2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-12195
THERMWOOD CORPORATION
(Exact name of small business issuer as specified in its charter)
INDIANA 35-1169185
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
P. O. Box 436, Dale, Indiana 47523
(Address of principal executive offices)
Issuer's telephone number, including area code: (812) 937-4476
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 the number of shares outstanding of each of the issuer's
classes of common equity as of the latest practicable date.
Outstanding at October 31, 1998 Class
1,444,709 Shares Common Stock, no par value
Transitional Small Business Format (check one); Yes No X
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended October 31
1998 1997
SALES
<S> <C> <C>
Machine sales $5,097,403 $3,800,378
Technical sales 1,349,210 1,736,344
6,446,613 5,536,722
----------- -----------
Less commissions 821,391 732,027
----------- -----------
NET SALES 5,625,222 4,804,695
----------- -----------
COST OF SALES
Machine sales 2,618,678 2,032,923
Technical sales 617,156 728,920
----------- -----------
3,235,834 2,761,843
----------- -----------
GROSS PROFIT 2,389,388 2,042,852
----------- -----------
RESEARCH AND DEVELOPMENT, MARKETING,
ADMINISTRATIVE AND GENERAL EXPENSES 1,928,098 1,468,373
----------- -----------
OPERATING PROFIT 461,290 574,479
----------- -----------
Interest expense (56,921) (25,445)
Other income (expense) 6,352 8,631
----------- -----------
Net other income (expense) (50,569) (16,814)
----------- -----------
EARNINGS BEFORE INCOME TAXES 410,721 557,665
Income taxes 192,026 202,626
----------- -----------
NET EARNINGS $218,695 $355,039
=========== ===========
Earnings per share:
Basic 0.15 0.22
Diluted 0.15 0.21
Weighted average number of shares:
Basic 1,440,976 1,408,909
Diluted 1,481,327 1,535,474
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 31 July 31
1998 1998
------------ ------------
ASSETS
Current Assets
<S> <C> <C>
Cash $184,111 $115,937
Accounts receivable 2,046,924 1,673,826
Inventories 5,630,985 5,359,182
Deferred income taxes 694,000 694,000
Prepaid expenses 561,520 491,209
----------- -----------
Total Current Assets 9,117,540 8,334,154
----------- -----------
Property and Equipment (net of
accumulated depreciation) 2,626,376 2,647,490
----------- -----------
Other Assets
Patents, trademarks and other 137,721 139,933
Bond issuance costs net of
accumulated amortization 2,677 4,089
Deferred income taxes 199,000 199,000
------------ ------------
Total Other Assets 339,398 343,022
------------ ------------
Total Assets $12,083,314 $11,324,666
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable 1,613,400 1,136,896
Accrued liabilities 1,007,301 1,050,290
Customer deposits 924,591 816,315
Current portion of long-term liabilities 4,632 6,195
------------ ------------
Total Current Liabilities 3,549,925 3,009,696
------------ ------------
Long-term Liabilities - less current portion
Note payable to bank 2,196,320 2,196,320
Bonds payable, net of
unamortized discount 106,159 170,550
------------ ------------
Total Long-term Liabilities 2,302,479 2,366,870
------------ ------------
Shareholders' Equity
Common stock, no par value,
4,000,000 shares authorized
1,444,709 and 1,431,109 shares
issued and outstanding at
October 31, 1998 and
July 31, 1998, respectively 10,806,394 10,742,636
Accumulated deficit (4,539,859) (4,758,911)
------------ ------------
6,266,535 5,983,725
Less subscriptions receivable 35,625 35,625
------------- ------------
Total Shareholders' Equity 6,230,910 5,948,100
------------- ------------
Total Liabilities and
Shareholders' Equity $12,083,314 $11,324,666
============= ============
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
October 31
1998 1997
----------- ------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net earnings $218,695 $355,039
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 103,570 103,619
Amortization of bond discount 1,137 2,601
Changes in operating assets
and liabilities
Accounts receivable (373,098) (121,480)
Inventories (271,803) (249,689)
Prepaid expenses and other assets (70,311) (12,078)
Accounts payable and other
accrued expenses 433,515 (50,925)
Customer deposits 108,276 (108,625)
---------- -----------
Net cash provided (used) by
operating activities 149,981 (81,538)
---------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (80,244) (60,492)
---------- -----------
Net cash used by investing activities (80,244) (60,492)
---------- -----------
Cash Flows From Financing Activities:
Principal payments on notes
payable, lease obligations and
long-term debt (1,563) (13,673)
Note payable at bank 0 2,546,320
Redemption of preferred stock 0 (2,546,320)
Payment of dividends on preferred stock 0 (42,190)
Payment received for
subscriptions receivable 0 21,550
----------- -----------
Net cash used by financing activities (1,563) (34,313)
----------- -----------
Decrease in cash 68,174 (176,343)
Cash, beginning of period 115,937 512,480
----------- -----------
Cash, end of period $184,111 $336,137
=========== ===========
ADDITIONAL INFORMATION:
Interest paid $54,588 $8,970
=========== ===========
Conversion of bonds payable,
net of unamortized discount $64,391 $82,000
=========== ===========
Subscriptions receivable for
common stock issued $0 $3,200
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS:
Note A - Basis of Presentation
______________________________
The unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form l0-QSB and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles for complete financial
statements. The statements have not been examined by independent
accountants but include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present
fairly the condensed financial position and the results of operations
for the periods presented. These financial statements should be read
in conjunction with the Company's consolidated financial statements
included on Form 10-K for the year ended July 31, 1998 and Form 10-Q
for the quarter ended October 31, 1997
Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the year ending
July 31, 1999.
Note B - Inventories
____________________
Inventories are priced at the lower of cost (first-in, first-out
method) or market.
<TABLE>
October 31 July 31
Components of inventory: 1998 1998
------------ ------------
<S> <C> <C>
Raw material $3,246,166 $3,166,526
Work in process 1,593,059 1,541,258
Finished goods 791,760 651,398
------------ -----------
Total $5,630,985 $5,359,182
============ ===========
</TABLE>
Note C - Reclassifications
__________________________
Certain amounts presented in the prior year condensed consolidated
financial statements have been reclassified to conform to the current
year presentation.
Note D - Earnings per Share
___________________________
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings
per Share," which requires companies to present basic and diluted
earnings per share. A reconciliation of the numerator and denominator
for the basic and diluted earnings per share calculation follows:
<TABLE>
Three Months Ended October 31
1998 1997
Basic Diluted Basic Diluted
-------- --------- ---------- -----------
Earnings:
<S> <C> <C> <C> <C>
Net earnings $218,695 $218,695 $355,039 $355,039
Less preferred stock dividend 0 0 (43,255) (43,255)
Add interest expense on
convertible bonds payable 0 3,840 0 7,500
Add amortization of bond discount
and issuance costs 0 1,495 0 7,286
Income tax effects of earnings
adjustments (2,134) 0 (5,471) 0
---------- --------- --------- ---------
Total earnings $218,695 $221,896 $311,784 $321,099
========== ========= ========= =========
Weighted average shares
outstanding 1,440,976 1,440,976 1,408,909 1,408,909
Incremental shares from assumed:
Exercise of diluted stock
options 0 17,751 0 82,765
Conversion of convertible bonds 0 22,600 0 43,800
---------- ---------- ---------- ----------
Total weighted average shares 1,440,976 1,481,327 1,408,909 1,535,474
========== ========== ========== ==========
Earnings per share $0.15 $0.15 $0.22 $0.21
========= ========== ========== ==========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995, 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 and its subsidiaries 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 herein and in the Company's Annual
Report on form 10-K, including, without limitation, the sections:
"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.
Results of Operations
Net sales for the quarter ended October 31, 1998 were $5,625,222, an
increase of 17% over the same quarter of the previous year. Gross
profit for the current quarter was $2,389,388, an increase of 17% over
the first quarter last year. Cost of sales as a percentage of net
sales was 57.52%, approximately the same as for the first quarter of
last year.
Research and development, marketing, administrative and general
expenses were $1,928,098 compared with $1,468,373 for the first
quarter of fiscal 1998 and were the primary reason for the reduced
operating profit of $461,290 compared to $574,479 for the same period
in fiscal year 1998. The 31% increase resulted in a 20% decrease in
operating profit. Research and development, marketing, administrative
and general expenses were 34% of net sales for the quarter ended
October 31, 1998 compared to 31% for the same period of fiscal 1998.
Expenses for the first quarter of fiscal 1999 were at a higher level
as a percentage of sales as a result of increased European expenses,
marketing expenses and salary increases. Legal and professional fees
were also higher due to the attempted stock reverse split.
Interest expense in the first quarter of fiscal year 1999 was $56,921,
an increase of approximately $31,000 from last year. This higher
level is due to interest on a $2,500,000 loan which was effected in
October, 1997.
Earnings from continuing operations before income taxes in the first
quarter of fiscal year 1999 were $410,721 compared to $557,665 in the
first quarter of fiscal year 1998, or a decrease of approximately 26%.
Federal income taxes were accrued in the amount of $192,026, lowering
earnings to a net of $218,695 compared to $355,039 in the first
quarter of fiscal 1998.
Liquidity and Capital Resources
At October 31, 1998 the Company's working capital was $5,567,615
compared to $5,324,458 at July 31, 1998. This increase was due to
cash generated from operations. Current backlog is approximately
$2,521,000 or $500,000 lower than the $3,029,000 backlog at July 31,
1998. Management anticipates that orders will continue at this level;
however, no assurances can be made.
Shareholders' equity increased from $5,948,100 at July 31, 1998 to
$6,230,910 in the three-month period ended October 31, 1998. A total
of 13,600 shares of common stock at a price of $5 per share were
converted from the 12% debenture bonds during the quarter ended
October 31, 1998 for an increase to shareholders' equity in the amount
of $63,758, net of discount and issuance costs.
During the second quarter of fiscal year 1999, the Company plans to
file a registration statement with the Securities and Exchange
Commission to offer 15-year Debentures to the Company's shareholders
in exchange for Company common stock. The Company anticipates that
the exchange ratio will be approximately $11 in principal amount of
debenture for every share of Company common stock tendered. The
details of this plan are not final and are subject to change. The
Company anticipates that it will fund the costs of conducting the
offering from its cash reserves, operating revenues and its existing
line of credit.The Company has a one-year $3,500,000 revolving secured
line of credit (the "line") with DuBois County Bank that expired in
October 1998, but has been extended through January 1, 2001. The
outstanding balance on the line bears interest at a variable rate
equal to the Money Market Prime index. Interest is payable monthly.
Principal and all unpaid and accrued interest is due and payable on
January 1, 2001. Management anticipates, but cannot assure, that, at
the end of term, the Company and Bank will enter into a new line and
transfers any outstanding loan balance to the new line. The line is
secured by the Company's assets. In the event of a default, as
defined in the line, the Bank has the right to accelerate payments
under the line and possess and sell the collateral. Events of default
under the line include: (i) failure of the Company to make any
payments under the line when due; (ii) failure of the Company to
comply with conditions in the line; (iii) false or misleading
representations by the Company in the line; (iv) the insolvency of
the Company or certain other events related to insolvency or
bankruptcy; and (v) materially adverse changes in the Company's
financial condition. As of November 30, 1998, the Company's
outstanding principal balance under the line was approximately
$2,196,320.
Year 2000 Issues.
Many currently installed computer systems and software products use
two digits rather than four to define the applicable year. In other
words, date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to track
inventory, issue purchase orders, write checks or engage in similar
normal business activities.
During the fiscal year ended July 31, 1998, we began a risk evaluation
of potential Year 2000 issues and formed a Year 2000 Committee which
consists of the Chief Executive Officer, Vice-President of
Engineering, Information Systems Manager and two other employees. The
committee's purpose is to assess all risks, analyze current systems,
coordinate upgrades and replacements and report the current and
projected status of all known Year 2000 compliance issues.
During the assessment phase, we identified computer-related systems
and software vendors. In the first quarter of fiscal 1999, we began
corresponding with the vendors that have not supplied Year 2000
statements requesting the Year 2000 compliance status of their
products. Responses received to date have not indicated that there
will be problems. We know of alternative vendors should our current
vendors fail to perform due to Year 2000 problems; however, use of
some of these vendors would be inconvenient. Moreover, we have not
contacted these alternate vendors to determine whether they are Year
2000 compliant.
We know of one mission-critical system that is not Year 2000
compliant. This system has a Year 2000 certified replacement product;
however, implementation of this replacement product would require us
to re-input all current data. Since we are going to be required to
input current data, we have decided to purchase a different system
that is Year 2000 compliant and, in our judgment, superior to the
current system that we are using. We anticipate that the new system
will arrive during the second quarter of fiscal 1999, at which time we
will begin to input current data. We are currently installing
upgrades to the non-mission critical systems and should complete the
upgrade by the end of the second quarter of fiscal 1999.
We estimate that the replacement or remedial costs for our Year 2000
compliance issues will be less than $150,000 and will consist of
software and hardware upgrades that include new features which are
combined with Year 2000 corrections. These costs will be expensed as
incurred or capitalized and depreciated, as appropriate.
We have tested the machine control systems and related computer
software, which we sell and we believe that such equipment is Year
2000 compliant.
We estimate that the worst case Year 2000 issue scenario would be that
the current software vendor would be unable to deliver upgrades; and
at that point, we would look to alternative vendors. We have not
established a formal contingency plan should we fail to become Year
2000 compliant. However, we will continue to evaluate our status and
will plan additional activity as it becomes necessary.
THERMWOOD CORPORATION
FORM 10-QSB
10/31/98
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
None.
ITEM 2. CHANGES IN SECURITIES:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
a. None.
b. Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 5. OTHER INFORMATION:
A total of $68,000 of 12% convertible debentures was converted to
13,600 common shares at a price of $5 per share during the quarter
ended October 31, 1998.
During the second quarter of fiscal year 1999, the Company plans to
file a registration statement with the Securities and Exchange
Commission to offer 15-year Debentures to the Company's shareholders
in exchange for Company common stock. The Company anticipates that
the exchange ratio will be approximately $11 in principal amount of
debenture for every share of Company common stock tendered. The
details of this plan are not final and are subject to change. The
planned exchange offering will be made only by means of a prospectus
that is filed with the Securities and Exchange Commission as part of a
registration statement and only if and when that registration
statement is declared effective by the Securities and Exchange
Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Form 8-K filed with the Commission on August 19, 1998. Item 5.
Form 8-K filed with the Commission on October 16, 1998. Item 5.
SIGNATURES
____________
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THERMWOOD CORPORATION
_____________________
(Registrant)
Date December 14, 1998 By__/s/ Kenneth J. Susnjara
___________________
Kenneth J. Susnjara
President (Principal Executive Officer)
Date December 14, 1998 By___/s/ Rebecca F. Fuller
__________________
Rebecca F. Fuller
Treasurer (Principal Financial Officer)
