely on a
review of such materials as are required by the
Securities and Exchange Commission, no officer,
director or beneficial holder of more than ten
percent of the Company's issued and outstanding
shares of Common Stock failed to timely file with
the Securities and Exchange Commission any form or
report required to be so filed pursuant to Section
16 (a) of the Securities Exchange Act of 1934
during the fiscal year ended July 31, 1995.
Item 11. Executive Compensation:
The following table sets forth the annual
remuneration paid during the fiscal years ended
July 31, 1995, 1994 and 1993 to the Chief
Executive Officer and to each of the executive
officers of the Company whose total fiscal 1995
remuneration exceeded $100,000 and to all officers
of the Company as a group.
<TABLE>
Summary Compensation Table
--------------------------
Annual compensation Long-term compensation
------------------- ----------------------
Awards Payouts
------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other
annual
Name and princi- compen- Restric- Op- LTIP
pal position Year Salary Bonus sation ted stock tions/ pay-
(1) awards SARs(#) outs Other
1995 63,000 $94,739 $2,000 --- --- --- ---
Chairman of 1994 74,250 --- 2,000 --- --- --- ---
the Board, 1993 64,025 --- 2,000 --- --- --- ---
President and
director
Michael Hardesty
Vice-president 1995 48,000 66,317
Engineering
David Hildenbrand
Vice-president 1995 45,000 73,964
Sales
All other officers 1995 80,000 77,618 --- --- --- ---
as a group
(2) persons --- --- --- ---
All other officers 1994 170,116 4,237 --- --- --- ---
as a group 1993 180,755 --- --- --- --- ---
(4) persons
</TABLE>
(1) Other annual compensation represents
directors' fees paid to Mr. Susnjara.
No stock options or stock appreciation rights were
issued in fiscal year 1995. At July 31, 1995 the
exercise price of some of the unexercised options
were less than the market price of the Company's
Common Stock. On September 6, 1994, registration
statements on Form S-8 were filed with the
Securities and Exchange Commission under the
Securities Act of 1933 in connection with the
registration of shares of the Company's Common
Stock under the Company's Employee Incentive Stock
Option Plan and Non-Qualified Stock Option Plan.
In 1985 the Board of Directors appointed Mr.
Susnjara to the position of President and Chief
Executive Officer. In this position, he is to
receive a bonus based on the pre-tax profits of
the Company as set forth below. See "Profit
Sharing Plan" below.
Certain other officers may be entitled to
participate in the Company's profit sharing plan.
See "Profit Sharing Plan" below.
Profit Sharing Plan.
In 1985, the Company instituted a management
profit sharing plan. This plan has been operative
since fiscal 1987, and was continued in an amended
form for fiscal 1995. Covered under the plan are
the Chairman of its Board of Directors, the
President, Vice President of Engineering, Vice
President of Sales, Vice President of Technical
Services, the Treasurer and various departmental
managers.
Under the plan, the Chairman is entitled to 5% of
corporate operating income. The Vice President of
Sales and Vice President of Technical Services
each are entitled to 5% of the divisional
operating income and the Treasurer is entitled to
3% of the Corporate operating income. Any
divisional losses are to be subtracted from these
amounts so that the total bonus paid does not
exceed 25% of operating income.
Department managers are entitled to various
bonuses based upon productivity of their
departments. Payments due under the plan accrue
for each six-month period and are thereafter paid
in six monthly installments. Vesting of rights
under the plan requires eligible participants to
be continually employed through the payment dates.
Divisional losses of the fiscal year must be
recouped in the succeeding year, or years, in
order to be eligible for profit sharing earnings
in the succeeding year(s).
Incentive Stock Option Plan.
Under the Company's Incentive Stock Option
Qualified Plan (the "Qualified Plan"), options to
purchase a maximum of 400,000 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 Internal Revenue Code of 1954, as amended
by the Tax Reform Act of 1986.
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 process. In the event an optionee
voluntarily terminates his employment with the
Company, he has the right to exercise his accrued
options within 5 days prior to such termination.
However, the Company may redeem any accrued
options held by each optionee by paying him the
difference between the option price and the then
fair market value. If an optionee's employment is
involuntarily terminated, other than because of
death, he also has the right to exercise his
accrued options within 30 days of termination.
Upon death, his estate or heirs have one year to
exercise his 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 the voting shares of the
Company may not have a term in excess of five
years and the option price per share may not be
less than 110% of fair market value at the date
the option is granted.
The aggregate fair market value of the shares of
Common Stock (determined at the time the options
are granted) with respect to which incentive stock
options are exercisable for the first time by such
optionee during any calendar year (under all such
plans) shall not exceed $100,000. Options must be
granted within ten years from the effective date
of this Qualified Plan.
Options granted under the Qualified Plan are not
transferable other than by will or the laws of
descent and distribution. Options granted under
the Qualified Plan are protected by anti-dilution
provisions increasing the number of shares
issuable thereunder and reducing the exercise
price of such options, under certain conditions.
During fiscal year 1992, the life term of the
Qualified Plan was extended from December 3, 1991
to December 3, 1995, or on such earlier date as
the Board of Directors may determine. Any option
outstanding at the termination date will remain
outstanding at the termination date until it
expires or is exercised in full, whichever occurs
first.
As of July 31, 1995, options to acquire 175,000
shares of the Company's common stock for ten years
at exercise prices of $1.00 to $5.00 per share had
been granted under the Qualified Plan to 13
employees of the Company. Options for the
purchase of 175,000 shares were exercisable as of
July 31, 1995.
Non-qualified Stock Option Plan.
Under Thermwood's Non-qualified Stock Option Plan
("NSO Plan"), options to purchase a maximum of
350,000 shares of its Common Stock may be granted
to officers, directors, and other key employees.
The NSO Plan is administered by the Board of
Directors and a committee of three members of the
Board which determines which persons are to
receive such options, the number of shares that
may be purchased under the option, the exercise
prices, the time and manner of exercise and other
related matters.
In the event an optionee voluntarily terminates
his employment or tenure with the Company's
consent or his employment or tenure is terminated
by Thermwood without cause, he generally has the
right to exercise his accrued options within 30
days after such termination unless the Committee
elects other time periods. In all other cases of
termination of the optionee's employment or tenure
other than death, said options shall cease
immediately. Upon death, his estate or heirs have
one year to exercise his accrued options.
The Committee may grant an optionee the right to
surrender all or a portion of his accrued options
to the Company and receive from it the difference
between the option price and the then fair market
value. Options become exercisable in 25%
installments each year beginning in the second
year through the fifth year. Options are
generally not transferable and are conditioned
upon the optionee remaining in the Company's
employ for at least one year from the date of its
grant. Under the NSO Plan, no option may be
granted after January 1, 2005 and the exercise
price of such options could have been less than
the then fair market value. It is within the
Committee's discretion to grant anti-dilution
provisions to each optionee. Under present
federal income tax law, an employee, officer or
director who is granted an option will not have
any income upon the grant of an option and the
Company will not be entitled to any deduction at
the time. When an optionee exercises his option,
ordinary income will be realized by him, measured
by the excess of the fair market value of the
shares over the price paid for the shares. The
Company will be entitled to a deduction equal to
the amount of income realized by the holder of the
option. If the optionee surrenders all or part of
his option for a cash or common stock payment, he
will realize ordinary income in the amount of cash
or fair market value of stock received. The
Company will be entitled to a deduction equal to
the amount of income realized by the optionee.
As of July 31, 1995 options to acquire 200,000
shares of the Company's common stock at exercise
prices ranging from $1.125 to $2.00 per share have
been granted under the NSO Plan to four directors
and officers of Thermwood, all of which are
presently exercisable.
Other options.
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 & 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.
Section 401(k) Plan
The Company adopted a tax-qualified cash savings
plan (the "401(k) Plan") which became effective in
October 1989. This Plan covers all employees who
have completed 12 months of continuous service
prior to a plan entry date. Pursuant to the
401(k) Plan, eligible employees may make salary
deferral (before tax) contributions of up to 12%
of their total compensation per plan year up to a
specified maximum contribution as determined by
the Internal Revenue Service. The Company also
makes matching contributions equal to 25% of the
employee's contribution up to a maximum of 3% of
the employee's annual compensation. The 401(k)
Plan also includes provisions which authorize the
Company to make discretionary contributions. Such
contributions, if made, are allocated among all
eligible employees as determined under the 401(k)
Plan. The trustee under the 401(k) Plan is
Merrill Lynch of Evansville, Indiana. It invests
the assets of each participant's account in funds
at the direction of such participant.
Item 12. Securities Ownership of Certain
Beneficial Owners and Management:
The following table sets forth certain information
regarding the Company's Common Stock, including
shares underlying the convertible debentures and
exercisable Common Stock warrants and options
owned as of September 30, 1995 by (i) each person
known by the Company to own beneficially more than
5% of its outstanding Common Stock, (ii) each
director, and (iii) all officers and directors as
a group:
<TABLE>
<S> <C> <C> <C> <C>
Shares Owned
Including
Those
Underlying
Percentage Exercisable Percentage
Names and Addresses Shares of Total Options, of Total
of Beneficial Owned at Outstanding Warrants and Outstanding
Owners (1) July 31, 1995 Shares Owned Convertible Shares
(2) Securities Owned
- ------------------- ------------- ------------ ------------ -----------
Kenneth J. Susnjara 1,330,000 25.8 2,155,000(5) 23.2(5)
(3,4)
Edgar Mulzer 940,562 18.3 990,562(6) 10.7(6)
401 10th Street
Tell City, Indiana
47586
Peter N. Lalos 25,000 0.5 135,000(7) 1.5(7)
14312 Darnstown Road
Gaithersburg,
Maryland 20878
Linda S. Susnjara --- --- 50,000(8) 0.05(8)
(3,4)
Lee Ray Olinger --- --- --- ---
c/o First Bank of
Huntingburg
4th and Main Street
Huntingburg, IN 47542
All Officers and
Directors as a 2,300,562 44.7 3,426,562 36.9
Group (9 persons) (5,6,7,8) (5,6,7,8)
</TABLE>
(1) All shares are beneficially owned and the
sole voting and investment power is held by the
person indicated.
(2) Excludes (i) an aggregate of 3,105,000 shares
of Common Stock reserved for issuance upon
conversion of debentures and exercise of the
redeemable warrants; (ii) 400,000 shares reserved
for issuance under the Company's Qualified Stock
Option Plan of which options to purchase 175,000
shares have been granted and options to purchase
175,000 shares are currently exercisable; (iii)
350,000 shares reserved for issuance under the
Company's Non-Qualified Stock Option Plan of which
options to purchase 200,000 shares have been
granted and are currently exercisable; (iv)
600,000 shares reserved for issuance upon exercise
of options granted to Mr. Susnjara, all of which
are currently exercisable; (v) 30,000 shares
reserved for issuance of options granted to Lalos
& Keegan, all of which are currently exercisable;
and (vi) 30,000 shares reserved for issuance upon
exercise of options granted to an employee, all of
which are currently exercisable. See Item 11.
"Executive Compensation" and Item 13. "Certain
Relationships and Related Transactions."
(3) The address of this person is c/o the
Company.
(4) Mr. and Mrs. Susnjara may each be deemed to
be a beneficial owner of the Company's securities
owned by the other because of their marital
relationship.
(5) Includes (i) an aggregate of 75,000 shares
issuable upon conversion of debentures and
exercise of redeemable warrants owned by Mr.
Susnjara; (ii) 50,000 shares issuable upon the
exercise of options granted to Mr. Susnjara under
the Company's Non-Qualified Stock Option Plan; and
(iii) 600,000 shares issuable upon the exercise
of other options granted to him.
(6) Includes 50,000 shares issuable upon the
exercise of options granted to Mr. Mulzer under
the Company's Non-Qualified Stock Option Plan.
(7) Includes (i) an aggregate of 30,000 shares
issuable upon conversion of debentures and
exercise of redeemable warrants owned by Mr.
Lalos; (ii) 30,000 shares issuable upon the
exercise of options granted to Lalos & Keegan; and
(iii) 50,000 shares issuable upon the exercise of
options granted to Mr. Lalos under the Company's
Non-Qualified Stock Option Plan.
(8) Includes 50,000 shares issuable upon the
exercise of options granted to Mrs. Susnjara under
the Company's Non-Qualified Stock Option Plan.
Item 13. Certain Relationships and Related
Transactions:
Bank Loans from Affiliated Parties:
Thermwood had an agreement, which expired on
September 25, 1992, to borrow up to $1,500,000
from the Dale State Bank (the "Dale Bank") in the
form of a line of credit. Mr. Mulzer was Chairman
of the Board and the principal shareholder of the
Dale Bank during the period that this loan was
made. He is also a director and principal
shareholder of the Company. The loan bore
interest at the annual rate of prime plus 2.5%,
payable quarterly, and was secured by all of the
Company's assets. Thermwood replaced this loan,
as of September 25, 1992, with a term loan in the
amount of $1,500,000 from the Dale Bank, also
secured by all of the Company's assets. The
principal of the term loan, together with interest
at the annual rate of prime plus 2.75%, was due on
March 24, 1993, at which time it was assumed by
Mr. Mulzer, who had agreed to collect only
interest, payable quarterly, until August 1, 1994,
at which time amortization was to have begun.
Interest expense on the Company's loans from the
Bank and Mr. Mulzer totaled $41,117, and $127,000,
and for fiscal years 1994 and 1993. There was no
interest expense on this loan during fiscal 1995.
The balance of this loan in the amount of
$1,499,800, along with accrued interest in the
amount of $23,011, was converted to Series A
Preferred Stock (the "Preferred Stock") on
November 18, 1993.
Other Loans from Affiliated Party:
On March 26, 1986, the Company borrowed $250,000
from Mr. Mulzer under a promissory note bearing
annual interest at the rate 10.5%. In March 1991
the note was converted into a self amortizing five-
year term loan, payable in monthly installments of
principal and interest of $5,373 through March
1996. On November 18, 1994, the balance of this
note in the amount of $169,218 along with accrued
interest in the amount of $13,971 was converted to
Preferred Stock. Interest expense on this loan
was $9,256 in 1994. There was no interest
expense on this loan in 1995.
Sale and Lease Back of Company's Facilities with
Affiliated Party:
In February 1987 the Company purchased its
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 the
Company leased the premises back from Mr. Mulzer
for a 20-year period at a monthly rental of
$19,353 or approximately $232,000 on an annual
basis. Total lease payments and accrued interest
were $138,579 for fiscal year 1994. There were no
lease payments or interest expense for fiscal year
1995.
The lease agreement, which is treated as a
capitalized lease for financial reporting
purposes, also obligates the Company to pay all
maintenance, taxes, assessments, insurance
premiums and utilities incurred in connection with
the operation of the premises. Pursuant to a
related agreement, the Company has an option to
repurchase the premises from Mr. Mulzer,
exercisable through 2006, at prices descending on
an annual basis from $1,786,781 in 1987 to
$240,000 in the last year.
On November 18, 1993, this lease payment
obligation in the amount of $1,608,629, together
with accrued interest in the amount of $122,491
was converted to Preferred Stock. Upon the
issuance of the Preferred Stock, the Company no
longer has any lease payments. The liability for
all accrued and future lease payments was
converted to Preferred Stock.
Conversion by Affiliated Party of Debt to
Preferred Stock:
As previously noted, an aggregate of $3,437,120
owed to Mr. Mulzer was converted to an aggregate
of 1,000,000 shares of Preferred Stock on November
18, 1993. The holders of the 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. Dividends were paid in the
amount of $367,910 for the fiscal year 1995.
Equipment Leases with Affiliated Party:
Thermwood has entered into agreements with a
company owned by Mr. Mulzer pursuant to which it
has leased certain computer, demonstration and
manufacturing equipment with a right to purchase
this equipment at the end of the term of each
agreement for nominal consideration. Lease
payments under these agreements were $64,888 for
the 1995 fiscal year. These leases will terminate
in fiscal year 1996.
Product Sales Through and Lease Agreement With
Affiliated Dealer:
Mr. and Mrs. Susnjara are the owners of Automation
Associates Incorporated ("AAI"), a dealer of the
Company's industrial products. The agreement
between the Company and AAI contains the same
terms and conditions as do the Company's
agreements with its other dealers. The Company
sold no products to AAI during fiscal year 1995,
but paid AAI $578,000 in commissions during the
year for assisting in effecting sales of
approximately $2,700,000. This amount represents
approximately 20% of the Company's gross sales for
fiscal year 1995. AAI also leases space from the
Company at what management believes is a fair
market rate. Rental payments were $7,200 during
the 1995 fiscal year.
Payment of Legal Fees to Affiliated Party:
Lalos & Keegan, a law firm in which Mr. Lalos is
the senior partner, accrued fees of $94,000,
$102,000, $77,000, for the fiscal years 1995,
1994, and 1993, respectively. During fiscal year
1995 the Company paid this firm an aggregate of
$135,000, of which $69,000 represented previously
accrued fees. Accordingly, as of July 31, 1995
the Company owed Lalos & Keegan approximately
$28,000, all of which has been paid as of
September 15, 1995. This firm performs patent,
trademark, general corporate and litigation
services for the Company.
Fairness of Transactions with Affiliated Parties:
Management believes that the terms of the
transactions between the Company and its
affiliated parties as described in this section
are as fair as those which the Company would have
obtained if these transactions had been effected
with independent third parties. Each transaction
was approved by a majority of the disinterested
directors. In the future, all such transactions
will continue to be approved by a majority of the
disinterested directors.
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K:
(a) The following documents are filed as a part
of this report:
1. Financial Statements:
Index to Financial Statements: Page
----------------------------- ----
Reference
---------
Independent Auditors'Report 32
Financial Statements:
Balance Sheets - July 31, 1995 and 1994 33
Statements of Operations - Years ended
July 31, 1995, 1994 and 1993 35
Statements of Shareholders' Equity
Years Ended July 31, 1995, 1994 and 1993 37
Statements of Cash Flows - Years ended
July 31, 1995, 1994 and 1993 38
Notes to Financial Statements 39
2. The following financial statement schedule for each of
the years ended July 31, 1995, 1994 and 1993 is included
in Part IV:
Independent Auditors' Report 48
Schedule II: Valuation and Qualifying Accounts 49
All other schedules are omitted because they are not
required, or are inapplicable or the information is otherwise
shown in the financial statements or notes thereto.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
Exhibit 11. 51
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly
authorized.
Date: October 26, 1995 /s/ Kenneth J. Susnjara
-----------------------
Kenneth J. Susnjara,
Chairman of the
Board and President
(Principle Executive
Officer)
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of
the Company and in the capacities and on the dates
indicated:
Date: October 26, 1995 /s/ Kenneth J. Susnjara
-----------------------
Kenneth J. Susnjara,
Chairman of the
Board and President
(Principal Executive
Officer)
Date: October 26, 1995 /s/ Rebecca F. Fuller
---------------------
Rebecca F. Fuller,
Treasurer (Principal
Financial and
Accounting Officer)
Date: October 26, 1995 /s/ Linda S. Susnjara
----------------------
Linda S. Susnjara,
Secretary
Date: October 26, 1995 /s/ Peter N. Lalos
--------------------
Peter N. Lalos,
Director
Date: October 26, 1995 /s/ Edgar Mulzer
--------------------
Edgar Mulzer,
Director
Date:
-------------------
Lee Ray Olinger,
Director
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 the 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
<TABLE>
THERMWOOD CORPORATION
BALANCE SHEETS
July 31
-------------------------
1995 1994
-------------------------
Assets
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 0
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 0
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 0
----------- -----------
Total Other Assets 993,861 200,795
----------- -----------
Total Assets $ 7,527,093 $ 5,417,565
============ ===========
</TABLE>
<TABLE>
THERMWOOD CORPORATION
BALANCE SHEETS
July 31
------------------------
1995 1994
------------------------
Liabilities and Shareholders' Equity
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 0 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
=========== ===========
See accompanying notes to financial
statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
STATEMENTS OF OPERATIONS
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 0 0 0
--------- -------- -----------
Earnings (loss) from
continuing operations before
extraordinary loss 2,349,794 136,146 (1,394,238)
Discontinued operations:
Gain on sale 0 0 268,107
Earnings from operations, net 0 72,015 17,074
---------- --------- ------------
Earnings from discontinued
operations 0 72,015 285,181
---------- --------- ------------
Earnings (loss) before
extraordinary loss 2,349,794 208,161 (1,109,057)
Extraordinary loss on
extinguishment of debt 0 0 (251,000)
---------- ---------- -------------
Net earnings (loss) $2,349,794 $ 208,161 $(1,360,057)
</TABLE>
<TABLE>
THERMWOOD CORPORATION
STATEMENTS OF OPERATIONS
Years Ended July 31
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Earnings (loss) per common and
common equivalent share:
Primary:
Continuing operations $0.38 $(0.01) $(0.28)
Discontinued operations 0.00 0.01 0.06
Extraordinary loss 0.00 0.00 (0.05)
----- ------- -------
Net earnings (loss) $0.38 $ 0.00 $(0.27)
===== ======= =======
Assuming full dilution:
Continuing operations $0.30 $(0.01) $(0.28)
Discontinued operations 0.00 0.01 0.06
Extraordinary loss 0.00 0.00 (0.05)
----- ------- -------
Net earnings (loss) $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
See accompanying notes to financial statements
</TABLE>
<TABLE>
THERMWOOD CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
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, 0 $ 0 4,862,046 $8,701,397 $(9,613,579)
1992
Issuance of common
stock in connection
with private placement 0 0 287,500 287,500 0
private placement
Net loss 0 0 0 0 (1,360,057)
---------- -------- --------- ---------- ------------
Balances at July 31, 0 0 5,149,546 8,988,897 (10,973,636)
1993
Issuance of
preferred stock 1,000,000 3,437,120 0 0 0
Preferred
dividends paid 0 0 0 0 (204,944)
Net earnings 0 0 0 0 208,161
----------- --------- ---------- --------- ------------
Balances at July 31,
1994 1,000,000 3,437,120 5,149,546 8,988,897 (10,970,419)
Preferred
dividends paid 0 0 0 0 (367,910)
Net earnings 0 0 0 0 2,349,794
------------ --------- --------- ---------- -----------
Balances at July 31,
1995 1,000,000 $3,437,120 5,149,546 $8,988,897 $(8,988,535)
============ ========== ========= ========== ============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
STATEMENTS OF CASH FLOWS
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 0 0 345,000
Provision for inventories 80,000 130,000 100,000
Gain on sale of discontinued operations 0 0 (268,107)
Gain on disposal of property
and equipment (1,850) (17,500) 0
Deferred income taxes (1,236,000) 0 0
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 0 0 (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 0
Purchases of property and equipment (350,111) (154,753) (187,565)
Proceeds from sale of
discontinued operations 0 0 495,000
----------- ---------- ----------
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 0 51,046 0
Net proceeds of private placement 0 0 230,000
Payment of notes from private placement 0 0 (575,000)
Net proceeds from bonds issued 0 0 1,720,550
Payment of dividends on preferred stock (367,910) (204,944) 0
----------- --------- ----------
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
=========== =========== ==========
See accompanying notes to
financial statements.
</TABLE>
THERMWOOD CORPORATION
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 :
<TABLE>
<S> <C>
Buildings and improvements 10 to 30 years
Equipment 3 to 10 years
</TABLE>
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 subordinated 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>
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>
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>
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
2000 0 0
Thereafter 0 0
--------- ----------
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>
NOTE C -- LEASES (CONTINUED):
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 & 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.
NOTE E -- COMMON STOCK OPTIONS (CONTINUED):
A summary of common stock options for the years ended July 31 follows:
<TABLE>
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 1,076,750 $ 1.00 1,131,750 $1.00
to 10.00 to 10.00 to 10.00
Granted 0 0 10,000 $ 1.00 0 0
Canceled/expired 9,750 $ 1.00 42,000 $ 1.00 55,000 $1.00
to 5.00 to 5.00 to 5.00
Exercised 0 0 0 0 0 0
---------- -------- ---------- -------- --------- --------
Outstanding at $ 1.00 $ 1.00 $1.00
end of year 1,035,000 to 10.00 1,044,750 to 10.00 1,076,750 to 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.
NOTE F -- SHAREHOLDERS' EQUITY (CONTINUED):
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
NOTE G -- RELATED PARTY TRANSACTIONS (CONTINUED):
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>
1995 1994 1993
----------- ----------- ---------
<S> <C> <C> <C>
Federal:
Currently payable $ (26,000) $ 0 $ 0
Deferred benefit 1,136,000 0 0
----------- ----------- ---------
1,110,000 0 0
----------- ----------- ---------
State:
Currently payable 0 0 0
Deferred benefit 100,000 0 0
----------- ----------- ---------
100,000 0 0
----------- ----------- ---------
Total income tax benefit $1,210,000 $ 0 $ 0
=========== =========== =========
</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>
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 0 0 (387,000)
Utilization of net operating
loss carryforward 474,000 90,000 0
Reduction in deferred tax
asset valuation allowance 1,163,000 0 0
Effect of non-deductible items:
Loss on extinguishment of debt and
related discount amortization 0 0 (106,000)
Meals and entertainment (9,000) (5,000) (7,000)
Governmental assessments 0 (8,000) (3,000)
Other 4,000 0 0
------------ ------------- -----------
Totals $ 1,210,000 $ 0 $ 0
============ ============= ===========
</TABLE>
NOTE I -- INCOME TAXES (CONTINUED):
The tax effects of significant temporary differences
represented by deferred tax assets and deferred tax
liabilities at July 31 are as follows:
<TABLE>
1995 1994
----------- ------------
Deferred tax assets:
<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 assets 1,431,000 230,000
---------- ------------
Deferred tax liability:
Property and equipment 195,000 230,000
---------- ------------
Net deferred tax assets $1,236,000 $ 0
========== ============
</TABLE>
At July 31, 1995, management has determined that future
earnings will 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>
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.
NOTE J -- ADDITIONAL INFORMATION (CONTINUED):
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.
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors
Thermwood Corporation:
Under date of September 8, 1995, we reported on
the 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, as contained in the annual
report on form 10-K for the year ended July 31,
1995. In connection with our audits of the
aforementioned financial statements, we also
audited the related financial statement schedule
listed in the accompanying index. This
financial statement schedule is the responsibility
of the Company's management. Our responsibility
is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule,
when considered in relation to the basic financial
statements taken as a whole, presents fairly, in
all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 8, 1995
<TABLE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS ADDITIONS
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of year Expenses Accounts Deductions End of
Year
------------ ------------- ------------- ------------- ---------
Year Ended
July 31, 1995:
<S> <C> <C> <C> <C> <C>
Allowance
for doubtful
accounts
receivable $25,000 $25,000 0 $34,000 (1) $16,000
------- ------- --------- ------- -------
Year Ended
July 31,
1994:
Allowance
for doubtful
accounts
receivable $31,500 $25,000 0 $31,500 (1) $25,000
------- ------- --------- ------- -------
Year Ended
July 31,
1993
Allowance
for doubtful
accounts
receivable $31,500 0 0 0 $31,500
------- ------- ---------- ------- -------
(1) Uncollectible accounts charged off, net of recoveries.
</TABLE>
To The Shareholders and Board of Directors
Thermwood Corporation:
We consent to incorporation by reference in the
registration statements (No. 33-83742, 33-83744,
33-83746 and 33-83748) on Form S-8 of
Thermwood Corporation of our report dated
September 8, 1995, relating to the 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, and the related schedule, which reports
appear in the July 31, 1995, annual report on
Form 10-K of Thermwood Corporation.
KPMG Peat Marwick LLP
Indianapolis, Indiana
October 26, 1995
<TABLE>
EXHIBIT 11
STATEMENT REGARDING EARNINGS PER SHARE
YEAR ENDED JULY 31, 1995
Assuming full
Primary Dilution
-------------- ---------------
<S> <C> <C>
Earnings
Net earnings $ 2,349,794 $ 2,349,794
Less preferred stock dividend (367,910) (367,910)
Add interest expense on
convertible bonds payable 263,388
Add amortization of bond
discount and issuance costs 27,660
Income tax effects of earnings
adjustments (107,688)
--------------- --------------
Total Earnings 1,981,884 2,165,244
Common and Common Equivalent Shares
Weighted average common shares 5,149,546 5,149,546 46
Weighted average common
equivalent shares related to
dilutive stock options 37,606 37,606
Weighted average common shares
related to convertible bonds 2,070,000
--------------- -------------
Total Common and Common
Equivalent Shares 5,187,152 7,257,152
Earnings per Common and Common
Equivalent Share $ 0.38 $ 0.30
=============== ==============
For the years ended July 31, 1994 and 1993, shares
contingently issuable in connection with stock options and
warrants, and convertible bonds have been excluded as their
impact on the earnings (loss) per share would not be
dilutive. Accordingly, earnings (loss) per share for such
years is based on net earnings (loss) less preferred stock
dividends and the weighted average number shares of common
stock outstanding.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-END> JUL-31-1995
<CASH> 10544
<SECURITIES> 0
<RECEIVABLES> 1197599
<ALLOWANCES> 16000
<INVENTORY> 3008947
<CURRENT-ASSETS> 5030255
<PP&E> 3436347
<DEPRECIATION> 1933370
<TOTAL-ASSETS> 7527093
<CURRENT-LIABILITIES> 2219189
<BONDS> 1848684
<COMMON> 8988897
0
3437120
<OTHER-SE> 8988535
<TOTAL-LIABILITY-AND-EQUITY> 7527093
<SALES> 12314271
<TOTAL-REVENUES> 12314271
<CGS> 7528034
<TOTAL-COSTS> 3315904
<OTHER-EXPENSES> 35614
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294925
<INCOME-PRETAX> 1139794
<INCOME-TAX> 1210000
<INCOME-CONTINUING> 2349794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2349794
<EPS-PRIMARY> .38
<EPS-DILUTED> .30
</TABLE>
