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, 1996
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 28, 1996 based upon the closing price of
the Registrant's Common Stock as reported on the
American Stock Exchange was approximately
$13,097,092.
The number of the Registrant's shares of Common
Stock outstanding as of October 28, 1996 was
6,548,546 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, 1992, July
31, 1993, July 31, 1994 and July 31, 1995.
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 routers. 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.
During fiscal year 1996 the Company developed a
wood carving routing system which has replaced the
older Wood Carving Robot, although the Company did
have a few minor sales of this product in 1996.
Retail prices for the Wood Carving Router are
approximately $150,000. This system has replaced
sales of the Carving Robot, and management
believes that a larger market for the new machine
will be created; however, at this time no
assurance for the larger market can be given.
Probe
During year ended July 31, 1996 the Company
introduced a new five-axis probe system which
significantly reduces the time required to program
machining of three-dimensional plastic parts. The
Company has applied for patents involving the
technology underlying this new probe system. This
product is also being offered for use on machines
built by Thermwood's competitors, provided their
control system is upgraded to a Thermwood 91000
SuperControl. The probe sells for approximately
$15,000. Management hopes the new technological
capability will result in a larger market share in
the plastics industry; however, no assurance to
this effect can be given.
Tooling
After the end of fiscal year 1996 Thermwood
introduced certain new tooling for its woodworking
line of CNC routers. New tooling includes a low-
cost piggyback router and a low-cost 8-position
turret. These products are priced at
approximately $5,000 for the piggyback router and
$12,000 for the turret. Management hopes that
these new offerings will allow Thermwood machines
to penetrate new markets, however, no assurance to
this 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, 1996 the Company had 12
authorized dealers marketing its industrial
products. Thermwood usually requires each dealer
to execute a non-exclusive written agreement. A
dealer is required to sell one machine within each
six-month period in order to retain its
dealership. Most dealers concentrate their sales
efforts in specific geographical areas and in
particular industries such as woodworking or
plastics, and sell only one of the Company's
product lines. However, some market and sell
products to more than one industry and sell both
the CARTESIAN 5 systems and the Company's line of
Wood Carving Routers.
One dealer accounted for approximately 14% of the
Company's sales for the fiscal year ended July 31,
1996. 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 11% of the Company's
business during the 1996 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.
The Company has opened an office in the United
Kingdom to target the European Community as a
primary market opportunity. The Company has also
completed electromagnetic interference ("EMI")
testing on its product lines which allow the
Company to comply with recent European
requirements for computer numerically controlled
machines. Sales are expected to begin in fiscal
year end 1997.
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 has completed efforts to add the
capability of performing three-dimensional wood
carving to its entire CNC router line. The
resulting system produces carved wood components
at a three to ten times faster production rate
than the Company's previously marketed carving
robot product. Management is now offering these
new capabilities and expects sales of these new
products to replace sales of the current two-
dimensional carving robot product. For the fiscal
year ended July 31, 1996, the two-dimensional
carving robot accounted for approximately $185,000
or 2% 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,
1996.
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 services. See
"Technical Services" above.
Backlog
- - -------
As of July 31, 1996, the Company's backlog was
approximately $1,630,000 compared with a backlog
of $1,860,000 as of July 31, 1995. Substantially
all of this backlog will be manufactured and
delivered prior to October 31, 1996.
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.
Management believes that backlog is not a good
indicator of future economic performance. The
time delay between receipt of the order and
shipment of products varies and, in many cases, is
short. Therefore, a portion, and perhaps a
material portion, of each quarter's sales will not
appear on a quarterly backlog report.
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 approximately 17% of total
components purchased by the Company for the fiscal
year ended July 31, 1996. 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, 1996 and 1995,
the Company spent $284,000 and $246,000,
respectively, for research and development. There
was no customer sponsored research and development
during the 1996 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 20 domestic patents and
has applications pending in the United States for
9 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 in the United States for
what it believed were prospective unauthorized use
of proprietary rights. The Company has not been
involved in any claims concerning patent
infringement.
The Company markets its products under various
trademarks, including THERMWOOD, CARTESIAN 5,
91000 SUPERCONTROL, CARTESIAN EAGLE, ROUTER ART
and PANEL-CAD. It has three trademark
registrations and one application for registration
in the United States. The Company also has two
foreign trademark registrations and applications
for seven foreign registrations
Employees
- - ---------
As of July 31, 1996, the Company had 96 full time
employees, of whom 51 were engaged in
manufacturing, 9 in marketing, 9 in
administration, 10 in engineering, 3 in research
and development, and 14 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.
Item 2. Properties
- - -------------------
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 leased certain equipment at an
aggregate annual rental of approximately $65,000
from one of Mr. Mulzer's affiliated companies,
which lease terminated in December, 1995. 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.
On September 19, 1996, the Court of Common Pleas
in Lake County, Ohio, found that the plaintiff,
Ronald Hughes was not entitled to relief from
Defendant Thermwood Corporation. The Court found
no defective design or manufacture and the risk of
climbing onto the machine by the plaintiff was an
open and obvious risk and the machine was designed
in a manner that a person could not be cut by the
router while operating it properly. The motion of
Defendant Plastivax, Inc. for summary judgment
under Rule 56 of the Ohio Rules of Civil Procedure
was denied.
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, 1996 and July 31, 1995,
respectively, and for the interim periods
indicated:
<TABLE>
Common Stock Low High
Sales Price Sales Price
1996
<S> <C> <C>
Fourth Quarter $ 1.79 $ 2.50
Third Quarter $ 1.43 $ 1.93
Second Quarter $ 1.85 $ 2.45
First Quarter $ 1.75 $ 2.54
1995
Fourth Quarter $ 1.00 $ 1.63
Third Quarter $ .82 $ 1.44
Second Quarter $ .75 $ 1.12
First Quarter $ .75 $ 1.32
</TABLE>
As of October 25, 1996, there were approximately
1,200 holders of record of the Common Stock and
6,548,546 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's warrants which were listed for
trading on the Pacific Stock Exchange expired on
February 22, 1996 and have not been extended.
There had been no active market for these
securities from February 22, 1993, the date of
issuance, through the termination date.
Item 6. Selected Financial Data
- - -------------------------------
<TABLE>
Operations for the years ended July 31 (in thousands
except per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales, less commissions $12,636 $12,314 $9,985 $10,825 $ 7,508
Gross Profit 4,925 4,786 3,579 2,173 1,592
Earnings (loss) from
continuing operations 2,334 2,350 136 (1,394) (1,768)
Net earnings (loss) $ 2,334 $ 2,350 $ 208 $(1,360) $(1,928)
-------- -------- ------- -------- --------
Net earnings (loss) per
common and common equivalent share:
Primary $ 0.31 $ 0.38 $ 0.00 $ (0.27) $(0.40)
Assuming full dilution $ 0.29 $ 0.30 $ 0.00 $ (0.27) $(0.40)
------- ------- ------- -------- -------
Weighted average number of shares:
Primary 6,421 5,187 5,150 5,054 4,862
Assuming full dilution 7,184 7,257 5,150 5,054 4,862
Cash dividends declared per
common share 0 0 0 0 0
Financial position at July 31:
Total assets $8,766 $7,527 $5,418 $6,928 $6,781
Working capital 3,791 2,811 1,706 1,291 (939)
Long-term obligations 709 1,870 1,862 5,711 2,559
Shareholders' equity
(deficit) 6,275 3,437 1,456 (1,985) (912)
</TABLE>
Item 7. Management's Discussion and Analysis of
- - --------------------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
- - ---------------------
Net sales for fiscal year 1996 were $12,636,491,
an increase of 3% from fiscal year 1995, and a 27%
increase from fiscal year 1994. Backlog decreased
from $1,860,000 at July 31, 1995 to $1,630,000 at
July 31, 1996. Management attributes the decreased
level of orders at fiscal year end 1996 to
potential customers waiting to order until after
an international machinery show in August.
Gross profit for fiscal year 1996 was $4,925,353,
or 38.97% of net sales. The percentage of current
year gross profit to net sales has increased only
slightly from last year's 38.86%. A higher
increase occurred from the gross profit percentage
of 35.83% in fiscal year 1994. In the current
year, gross profit was positively affected by the
continued use of more efficient production
methods; however, due to an increase of
approximately 5% in hourly wages and benefits, the
margin did not increase as much as it had in the
prior year. A charge to cost of sales of
approximately $80,000 in 1995 and $20,000 in 1996
for recognition of inventory obsolescence and
valuation adjustments caused gross profit to
decrease by less than 1% in 1995 and 1996.
Management expects the first quarter of fiscal
year 1997 to continue to reflect higher margins
due to generally higher margins on newly designed
products and better production efficiency due to a
more experienced work force and manufacturing of
standard machines. Although management
anticipates that gross profit percentages from
operations should continue to improve during 1997,
no assurance to this effect can be given.
Research and development, marketing,
administrative and general expenses were
$3,638,536 in fiscal year 1996, compared to
$3,315,905 in 1995 and $3,036,418 in 1994.
Research and development expenditures aggregating
$284,000 in 1996, versus $246,000 in 1995 and
$244,000 in 1994 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 1994 to 1996 was
attributable to increased wages and benefits and
increased advertising and marketing efforts.
Interest expense for fiscal year 1996 was
$118,599, a decrease of $176,326 from 1995 and a
decrease of $302,126 from 1994. The current year
decrease from prior years is primarily due to the
conversion of 12% convertible debentures to common
stock during fiscal year 1996 and reduction of
long-term debt during fiscal year 1994 through
conversion of preferred stock..
Fiscal year 1996 net earnings were $2,334,428,
compared to net earnings of $2,349,794 and
$208,161 in 1995 and 1994, respectively.
Deferred tax benefits of $1,178,000 and $1,236,000
recognized in 1996 and 1995, respectively,
contributed to the increases. This benefit
primarily 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 utilization of net
operating loss carryforwards. Operating income for
fiscal year 1996 was $1,286,817 compared to
operating income of $1,470,333 and $542,133 in
1995 and 1994, respectively. The decrease in
operating income in 1996 from 1995 resulted
primarily from increased salaries and related
taxes and benefits. Other contributing factors to
the decrease was increased advertising and
expansion into the European market and increased
listing costs due to the conversion of debentures
into additional common stock.
Because of loss carryforwards, there was no
federal income tax expense in 1994. The Company
has federal income tax net operating loss
carryforwards of approximately $6,144,000 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, 1996 the Company's working capital was
$3,790,586 compared to $2,811,066 at July 31,
1995. 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. Increased finished goods inventory
for an upcoming trade show also contributed to
increased working capital.
Management believes that the focus on marketing,
sale and manufacture of standard machines has
helped margins and profitability.
The Company had a positive cash flow from
operating activities for the 1996 fiscal year in
the amount of $1,114,580. Net earnings of
$2,334,428, less non-cash deferred tax benefits of
$1,178,000 for the fiscal year, along with the add
back of other non-cash expenses such as
depreciation and amortization of $295,510, and a
decrease in accounts receivable contributed to a
positive cash flow. However, an increase in
inventories and payment of accounts payable and
other accrued liabilities used cash flow.
During the 1996 fiscal year, the Company's
investing activities were primarily for
replacement of production equipment and the
addition of machines and a training area for
customers. Expenditures for fixed assets in the
1997 fiscal year are 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 1997.
Principal payments on lease obligations and long-
term debt during the 1996 fiscal year were to a
leasing company owned by a related party and for
leased office equipment. Cash flows from
financing activities included $350,055 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. Changes in and Disagreements with
- - --------------------------------------------------
Accountants on Accounting and Financial Disclosure
--------------------------------------------------
None.
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>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Kenneth J. Susnjara (1) 49 Chairman of the Board
President and Director
Linda S. Susnjara (1) 47 Secretary and Director
Michael P.Hardesty 42 Vice President of
Engineering
Rebecca F. Fuller 46 Treasurer
David J. Hildenbrand 39 Vice President of Sales
Richard Kasten 44 Vice President of
Technical Services
Peter N. Lalos (2) 62 Director
Edgar Mulzer (2) 78 Director
Lee Ray Olinger 69 Director
(2)
</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, 1996 with the
exception of the following: Form 3 was filed by
Rebecca Fuller on April 22, 1996 for 3,000 options
exercised on March 22, 1996. Form 4 was filed by David
Hildenbrand on April 22, 1996 for 3,000 options exercised
on March 22, 1996.
Item 11. Executive Compensation
- - -------------------------------
The following table sets forth the annual
remuneration paid during the fiscal years ended
July 31, 1996, 1995 and 1994 to the Chief
Executive Officer and to each of the executive
officers of the Company whose total fiscal 1996
remuneration exceeded $100,000 and to all officers
of the Company as a group.
<TABLE>
Summary Compensation Table
Long-term
Annual compensation compensation
------------------- --------------
Awards Payouts
Other ------ ------- All
Name and Annual Options/ LTIP Other
principal Compen- SARs (#) Payouts Compensa-
position Year Salary Bonus sation sation
- - --------- ---- ------ ------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth J. Susnjara
Chairman of the 1996 63,000 83,242 2,000 650,000 0 0
Board, President 1995 63,000 94,739 2,000 0 0 0
and director 1994 74,250 0 2,000 0 0 0
Michael Hardesty 1996 48,000 58,269 0 0 0 0
Vice-president 1995 48,000 66,317 0 0 0 0
Engineering
David Hildenbrand 1996 45,000 56,818 0 12,000 0 0
Vice-president Sales 1995 45,000 73,964
All other officers as 1996 80,000 76,369 0 0 0 0
a group (2) persons 1995 80,000 77,618 0 0 0 0
All other officers as
a group (4) persons 1994 170,116 4,237 0 0 0 0 7
</TABLE>
(1) Other annual compensation represents
directors' fees paid to Mr. Susnjara.
An additional 135,000 stock options, including
12,000 to David Hildenbrand, were issued under
the Qualified Stock Option Plan in fiscal year
1996. Also under the Qualified Stock Option Plan,
52,000 options were exercised and 50,000 expired.
A total of 30,000 options under the Non-Qualified
Stock Option Plan were exercised during fiscal
year July 31, 1996. At July 31, 1996 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 1996. 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 1996, the life term of the
Qualified Plan was extended from December 3, 1995
to December 3, 2000, or on such earlier date as
the Board of Directors may determine. Any option
outstanding at the termination date will remain
outstanding at the termination date until it
expires or is exercised in full, whichever occurs
first.
As of July 31, 1996, options to acquire 208,000
shares of the Company's common stock for ten years
at exercise prices of $1.00 to $2.00 per share had
been granted under the Qualified Plan to 19
employees of the Company. Options for the
purchase of 208,000 shares were exercisable as of
July 31, 1996.
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 may not be less than the
then fair market value. It is within the
Committee's discretion to grant anti-dilution
provisions to each optionee. Under present
federal income tax law, an employee, officer or
director who is granted an option will not have
any income upon the grant of an option and the
Company will not be entitled to any deduction at
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 650,000 shares have been
granted by the Board of Directors, all of which
were exercisable as of July 31, 1996. 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 300,000 shares at $3.00 per share and 300,000
at $6.00 per share. The current options replace
cancelled options of 200,000 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, and was exercised during fiscal year
ended July 31, 1996. A 30,000 share option was
granted to an employee at $1.00 per share and is
exercisable through October 1997. An additional
20,000 shares at $1.6875 per share were granted
during fiscal year ended July 31, 1996 to R. Jerry
Falkner, a principal in a public relations firm
for the Company. The option is currently
exercisable and extends through February, 2006.
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. Security 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, 1996 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>
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, Shares Convertible Shares
1996 Owned Securities Owned
(2)
- - --------------------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Kenneth J. Susnjara (3,4) 1,330,000 20.3 2,130,000(5) 25.0(5)
(3,4)
Edgar Mulzer 940,562 14.4 990,562(6) 11.6(6)
401 10th Street
Tell City, Indiana 47586
Peter N. Lalos 25,000 0.4 95,000(7) 1.1(7)
14312 Darnstown Road
Gaithersburg, Maryland 20878
Linda S. Susnjara (3,4) 0 0 50,000(8) .6(8)
Lee Ray Olinger 0 0 0 0
c/o First Bank of Huntingburg
4th and Main Street
Huntingburg, IN 47542
All Officers and
Directors 2,356,562 35.6 3,376,562 39.7
as a Group (9 persons) (5,6,7,8) (5,6,7,8)
</TABLE>
(1) Except as indicated in (4), all shares are
beneficially owned and the sole voting and
investment power is held by the person indicated.
(2) Excludes (i) an aggregate of 763,000 shares of
Common Stock reserved for issuance upon conversion
of debentures; (ii) 400,000 shares reserved for
issuance under the Company's Qualified Stock
Option Plan of which options to purchase 208,000
shares have been granted and options to purchase
208,000 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) 20,000 shares
reserved for issuance of options granted to R.
Jerry Falkner, 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 50,000 shares
issuable upon conversion of debentures 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 20,000 shares
issuable upon conversion of debentures owned by
Mr. Lalos; and (ii) 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 for fiscal
year 1994. There was no interest expense on this
loan during fiscal 1995 and 1996. 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 and 1996.
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
years 1995 and 1996.
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. The Company redeemed 100,000
shares of the preferred stock for a total of
$340,000 during fiscal year 1996. Dividends were
paid in the amount of $330,055 for the fiscal year
1996.
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 $27,037 for
the 1996 fiscal year. These leases terminated 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 1996,
but paid AAI $349,584 in commissions during the
year for assisting in effecting sales of
approximately $1,900,000. This amount represents
approximately 14% of the Company's gross sales for
fiscal year 1996. AAI also leases space from the
Company at what management believes is a fair
market rate. Rental payments were $7,200 during
the 1996 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 $103,000,
$94,000, $102,000, for the fiscal years 1996,
1995, and 1994, respectively. During fiscal year
1996 the Company paid this firm an aggregate of
$131,000, of which $28,000 represented previously
accrued fees. Accordingly, as of July 31, 1996
the Company carried no balance for Lalos & Keegan.
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:
- - --------------------------------------------------
<TABLE>
(a) The following documents are filed as a part
of this report:
<S> <C>
1. Financial Statements:
Index to Financial Statements: Page
Reference ----
---------
Independent Auditors' Report 34
Financial Statements:
Balance Sheets - July 31, 1996 and 1995 35
Statements of Operations - Years ended
July 31, 1996, 1995 and 1994 37
Statements of Shareholders' Equity
Years Ended July 31, 1996, 1995 and 1994 39
Statements of Cash Flows - Years ended
July 31, 1996, 1995 and 1994 40
Notes to Financial Statements 41
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
</TABLE>
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 29, 1996 /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 29, 1996 /s/ Kenneth J. Susnjara
-----------------------
Kenneth J. Susnjara, Chairman
of the Board and President
(Principal Executive Officer)
Date:
October 29, 1996 /s/ Rebecca F. Fuller
---------------------
Rebecca F. Fuller, Treasurer
(Principal Financial and
Accounting Officer)
Date:
October 29, 1996 /s/ Linda S. Susnjara
---------------------
Linda S. Susnjara, Secretary
Date:
October 29, 1996 /s/ Peter N. Lalos
------------------
Peter N. Lalos, Director
Date:
October 29, 1996 /s/ Edgar Mulzer
----------------
Edgar Mulzer, Director
Date: October 29, 1996 ----------------------
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, 1996 and
1995, and the related statements of operations,
shareholders' equity and cash flows for each of
the years in the three-year period ended July 31,
1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the
years in the three-year period ended July 31,
1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 13, 1996
<TABLE>
THERMWOOD CORPORATION
BALANCE SHEETS
July 31
1996 1995
------------ --------------
Assets
Current Assets
<S> <C> <C>
Cash $ 18,995 $ 10,544
Accounts receivable, less allowance
for doubtful accounts ($25,000 for
1996 and $16,000 for 1995) 812,540 1,181,599
Inventories 3,329,337 3,008,947
Deferred income taxes 1,073,000 454,000
Prepaid expenses 339,015 375,165
----------- -----------
Total Current Assets 5,572,887 5,030,255
----------- -----------
Property and Equipment
Land 73,260 73,260
Buildings and improvements 1,235,621 1,171,778
Furniture and equipment 2,331,461 2,069,774
Construction in progress 168,140 121,535
Less accumulated depreciation
and amortization (2,115,795) (1,933,370)
----------- -----------
Net Property and Equipment 1,692,687 1,502,977
----------- -----------
Other Assets
Patents, trademarks and other 131,899 123,563
Bond issuance costs less
accumulated amortization 27,817 88,298
Deferred income taxes 1,341,000 782,000
----------- -----------
Total Other Assets 1,500,716 993,861
----------- -----------
Total Assets $8,766,290 $7,527,093
=========== ===========
July 31
1996 1995
Liabilities and Shareholders' Equity -------------- -------------
Current Liabilities
Accounts payable $ 694,603 $ 792,544
Accrued compensation and payroll taxes 349,136 379,839
Customer deposits 494,009 642,359
Other accrued liabilities 238,288 372,849
Current portions of:
Capital lease obligations 6,264 5,450
Capital lease obligations - related party 0 26,148
------------ -------------
Total Current Liabilities 1,782,300 2,219,189
------------ -------------
Long-Term Liabilities, Less Current Portion
Capital lease obligations 15,474 21,738
Bonds payable, net of unamortized
discount of $69,721 for 1996
and $221,316 for 1995 693,279 1,848,684
------------ -------------
Total Long-Term Liabilities 708,753 1,870,422
------------ -------------
Shareholders' Equity
Preferred stock, no par value, 2,000,000
shares authorized, 900,000 and 1,000,000
shares issued and outstanding for 1996
and 1995, respectively 3,097,120 3,437,120
Common stock, no par value, 20,000,000
shares authorized, 6,538,546 and 5,149,546
shares issued and outstanding for 1996
and 1995, respectively 10,190,404 8,988,897
Accumulated deficit (6,984,162) (8,988,535)
----------- -------------
6,303,362 3,437,482
Less subscriptions receivable 28,125 0
----------- -------------
Total Shareholders' Equity 6,275,237 3,437,482
----------- -------------
Total Liabilities and Shareholders' Equity $8,766,290 $7,527,093
=========== =============
See accompanying notes to financial
statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
STATEMENTS OF OPERATIONS
Years Ended July 31
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Sales $14,264,663 $13,828,318 $10,932,467
Less commissions 1,628,172 1,514,047 947,126
------------- ------------ ------------
Net Sales 12,636,491 12,314,271 9,985,341
Cost of Sales 7,711,138 7,528,034 6,406,800
------------- ------------ ------------
Gross Profit 4,925,353 4,786,237 3,578,541
Research and development,
marketing, administrative
and general expenses 3,638,536 3,315,904 3,036,408
------------- ------------ ------------
Operating income 1,286,817 1,470,333 542,133
------------- ------------ ------------
Other income (expense):
Interest expense - related party (889) (7,791) (130,277)
Interest expense - other (117,710) (287,134) (290,448)
Other 6,210 (35,614) 14,738
------------- ------------ ------------
Other expense, net (112,389) (330,539) (405,987)
Earnings from continuing
operations before income taxes 1,174,42 1,139,794 136,146
Income tax benefit 1,160,000 1,210,000 0
------------- ------------ -------------
Earnings from continuing
operations 2,334,428 2,349,794 136,146
------------- ------------ -------------
Earnings from discontinued
operations, net 0 0 72,015
------------- ------------ -------------
Net earnings $2,334,428 $2,349,794 $ 208,161
============= ============ =============
Earnings (loss) per common
and common equivalent share:
Primary:
Continuing operations $0.31 $0.38 $(0.01)
Discontinued operations 0.00 0.00 0.01
------------ ------------- ------------
Net earnings per share $0.31 $0.38 $ 0.00
============ ============= ============
Assuming full dilution:
Continuing operations $0.29 $0.30 $(0.01)
Discontinued operations 0.00 0.00 0.00
------------ ------------- ------------
Net earnings per share $0.29 $0.30 $ 0.00
Weighted average number of shares:
Primary 6,421,102 5,187,152 5,149,546
Assuming full dilution 7,184,102 7,257,152 5,149,546
See accompanying notes to financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended July 31, 1996, 1995 and 1994
Preferred Stock Common Stock
Subscriptions Accumulated
Shares Amount Shares Amount Receivable (Deficit)
------ -------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at
July 31, 1993 0 0 5,149,546 8,988,897 0 (10,973,636)
Issuance of
preferred
stock 1,000,000 3,437,120 0 0 0 0
Preferred
dividends paid 0 0 0 0 0 (204,944)
Net earnings 0 0 0 0 0 208,161
--------- --------- ----------- --------- -------- -------------
Balances at
July 31,1994 1,000,000 3,437,120 5,149,546 8,988,897 0 (10,970,419)
Preferred dividends
paid 0 0 0 0 0 (367,910)
Net earnings 0 0 0 0 0 2,349,794
--------- --------- ----------- --------- -------- -------------
Balances at
July 31,1995 1,000,000 3,437,120 5,149,546 8,988,897 0 (8,988,535)
Preferred dividends
paid 0 0 0 0 0 (330,055)
Redemption of
preferred stock
stock (100,000) (340,000) 0 0 0 0
Conversion of 12%
debentures, net
of related
bond issuance costs
and unamortized
discount 0 0 1,307,000 1,115,507 0 0
Exercise of
qualified stock
options 0 0 52,000 56,000 (28,125) 0
Exercise of
other stock
options 0 0 30,000 30,000 0 0
Net earnings 0 0 0 0 0 2,334,428
-------- ----------- ---------- ----------- -------- ------------
Balances at
July 31, 1996 900,000 $3,097,120 6,538,546 $10,190,404 $28,125 $(6,984,162)
See accompanying notes to financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended July 31
1996 1995 1994
Cash Flows From Operating ------------ ----------- ------------
Activities:
<S> <C> <C> <C>
Net earnings $2,334,428 $2,349,794 $ 208,161
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 295,510 329,012 292,727
Provision for inventories 21,012 80,000 130,000
Gain on disposal of equipment (15,625) (1,850) (17,500)
Deferred income taxes (1,178,000) (1,236,000) 0
Changes in operating assets and liabilities:
Accounts receivable 369,060 (500,252) 629,479
Inventories (341,402) (244,890) (135,740)
Prepaid expenses and other assets 41,151 (140,219) 47,261
Accounts payable and other
accrued expenses (263,205) (114,974) (724,399
Customer deposits (148,350) 273,154 (96,890)
-------------- ------------- ------------
Net cash provided by
operating activities 1,114,579 793,775 333,099
-------------- ------------- ------------
Cash Flows From Investing Activities:
Proceeds from sale of equipment 40,000 1,850 45,985
Purchases of property and equipment (502,350) (350,111) (154,753)
-------------- ------------- ------------
Net cash used by investing activities (462,350) (348,261) (108,768)
-------------- ------------- ------------
Cash Flows From Financing Activities:
Principal payments on notes
payable, lease obligations
and long-term debt (31,598) (76,767) (86,760)
Redemption of preferred stock (340,000) 0 0
Increase in related party debt 0 0 51,046
Payment of dividends on preferred stock (330,055) (367,910) (204,944)
Exercise of stock options 57,875 0 0
------------- ------------ -------------
Net cash used by financing activities (643,778) (444,677) (240,658)
------------- ------------ -------------
Increase (decrease) in cash 8,451 837 (16,327)
Cash at beginning of year 10,544 9,707 26,034
------------- ------------ -------------
Cash at end of year $ 18,995 $ 10,544 $ 9,707
============= ============ =============
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. The Company sells its products primarily
through the assistance of dealer networks
established throughout the United States. The
Company's machining systems are utilized
principally in the woodworking, plastics and
boating industries.
Use of Estimates and Assumptions:
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of
contingent assets and liabilities, and the
reported amounts of revenues and expenses during
the reporting period. Actual results could differ
from those estimates.
Revenues and Warranties:
The manufacturing process may extend over several
months and advance cash deposits are normally
required from customers. Sales are recorded when
machines are shipped or when billed for inspected
machines being held for future delivery at a
customer's request. Estimated costs of product
warranties are charged to cost of sales at the
time of sale.
Inventories:
Inventories are stated at the lower of cost (first-
in, first-out method) or market.
Property and Equipment:
Property and equipment are recorded at cost for
assets purchased and at the present value of
minimum lease payments for assets acquired under
capital leases. Depreciation and amortization are
computed by the straight-line method over the
estimated useful lives of the assets, as shown
below :
Buildings and improvements 10 to 30 years
Equipment 3 to 10 years
Depreciation expense for 1996, 1995 and 1994 was
$256,290, $289,339, and $283,566, respectively.
Research and Development:
Research and development costs are expensed as
incurred. Expenditures for research and
development were approximately $284,000, $246,000
and $244,000 during 1996, 1995 and 1994,
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, 1996,
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
1996 and 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, shares contingently issuable in
connection with the stock options and warrants and
convertible subordinated debentures have been
excluded as their impact on earnings 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. The
results of the avionics equipment business
operations have been reported separately in the
accompanying statements of operations as
discontinued operations.
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:
1996 1995
--------- ----------
<S> <C> <C>
Finished goods $ 508,910 $ 260,737
Work-in-process 903,447 995,106
Raw materials 1,916,980 1,753,104
---------- ----------
$3,329,337 $3,008,947
========== ==========
</TABLE>
Inventories have been reduced by approximately
$281,000 and $260,000 as of July 31, 1996 and
1995, 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>
1996 1995
----------- ----------
<S> <C> <C>
Land $ 73,260 $ 73,260
Building and improvements 1,171,778 1,171,778
Furniture and equipment 266,929 266,929
---------- ----------
1,511,967 1,511,967
Less accumulated amortization (740,782) (656,178)
----------- -----------
$ 771,185 $ 855,789
=========== ===========
</TABLE>
Included in Land, Building and Improvements above
are assets with a net book value of $760,297 and
$749,830 at July 31, 1996 and 1995, respectively,
leased from a director of the Company under a
capital lease expiring in February, 2007. During
fiscal year 1994, the obligation under this lease
was converted to Preferred Stock (Note H). The
Company has the option to purchase the assets
under this lease at any time for a purchase price
of $1,608,629 less the aggregate amount paid to
the director for the redemption of the Series A
Preferred Stock, which payments aggregated
$340,000 through July 31, 1996.
Future minimum lease payments as of July 31, 1996
for all leases are as follows:
<TABLE>
Capital Operating
Years ending July 31: Leases Leases
---------- ------------
<S> <C> <C>
1997 $8,916 $12,564
1998 8,916 12,564
1999 8,916 12,564
---------- ------------
Total minimum lease payments 26,748 $37,692
============
Less amount representing
interest (principally at 12% - 15%) (5,008)
----------
Present value of minimum leases payments $21,740
==========
</TABLE>
Total operating lease expense for 1996, 1995 and
1994 was $12,564, $18,315, and $5,216,
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.
During fiscal year ended July 31, 1996, holders
tendered $1,307,000 of the debentures for
conversion into 1,307,000 common shares.
Each Warrant entitled 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. No warrants were exercised,
and the warrants expired on February 21, 1996.
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 260,000 of the shares have been granted,
52,000 of which were exercised
during fiscal year 1996. As of July 31, 1996,
208,000 were exercisable. 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,
1996.
Other options to purchase 650,000 shares have been
granted by the Board of Directors, all of which
were outstanding and exercisable as of July 31,
1996. 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 300,000 shares at
$3.00 per share and 300,000 at $6.00 per share. A
30,000 share option was granted to an employee at
$1.00 per share and is exercisable through October
1997. Options for an additional 20,000 shares at
$1.6875 per share were granted during fiscal year
July 31, 1996 to R. Jerry Falkner, a principal in
a public relations firm for the Company. The
option is currently exercisable and extends
through February, 2006. An option for 30,000
shares was granted to the law firm of Lalos &
Keegan at $1.00 per share and was exercised during
fiscal year 1996.
A summary of common stock options for the years ended July 31 follows:
<TABLE>
1996 1995 1994
------------------ -------------------- --------------------
Option Option Option
Shares Price Shares Price Shares Price
--------- -------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning
of year 1,035,000 $ 1.00 1,044,750 $ 1.00 1,076,750 $ 1.00
to $10.00 to $10.00 to $10.00
Granted 755,000 $ 1.69 0 0 10,000 $ 1.00
$ 6.00
Canceled/expired 650,000 $ 1.13 9,750 $ 1.00 42,000 $ 1.00
to $ 10.00 to 5.00 to $ 5.00
Exercised 82,000 $ 1.00
to $ 1.13 0 0 0 0
--------- ---------- --------- --------- --------- ----------
Outstanding at $ 1.00 $ 1.00 $ 1.00
end of year 1,058,000 to $ 6.00 1,035,000 to $10.00 1,044,750 to $10.00
========= ========== ========= ========= ========= ==========
Exercisable
at end of year 1,058,000 1,035,000 1,034,750
========= ========= =========
Average exercise price $ 3.19 $ 4.84 $ 4.85
====== ====== ======
NOTE F -- SHAREHOLDERS' EQUITY:
The Company is authorized to issue 2,000,000
shares of non-voting preferred stock, no par
value, of which 900,000 and 1,000,000 shares were
issued and outstanding as Series A Preferred Stock
at July 31, 1996 and 1995, respectively. 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. During fiscal year 1996, 100,000
shares were redeemed by the Company for $340,000.
In the event of the liquidation of the Company,
the holders of the Series A Preferred Stock are
entitled to receive $3.40 per share plus any
unpaid cumulative and current dividends before
payment to holders of shares of the Company's
common stock.
NOTE G -- RELATED PARTY TRANSACTIONS:
Interest expense incurred on debt represented by a
line of credit payable to a director/shareholder
totaled $41,117 during 1994. There was no
interest expense incurred on this debt during 1995
and 1996. 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. There was no
interest on this promissory note during 1995 and
1996. 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
relating to this lease amounted to $19,353.
Interest expense relating to this lease aggregated
$64,940 during 1994. There were no payments or
interest relating to this lease during 1995 and
1996. The net book value of these leased assets
was $696,454 and $749,830 at July 31, 1996 and
1995, 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 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 machine was sold at its cost of
$170,000. Total payments made during 1996, 1995
and 1994 relating to these leases amounted to
$27,037, $64,888, and $89,442, respectively, of
which $889, $7,791, and $21,386, respectively,
represent interest. The lease obligation as of
July 31, 1995 was $26,148. The final payments on
the leases were made in December, 1995. There was
no lease obligation as of July 31, 1996.
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 $103,180,
$93,929, and $101,599 for 1996, 1995, and 1994,
respectively. The Company had accounts payable
of $27,768 at July 31, 1995 relating to such legal
services.
President and secretary - The president and
secretary of the Company who are husband and wife
and are also directors of the Company, are the
owners of a dealership which leases office space
from and sells equipment for the Company. The
Company primarily
sells its machines directly to the purchaser
within this dealer's region; however, sales may
also be made directly to the dealer who in turn
sells the machines to the purchaser. The
agreement between the Company and the dealer is a
standard agreement similar to other dealer
agreements entered into by the Company.
Rent income from the dealership was $7,200 each
year for 1996, 1995 and 1994. Sales commissions
of $349,584, $578,298, and $309,509 were paid
to the dealership during
1996, 1995, and 1994, respectively, for assisting
in effecting sales.
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>
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Federal: ------ ----- ------
Currently payable $ (18,000) $ (26,000) $ 0
Deferred benefit 1,082,000 1,136,000 0
----------- ----------- --------
1,064,000 1,110,000 0
----------- ----------- --------
State:
Currently payable 0 0 0
Deferred benefit 96,000 100,000 0
----------- ----------- --------
96,000 100,000 0
----------- ----------- --------
Total income tax benefit $1,160,000 $1,210,000 $ 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>
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Net earnings before income taxes $ 1,174,428 $ 1,139,794 $ 208,161
============= ============ =============
Expected income tax expense $ (435,000) $ (422,000) $ (77,000)
Utilization of net operating
loss carryforwards 119,000 474,000 90,000
Reduction in deferred tax asset
valuation allowance 1,480,000 1,163,000 0
Effect of non-deductible items:
Meals and entertainment (11,000) (9,000) (5,000)
Governmental assessments 0 0 (8,000)
Other 7,000 4,000 0
------------- ------------ -------------
Totals $ 1,160,000 $ 1,210,000 $ 0
============= ============ =============
</TABLE>
The tax effects of significant temporary differences
represented by deferred tax assets and deferred tax
liabilities at July 31 are as follows:
<TABLE>
Deferred tax assets: 1996 1995
------------ ------------
<S> <C> <C>
Inventory valuation $ 248,000 $ 204,000
Warranty reserves 42,000 64,000
Net operating loss carryforwards 2,224,000 2,554,000
Other 90,000 89,000
------------ ------------
2,604,000 2,911,000
Less valuation allowance 0 (1,480,000)
------------ ------------
Deferred tax assets 2,604,000 1,431,000
------------ ------------
Deferred tax liability:
Property and equipment 190,000 195,000
------------ ------------
Net deferred tax assets $2,414,000 $1,236,000
============ ============
</TABLE>
During the fourth quarter of the years ended July 31, 1996
and 1995, management adjusted the deferred tax asset
valuation allowance based on its assessment as to the
likelihood that future earnings will be sufficient to
realize deferred tax assets, including net operating loss
carryforwards.
At July 31, 1996, the Company had the following
carryforwards for tax purposes:
Operating loss carryforwards expiring in 1997 - 2009 $6,144,000
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>
1996 1995
---------- -----------
<S> <C> <C>
Property and income taxes $ 43,498 $ 39,646
Accrued warranties 114,992 173,803
Other 79,798 159,400
---------- ----------
Totals $238,288 $372,849
========== ==========
</TABLE>
Cash Flow Information:
The Company paid cash for interest in the amount of
$146,810, $280,123 and $408,067 during 1996, 1995 and
1994, respectively. The Company paid cash for income
taxes in the amount of $9,000 and $35,000 during 1996 and
1995, respectively.
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 1996, bonds with a face value of $1,307,000
were converted to 1,307,000 shares of common
stock.
NOTE K -- PENSION AND PROFIT SHARING PLAN:
The Company has a deferred income 40l(k) savings
plan for its employees. The Company matches 25%
of employee contributions up to 3% of each
employee's wages. Pension expense for 1996, 1995
and 1994 amounted to $19,274, $18,588, and
$18,633, respectively. The Company also has a
management profit sharing plan. Profit sharing
expense amounted to $384,390, $423,037 and
$139,012 for 1996, 1995, and 1994, respectively.
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 13,
1996, relating to the balance sheets of Thermwood
Corporation as of July 31, 1996 and 1995, and the
related statements of operations, shareholders'
equity (deficit) and cash flows for the years then
ended, which reports appear in the July 31, 1996,
annual report on Form 10-K of Thermwood
Corporation.
KPMG Peat Marwick LLP
Indianapolis, Indiana
October 28, 1996
<TABLE>
EXHIBIT 11
STATEMENT REGARDING EARNINGS PER SHARE
YEAR ENDED JULY 31, 1996
1996 1995
----------------------- -----------------------
Assuming Assuming
full full
Primary Dilution Primary Dilution
----------- ----------- ----------- -----------
<S>
Earnings <C> <C> <C> <C>
Net earnings $2,334,428 $2,334,428 $2,349,794 $2,349,794
Less preferred stock dividend (330,055) (330,055) (367,910) (367,910)
Add interest expense on
convertible bonds payable 98,436 263,388
Add amortization of bond discount
and issuance costs 20,583 27,660
Income tax effects of earnings adjustments (44,037) (107,688)
----------- ----------- ----------- -----------
Total Earnings $2,004,373 $2,079,355 $1,981,884 $2,165,244
=========== =========== =========== ===========
Common and Common Equivalent Shares
Weighted average common shares 6,155,729 6,155,729 5,149,546 5,149,546
Weighted average common
equivalent shares related to
dilutive stock options 265,373 265,373 37,606 37,606
Weighted average common shares
related to convertible bonds 763,000 2,070,000
----------- ----------- ----------- -----------
Total Common and Common
Equivalent Shares 6,421,102 7,184,102 5,187,152 7,257,152
Earnings per Common and Common
Equivalent Share $ .31 $ .29 $ .38 $ .30
=========== =========== =========== ==========
</TABLE>
For the year ended July 31, 1994, shares contingently
issuable in connection with stock options and warrants, and
convertible bonds have been excluded as their impact on the
earnings per share would not be dilutive. Accordingly,
earnings per share for such years is based on net earnings
less preferred stock dividends and the weighted average
number shares of common stock outstanding.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 18995
<SECURITIES> 0
<RECEIVABLES> 837540
<ALLOWANCES> 25000
<INVENTORY> 3329337
<CURRENT-ASSETS> 5572887
<PP&E> 3808482
<DEPRECIATION> 2115795
<TOTAL-ASSETS> 8766290
<CURRENT-LIABILITIES> 1782300
<BONDS> 693279
3097120
3097120
<COMMON> 10190404
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8766290
<SALES> 14264663
<TOTAL-REVENUES> 12636491
<CGS> 7711138
<TOTAL-COSTS> 7711138
<OTHER-EXPENSES> 3638536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 118599
<INCOME-PRETAX> 1174428
<INCOME-TAX> 1160000
<INCOME-CONTINUING> 2334428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2334428
<EPS-PRIMARY> .31
<EPS-DILUTED> .29
</TABLE>
