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, 1997
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, 1997 based upon the closing price of the
Registrant's Common Stock as reported on the American Stock Exchange
was approximately $10,847,723.
The number of the Registrant's shares of Common Stock outstanding as of
October 20, 1997 was 7,077,546 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, 1993,
July 31, 1994, July 31, 1995 and July 31, 1996.
PART I
Item 1. BUSINESS
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General
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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
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Flexible Automation
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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 a 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
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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. 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. Sales of the CARTESIAN
5 systems were approximately 80% of total sales of Thermwood Corporation in
fiscal year 1997.
Robotics Systems
- ----------------
During fiscal year 1996 the Company developed a wood carving routing system
which has replaced the older Wood Carving Robot. Retail prices for the Wood
Carving Router are approximately $150,000. Sales of the new system were
approximately 3% of total machine sales. 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
- -------
During fiscal year 1997 Thermwood introduced new tooling for its woodworking
line of CNC routers. This new tooling includes a low-cost piggyback router
and a low-cost 8-position turret. These products are priced at approximately
$5,000 for the piggyback router and $12,000 for the turret. 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 currently
manufactures version 91000 of the SuperControl CNC system.
MARKETING
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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 strives 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, 1997 the Company had 14
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 18% of the Company's sales for the
fiscal year ended July 31, 1997. See Item 13. (Certain Relationships and
Related Transactions) for information relating to the Company's agreement
with Automated Associates which is owned by the Company's president and his
wife who is also an officer and director. Two other dealers, Index, Inc. and
Process and Production Equipment, Inc., accounted for approximately 12% each
of the Company's business during the 1997 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. In fiscal year 1996 the Company
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 of machines and services in
fiscal year end 1997 were approximately 6% of total sales.
TECHNICAL SERVICES
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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. Sales and service by the Technical
Services Division in fiscal year 1997 amounted to approximately 18% of total
sales. 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. The Company
has incurred no significant expenses or problems in servicing its products.
PRODUCT DEVELOPMENT
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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 $182,000 or 1% of machine sales. There
were no sales of the robot in fiscal year ended July 31, 1997.
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 this control is
currently being sold and shipped on the Company's equipment. Current efforts
are being directed toward adding certain high-end features and capabilities.
Some of the high-end features being added are a service guide and manual,
Searchmode, maintenance videos and a service clock for improved guidance in
customer maintenance. Another feature is a 50-tool automatic tool changer
and a sanding head for the turret. A 12' Model 53 is being developed because
of increased popularity of 12' stock. A VHS player and a close up camera
are being added so that customers can record their set up and operations.
CUSTOMERS
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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, 1997.
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
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As of July 31, 1997, the Company's backlog was approximately $4,080,000
compared with a backlog of $1,630,000 as of July 31, 1996. Substantially all
of this backlog will be manufactured and delivered prior to January 31, 1998.
Backlog figures generally include only written orders from customers which
management believes are firm and will be shipped within eight to 12 weeks.
Approximately 90% of the backlog is covered by down payments from customers
ranging from 25% to 30%. On orders where down payments have not been
required, the Company has obtained irrevocable letters of credit for payment
upon proof of shipment.
Because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may
not be indicative of actual revenues for any subsequent period.
MANUFACTURING AND PRODUCTION
- ----------------------------
The Company maintains its manufacturing facilities in Dale, Indiana. See
"Property and Facilities" below. It manufactures its products on a batch
rather than a continuous flow or conventional production line basis. Except
for demonstration models, the Company does not generally manufacture products
without a purchase order although, in order to expedite the manufacturing
process, certain basic parts of machines may be fabricated before purchase
orders are received. The major portion of inventory is purchased to satisfy
specific customer orders with the balance acquired from one to four months in
advance of projected orders.
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 and 91000 Control systems operating conventional
metalworking machine tools to fabricate components.
During fiscal year 1997 the Company purchased two used pieces of equipment
which it retrofitted with the 91000 Control system for use in fabricating
components which were previously custom made for the Company. This move is
expected to save not only labor costs but material costs as well because raw
materials can be purchased in larger quantities at a lower cost.
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. One supplier accounted for
approximately 17% of total components purchased by the Company for the fiscal
year ended July 31, 1997. The materials purchased from this supplier are
available from several other sources.
COMPETITION
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There are many manufacturers of CNC routers in the United States and abroad,
particularly in Japan and Europe. A number of these manufacturers are
larger, better financed and have more resources than does the Company.
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, there are a large number of companies offering routing equipment,
and it is management's opinion that the market cannot support all of them.
Management believes, however, that the ability of the Company to offer
products which perform a variety of functions and sell at low prices,
provides Thermwood with a competitive advantage.
Competition in CNC routers is based upon real and perceived differences in
equipment features, price, performance, reliability, service, marketing,
financial strength and product development capability. The Company may be at
a competitive disadvantage with those manufacturers that offer a broader line
of equipment or related supplies.
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, development of new
products or product enhancements and reduction in manufacturing costs. The
Company utilizes a variety of sources in its research and development
efforts, including employees, vendor engineering staffs, contract employees
who are retained solely for specific projects, consultants and independent
design firms. See "Product Development" above for information relating to the
Company's current development efforts.
For the fiscal years ended July 31, 1997 and 1996, the Company spent $216,000
and $284,000, respectively, for research and development. There was no
customer sponsored research and development during the 1997 fiscal year.
Management believes that expenditures need to be increased for the Company
to maintain a competitive position in the immediate future. However, the
Company may eventually be at a competitive disadvantage with respect to firms
that spend significantly more on research and development efforts.
PATENTS, TRADE SECRETS AND TRADEMARKS
- -------------------------------------
Thermwood currently holds 26 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, 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
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As of July 31, 1997, the Company had 120 full time employees, of whom 68 were
engaged in manufacturing, 11 in marketing, 13 in administration, 9 in
engineering, 3 in research and development, and 16 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.
Forward-Looking Statements
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This Annual Report on form 10-K contains certain forward-looking statements
including, without limitation, statements containing the words "believes",
"anticipates", "expects" and words of similar import. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, financial condition, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Certain of these factors are discussed in more detail elsewhere
in this Annual Report on form 10-K, including, without limitation, "Description
of Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Given these uncertainties, readers are cautioned
not to place undue reliance on such forward-looking statements. the Company
disclaims any obligation to update any such forward-looking statements to
reflect future events or developments.
ITEM 2. PROPERTIES
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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
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None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
PART II
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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, 1997 and July 31, 1996, respectively, and for the interim periods
indicated:
<TABLE>
Common Stock Low Sales Price High Sales Price
1997
<S> <C> <C>
Fourth Quarter $ 1.50 $ 2.00
Third Quarter $ 1.50 $ 2.00
Second Quarter $ 1.38 $ 2.12
First Quarter $ 1.94 $ 2.38
1996
Fourth Quarter $ 1.79 $ 2.50
Third Quarter $ 1.43 $ 1.93
Second Quarter $ 1.85 $ 2.45
First Quarter $ 1.75 $ 2.54
</TABLE>
As of October 20, 1997, there were approximately 1,800 holders of record of
the Common Stock and 7,077,546 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.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Operations for the years ended July 31 (in thousands except per share data)
<TABLE>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales, less commissions $17,779 $12,636 $12,314 $ 9,985 $10,825
Gross Profit 6,906 4,925 4,786 3,579 2,173
Earnings (loss) from
continuing operations 1,236 2,334 2,350 136 (1,394)
Net earnings (loss) $ 1,236 $ 2,334 $ 2,350 $ 208 $(1,360)
======== ======= ======= ======= ========
Net earnings (loss) per common and
common equivalent share:
Primary $0.14 $0.31 $0.38 $0.00 $(0.27)
Assuming full dilution $0.14 $0.29 $0.30 $0.00 $(0.27)
Weighted average number of shares:
Primary 6,925 6,421 5,187 5,150 5,054
Assuming full dilution 7,237 7,184 7,257 5,150 5,054
Cash dividends declared per common share 0 0 0 0 0
FINANCIAL POSITION AT JULY 31:
------------------------------
Total assets $11,273 $ 8,766 $ 7,527 $ 5,418 $ 6,928
Working capital 5,080 3,791 2,811 1,706 1,291
Long-term obligations 285 709 1,870 1,862 5,711
Shareholders' equity (deficit) 7,087 6,275 3,437 1,456 (1,985)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales for fiscal year 1997 were $17,779,415, an increase of 41% from
fiscal year 1996, and a 44% increase from fiscal year 1995. European sales
for the first year in operation were $1,035,484, or approximately 6% of
total net sales. Machine sales consisted of $16,420,313, or 82% of total
gross sales. Technical services were $3,660,548, or 18% of total gross
sales. Backlog increased to $4,080,000 at July 31, 1997 from $1,630,000 at
July 31, 1996. Management attributes the increased level of orders at
July 31, 1997 to a better market share because of lower prices and a good
market due to sustained economic growth in the United States.
Gross profit for fiscal year 1997 was $6,905,916, or 38.84% of net sales.
The percentage of current year gross profit to net sales has decreased
slightly from last year's 38.97% and 38.86% for 1995. Gross profit for the
European operations was $374,021, or 36.12% of net European sales. In the
current year, gross profit was positively affected by the continued use of
more efficient production methods, including in-house fabrication of
components previously finished outside the Company. However, the total gross
profit was lower than the two prior years because of the lower gross profit
of the European sales. Management expects the first quarter of fiscal year
1998 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 improved manufacturing processes. Although management
anticipates that gross profit percentages from operations should continue to
improve during 1998, no assurance to this effect can be given.
Research and development, marketing, administrative and general expenses were
$4,794,563 in fiscal year 1997, compared to $3,638,536 in 1996 and $3,315,904
in 1995. Research and development expenditures aggregating $216,000 in 1997,
versus $284,000 in 1996 and $246,000 in 1995 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 1995 to 1997 was attributable to
European operations which did not exist in fiscal year 1996. These expenses
amounted to $570,000, or approximately 12% of total expenses in fiscal year
1997. Increased wages and benefits and increased advertising and marketing
efforts also contributed to the higher level of expenses.
Interest expense for fiscal year 1997 was $75,686, a decrease of $42,913 from
1996 and a decrease of $219,239 from 1995. The steady decrease from prior
years is primarily due to the conversion of 12% convertible debentures to
common stock during fiscal years 1997 and 1996.
Operating income for fiscal year 1997 was $2,111,353 compared to operating
income of $1,286,817 and $1,470,333 in 1996 and 1995, respectively.
The increase in operating income in 1997 over 1996 resulted primarily from
increased sales. The European operations had an operating loss of $195,971.
Fiscal year 1997 net earnings were $1,235,824, compared to net earnings of
$2,334,428 and $2,349,794 in 1996 and 1995, respectively. Deferred tax
benefits of $1,178,000 and $1,236,000 recognized in 1996 and 1995,
respectively, contributed to increases in those years. This benefit primarily
resulted from a reduction in a deferred tax asset valuation allowance based
on management's expectation that future earnings would more likely than not
allow for realization of deferred tax assets including utilization of net
operating loss carryforwards. As the deferred tax valuation allowance was
eliminated prior to fiscal year 1997, income tax expense was provided on all
1997 earnings. Federal income tax expense for fiscal year 1997 was $786,000,
compared to income tax benefits of $1,064,000 and $1,110,000 for fiscal years
ended July 31, 1996 and 1995, respectively.
The Company has federal income tax net operating loss carryforwards of
approximately $4,896,000 which expire in the years 1998 through 2009. It also
has other tax credits of lesser value which appear in Note I of Notes to
Financial Statements.
Liquidity and Capital Resources
- -------------------------------
At July 31, 1997 the Company's working capital was $5,080,310 compared to
$3,790,586 at July 31, 1996. This increase was primarily due to increased
sales and accounts receivable. The increase in accounts receivable
was due to increased sales in the fourth quarter. Inventories also
increased, primarily due to in-house processing of components previously
purchased completely fabricated. The increase in inventory levels,
however, also contributed to increased accounts payable.
Management believes that the focus on marketing, sale and manufacture of
standard machines at the lowest possible price has been a major factor in
the increased market share, margins and profitability.
The Company had a positive cash flow from operating activities for the 1997
fiscal year in the amount of $1,791,778. Net earnings of $1,235,824, along
with the add back of other non-cash expenses such as depreciation and
amortization of $338,274, and an increase in accounts payable and customer
deposits contributed to a positive cash flow. However, an increase in
inventories and accounts receivable used cash resources.
During the 1997 fiscal year, the Company's investing activities were
primarily for remodeling engineering and supervisors' offices, replacement of
computer equipment and the retrofitting of production equipment with
Thermwood Controls. Expenditures for fixed assets in the 1998 fiscal year
are anticipated to be for normal replacements and purchases of labor-saving
equipment for production. The Company also has plans for expansion of the
production area to increase efficiency and capacity due to an anticipated
increased level of sales.
Principal payments on lease obligations during the 1997 fiscal year were for
leased office equipment. Cash flows from financing activities included
$285,204 of dividend payments on preferred stock and redemption of $550,800
of preferred stock.
Recent Accounting Pronouncements
- --------------------------------
In February of 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 128, Earnings per Share,
(FAS 128) and No. 129, Disclosures of Information about Capital Structure,
(FAS 129), effective for years ending after December 15, 1997. FAS 128
specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. The Company will adopt FAS 128 in its July 31, 1998
financial statements. The effect of such adoption is not expected to have a
material impact on the earnings per share of the Company. FAS 129 specifies
and aggregates various disclosures which were previously required for certain
entities. The Company has complied with the disclosure requirements under
this statement.
In June of 1997, the FASB issued Statements of Financial Accounting
Standards, No. 130, Reporting Comprehensive Income, (FAS 130), and No. 131,
Disclosures About Segments of an Enterprise and Related Information,
(FAS 131), effective for years beginning after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
Company has not yet adopted FAS 130. The Company will comply with the
reporting and display requirements under this statement when required. FAS
131 establishes standards for reporting information about operating segments
and the methods by which such segments were determined. The Company has not
yet adopted FAS 131. As the Company operates within one industry segment,
the reporting of such information is not expected to be significant.
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 DISCLOSURES
None.
PART III
- --------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
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) 50 Chairman of the Board, President and Director
Linda S. Susnjara (1) 48 Secretary and Director
Michael P. Hardesty 43 Vice President of Engineering
Rebecca F. Fuller 47 Treasurer
David J. Hildenbrand 40 Vice President of Sales
Richard Kasten 45 Vice President of Technical Services
Peter N. Lalos (2) 63 Director
Edgar Mulzer (2) 79 Director
Lee Ray Olinger (2) 70 Director
- ------------------------
</TABLE>
(1) Mr. and Mrs. Susnjara are husband and wife.
(2) Member of the Incentive Stock Option Committee, Non-Qualified Stock
Option Committee, Audit Committee, Nominating Committee and Compensation
Committee of the Board of Directors.
All directors hold office until the next annual meeting of shareholders of
the Company or until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors. Each director
receives compensation in the amount of $1,000 plus $100 for each $100,000 in
profit for the previous quarter 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. 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. He has also been a director of
Thermwood Europe Ltd. since July, 1996.
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 SECURITYES 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.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The following table sets forth the annual remuneration paid during the fiscal
years ended July 31, 1997, 1996 and 1995 to the Chief Executive Officer and
to each of the executive officers of the Company whose total fiscal 1997
remuneration exceeded $100,000 and to all officers of the Company as a group.
<TABLE>
Summary Compensation Table
Annual compensation Long-term compensation
------------------- -------------------------
Awards Payouts
------------------ -------
Other
annual Restricted Options/
Name and principal compensa- stock SARs LTIP
position Year Salary Bonus tion(1) award(s) (#) payouts
- -------------------- ---- ------- -------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth J. Susnjara, 1997 $63,000 $145,949 $3,700 0 0 0
Chairman of 1996 63,000 83,242 2,000 0 0 0
the Board, 1995 63,000 94,739 2,000 0 0 0
President and director
Michael Hardesty, 1997 48,000 102,165 0 0 0 0
Vice-president 1996 48,000 58,269 0 0 0 0
Engineering 1995 48,000 66,317 0 0 0 0
David Hildenbrand, 1997 45,000 116,779 0 0 0 0
Vice-president Sales 1996 45,000 56,818 0 0 0 0
1995 45,000 73,964 0 0 0 0
Rebecca Fuller, 1997 40,000 87,570 0 0 0 0
Treasurer
All other officers
as a group (1)person 1997 40,000 29,172 0 0 0 0
(2) persons 1996 80,000 76,369 0 0 0 0
(2) persons 1995 80,000 77,618 0 0 0 0
</TABLE>
<TABLE>
Name and principal position Year All other compensation
- --------------------------- ---- ----------------------
<S> <C> <C>
Kenneth J. Susnjara, 1997 0
Chairman of the Board, 1996 0
President and director 1995 0
Michael Hardesty, Vice-president 1997 0
Engineering 1996 0
1995 0
David Hildenbrand 1997 0
Vice-president Sales 1996 0
1995 0
Rebecca Fuller, Treasurer 1997 0
All other officers as a group (1) 1997 0
as a group (2) 1996 0
as a group (2) 1995 0
</TABLE>
(1) Other annual compensation represents directors' fees paid to Mr. Susnjara.
An additional 25,000 stock options were issued to Grant Lockhart under the
Qualified Stock Option Plan in fiscal year 1997. An additional 50,000
options were issued under a non-qualified stock option plan to a public
relations firm. At July 31, 1997 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 year 1997. 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 Employee 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. The life term of the Qualified Plan
extends to December 3, 2000, or on such earlier date as the Board of
Directors may determine. Any option outstanding at the termination date
will remain outstanding at the termination date until it expires or is
exercised in full, whichever occurs first.
As of July 31, 1997, options to acquire 233,000 shares of the Company's
common stock for ten years at an average exercisable price of $1.68 per share
had been granted under the Qualified Plan to 20 employees of the Company.
Options for the purchase of 233,000 shares were exercisable as of
July 31, 1997.
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 that time. When an optionee
exercises his option, ordinary income will be realized by him, measured by
the excess of the fair market value of the shares over the price paid for the
shares. The Company will be entitled to a deduction equal to the amount of
income realized by the holder of the option. If the optionee surrenders all
or part of his option for a cash or common stock payment, he will realize
ordinary income in the amount of cash or fair market value of stock received.
The Company will be entitled to a deduction equal to the amount of income
realized by the optionee.
As of July 31, 1997 options to acquire 200,000 shares of the Company's common
stock at an average exercisable price of $1.34 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 canceled 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 a principal in a former
public relations firm for the Company. The options are currently exercisable
and extend through February, 2006. During fiscal year 1997 options for
50,000 shares were granted to another public relations firm. These options
are exercisable as of July 31, 1997, 25,000 of which are exercisable at
$2.50 per share and 25,000 at $5.00 per share and expire 30 days after
termination of the service agreement between the Company and the firm.
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 15% 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 options owned as of July 31, 1997 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
Percentage of Exercisable of Total
Names and Shares Owned Total Outstan- Options Outstanding
Addresses of at ding Shares Convertible Shares
Beneficial Owners (1) July 31, 1997 Owned (2) Securities Owned
- --------------------- ------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Kenneth J. Susnjara 1,330,000 19.0 2,130,000(5) 25.96(5)
(3,4)
Edgar Mulzer
401 10th Street
Tell City, Indiana 47586 985,262 14.07 1,035,262(6) 12.94(6)
Peter N. Lalos
14312 Darnstown Road
Gaithersburg, Maryland 20878 43,300 0.6 113,300(7) 1.4(7)
Linda S. Susnjara (3,4) 0 0 50,000(8) .6(8)
Lee Ray Olinger
c/o First Bank of Huntingburg
4th and Main Street
Huntingburg, IN 47542 2,000 0 2,000 0
All Officers and Directors
as a Group (9 persons) 2,391,562 34.2 3,438,562 42.96
(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 301,000 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 233,000 shares have been granted and options to purchase 233,000
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:
- --------------------------------------------------------
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.
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 162,000 and 100,000 shares of the
preferred stock for a total of $550,800 and $340,000 during fiscal years 1997
and 1996, respectively. Dividends were paid in the amount of $285,204 and
$330,055 for the fiscal years 1997 and 1996, respectively.
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 1997, but paid AAI $447,667 in commissions during the
year for assisting in effecting sales of approximately $2,575,000. This
amount represents approximately 18% of the Company's gross sales for fiscal
year 1997. AAI also leases space from the Company at what management
believes is a fair market rate. Rental payments were $6,400 during the
1997 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 $77,000, $103,000, $94,000, for the fiscal years 1997, 1996, and
1995, respectively. During fiscal year 1997 the Company paid this
firm an aggregate of $62,237. Accordingly, as of July 31, 1997 the Company
carried a balance of $14,462 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:
(a) The following documents are filed as a part of this report:
1. Financial Statements:
Index to Financial Statements:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - July 31, 1997 and 1996
Consolidated Statements of Operations - Years ended
July 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity
Years Ended July 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended
July 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
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.
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 28, 1997 /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 28, 1997 /s/ Kenneth J. Susnjara
-----------------------
Kenneth J. Susnjara, Chairman of the Board and
President (Principal Executive Officer)
Date:
October 28, 1997
/s/ Rebecca F. Fuller
---------------------
Rebecca F. Fuller, Treasurer
(Principal Financial and Accounting Officer)
Date:
October 28, 1997
/s/ Linda S. Susnjara
---------------------
Linda S. Susnjara, Secretary
Date:
October 28, 1997
/s/ Peter N. Lalos
------------------
Peter N. Lalos, Director
Date:
October 28, 1997 /s/ Edgar Mulzer
----------------
Edgar Mulzer, Director
Date: October 28, 1997
Lee Ray Olinger, Director
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Thermwood Corporation:
We have audited the accompanying consolidated balance sheets of Thermwood
Corporation and subsidiary as of July 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended July 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermwood
Corporation as of July 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
July 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 12, 1997, except as to Note L which is as of October 7, 1997
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
-----------------------------------
1997 1996
--------------- -----------------
Assets
- ------
Current Assets
<S> <C> <C>
Cash $ 512,480 $ 18,995
Accounts receivable, less allowance for
doubtful accounts of $25,000 for 1997
and 1996 1,802,569 812,540
Inventories 4,618,001 3,329,337
Deferred income taxes 1,676,000 1,073,000
Prepaid expenses 372,287 339,015
------------- -------------
Total Current Assets 8,981,337 5,572,887
------------- -------------
Property and Equipment
Land 73,260 73,260
Buildings and improvements 1,352,059 1,235,621
Furniture and equipment 2,768,255 2,331,461
Construction in progress 6,257 168,140
Less accumulated depreciation
and amortization (2,375,826) (2,115,795)
------------ ------------
Net Property and Equipment 1,824,005 1,692,687
------------ ------------
Other Assets
Patents, trademarks and other 133,026 131,899
Bond issuance costs less
accumulated amortization 8,665 27,817
Deferred income taxes 326,000 1,341,000
------------ ------------
Total Other Assets 467,691 1,500,716
------------ ------------
Total Assets $11,273,033 $ 8,766,290
============ ============
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
-----------------------------
1997 1996
------------ --------------
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities
<S> <C> <C>
Accounts payable $ 1,375,005 $ 694,603
Accrued compensation and payroll taxes 582,652 349,136
Customer deposits 907,110 494,009
Other accrued liabilities 1,028,505 238,288
Current portion of capital lease obligations 7,755 6,264
------------ --------------
Total Current Liabilities 3,901,027 1,782,300
------------ --------------
Long-Term Liabilities, Less Current Portion
Capital lease obligations 5,918 15,474
Bonds payable, net of unamortized discount of
$22,225 for 1997 and $69,721 for 1996 278,775 693,279
------------ --------------
Total Long-Term Liabilities 284,693 708,753
------------ --------------
Shareholders' Equity
Preferred stock, no par value, 2,000,000
shares authorized, 1,000,000 shares
issued and 738,000 and 900,000 shares
outstanding for 1997 and 1996, respectively 2,546,320 3,097,120
Common stock, no par value, 20,000,000
shares authorized, 7,000,546 and
6,538,546 shares issued and outstanding
for 1997 and 1996, respectively 10,599,285 10,190,404
Accumulated deficit (6,033,542) (6,984,162)
------------ --------------
7,112,063 6,303,362
Less subscriptions receivable 24,750 28,125
------------ --------------
Total Shareholders' Equity 7,087,313 6,275,237
------------ --------------
Total Liabilities and Shareholders' Equity $11,273,033 $ 8,766,290
============ ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended July 31
---------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Sales
Machine sales $16,420,313 $10,966,096 $11,042,793
Technical services 3,660,548 3,298,567 2,785,525
---------------- ---------------- ---------------
20,080,861 14,264,663 13,828,318
Less commissions 2,301,446 1,628,172 1,514,047
---------------- ---------------- ---------------
Net Sales 17,779,415 12,636,491 12,314,271
Cost of Sales
Machines 8,841,911 5,577,272 5,951,699
Technical services 2,031,588 2,133,866 1,576,335
---------------- ---------------- ---------------
Total Cost of Sales 10,873,499 7,711,138 7,528,034
---------------- ---------------- ---------------
Gross Profit 6,905,916 4,925,353 4,786,237
Research and development,
marketing, administrative
and general expenses 4,794,563 3,638,536 3,315,904
---------------- ---------------- ---------------
Operating income 2,111,353 1,286,817 1,470,333
---------------- ---------------- ---------------
Other income (expense):
Interest expense -
related party 0 (889) (7,791)
Interest expense - other (75,686) (117,710) (287,134)
Other 19,157 6,210 (35,614)
---------------- ---------------- ---------------
Other expense, net (56,529) (112,389) (330,539)
---------------- ---------------- ---------------
Earnings before income taxes 2,054,824 1,174,428 1,139,794
Income tax (expense) benefit (819,000) 1,160,000 1,210,000
---------------- ---------------- ---------------
Net earnings $ 1,235,824 $ 2,334,428 $ 2,349,794
================ ================ ===============
Net earnings applicable to
common shareholders $ 950,620 $ 2,004,373 $ 1,981,884
================ ================ ===============
Earnings per common and
common equivalent share
Primary $0.14 $0.31 $0.38
================ ================ ===============
Assuming full dilution $0.14 $0.29 $0.30
================ ================ ===============
Weighted average number of shares:
Primary 6,925,601 6,421,102 5,187,152
Assuming full dilution 7,236,782 7,184,102 7,257,152
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
------------------- -----------------------------
Subscriptions Accumulated
Shares Amount Shares Amount Receivable (Deficit)
--------- ---------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
July 31, 1995 1,000,000 $3,437,120 5,149,546 $8,988,897 $ 0 ($8,988,535)
Preferred
dividends paid 0 0 0 0 0 (330,055)
Redemption of
preferred
stock (100,000) (340,000) 0 0 0 0
Conversion of
12% debentures,
net of related
bond issuance
costs and unamor-
tized 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)
Subscriptions
received 0 0 0 0 3,375 0
Preferred dividends
paid 0 0 0 0 0 (285,204)
Redemption of
preferred
stock (162,000) (550,800) 0 0 0 0
Conversion of
12% debentures,
net of related
bond issuance
costs and
unamortized
discount 0 0 462,000 408,881 0 0
Net earnings 0 0 0 0 0 1,235,824
----------- ---------- --------- ----------- ---------------------
Balances at
July 31, 1997 738,000 $2,546,320 7,000,546 $10,599,285 ($24,750)($6,033,542)
=========== ========== ========= =========== ========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31
----------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
Cash Flows From Operating Activities:
- -------------------------------------
<S> <C> <C> <C>
Net earnings $ 1,235,824 $ 2,334,428 $ 2,349,794
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 338,274 295,510 329,012
Provision for inventories 0 21,012 80,000
Gain on disposal of equipment 0 (15,625) (1,850)
Deferred income taxes 412,000 (1,178,000) (1,236,000)
Changes in operating assets and
liabilities:
Accounts receivable (990,029) 369,060 (500,252)
Inventories (1,288,664) (341,402) (244,890)
Prepaid expenses and
other assets (32,864) 41,151 (140,219)
Accounts payable and
other accrued expenses 1,704,136 (263,205) (114,974)
Customer deposits 413,101 (148,350) 273,154
------------ -------------- --------------
Net cash provided by
operating activities 1,791,778 1,114,579 793,775
------------ -------------- --------------
Cash Flows From Investing Activities:
- ------------------------------------
Proceeds from sale of equipment 0 40,000 1,850
Purchases of patents, property
and equipment (457,599) (502,350) (350,111)
------------ -------------- --------------
Net cash used by
investing activities (457,599) (462,350) (348,261)
------------ -------------- --------------
Cash Flows From Financing Activities:
- -------------------------------------
Principal payments on
lease obligations (8,065) (31,598) (76,767)
Redemption of preferred stock (550,800) (340,000) 0
Payment of dividends on
preferred stock (285,204) (330,055) (367,910)
Proceeds from subscriptions
receivable 3,375 0 0
Proceeds from exercise of stock options 0 57,875 0
---------- -------------- --------------
Net cash used by
financing activities (840,694) (643,778) (444,677)
---------- -------------- --------------
Increase in cash 493,485 8,451 837
Cash at beginning of year 18,995 10,544 9,707
----------- -------------- --------------
Cash at end of year $ 512,480 $ 18,995 $ 10,544
=========== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES :
- ------------------------------------------------------
General :
- ---------
The consolidated financial statements include the accounts of Thermwood
Corporation and its wholly-owned subsidiary, Thermwood Europe Limited, a
United Kingdom company. The term "Company" refers to the consolidated
operations of Thermwood Corporation and its subsidiary.
The Company operates within a single business segment called industrial
automation equipment, and manufactures high technology machining systems.
The Company sells its products primarily through the assistance of dealer
networks established throughout the United States and Europe. Three dealers
accounted for approximately 42% of the Company's business. The loss of any
large dealer could have a materially adverse effect on the Company's
business.
The Company also offers a variety of technical services. These services
include training, installation assistance, preventive maintenance and
upgrading and enhancement of installed products as technology advances. The
Technical Services Division also has responsibility for the quality control
of the Company's industrial products during their manufacture. Technical
services are marketed to current customers as well as to companies that
purchase Thermwood equipment in the used market. Sales and service by the
Technical Services Division in fiscal year 1997 amounted to approximately 18%
of total sales.
The Company's machining systems are utilized principally in the woodworking,
plastics and boating industries. The Company is not dependent upon a single
supplier or only a few suppliers.
Principles of Consolidation:
- ----------------------------
All significant intercompany transactions and accounts have been eliminated
in consolidation.
Use of Estimates and Assumptions:
- ---------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.
Revenues and Warranties:
- ------------------------
The manufacturing process may extend over several months and advance cash
deposits are normally required from customers. Sales are recorded when
machines are shipped. Revenues of technical services are recognized when
the service is performed. Estimated costs of product warranties are charged
to cost of sales at the time of sale.
Inventories:
- ------------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment:
- -----------------------
Property and equipment are recorded at cost for assets purchased and at the
present value of minimum lease payments for assets acquired under capital
leases. Depreciation and amortization are computed by the straight-line
method over the estimated useful lives of the assets, as shown below :
<TABLE>
<S> <C>
Buildings and improvements 10 to 30 years
Equipment 3 to 10 years
</TABLE>
Depreciation expense for 1997, 1996 and 1995 was $304,716, $256,290 and
$289,339, respectively.
Research and Development:
- -------------------------
Research and development costs are expensed as incurred. Expenditures for
research and development were approximately $216,000, $284,000 and $246,000
during 1997, 1996 and 1995, 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, 1997, substantially all of
the deposits had no incurred work-in-process cost.
Earnings 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, 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.
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:
1997 1996
------------------ -------------------
<S> <C> <C>
Finished goods $ 644,477 $ 508,910
Work-in-process 1,171,484 903,447
Raw ------------------ -------------------
$ 4,618,001 $ 3,329,337
================== ===================
</TABLE>
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>
1997 1996
---------------- -----------------
<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 (799,558) (740,782)
---------------- -----------------
$ 712,409 $ 771,185
================ =================
</TABLE>
Included in Land, Building and Improvements above are assets with a net book
value of $533,928 and $696,454 at July 31, 1997 and 1996, 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 G). 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 $890,800 through
July 31, 1997.
Future minimum lease payments as of July 31, 1997 for all leases are as follows:
<TABLE>
Capital Operating
Years ending July 31: Leases Leases
----------------- --------------------
<C> <C> <C>
1998 $8,916 $42,108
1999 7,114 42,108
2000 0 42,108
2001 0 42,108
2002 0 1,200
----------------- --------------------
Total minimum lease payments 16,030 $169,632
Less amount representing interest ====================
(principally at 14%) (2,357)
-----------------
Present value of net minimum lease
payments $13,673
=================
</TABLE>
Total operating lease expense for 1997, 1996 and 1995 was $44,390, $18,130
and $18,315 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, 1997 holders tendered $462,000 of the
debentures for conversion into 462,000 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. 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 applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for these plans. Had
compensation cost been determined based on the fair value at the grant date
for awards under those plans consistent with the method of Statement of
Financial Accounting Standards No. 123 (FAS 123), the Company's
net earnings and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
1997 1996
----------------- -----------------
Net Earnings
<S> <C> <C>
As Reported $1,235,824 $2,334,428
Pro Forma 1,214,168 1,985,024
Primary Earnings Per Share
As Reported $0.14 $0.31
Pro Forma 0.14 0.27
Fully Diluted Earnings Per Share
As Reported 0.14 0.29
Pro Forma 0.14 0.26
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. The Statement does not apply to awards granted
prior to December 16, 1995. The fair value of each option is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in fiscal years 1997 and 1996: no dividend yield
for both years; expected volatility of 56 percent and 72 percent for 1997
and 1996, respectively, risk-free interest rates of 6.2 percent and 6.6
percent for 1997 and 1996, respectively, expected lives of 10 years for all
options except 5 years for options to purchase 600,000 shares granted in 1996.
The Company reserved 400,000 shares of common stock for issuance under the
qualified plan. Options to purchase 285,000 of the shares have been granted,
25,000 of which were granted during fiscal year 1997. None of these options
were exercised during fiscal year 1997. As of July 31, 1997, 233,000 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, 1997.
Other options to purchase 700,000 shares have been granted by the Board of
Directors, all of which were outstanding and exercisable as of July 31, 1997.
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 1996 to a principal in a
former public relations firm for the Company. The options are currently
exercisable and extend through February, 2006. During fiscal year 1997
options for 50,000 shares were granted to another public relations firm.
These options are exercisable as of July 31, 1997, 25,000 of which are
exercisable at $2.50 per share and 25,000 at $5.00 per share and expire 30
days after termination of the service agreement between the Company and the
firm.
<TABLE>
A summary of common stock options for the years ended July 31 follows:
1997 1996 1995
--------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 1,058,000 $ 3.19 1,035,000 $ 4.85 1,044,750 $ 4.85
Granted 75,000 $ 2.95 755,000 $ 3.86 0 0
Canceled/expired 0 0 650,000 $ 7.01 9,750 $ 1.63
Exercised 0 0 82,000 $ 1.37 0 0
--------- ---------- ---------- ---------- --------- ---------
Outstanding at end
of year 1,133,000 $3.18 1,058,000 $ 3.19 1,035,000 $ 4.85
========= ========== ========== ========== ========= =========
Exercisable at end
of year 1,133,000 1,058,000 1,035,000
========= ========== =========
Weighted average fair
value of options
granted during the year $ 1.38 $ .75 $ 0.00
========== ========= ========
</TABLE>
NOTE F -- SHAREHOLDERS' EQUITY:
- -------------------------------
The Company is authorized to issue 2,000,000 shares of non-voting preferred
stock, no par value Series A Preferred Stock, of which 1,000,000 shares were
issued and 738,000 and 900,000 shares were outstanding at July 31, 1997 and
1996, respectively. All of these shares were issued to a director/
shareholder in a conversion of debt transaction (Note G). 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
years 1997 and 1996, 162,000 and 100,000 shares were redeemed by the Company
for $550,800 and $340,000, respectively. 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:
- -------------------------------------
Director and shareholder - The Company leased land, building and improvements
from a director/shareholder and a leasing company owned by this director.
The net book value of these leased assets was $533,928 and $696,454 at
July 31, 1997 and 1996, respectively. On November 18, 1993, the Company
entered into an agreement with the director/shareholder, whereby
approximately $3.4 million in long-term debt (including amounts due under
capital leases) was converted to 1,000,000 shares of the Company's Series A
Preferred Stock.
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 $76,699, $103,180 and $93,929 for 1997, 1996
The Company had accounts payable of $14,462 at July 31, 1997 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 $6,800, $7,200 and $7,200 for 1997, 1996
and 1995, respectively. Sales commissions of $447,667, $349,584 and $578,298
were paid to the dealership during 1997, 1996, and 1995, respectively,
for assisting in effecting sales.
NOTE I -- INCOME TAXES:
- -----------------------
<TABLE>
The provisions for income taxes for the years ended July 31 consist of:
1997 1996 1995
----------- ------------ -----------
Federal:
<S> <C> <C> <C>
Currently payable $ (407,000) $ (18,000) $ (26,000)
Deferred (expense) benefit (379,000) 1,082,000 1,136,000
----------- ------------ -----------
(786,000) 1,064,000 1,110,000
----------- ------------ -----------
State:
Currently payable 0 0 0
Deferred (expense) benefit (33,000) 96,000 100,000
----------- ------------ -----------
(33,000) 96,000 100,000
Total income tax (expense) benefit ($819,000) $1,160,000 $1,210,000
=========== ============ ===========
</TABLE>
A reconciliation of expected income taxes using an effective combined state
and federal income tax rate of 37% and actual income taxes for the years
ended July 31 follows:
<TABLE>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Net earnings before income taxes $ 2,054,824 $ 1,174,428 $ 1,139,794
============ ============= ============
Expected income tax expense $ (760,000) $ (435,000) $ (422,000)
Utilization of net operating
loss carryforwards 0 119,000 474,000
Reduction in deferred tax asset
valuation allowance 0 1,480,000 1,163,000
Effect of non-deductible items:
Meals and entertainment (14,000) (11,000) (9,000)
Other (45,000) 7,000 4,000
------------- ------------ ------------
Total actual income tax
(expense) benefit $ (819,000) $ 1,160,000 $ 1,210,000
============= ============ ============
</TABLE>
The tax effects of significant temporary differences represented by deferred
tax assets and deferred tax liabilities at July 31 are as follows:
<TABLE>
Deferred tax assets: 1997 1996
--------------- ------------------
<S> <C> <C>
Inventory valuation $ 246,000 $ 248,000
Warranty reserves 73,000 42,000
Net operating loss carryforwards 1,812,000 2,224,000
Other 3,000 90,000
--------------- ------------------
Deferred tax assets 2,134,000 2,604,000
--------------- ------------------
Deferred tax liability:
Property and equipment 132,000 190,000
--------------- ------------------
Net deferred tax assets $2,002,000 $2,414,000
=============== ==================
</TABLE>
During the fourth quarter of the fiscal year 1996, management adjusted the
deferred tax asset valuation allowance based on its assessment as to the
likelihood that future earnings would be sufficient to realize deferred tax
assets, including net operating loss carryforwards.
At July 31, 1997, the Company had the following carryforwards for tax purposes:
<TABLE>
<S> <C>
Operating loss carryforwards expiring in 2004 - 2009 $4,896,000
General business credits expiring in 1998 - 2001 $ 31,000
</TABLE>
The amount of such loss carryforwards and other credits available for
utilization in any future year could be limited in the event of a change in
ownership as defined by income tax laws.
NOTE J -- ADDITIONAL INFORMATION:
- ---------------------------------
<TABLE>
Other accrued liabilities at July 31 consist of:
1997 1996
---------------- --------------------
<S> <C> <C>
Property taxes $ 66,138 $ 43,498
Income taxes 387,000 0
Accrued warranties 196,777 114,992
Other 378,590 79,798
---------------- --------------------
$1,028,505 $238,288
================ ====================
</TABLE>
Cash Flow Information:
- ----------------------
The Company paid cash for interest in the amount of $69,739, $146,810 and
$280,123 during 1997, 1996 and 1995, respectively. The Company paid cash for
income taxes in the amount of $30,000, $9,000 and $35,000 during 1997, 1996
and 1995, respectively.
Non-cash Investing and Financing Activities:
- -------------------------------------------
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
1997 and 1996, bonds with face values of $462,000 and $1,307,000,
respectively, were converted to 462,000 and 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 1997, 1996 and 1995 amounted to $35,840, $19,274
and $18,588, respectively. The Company also has a management profit sharing
plan. Profit sharing expense amounted to $647,407, $384,390 and $423,037 for
1997, 1996 and 1995, respectively.
NOTE L -- SUBSEQUENT EVENTS:
- ----------------------------
On October 7, 1997, the Company entered into a line of credit with a bank in
the amount of $3.5 million. The balance of preferred stock in the amount of
$2,546,320 was repurchased from the shareholder. This transaction enabled
the Company to take clear title to its land and building. An expansion of
20,000 square feet to the production facilities was started and is expected
to be completed in January, 1998. Management estimates the total cost of the
expansion will be approximately $500,000.
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 12, 1997, except as to Note L
which is as of October 7, 1997, relating to the consolidated balance sheets
of Thermwood Corporation and subsidiary as of July 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three-year period ended July 31,
1997, which report appears in the July 31, 1997, annual report on Form 10-K
of Thermwood Corporation.
KPMG Peat Marwick LLP
Indianapolis, Indiana
October 28, 1997
EXHIBIT 11
STATEMENT REGARDING EARNINGS PER SHARE
YEAR ENDED JULY 31,
<TABLE>
1997
-------------------------
Assuming full
Primary Dilution
----------- -------------
Earnings
<S> <C> <C>
Net earnings $1,235,824 $1,235,824
Less preferred stock dividend (285,204) (285,204)
Add interest expense on convertible
bonds payable 0 62,580
Add amortization of bond discount
and issuance costs 0 13,120
Income tax effects of earnings adjustments 0 (28,009)
----------- --------------
Total Earnings 950,620 998,311
----------- --------------
Common and Common Equivalent Shares
Weighted average common shares 6,748,713 6,748,713
Weighted average common equivalent
shares related to dilutive stock
options 176,891 187,069
Weighted average common shares
related to convertible bonds 0 301,000
---------- -------------
Total Common and Common Equivalent Shares 6,925,604 7,236,782
=========== =============
Earnings per Common and Common
Equivalent Share $ 0.14 $ 0.14
=========== ============
</TABLE>
<TABLE>
1996
------------------------
Assuming full
Primary Dilution
------------ -------------
Earnings
<S> <C> <C>
Net earnings $2,334,428 $2,334,428
Less preferred stock dividend (330,055) (330,055)
Add interest expense on convertible
bonds payable 0 98,436
Add amortization of bond discount
and issuance costs 0 20,583
Income tax effects of earnings adjustments 0 (44,037)
------------ -------------
Total Earnings 2,004,373 2,079,355
------------ -------------
Common and Common Equivalent Shares
Weighted average common shares 6,155,729 6,155,729
Weighted average common equivalent
shares related to dilutive
stock options 265,373 265,373
Weighted average common shares
related to convertible bonds 0 763,000
------------ -------------
Total Common and Common Equivalent Shares 6,421,102 7,184,102
============ =============
Earnings per Common and Common
Equivalent Share $ 0.31 $ 0.29
============ =============
</TABLE>
<TABLE>
1995
--------------------------
Assuming full
Primary Dilution
------------ -------------
Earnings
<S> <C> <C>
Net earnings $2,349,794 $2,349,794
Less preferred stock dividend (367,910) (367,910)
Add interest expense on convertible
bonds payable 0 263,388
Add amortization of bond discount
and issuance costs 0 27,660
Income tax effects of earnings adjustments 0 (107,688)
------------ -------------
Total Earnings 1,981,884 2,165,244
============ =============
Common and Common Equivalent Shares
Weighted average common shares 5,149,546 5,149,546
Weighted average common equivalent
shares related to dilutive stock options 37,606 37,606
Weighted average common shares related to
convertible bonds 0 2,070,000
----------- -------------
Total Common and Common Equivalent Shares 5,187,152 7,257,152
=========== =============
Earnings per Common and Common Equivalent Share $ 0.38 $ 0.30
=========== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 512480
<SECURITIES> 0
<RECEIVABLES> 1827569
<ALLOWANCES> 25000
<INVENTORY> 4618001
<CURRENT-ASSETS> 8981337
<PP&E> 4199831
<DEPRECIATION> 2375826
<TOTAL-ASSETS> 11273033
<CURRENT-LIABILITIES> 3901027
<BONDS> 278775
2546320
2546320
<COMMON> 10599285
<OTHER-SE> 24750
<TOTAL-LIABILITY-AND-EQUITY> 11273033
<SALES> 17779415
<TOTAL-REVENUES> 17779415
<CGS> 10873499
<TOTAL-COSTS> 10873499
<OTHER-EXPENSES> 4794563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75686
<INCOME-PRETAX> 2054824
<INCOME-TAX> 819000
<INCOME-CONTINUING> 1235824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1235824
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
