8
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, 1998
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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at October 28, 1998 based upon the closing price of
the Registrant's Common Stock as reported on the American Stock
Exchange was approximately $9,925,151.
The number of the Registrant's shares of Common Stock outstanding as of
October 28, 1998 was 1,444,709 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, 1994, July 31, 1995, July 31, 1996 and July 31, 1997.
PART I
Forward-Looking Statements
This Annual Report on Form 10-K 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
Thermwood Corporation and subsidiaries (the Company or Thermwood) 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 1. Business
General
On January 5, 1998 the Company effected a one for five reverse stock
split of its common shares, and all related share and per share
information has been adjusted to give retroactive effect to this split
except where text indicates otherwise.
The Company develops, manufactures and markets all of its products.
Its operations are divided into a number of different divisions. The
Production Manager directs the production organization, which is
responsible for all manufacturing. 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. A Vice President manages that division. 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 that is managed
by the Company's President and a research and development group that is
supervised by the Vice President of Engineering.
Industry Background
Flexible Automation
Prior to the availability of microprocessor-based machinery control
systems, there were only two alternatives to automating the industrial
process: a manual operation using humans to manipulate tools; or "hard
automation" employing dedicated automatic machinery. High initial cost
and limited flexibility have made hard automation suitable only for
applications involving large volumes of identical parts. Smaller
volumes of parts were traditionally produced by using human labor, hand
tools or machine tools operated manually.
In today's marketplace, competitive pressures demand a greater variety
of products. Due to demographic and economic factors, neither hard
automation nor manual labor appears to be a feasible means of meeting
this manufacturing requirement.
The gap between hard automation and manual labor is currently being
filled by a variety of flexible automation equipment. This equipment
is often better suited to small and medium volumes of parts and is
usually designed to perform a number of tasks utilizing the same
computer-controlled machine.
Flexible automation equipment is manufactured in a variety of forms and
addresses a number of applications. Specific markets have developed
for certain classes of equipment with a number of vendors offering
products in each of these niche markets. Many vendors, including the
Company, build products that 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
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 that 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 79% of total sales
of Thermwood Corporation in fiscal year 1998.
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.
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 acquired
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.
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. Sales of these products in fiscal year 1998 were
approximately $570,000. 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 that it uses for
sale with its own automated industrial equipment. It currently
manufactures version 91000 of the SuperControl CNC system.
Marketing
The market for industrial automation equipment can be divided into a
large number of applications in a variety of industries. Thermwood
seeks to produce industrial products that address specific applications
in a variety of industries. It also attempts to provide complete, pre-
engineered, standard automation systems that 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 the assistance of
dealer networks established throughout North America and Europe.
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, 1998 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 21% of the Company's sales for
the fiscal year ended July 31, 1998. 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.
This dealer sold to 39 different customers, none of which accounted for
10% or more of the Company's sales in the fiscal year ended July 31,
1998.
One other dealer, CNC Automation, accounted for approximately 11% of
the Company's business during the 1998 fiscal year. This dealer sold
to 19 different customers, none of which accounted for 10% or more of
the Company's sales in the fiscal year ended July 31, 1998. 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.
The Company has a wholly-owned subsidiary, Carolina CNC, Inc., a North
Carolina corporation, which conducts sales in the southeastern region
of the United States.
The Company also has a wholly-owned subsidiary, Thermwood (Europe)
Limited, a United Kingdom company, which currently maintains sales
offices in England and Vienna, Austria for conducting sales to the
European Community. During the 1998 fiscal year, the Company lost
$453,000 in connection with its European operations. Neither of the
foreign sales offices generated a profit. The Company closed the
Vienna office in September 1998. Sales of machines and services in
fiscal year 1998 were approximately $1,735,000, or 8% of total sales.
Typically, Thermwood seeks to develop sales leads through advertising
in trade magazines and product exhibitions at selected trade shows.
The Company then furnishes such leads to dealers in the geographic area
where the potential customer is located. It also supplies the dealers
with promotional materials and sales aids, including product
literature, a dealer's manual, news letters, press releases and
advertising, technical briefs, sales incentive programs and video tapes
of product demonstrations. The Company assists its dealers by
providing training for them and their customers. Thermwood encourages
trainees and potential customers to visit its manufacturing facilities
where it maintains areas and machinery to demonstrate the operation and
use of its products.
Technical Services
Management believes that providing extensive and ongoing technical
services to customers is essential for the success of small and medium-
sized companies. Accordingly, Thermwood offers a variety of technical
services through its Technical Services Division. These services
include training, installation assistance, preventive maintenance and
upgrading and enhancement of installed products as technology advances.
The Technical Services Division also has responsibility for the quality
control of the Company's industrial products during their manufacture.
Technical services are marketed to current customers as well as to
companies that purchase Thermwood equipment in the used market. Sales
and service by the Technical Services Division in fiscal year 1998
accounted for approximately 21% 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
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 woodcarving 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 while sales of the
three-dimensional carving robot in fiscal year ended July 31, 1998
amounted to approximately $540,000 or 3% of machine sales. There were
no sales of the two-dimensional robot in fiscal years ended July 31,
1997 or 1998.
Development efforts have been continuing on the 91000 SuperControl that
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
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, 1998.
Thermwood generally requires a purchaser of industrial products to pay
30% of the sales price when placing the order, an additional 40% prior
to shipment and the balance within 30 days after date of invoice.
Charges for technical services and spare parts are due within 30 days
after billing.
Thermwood offers its customers a limited warranty, ranging from 90 days
for labor to one year for parts. The Company also provides training
and installation services. See "Technical Services" above.
Backlog
As of July 31, 1998, the Company's backlog was approximately $3,029,000
compared with a backlog of $4,080,000 as of July 31, 1997.
Substantially all of this backlog will be manufactured and delivered
prior to January 31, 1999.
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 has saved the Company approximately $250,000 during
fiscal year 1998 in labor and material costs.
Raw materials are purchased from third party sources. Most raw
materials and components, including those that are custom made for the
Company, are either purchased or available from several sources. One
supplier accounted for approximately 19% of total components purchased
by the Company for the fiscal year ended July 31, 1998. The materials
purchased from this supplier are available from several other sources.
Competition
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, Accurouter, 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 that 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, 1998 and 1997, the Company spent
$314,000 and $216,000, respectively, for research and development.
There was no customer-sponsored research and development during the
1998 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 14 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 that 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
As of October 1, 1998, the Company had 145 full time employees, of whom
82 were engaged in manufacturing 14 in marketing, 14 in administration,
10 in engineering, 7 in research and development, and 18 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.
Year 2000 Issues.
During the fiscal year ended July 31, 1998, the Company began a risk
evaluation of potential Year 2000 issues. The outcome of this
evaluation was the formation of a Year 2000 Committee which consists of
the Chief Executive Officer, Vice-President of Engineering, Information
Systems Manager and two other employees. The purpose of this committee
is to assess all risks, analyze current systems, coordinate upgrades
and replacements and report current and projected status of all known
Year 2000 compliance issues.
During the assessment phase, computer-related systems and software
vendors were identified. Correspondence requesting the status of Year
2000 compliance is scheduled to be delivered in the first quarter of
fiscal 1999 to the vendors that have not supplied Year 2000 statements.
The Company also plans to obtain correspondence from all significant
vendors regarding the status of Year 2000 compliance.
The Company has one known mission-critical system that is not Year 2000
compliant. This system has a Year 2000 certified replacement product
that is scheduled for implementation during the second quarter of
fiscal 1999. The Company is currently installing upgrades to the non-
mission critical systems and should be completed by the end of the
second quarter of fiscal 1999.
The replacement or remedial costs for the Company's Year 2000
compliance issues are estimated to be less than $150,000 and consists
of software and hardware upgrades that include new features, which are
combined with Year 2000 corrections. As appropriate, these costs will
be expensed as incurred or capitalized and depreciated, as appropriate.
The Company has tested the machine control systems and related computer
software, which it sells and believes that such equipment is Year 2000
compliant.
The Company estimates that the worst case Year 2000 issue Scenario
would be that the current software vendor would be unable to deliver
the upgrades; and at that point, the Company would investigate other
vendors. The Company has not established a formal contingency plan
should it fail to become year 2000 compliant and, based on the assessed
risk to the business, does not intend to do so.
Item 2. Properties
Thermwood's manufacturing facilities and executive offices are located
in a 100,000 square foot building in Dale, Indiana which had been
leased from Edgar Mulzer, a director and major stockholder of the
Company. 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. In fiscal year 1998, the Company repurchased
the Preferred Stock with proceeds from a line of credit from a bank
resulting in transfer of ownership of the land and building to the
Company. This line of credit also made it possible to increase the
original approximately 75,000 square feet of the building to the
current 100,000 square feet. Management believes that these facilities
are in good condition and adequately satisfy the Company's current
requirements. . See Item 13. "Certain Relationships and Related
Transactions
Item 3. Legal Proceedings
There are no known pending or threatened litigation, claims or
assessments which management believes could have a material effect on
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters
The Company's 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 fiscal years ended July 31, 1998 and July 31, 1997, and for
the interim periods indicated:
<TABLE>
Common Stock Low Sales Price High Sales Price
<S> <C> <C>
1998
Fourth Quarter $ 7.50 $ 10.06
Third Quarter $ 7.50 $ 9.12
Second Quarter $ 9.05 $ 13.10
First Quarter $ 9.70 $ 14.05
1997
Fourth Quarter $ 7.50 $ 10.00
Third Quarter $ 7.50 $ 10.00
Second Quarter $ 6.90 $ 10.60
First Quarter $ 9.70 $ 11.90
</TABLE>
As of October 28, 1998, there were approximately 1,900 holders of
record of the Common Stock and 1,431,709 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>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net sales $21,840 $17,779 $12,636 $12,314 $9,985
Gross profit 8,842 6,906 4,925 4,786 3,579
Earnings from continuing
operations 1,318 1,236 2,334 2,350 136
Net earnings 1,318 1,236 2,334 2,350 208
Earnings per share:
Basic $0.89 $0.70 $1.63 $1.92 $0.00
Diluted $0.86 $0.69 $1.45 $1.49 $0.00
Weighted average number of
shares:
Basic 1,425 1,349 1,231 1,030 1,030
Diluted 1,517 1,446 1,437 1,451 1,030
Cash dividends declared per
common share 0 0 0 0 0
Financial position at July 31:
Total assets $11,325 $11,273 $8,766 $7,527 $5,418
Working capital 5,324 5,080 3,791 2,811 1,706
Long-term obligations 2,367 285 709 1,870 1,862
Shareholders' equity 5,948 7,087 6,275 3,437 1,456
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net sales for fiscal year 1998 were $21,839,529, an increase of 23%
from fiscal year 1997, and a 73% increase from fiscal year 1996.
European sales for the first year in operation were $1,734,716 or
approximately 8% of total net sales. Machine sales consisted of
$20,199,191 or 81% of total gross sales. Technical services were
$4,657,784, or 19% of total gross sales. Backlog decreased from
$4,080,000 at July 31, 1997 to $3,029,000 at July 31, 1998. Management
attributes the decreased level of orders at July 31, 1998 to a slowdown
in capital purchasing because of a slower economy. Also, traditionally
sales are slower before the International Woodworking Fair, a furniture
industry trade show, which was held in August. Sales generally
increase a month or two after the show.
Gross profit for fiscal year 1998 was $8,841,623, or 40.48% of net
sales. The percentage of current year gross profit to net sales has
increased from last year's 38.84% and 38.97% for 1996. Gross profit
for the European operations was $695,121 or 40.07% of net sales
compared to $374,021, or 36.12% of net European sales for fiscal 1997.
There were no sales for the European operation for fiscal 1996. 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 purchased outside the Company. Management
expects the first quarter of fiscal year 1999 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. Improved efficiency was also attributed to an
addition to the production facility of approximately 20,000 square
feet, allowing better production flows, methods and processes including
the purchasing and storage of larger quantities of steel for
fabrication at the Dale facility. Although management anticipates that
gross profit percentages from operations should continue to improve
during 1999, no assurance to this effect can be given.
Research and development, marketing, administrative and general
expenses were $6,413,160 in fiscal year 1998, compared to $4,794,563 in
1997 and $3,638,536 in 1996. Research and development expenditures
aggregating $314,000 in 1998, versus $216,000 in 1997 and $284,000 in
1996 are included in the foregoing amounts.
The major portion of the increased research and development, marketing
and administrative and general expenses from 1996 to 1998 was
attributable to European operations which did not exist in fiscal year
1996. These expenses amounted to $1,052,000, or 16% of total expenses
in fiscal 1998 compared to $570,000, or approximately 12% of total
expenses in fiscal year 1997. A portion of the increased European
expense was approximately $100,000 due to the operations of an office
in Vienna which management closed in September 1998. Increased wages
and benefits and increased advertising and marketing efforts also
contributed to the higher level of expenses.
Interest expense for fiscal year 1998 was $231,747, an increase of
$156,061 from 1997 and an increase of $114,037 from 1996. The increase
from prior years is due to interest on a $3.5 million line credit from
a bank, proceeds of which the Company used to repurchase the Preferred
Stock in the amount of $2,546,320.
Operating income for fiscal year 1998 was $2,428,463 compared to
operating income of $2,111,353 and $1,286,817 in 1997 and 1996,
respectively. The increase in operating income in 1998 over 1997 and
1996 resulted primarily from increased sales. The European operations
had an operating loss of $356,644 for fiscal year 1998 compared to
$195,971 for 1997. Fiscal year 1998 net earnings were $1,317,886,
compared to net earnings of $1,235,824 and $2,334,428 in 1997 and 1996,
respectively. Deferred tax benefits of $1,178,000 recognized in 1996
contributed to an increase in that year. 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 1998 and 1997 earnings. Income tax
expense for fiscal years 1998 and 1997 was $848,000 and $819,000,
respectively, compared to an income tax benefit of $1,060,000 for
fiscal year ended July 31, 1996.
The Company has income tax net operating loss carryforwards of
approximately $529,000, which expire in the years 2008 and 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, 1998 the Company's working capital was $5,324,458 compared
to $5,080,310 at July 31, 1997. Inventories increased approximately
$800,000 due to increased in-house processing of components; however,
accounts receivable decreased from July 31, 1997 primarily due to lower
sales in July 1998 compared to the prior July. Cash also decreased
approximately $400,000 and was used primarily to pay accounts payable
and other liabilities.
The Company had a positive cash flow from operating activities for the
1998 fiscal year in the amount of $1,222,952. Net earnings of
$1,317,886, along with the add back of other non-cash expenses such as
depreciation and amortization of $368,261, and a decrease in accounts
receivable contributed to a positive cash flow. However, an increase
in inventories and payments of accounts payable and other liabilities
used cash resources.
During the 1998 fiscal year, the Company's investing activities
consisted primarily of a 20,000 square foot addition to the production
area and additional machinery purchased to increase efficiency and
capacity. Expenditures for fixed assets in the 1999 fiscal year are
anticipated to be for normal replacements and purchases of labor-saving
equipment for production.
Cash flows from financing activities included $43,255 for dividend
payments on Preferred Stock and redemption of $2,546,320 of Preferred
Stock. A line of credit in the amount of $3,500,000 was established at
a bank with $2,196,320 being utilized at July 31, 1998, primarily for
the redemption of the Preferred Stock.
At a meeting on August 17, 1998, the Company's Board of Directors
authorized its officers to take steps to prepare for a 1 for 38,000
Reverse Stock Split in which shareholders with less than 38,000 shares
would receive cash of $11.00 per share previously held. The proposed
transaction was subject to supplemental approval by the Board of
Directors.
On September 4, 1998, the Company filed a preliminary proxy statement
and Schedule 13E-3 with the Securities and Exchange Commission relating
to the Reverse Stock Split (and proposed a modified 1 for 37,000
exchange ratio). It also proceeded with steps to obtain financing for
the transaction. The Company intended to borrow $14,000,000 to finance
the Reverse Stock Split.
On October 16, 1998, the Company determined that it was unable to
obtain financing for the Reverse Stock Split with acceptable terms and
decided not to proceed with the transaction.
On September 3, 1998 the Company entered into an agreement whereby the
Company acquired an option to purchase the shares of Common stock held
by Mr. Edgar Mulzer, a major shareholder of the Company, during a
period commencing November 1, 1999 and ending October 31, 2002 for a
per share price equivalent to $15.50 per share. This agreement was
contingent upon the 1 for 37,000 Reverse Stock Split being successfully
completed. As the Board decided not to proceed with the Reverse Stock
Split, the option agreement between the Company and Mr. Mulzer is no
longer in effect.
Recent Accounting Pronouncements
In June of 1997, the Financial Accounting Standards Board (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 but does not expect the adoption of
FAS 130 to have a material effect on the consolidated financial
statements. 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 Disclosure
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) 51 Chairman of the Board, President
and Director
Linda S. Susnjara (1) 49 Secretary and Director
Michael P. Hardesty 44 Vice President of Engineering
Rebecca F. Fuller 48 Treasurer
David J. Hildenbrand 41 Vice President of Sales
Richard Kasten 46 Vice President of Technical
Services
Donald L.Ubelhor 41 Vice-President of Manufacturing
Peter N. Lalos (2) 64 Director
Edgar Mulzer (2) 80 Director
Lee Ray Olinger (2) 71 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
of the four directors' meetings 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. 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, the Company had employed him in various technician and
sales manager positions since 1977. He has also been a director of
Thermwood Europe Ltd., the Company's wholly owned subsidiary, since
July 1996.
Mr. Ubelhor became Vice-President of Manufacturing in August 1997.
Previously, he had been the Company's Production Manager since 1993.
Mr. Kasten became a Vice President in December 1993. Previously, the
Company had employed him 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. He 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 of the First Bank of Huntingburg, a commercial bank in
Huntingburg, Indiana since 1949 and Chairman of the bank since 1986.
Compliance with Section 16 (a) of the Securities Exchange Act of 1934
To the Company's knowledge, based solely on a review of such materials
as are required by the Securities and Exchange Commission, no officer,
director or beneficial holder of more than ten percent of the Company's
issued and outstanding shares of Common Stock failed to timely file
with the Securities and Exchange Commission any form or report required
to be so filed pursuant to Section 16 (a) of the Securities Exchange
Act of 1934 during the fiscal year ended July 31, 1998.
Item 11. Executive Compensation
The following table sets forth the annual remuneration paid during the
fiscal years ended July 31, 1998, 1997 and 1996 to the Chief Executive
Officer and to each of the executive officers of the Company whose
total fiscal 1998 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
Name and princi- Year Salary Bonus annual Restri- Options/ LTIP All
pal position compen- cted SARs payouts other
sation stock (#) compen-
(1) award(s) sation
---- ------- ------ ------ --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth J. Susnjara,
Chairman of the Board
President and
director 1998 $108,000 $146,664 $6,400 0 0 0 0
1997 63,000 83,242 3,700 0 0 0 0
1996 63,000 94,739 2,000 0 0 0 0
Michael Hardesty,
Vice-president
Engineering 1998 48,000 100,565 0 0 0 0 0
1997 48,000 102,165 0 0 0 0 0
1996 48,000 58,269 0 0 0 0 0
David Hildenbrand
Vice-president
Sales 1998 45,000 122,239 0 0 0 0 0
1997 45,000 116,779 0 0 0 0 0
1996 45,000 56,818 0 0 0 0 0
Rebecca Fuller,
Treasurer 1998 40,000 86,199 0 0 0 0 0
1997 40,000 87,570 0 0 0 0 0
All other officers
as a group:
(2) persons 1998 80,000 78,893 0 0 4,000 0 0
(1) person 1997 40,000 29,172 0 0 0 0 0
(2) persons 1996 80,000 76,369 0 0 0 0 0
</TABLE>
(1) Other annual compensation represents directors' fees paid to Mr.
Susnjara.
Stock options for an additional 4,000 shares were issued to an officer
of the Company under the Qualified Stock Option Plan in fiscal year
1998. At July 31, 1998 the exercise prices 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 1998. 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.
The Vice-President of Manufacturing and the Treasurer are each entitled
to receive 2% and 3%, respectively, 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 80,000 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 price. 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/she also has the right to exercise his accrued options within 30
days of termination. Upon death, his/her estate or heirs have one year
to exercise his/her 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, 1998, options to acquire 50,600 shares of the Company's
common stock for ten years at an average exercisable price of $8.48 per
share had been granted under the Qualified Plan to 20 employees of the
Company. Options for the purchase of 50,600 shares were exercisable as
of July 31, 1998.
Non-qualified Stock Option Plan.
Under Thermwood's Non-qualified Stock Option Plan ("NSO Plan"), options
to purchase a maximum of 70,000 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, 1998 options to acquire 40,000 shares of the Company's
common stock at an average exercisable price of $8.91 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 140,000 shares have been granted by the Board
of Directors, 124,000 of which were outstanding and exercisable as of
July 31, 1998. An option to purchase 120,000 of these shares was
granted to the President of the Company. The option extends through
October 18, 1998 and permits the purchase of 60,000 shares at $15.00
per share and 60,000 at $30.00 per share. A 6,000 share option was
granted to an employee at $5.00 per share and was exercised in October,
1997. An additional 4,000 shares at $8.44 per share were granted
during fiscal year ended July 31, 1996 to a principal in a former
public relations firm for the Company. At July 31, 1998 the options
were exercisable; however, in August 1998, the Company and the option
holder agreed to terminate the option agreement in exchange for a cash
payment to the option holder of $10,250. During fiscal year 1997
options for 10,000 shares were granted to another public relations
firm. These options expired in March, 1998 upon the 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 a
matching contribution of 25% of employees' contributions up to 5% of
their annual salaries and an additional match of 10% of their
contributions between 6% and 8% of employees' salaries.
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 Trust Company
of Evansville, Indiana. The trustee 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,
1998 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
Percentage Underlying Percentage of
Names and Addresses Shares of Total Exercisable Total
of Beneficial Owned at Outstanding Options and Outstanding
Owners (1) July 31, Shares Convertible Shares Owned
1998 Owned Securities
(2)
<S> <C> <C> <C> <C>
Kenneth J. Susnjara
(3,4)
and Linda Susnjara 251,400 17.57 411,400(5) 24.79(5)
Edgar Mulzer
401 10th Street
Tell City, Indiana 208,052 14.54 218,052(6) 13.14(6)
47586
Peter N. Lalos
14312 Darnstown
Road 8,000 0.6 22,000(7) 1.3(7)
Gaithersburg,
Maryland 20878
Lee Ray Olinger
c/o First Bank of
Huntingburg
4th and Main Street 400 0 400 0
Huntingburg, IN
47542
All Officers and
Directors as a 471,402 32.94 686,402 41.36
Group (9 persons) (5,6,7,8) (5,6,7,8)
</TABLE>
(1) Except as indicated in (4), all shares are beneficially owned and
the sole voting and investment power is held by the person indicated.
(2) Excludes (i) an aggregate of 181,000 shares of Common Stock
reserved for issuance upon conversion of debentures; (ii) 80,000 shares
reserved for issuance under the Company's Qualified Stock Option Plan
of which options to purchase 50,600 shares have been granted and are
currently exercisable; (iii) 70,000 shares reserved for issuance under
the Company's Non-Qualified Stock Option Plan of which options to
purchase 40,000 shares have been granted and are currently exercisable;
(iv) 120,000 shares reserved for issuance upon exercise of options
granted to Mr. Susnjara, all of which are currently exercisable; and
(v) 4,000 shares reserved for issuance of options granted to R. Jerry
Falkner, all of which were exercisable as of July 31, 1998. In August
1998, the Company and the option holder agreed to terminate the option
agreement in exchange for a cash payment to the option holder of
$10,250. 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 10,000 shares issuable upon
conversion of debentures owned by Mr. Susnjara; (ii) 10,000 shares
issuable upon the exercise of options granted to Mr. Susnjara under the
Company's Non-Qualified Stock Option Plan; and (iii) 120,000 shares
issuable upon the exercise of other options granted to him and includes
10,000 shares issuable upon the exercise of options granted to Mrs.
Susnjara under the Company's Non-Qualified Stock Option Plan.
(6) Includes 10,000 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 4,000 shares issuable upon conversion
of debentures owned by Mr. Lalos; and (ii) 10,000 shares issuable upon
the exercise of options granted to Mr. Lalos 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 was treated as a capitalized lease for
financial reporting purposes, also obligated 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 had 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 had any lease payments. The liability for
all accrued and future lease payments was converted to Preferred Stock.
On October 7, 1997, the Company entered into an agreement for a $3.5
million line of credit with a bank, proceeds of which were used to
repurchase the 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 holder of the Preferred Stock was 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 had the right in its sole discretion to
redeem the stock at any time at $3.40 per share. The Company redeemed
738,000 and 162,000 shares of the preferred stock for a total of
$2,546,320 and $550,800 during fiscal years 1998 and 1997,
respectively. Dividends were paid in the amount of $43,255 and
$285,204 for the fiscal years 1998 and 1997, respectively. The balance
of the shares had been previously repurchased. The Preferred Stock is
fully redeemed and no further dividends will be paid as of July 31,
1998.
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 1998, but paid AAI
$627,816 in commissions during the year for assisting in effecting
sales of approximately $3,800,000. This amount represents
approximately 21% of the Company's gross sales for fiscal year 1998.
AAI also leases space from the Company at what management believes is a
fair market rate. Rental payments were $2,400 during the 1998 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 $95,000, $77,000, $103,000, for the fiscal years 1998,
1997, and 1996, respectively. During fiscal year 1998 the Company paid
this firm an aggregate of $77,901. Accordingly, as of July 31, 1998
the Company carried a balance of $31,515 payable to Lalos & Keegan.
This firm performs patent, trademark, general corporate and litigation
services for the Company. As of October 27, 1998 all of the balance
has been paid.
Fairness of Transactions with Affiliated Parties:
Management believes that the terms of the transactions between the
Company and its affiliated parties as described in this section are as
fair as those which the Company would have obtained if these
transactions had been effected with independent third parties. Each
transaction was approved by a majority of the disinterested directors.
In the future, all such transactions will continue to be approved by a
majority of the disinterested directors.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K:
(a) The following documents are filed as a part of this report:
1. Financial Statements:
Index to Financial Statements: Page
Reference
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - July 31, 1998 and 1997
Consolidated Statements of Operations - Years ended
July 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
Years Ended July 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended
July 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
All 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:
None.
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, 1998 /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, 1998 /s/ Kenneth J. Susnjara
Kenneth J. Susnjara, Chairman of the
Board and President (Principal Executive
Officer)
Date:
October 28, 1998 /s/ Rebecca F. Fuller
Rebecca F. Fuller, Treasurer (Principal
Financial and Accounting Officer)
Date:
October 28, 1998 /s/ Linda S. Susnjara
Linda S. Susnjara, Secretary
Date:
October 28, 1998 /s/ Peter N. Lalos
Peter N. Lalos, Director
Date:
October 28, 1998 /s/ Edgar Mulzer
Edgar Mulzer, Director
Date: October 28, 1998
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 subsidiaries as of July 31, 1998 and 1997,
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, 1998. 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 and subsidiaries as of July 31, 1998 and 1997,
and the results of their operations and their cash flows for each of
the years in the three-year period ended July 31, 1998, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 4, 1998
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
1998 1997
----------- ------------
Assets
Current Assets
<S> <C> <C>
Cash $ 115,937 $ 512,480
Accounts receivable, less
allowance for doubtful accounts
of $20,000 fpr 1998 and $25,000
for 1997 1,673,826 1,802,569
Inventories 5,359,182 4,618,001
Deferred income taxes 694,000 1,676,000
Prepaid expenses 491,209 372,287
---------- ----------
Total Current Assets 8,334,154 8,981,337
---------- ----------
Property and Equipment
Land 73,260 73,260
Buildings and improvements 1,977,659 1,352,059
Furniture and equipment 3,131,306 2,768,255
Construction in progress 6,257 6,257
Less accumulated depreciation (2,540,992) (2,375,826)
----------- -----------
Net Property and Equipment 2,647,490 1,824,005
----------- -----------
Other Assets
Patents, trademarks and other 139,933 133,026
Bond issuance costs less
accumulated amortization 4,089 8,665
Deferred income taxes 199,000 326,000
------------ ------------
Total Other Assets 343,022 467,691
------------ ------------
Total Assets $11,324,666 $11,273,033
============ ============
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
1998 1997
Liabilities and Shareholders' Equity ------------- -------------
Current Liabilities
<S> <C> <C>
Accounts payable $ 1,136,896 $ 1,375,005
Accrued compensation and
payroll taxes 498,224 582,652
Customer deposits 816,315 907,110
Other accrued liabilities 552,066 1,028,505
Current portion of capital
lease obligations 6,195 7,755
----------- -----------
Total Current Liabilities 3,009,696 3,901,027
----------- -----------
Long-Term Liabilities, Less Current
Portion
Capital lease obligations 0 5,918
Note payable to bank 2,196,320 0
Bonds payable, net of
unamortized discount of
$10,450 for 1998 and $22,225
for 1997 170,550 278,775
------------ ----------
Total Long-Term Liabilities 2,366,870 284,693
------------ ----------
Shareholders' Equity
Preferred stock, no par value,
2,000,000 shares authorized,
1,000,000 shares issued and
738,000 shares outstanding
for 1997 0 2,546,320
Common stock, no par value,
4,000,000 shares authorized,
1,431,109 and 1,400,109
shares issued and outstanding
for 1998 and 1997, respectively 10,742,636 10,599,285
Accumulated deficit (4,758,911) (6,033,542)
------------- ------------
5,983,725 7,112,063
Less subscriptions receivable (35,625) (24,750)
------------- ------------
Total Shareholders'Equity 5,948,100 7,087,313
------------- ------------
Total Liabilities
and Shareholders' Equity $11,324,666 $11,273,033
============= ============
See accompanying notes to
consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended July 31
1998 1997 1996
------------ ----------- ------------
Sales
<S> <C> <C> <C>
Machine sales $ 20,199,191 $16,420,313 $10,966,096
Technical services 4,657,784 3,660,548 3,298,567
------------ ----------- -----------
24,856,975 20,080,861 14,264,663
Less commissions 3,017,446 2,301,446 1,628,172
------------ ----------- -----------
Net Sales 21,839,529 17,779,415 12,636,491
Cost of Sales
Machines 9,981,401 8,841,911 5,577,272
Technical services 3,016,505 2,031,588 2,133,866
------------ ---------- ---------
Total Cost of Sales 12,997,906 10,873,499 7,711,138
------------ ---------- ---------
Gross Profit 8,841,623 6,905,916 4,925,353
Research and development,
marketing, administrative and
general expenses 6,413,160 4,794,563 3,638,536
----------- ---------- ----------
Operating income 2,428,463 2,111,353 1,286,817
Other income (expense):
Interest expense - related
party 0 0 (889)
Interest expense - other (231,747) (75,686) (117,710)
Other (30,830) 19,157 6,210
----------- ----------- -----------
Other expense, net (262,577) (56,529) (112,389)
----------- ----------- -----------
Earnings before income taxes 2,165,886 2,054,824 1,174,428
Income tax (expense) benefit (848,000) (819,000) 1,160,000
----------- ----------- -----------
Net earnings $1,317,886 $1,235,824 $2,334,428
=========== =========== ===========
Earnings applicable to common
shareholders $1,274,631 $ 950,620 $2,004,373
=========== =========== ===========
Earnings per share:
Basic $0.89 $0.70 $1.63
=========== ============ ===========
Diluted $0.86 $0.69 $1.45
=========== ============ ===========
Weighted average number of shares:
Basic 1,424,676 1,349,143 1,231,146
Diluted 1,516,748 1,446,198 1,436,820
See accompanying notes to
consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
------------------------ ------------------- -----------
Subscrip Accumula
tions ted
Shares Amount Shares Amount Receivable (Deficit)
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at
July 31, 1995 1,000,000 $3,437,120 1,029,909 $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 unamortized
discount 0 0 261,400 1,115,507 0 0
Exercise of
qualified stock
options 0 0 10,400 56,000 (28,125) 0
Exercise of other
stock options 0 0 6,000 30,000 0 0
Net earnings 0 0 0 0 0 2,334,428
-------- ----------- ---------- ----------- -------- -----------
Balances at
July 31, 1996 900,000 $3,097,120 1,307,709 $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 92,400 408,881 0 0
Net earnings 0 0 0 0 0 1,235,824
---------- ---------- --------- ----------- -------- ------------
Balances at
July 31, 1997 738,000 $2,546,320 1,400,109 $10,599,285 ($24,750)($6,033,542)
Preferred
dividends paid 0 0 0 0 0 (43,255)
Redemption of
preferred
stock (738,000) (2,546,320) 0 0 0 0
Conversion of 12%
debentures, net
of related bond
issuance costs
and unamortized
discount 0 0 24,000 108,351 0 0
Exercise of
qualified stock
options 0 0 1,000 5,000 0 0
Exercise of other
stock options 0 0 6,000 30,000 (30,000) 0
Subscriptions
received 0 0 0 0 19,125 0
Net earnings 0 0 0 0 0 1,317,886
------- ------------ ------- ------------ ------- -----------
Balances at
July 31, 1998 0 0 1,431,109 $10,742,636 ($35,625)($4,758,911)
======= ============ ========= =========== ========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31
1998 1997 1996
-------------- ------------ --------------
Cash Flows From Operating
Activities:
<S> <C> <C> <C>
Net earnings $ 1,317,886 $ 1,235,824 $ 2,334,428
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:
Depreciation and amortization 368,261 338,274 295,510
Provision for inventories 68,000 0 21,012
Loss (Gain) on disposal of
equipment 48,936 0 (15,625)
Deferred income taxes 1,109,000 412,000 (1,178,000)
Changes in operating
assets and liabilities:
Accounts receivable 128,743 (990,029) 369,060
Inventories (809,181) (1,288,664) (341,402)
Prepaid expenses and
other assets (118,922) (32,864) 41,151
Accounts payable and
other accrued expenses (798,976) 1,704,136 (263,205)
Customer deposits (90,795) 413,101 (148,350)
---------- --------- ----------
Net cash provided by
operating activities 1,222,952 1,791,778 1,114,579
---------- --------- ----------
Cash Flows From Investing
Activities:
Proceeds from sale of equipment 0 0 40,000
Purchases of patents,
property and equipment (1,242,887) (457,599) (502,350)
----------- ---------- ---------
Net cash used by investing
activities (1,242,887) (457,599) (462,350)
----------- ---------- ---------
Cash Flows From Financing
Activities:
Principal payments on lease
obligations (7,478) (8,065) (31,598)
Redemption of preferred stock (2,546,320) (550,800) (340,000)
Payment of dividends on
preferred stock (43,255) (285,204) (330,055)
Note payable at bank 2,196,320 0 0
Proceeds from subscriptions
receivable 19,125 3,375 0
Proceeds from exercise of
stock options 5,000 0 57,875
----------- ---------- ----------
Net cash used by financing
activities (376,608) (840,694) (643,778)
----------- ----------- ----------
Increase (decrease) in cash (396,543) 493,485 8,451
Cash at beginning of year 512,480 18,995 10,544
----------- ----------- ----------
Cash at end of year $ 115,937 $ 512,480 $ 18,995
=========== =========== ==========
</TABLE>
See accompanying notes to
consolidated financial statements.
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 subsidiaries, Thermwood Europe Limited,
a United Kingdom company, CNC Carolina, Inc., a dealer in North Carolina,
and Thermwood Capital Corporation, a leasing company. CNC Carolina, Inc.
and Thermwood Capital Corporation were established in 1998. The term
"Company" refers to the consolidated operations of Thermwood Corporation
and its subsidiaries.
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. Two
dealers accounted for approximately 32% of the Company's business;
however, no customer accounted for more than 10% of the Company's sales
in fiscal 1998, 1997 or 1996. 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 1998
amounted to approximately 18.7% of total gross sales. There was no
revenue generated in 1998 by Thermwood Capital Corporation.
The Company's machining systems are utilized principally in the
woodworking, plastics, boating and automotive 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. Technical services revenues are recognized when
the services are 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.
Research and Development:
Research and development costs are expensed as incurred. Expenditures
for research and development were approximately $314,000, $216,000 and
$284,000 during 1998, 1997 and 1996, respectively.
Property and Equipment:
Property and equipment are recorded at cost for assets purchased and at
the present value of minimum lease payments for assets acquired under
capital leases. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets, as
shown below:
Buildings and improvements 10 to 30 years
Equipment 3 to 10 years
Depreciation expense for 1998, 1997 and 1996 was $345,890, $304,716 and
$256,290, 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, 1998 and 1997,
substantially all of the deposits had no incurred work-in-process cost.
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>
1998 1997 1996
Basic Diluted Basic Diluted Basic Diluted
---------- ---------- ---------- ---------- ---------- ---------
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $1,317,886 $1,317,886 $1,235,824 $1,235,824 $2,334,428 $2,334,428
Less preferred
stock dividends (43,255) (43,255) (285,204) (285,204) (330,055) (330,055)
Add interest
expense on
convertible
bonds payable 0 47,180 0 62,580 0 98,436
Add amortization
of bond discount
and issuance costs 0 4,701 0 13,120 0 30,583
Income tax effects
of earnings
adjustments 0 (19,196) 0 (28,009) 0 (44,037)
---------- ---------- -------- -------- ---------- -----------
Total
earnings $1,274,631 $1,307,316 $950,620 $998,311 $2,004,373 $2,079,355
========== ========== ======== ======== ========== ===========
Weighted average
number of shares:
Common shares
outstanding 1,424,676 1,424,676 1,349,143 1,349,143 1,231,146 1,231,146
Incremental
shares related to
dilutive stock
options 0 55,872 0 36,255 0 53,075
Incremental
shares related to
convertible bonds 0 36,200 0 60,200 0 152,600
--------- --------- ---------- --------- ---------- ----------
Total weighted
average number
of shares 1,424,676 1,516,748 1,349,143 1,446,198 1,231,146 1,436,820
========= ========== ========== ========= ========== ==========
Earnings per share $0.89 $0.86 $0.70 $0.69 $1.63 $1.45
========= ========== ========== ========= ========== ==========
</TABLE>
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.
NOTE B -- INVENTORIES:
<TABLE>
Inventories at July 31 consist of:
1998 1997
<S> <C> <C>
Finished goods $ 651,398 $ 644,477
Work-in-process 1,541,258 1,171,484
Raw materials 3,166,526 2,802,040
----------- ----------
$ 5,359,182 $4,618,001
============ ==========
</TABLE>
NOTE C -- LEASES :
The Company had leased its production facilities and certain equipment,
primarily from related parties. Amounts included in property and
equipment at July 31, 1997 relating to capital leases are as follows:
<TABLE>
<S> <C>
Land $ 73,260
Building and improvements 1,171,778
Furniture and equipment 266,929
------------
1,511,967
Less accumulated amortization (799,558)
------------
$ 712,409
============
</TABLE>
Included in Land, Building and Improvements above are assets with a net
book value of $533,928 at July 31, 1997, leased from a director of the
Company under a capital lease expiring in February, 2007. During fiscal
year 1994, the obligation under this lease was converted to Preferred
Stock (Note H). The Company had 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 under the lease and for the
redemption of the Series A Preferred Stock. The Preferred Stock was
fully redeemed during fiscal year 1998 enabling the Company to take clear
title to the land and building.
The Company leases certain office equipment under long-term operating
leases. Future minimum lease payments as of July 31, 1998 for operating
leases are as follows:
<TABLE>
Years ending July 31:
<S> <C>
1999 $118,700
2000 118,700
2001 118,700
2002 1,200
2003 1,200
</TABLE>
Total operating lease expense for 1998, 1997 and 1996 was $118,670,
$44,390 and $18,130 respectively.
NOTE D - NOTES PAYABLE TO BANK
During 1998, the Company obtained a $3,500,000 line of credit with a
bank. At July 31, 1998 $2,196,320 was outstanding under the line of
credit. The line of credit bears interest payable monthly at the bank's
money market prime rate plus .5% (9.0% at July 31, 1998). The line is
secured by the tangible assets of the Company and expires in October
1998. Management expects to renew the line under terms similar to the
existing agreement.
NOTE E - 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 $5.00 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 $12.50 per share. The redemption price will be 105%
plus accrued interest through the date of redemption.
During fiscal year ended July 31, 1998 and 1997, holders tendered
$120,000 and $462,000 of the debentures for conversion into 24,000 and
92,400 common shares, respectively.
Each Warrant entitled the holder to purchase one share of common stock at
a price of $15.00 per share, subject to anti-dilutive adjustments,
through February 1996. The warrants expired on February 21, 1996.
NOTE F -- 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>
1998 1997 1996
<S> <C> <C> <C>
Net Earnings
As Reported $1,317,886 $1,235,824 $2,334,428
Pro Forma 1,308,962 1,214,168 1,985,024
Basic Earnings Per Share
As Reported $0.89 $0.70 $1.63
Pro Forma 0.89 0.69 1.34
Diluted Earnings Per Share
As Reported 0.86 0.69 1.45
Pro Forma 0.86 0.68 1.20
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. 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 1998, 1997 and
1996: no dividend yield for all years; expected volatility of 35
percent, 56 percent and 72 percent for 1998, 1997 and 1996, respectively;
risk-free interest rates of 4.7 percent, 6.2 percent and 6.6 percent for
1998, 1997 and 1996, respectively; expected lives of 10 years for all
options except 5 years for options to purchase 120,000 shares granted in
1996.
The Company reserved 80,000 shares of common stock for issuance under the
qualified plan. Options to purchase 50,600 of the shares have been
granted, 4,000 of which were granted during fiscal year 1998. None of
these options were exercised during fiscal year 1998. As of July 31,
1998, options for 50,600 shares 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 70,000 shares of common stock of which options to purchase 40,000
shares were outstanding and exercisable as of July 31, 1998.
Other options to purchase 140,000 shares have been granted by the Board
of Directors, 124,000 of which were outstanding and exercisable as of
July 31, 1998. An option to purchase 120,000 of these shares was granted
to the President of the Company. The option extends through October 18,
1998 and permits the purchase of 60,000 shares at $15.00 per share and
60,000 at $30.00 per share.
A 6,000 share option granted to an employee at $5.00 per share was
exercised in 1998. Options for an additional 4,000 shares at $8.4375 per
share were granted during fiscal year 1996 to a principal in a former
public relations firm for the Company. At July 31, 1998, the options
were exercisable; however, in August 1998, the Company and the option
holder agreed to terminate the option agreement in exchange for a cash
payment to the option holder of $10,250. During fiscal year 1997 options
for 10,000 shares were granted to another public relations firm. These
options expired in February, 1998.
<TABLE>
A summary of common stock options for the years ended July 31 follows:
1998 1997 1996
------------------ ---------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- ------ -------- ------- ---------
<S>
Outstanding at <C> <C> <C> <C> <C> <C>
beginning of
year 226,600 $ 15.90 211,600 $ 15.95 207,000 $ 24.25
Granted 4,000 10.63 15,000 14.75 151,000 19.30
Canceled/expired 10,000 9.38 0 0 130,000 35.05
Exercised 6,000 5.00 0 0 16,400 6.85
-------- -------- -------- ------- -------- --------
Outstanding
at end of year 214,600 $ 9.15 226,600 $ 15.90 211,600 $ 15.95
======== ======= ======= ======= ======= =======
Exercisable
at end of year 214,600 226,600 211,600
======== ======= =======
Weighted average
fair value of options
granted during the year $ 3.66 $ 6.90 $ 3.75
======= ======= =======
</TABLE>
NOTE G -- SHAREHOLDERS' EQUITY:
On January 5, 1998, the Company completed a one for five reverse split of
its common stock. All common share and per share information in the
consolidated financial statements has been adjusted to reflect the
reverse split on a retroactive basis.
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 shares were outstanding at July
31, 1997. All of these shares were issued to a director/shareholder in a
conversion of debt transaction (Note G). The holder of Series A
Preferred Stock was 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 had the right in its
sole discretion to redeem the stock at any time at $3.40 per share.
During fiscal years 1998 and 1997, the Company redeemed 738,000 and
162,000 shares for $2,546,320 and $550,800, respectively. In the event
of the liquidation of the Company, the holders of the Series A Preferred
Stock were 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 H -- 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. 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. The net book value of these leased assets was $533,928 at July
31, 1997.
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 land and building
and improvements.
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 $94,954, $76,699 and $103,180 for 1998,
1997 and 1996, respectively. The Company had accounts payable of $31,515
and $14,462 at July 31, 1998 and 1997, respectively, 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 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 $2,400, $6,800 and $7,200 for 1998,
1997 and 1996, respectively. Sales commissions of $627,816, $447,667 and
$349,584 were paid to the dealership during 1998, 1997, and 1996,
respectively, for assisting in effecting sales.
NOTE I -- INCOME TAXES:
The provisions for income taxes for the years ended July 31 consist of:
<TABLE>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Federal:
Current (expense) benefit $ 308,000 (407,000) (18,000)
Deferred (expense) benefit (1,019,000) (379,000) 1,082,000
------------ ------------ ----------
(711,000) (786,000) 1,064,000
------------ ------------ ----------
State:
Current expense (47,000) 0 0
Deferred (expense) benefit (90,000) (33,000) 96,000
------------ ------------ ----------
(137,000) (33,000) 96,000
------------ ------------ ----------
Total income tax
(expense) benefit $(848,000) $(819,000) $1,160,000
============ ============ ==========
</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>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net earnings before income taxes $ 2,165,886 $ 2,054,824 $ 1,174,428
=========== =========== ============
Expected income tax expense $ (801,000) $ (760,000) $ (435,000)
Utilization of net operating
loss carryforwards 0 0 119,000
Reduction in deferred tax
asset valuation allowance 0 0 1,480,000
Effect of non-deductible items (19,000) (14,000) (11,000)
Other (28,000) (45,000) 7,000
------------ ----------- -----------
Total actual income
tax (expense) benefit $ (848,000) $ (819,000) $1,160,000
============ =========== ===========
</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 attributable to: 1998 1997
------- ---------
<S> <C> <C>
Property and equipment $185,000 $ 0
Inventory valuation 245,000 246,000
Warranty reserves 79,000 73,000
Net operating loss carryforwards 351,000 1,812,00
Other 33,000 3,000
---------- ---------
Deferred tax assets 893,000 2,134,000
---------- ----------
Deferred tax liability attributable to:
property and equipment 0 132,000
--------- ----------
Net deferred tax assets $ 893,000 $2,002,000
========= ==========
</TABLE>
At July 31, 1998, the Company had the following carryforwards for tax
purposes:
Net operating loss carryforwards expiring in 2008 and 2009 $529,000
General business credits expiring in 1998 - 2001 $ 14,000
The amount of such loss carryforwards and other credits available for
utilization in any future year could be limited in the event of a change
in ownership as defined by income tax laws. Based upon the level of
historical taxable income and anticipated future taxable income,
management believes it is more likely than not that the Company will
realize the benefits of the net deferred tax assets.
NOTE J -- ADDITIONAL INFORMATION:
<TABLE>
Other accrued liabilities at July 31 consist of:
1998 1997
--------- --------
<S> <C> <C>
Property taxes $ 79,282 $ 66,138
Income taxes 14,002 387,000
Accrued warranties 212,339 196,777
Other 246,443 378,590
--------- ----------
$552,066 $1,028,505
========= ==========
</TABLE>
Cash Flow Information:
The Company paid cash for interest in the amount of $200,319, $69,739
and $146,810 during 1998, 1997 and 1996, respectively. The Company
paid cash for income taxes in the amount of $77,024, $30,000 and $9,000
during 1998, 1997 and 1996, respectively.
Non-cash Investing and Financing Activities:
During 1998 and 1997, bonds with face values of $120,000 and $462,000,
respectively, were converted to 24,000 and 92,400 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 makes a matching contribution of 25% of employees'
contributions up to 5% of their annual salaries and an additional match
of 10% of their contributions between 6% and 8% of employees' salaries.
Pension expense for 1998, 1997 and 1996 amounted to $48,759, $35,840 and
$19,274, respectively. The Company also has a management profit sharing
plan. Profit sharing expense amounted to $603,978, $647,407 and $384,390
for 1998, 1997 and 1996, respectively.
To The Shareholders and Board of Directors
Thermwood Corporation:
We consent to incorporation by reference in the registration statements
(No. 33-83742, 33-83744, 33-83746 and 33-83748) on Form S-8 of Thermwood
Corporation of our report dated September 4, 1998 relating to the
consolidated balance sheets of Thermwood Corporation and subsidiaries as
of July 31, 1998 and 1997, 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, 1998, which report appears in the
July 31, 1998 annual report on Form 10-K of Thermwood Corporation.
KPMG Peat Marwick LLP
Indianapolis, Indiana
October 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 115,937
<SECURITIES> 0
<RECEIVABLES> 1,693,826
<ALLOWANCES> 20,000
<INVENTORY> 5,359,182
<CURRENT-ASSETS> 8,334,154
<PP&E> 5,188,482
<DEPRECIATION> 2,540,992
<TOTAL-ASSETS> 11,324,666
<CURRENT-LIABILITIES> 3,009,696
<BONDS> 170,550
0
0
<COMMON> 10,742,636
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,948,100
<SALES> 21,839,529
<TOTAL-REVENUES> 21,839,529
<CGS> 12,997,906
<TOTAL-COSTS> 12,997,906
<OTHER-EXPENSES> 6,413,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231,747
<INCOME-PRETAX> 2,165,886
<INCOME-TAX> 848,000
<INCOME-CONTINUING> 1,317,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,317,886
<EPS-PRIMARY> .89
<EPS-DILUTED> .86
</TABLE>
