SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15D
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1999
Commission file number 0-12195
THERMWOOD CORPORATION
( Name of small business issuer 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
(Issuer's telephone number )
Securities registered pursuant to Section 12 (b) and 12 (g) of the Act
Name of each exchange on which registered:
Shares of Common Stock without par value American Stock Exchange
Pacific Stock Exchange
Check whether whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will
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-KSBor any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were
$24,622,322
The aggregate market value of the voting stock held by non-
affiliates of the issuer at October 21, 1999 based upon the closing
price of the issuer's Common Stock as reported on the American Stock
Exchange was approximately $2,835,242.
The number of the Registrant's shares of Common Stock outstanding
as of October 21, 1999 was 985,045 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, 1995, July 31, 1996, July 31, 1997 and July 31, 1998.
PART I
Forward-Looking Statements
This Annual Report on Form 10-KSB 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 our
actual results, financial condition, performance or achievements 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-KSB, 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. We disclaim any obligation to update
any such forward-looking statements to reflect future events or
developments.
Item 1. Business
General
On January 5, 1998 Thermwood effected a 5-1 reverse split and all
share and per share information give retroactive effect except as
indicated otherwise.
We develop and manufacture most of the products we market. Those
products that we market that we do not develop and manufacture are
generally purchased from vendors under an OEM arrangement.
Our operations are divided into a three operating segments including
our Machining Products Division, which is responsible for marketing our
machinery, hardware and software products, our Technical Services
Division, which is responsible for marketing our service, support,
upgrade and catalog products, and Thermwood Europe Ltd., a British
Company, which is a wholly owned subsidiary of Thermwood Corporation
and reports to the Machining Products Division. For the financial
results of our operating segments, see Note L of Notes to the
Consolidated Financial Statements incorporated by reference in Item 7
of Part II of this annual report.
The Vice President of Production directs the production organization,
which is responsible for all manufacturing. Manufacturing operates as a
cost center allocating costs to each Division for the manufactured
products they sell.
Research and development, product and production engineering is
directed by the Vice President of Engineering. Costs for these
activities are allocated to the Machining Products and Technical
Services Divisions.
The Marketing Group is managed by the Marketing Manager who reports
directly to the President. This group provides marketing services to
the Machining Products and Technical Services Divisions and allocates
its costs to these Divisions.
Industry Background
Flexible Automation
Prior to the availability of microprocessor-based machinery control
systems, there were only two manufacturing methods available: 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
Thermwood, 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
Flexible automation equipment generally uses an electronic computer
control known as Computer Numerical Control, commonly referred to as
CNC control. 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 control 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, moving the
machine to a position and having the machine's controller create the
block of instructions or using an electronic probe to guide the machine
through the desired path.
We design and manufacturer our own CNC control, called the 91000
SuperControl. We believe that we are the only company in our markets
that builds its own CNC control. We also believe that our control
offers features and capabilities that other controls in the market do
not offer. We also believe that these exclusive features offer it an
advantage in the marketplace, but there is no assurance that this is
true.
Machining Products Division
Automated Industrial Equipment- CNC Routers
Our automated industrial systems are high-speed computer controlled,
fully automatic machining centers commonly called CNC routers. These
CNC routers are designed to perform a variety of tasks such as routing,
drilling, sanding, carving, sawing and shaping wood parts, trimming of
three dimensional plastic parts, machining of aluminum honeycomb,
drilling and high speed machining of aluminum. They generally operate
over larger table areas and at higher speeds than do conventional
metalworking machine tools but cannot machine the heavy materials and
large cross sections that standard metalworking machine tools are
capable of doing.
Our CNC routers utilize the 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 and blades. Additional motions or
axes, which permit the head to both pivot and rotate, can be installed,
thereby making three-dimensional cuts possible. Multiple and varying
cutting and drilling heads can be added, allowing a number of different
machining operations to be accomplished in a single cycle.
Currently we market six standard CNC router 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.
Our CNC routers are utilized principally in the woodworking, plastics,
aerospace, boating and automotive industries. Current prices to end
users range from approximately $39,000 to over $200,000 per system.
The average price of a standard system is approximately $100,000.
Sales of the CNC router systems were approximately 76% of total sales
in fiscal year 1999.
Carving Router
One model of our CNC router line is specifically intended for intricate
carving of three dimensional wood parts such as chair legs. This
machine is capable of carving six parts simultaneously. It is
programmed using an electronic programming probe which traces a sample
carved part. The CNC control automatically creates the program
necessary to reproduce the sample carving. Sales of this system in
Fiscal 1999 were $1,038,000.
Hardware Options
Our Machining Products Division offers a variety of hardware options
for use with its CNC router line. These options include products
designed and manufactured by us, such as tooling heads, automatic tool
changers and hand held programmers. We also offer a variety of products
manufactured by others for use with our equipment. These products are
generally, but not always, obtained through an OEM arrangement. This
type of product includes, among others, the programming probe, vacuum
pumps, dust collection systems as well as a variety of electronic
hardware devices that work with our control system.
Software Products
During Fiscal 1999 the Machining Products Division established the
Software Technology Group to market software products that work with
its CNC routers. Although some of these products consist of proprietary
software developed by us, we expect that the majority will be software
packages obtained from third party vendors under OEM arrangements.
OEM agreements have been signed with CNC Automation to sell a Computer
Aided Design/Computer Aided Manufacturing package called MasterCAM;
with Graphitech Software Solutions, Inc. to distribute the Cimagrafi
artistic CAD/CAM software package; with Northwood Design, Inc to
distribute a software package under the name "Final Finish"; and with
CNC Automation, an existing Thermwood Authorized Dealer, to distribute
their Panelmetrix, kitchen cabinet door program. In addition, we have
signed an agreement with Cabinet Vision, Inc., a supplier of advanced
cabinet design software in the US to market its "Solid Professional"
kitchen design software as part of an integrated package to design and
manufacture kitchen cabinets. Our European subsidiary, Thermwood Europe
Ltd. has signed a similar agreement with Planit CV of Ashford Kent, UK,
for distribution of the same product, under essentially the same terms
in the UK and Europe. Planit CV is the parent company of Cabinet
Vision. During fiscal 1999 the Software Technology Group recorded sales
of $105,000.
Technical Services Division
The Technical Services Division products consist of customer training,
installation assistance, warranty service, field service, spare parts,
upgrades and enhancements, the Advanced Support Program and catalog
sales. Sales and service by the Technical Services Division in fiscal
year 1999 accounted for approximately 24% of total sales.
The Technical Services Division receives an allocation on the sales of
each machine to cover the cost of customer training, installation and
service during the warranty period. Our standard limited warranty
covers one year parts and labor; however, if a technician must travel
to the customer site, the customer is required to pay travel costs.
After the warranty period, both service labor and spare parts are sold
to customers.
Advanced Support Program
During Fiscal 1999 the Advanced Support Program was created for CNC
router customers. The primary purpose of this program is to offer
customers a low cost method of updating their Thermwood machines,
minimizing the possibility of a major service expense and providing us
with an ongoing revenue stream. In order to join the program a customer
must sign an agreement for an initial 12 month period which then
continues on a month by month basis. The cost of the program is
currently $250 per month for each machine enrolled. In return, the
customer receives an annual control system software update, a 35%
discount on any hardware required for the update, an ongoing labor
warranty (customer pays travel expense), a full parts and labor
warranty on the control and various discounts on spare parts, upgrades
and catalog purchases. There were 60 machines enrolled in the program
at the end of Fiscal 1999.
Catalog Sales
We publish a CNC Router Supply Catalog that offers for sale various
tooling, supplies, support equipment and consumables that are used in
the operation of a CNC router. This catalog not only contains products
for use with our machines but also offers products specifically
intended for use with competitors' machines. In addition to the printed
catalog, the catalog has been available for free download from our web
site. After the end of Fiscal 1999, we began offering on-line ordering
of catalog items from our web site. Catalog sales for Fiscal 1999 were
approximately $414,000.
Thermwood Europe, Ltd.
Thermwood Europe Ltd, a wholly owned subsidiary of Thermwood
Corporation, reports to the Machining Products Division and is a sales
and service office located in Durham, England. It is responsible for
marketing and servicing our machines in Europe.
Marketing
The market for CNC routers can be divided into a large number of
applications in several industries. We seek to produce products that
address specific applications in specific industries. We also attempt
to provide complete, pre-engineered, standard 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.
Our systems are currently designed to operate at high quality and
reliability levels. In addition, we strive to support these systems
with good technical services and assistance. Although our marketing
strategy has involved emphasis on small to medium-sized companies, we
have also received orders from larger companies.
We generally sell our products through the assistance of dealer
networks established throughout North America and Europe. Dealers
assist us in making sales and are paid on a commission basis for this
service. Commissions generally range from 10% to 20% of the our
published retail prices. As of July 31, 1999, we had 15 authorized
dealers marketing our products. We usually require 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. Although some dealers may handle non-competing
products manufactured by other companies, most dealers handle our
products exclusively.
One dealer accounted for approximately 25% of the our sales for the
fiscal year ended July 31, 1999. See Item 12. "Certain Relationships
and Related Transactions" for information relating to our agreement
with AutomationAssociates which is owned by our president and his wife
who is also an officer and director. This dealer sold to 33 different
customers, none of which accounted for 10% or more of our sales in the
fiscal year ended July 31, 1999.
No other dealer accounted for 10% or more of our business for the
fiscal year. The loss of any large dealer could have a materially
adverse effect on our business. Our business is not seasonal.
We have a wholly owned subsidiary, Carolina CNC, Inc., a North Carolina
corporation, which operates as a dealer and conducts sales in the
southeastern region of the United States.
We also have a wholly-owned subsidiary, Thermwood (Europe) Limited, a
United Kingdom company, which currently conducts sales, service,
training and demonstrations out of offices located in England targeting
the European Community. During the 1999 fiscal year, the subsidiary
had a net loss of $226,000. Their sales of machines and services in
fiscal year 1999 were approximately $1,700,000, or approximately 8% of
consolidated net sales.
Typically, we seek to develop sales leads through advertising in trade
magazines and product exhibitions at selected trade shows. We also
maintain an extensive site on the Internet that offers both product
information and pricing. We then furnish leads obtained on the Internet
to dealers in the geographic area where the potential customer is
located. The website 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 of product demonstrations. We
assist our dealers by providing training for them and their customers.
We encourage trainees and potential customers to visit our
manufacturing facilities where we maintain areas and machinery to
demonstrate the operation and use of our products.
In addition to the above, we also seek to sell our products through
full service dealers in areas of the world where we do not have the
ability to perform the demonstration, training and service required.
These full service dealers are responsible for all aspects of selling,
installing, training and servicing our products. Currently we have this
type of arrangement with dealers in Canada, Mexico, Malaysia and
Israel.
Technical Services
We believe that providing extensive and ongoing technical services to
customers is essential for long term success. Accordingly, we offer a
variety of technical services through our Technical Services Division.
These services include training and installation assistance, as well as
upgrading and enhancement of older machines. The Technical Services
Division also operates the Advanced Support Program as well as Catalog
Sales.
Technical services are marketed to current customers as well as to
companies that purchase our equipment in the used market. The Division
also markets products from its supply catalog to customers that operate
CNC router products manufactured by competitors. A toll-free service
line is maintained for the use of all owners of our equipment.
Other than the Advanced Support Program, we do not offer our customers
written service contracts. We have incurred no significant expenses or
problems in servicing our products.
Product Development - R&D
Research and development and product development efforts are conducted
concurrently under the direction of the Vice President of Engineering.
These efforts are intended to simultaneously improve and enhance our
product performance and capabilities while reducing manufacturing
costs. Much of our product development effort during the last two years
has been directed toward development of a variety of cutting and
machining heads and automatic tool changers for use on our CNC router
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.
During the year, we increased the feed speed of our machines from 900
inches per minute to 1500 inches per minute. We also developed a Turbo
option that offers cutting speeds up to 3,000 inches per minute and
positioning speed up to 4,200 inches per minute. Tool change time for
our rotary turret tooling head was reduced from approximately 11
seconds to approximately 5 seconds. A new low-cost, high-speed, at-the-
head automatic tool changer was developed as was a 50 position bulk
tool changer. The two were integrated so that the machine could
automatically retrieve the proper tools when a new program is loaded.
We developed a multi-function machine table that simplifies use of the
three most common methods of holding a part as well as offering very
fast changeover from one part to another. An auxiliary tooling slide
was developed that allows turret tooling to be used with the Extended
Duty Head, which is standard with woodworking machines.
We also developed the software interface between the Cabinet Vision
Solid Professional software package and the Thermwood 91000 Control
system. As part of this development, a fixture method and operating
system was developed for producing hardwood face frames for kitchen
cabinets.
We plan to continue our research and development efforts primarily
directed toward the improvement of existing products, development of
new products or product enhancements, increases in feed speed and
reduction in manufacturing costs. We utilize a variety of sources in
our research and development efforts, including employees, vendor-
engineering staffs, contract employees who are retained solely for
specific projects, consultants and independent design firms.
For the fiscal years ended July 31, 1999 and 1998, we spent $570,000
and $314,000, respectively, for research and development. There was no
customer-sponsored research and development during the 1999 fiscal
year. We believe that expenditures need to continue to allow us to
maintain a competitive position in the immediate future.
Customers
Although we have sold our industrial products to large corporations
(i.e., companies with annual sales approximating or exceeding $1
billion), our 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 our sales in the fiscal year ended July 31, 1999.
We generally require 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 the date of shipment.
Charges for technical services and spare parts are due within 30 days
after billing.
We offer our customers a one year limited warranty on parts and labor.
Under the terms of this warranty, the customer is responsible for
travel expenses associated with the labor portion of the warranty. In
addition, we offer an optional Advanced Support Program that provides,
for a monthly payment, additional warranty protection as well as an
annual system software update and miscellaneous discounts. The limited
warranty offered under this program covers parts and labor on the
control system and labor on the remainder of the machine.
We offer a five day training course for two people as part of the
purchase price of a new machine. This training is conducted at our
headquarters in Dale, Indiana. We also offer formal training for our
major software products.
Backlog
As of July 31, 1999, our backlog was approximately $5,059,000 compared
with a backlog of $3,029,000 as of July 31, 1998. Substantially all of
this backlog will be manufactured and delivered prior to January 31,
2000.
Backlog figures generally include only written orders from customers
which we believe are firm and will be shipped within 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, we have normally obtained irrevocable letters of
credit for payment upon proof of shipment or obtained lease
documentation from an approved leasing company.
Because of the possibility of customer changes in delivery schedules or
cancellation of orders, our backlog as of any particular date may not
be indicative of actual revenues for any subsequent period.
Manufacturing and Production
Our manufacturing facilities are located in Dale, Indiana. We
manufacture essentially standard machines with certain options using a
batch rather than a continuous flow or conventional production line
process. Except for demonstration models, we do 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.
We design, develop and engineer all of the products that we
manufacturer. Components contained in these products are either
purchased from outside suppliers or fabricated by us. We fabricate
such components as the computer-based electronic control systems and
the steel structure of the CNC routers. Where possible, the Company
utilizes its own CNC routers. We also use our own 91000 Control systems
to operate conventional metalworking machine tools to fabricate
components.
Raw materials are purchased from third party sources. Most raw
materials and components, including those that are custom made, are
either purchased or available from several sources. One supplier
accounted for approximately 13% of total components purchased for the
fiscal year ended July 31, 1999. 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. Some of these manufacturers
are larger and have more resources than we do.
Our primary competitors in the CNC router market are a number of major
domestic, Japanese and European firms such as Shoda Iron Works, Heian,
Anderson Machinery, Accurouter, Motionmaster and Komo Machinery. There
are a large number of companies offering routing equipment and it is
our opinion that the market cannot support all of them. We believe,
however, that our ability to offer products that perform a variety of
functions and sell at low prices provides us with a competitive
advantage but there is no assurance that this is true.
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.
We seek to design our products for high levels of performance and
reliability while offering them at moderate prices.
Patents, Trade Secrets and Trademarks
We currently hold 26 domestic patents and have applications pending in
the United States for 14 additional patents. There is no assurance
that any additional patents will be granted. We do not believe that
major reliance can be placed on patents for the protection of our
products, although patent protection for our newly developed products
is increasing.
We rely primarily upon trade secret laws, internal non-disclosure
safeguards and restrictions incorporated into our dealership, sales,
employment and other agreements to protect our proprietary property and
information. In addition, we have proprietary rights arrangements with
our employees that provide for the disclosure and assignment by the
employee to us of any discovery, invention or improvement relating to
our business. While we are unaware of any breach of our security,
competitors may develop similar products outside the protection of any
measures that we take. In addition, policing unauthorized use of our
technology, particularly in foreign countries, may be difficult. We
have been unsuccessful in prosecuting two claims in the United States
for what we believed were prospective unauthorized use of proprietary
rights. We have not been involved in any claims concerning patent
infringement.
Our products are marketed under various trademarks, including
THERMWOOD, CARTESIAN 5, 91000 SUPERCONTROL, ROUTER ART and PANEL-CAD.
We have three trademark registrations and one application for
registration in the United States. We also have two foreign trademark
registrations and applications for seven foreign registrations.
Employees
As of October 1, 1999, we had 152 full-time employees, of whom 82 were
engaged in manufacturing, 16 in marketing, 14 in administration, ten in
engineering, sixin research and development, and 24 in technical
services. None of our employees is a member of any union or collective
bargaining organization. We consider our relationship with our
employees to be satisfactory.
Designing and manufacturing our industrial equipment requires
substantial technical capabilities in many varied disciplines, ranging
from mechanics and computer sciences to mathematics. Although we
believe that the capability and experience of our technical staff
compare favorably with other similar manufacturers, there is no
assurance that we can retain existing employees or attract and hire the
type of skilled employees we may need in the future.
Item 2. Description of Property
Our manufacturing facilities and executive offices are located in a
100,000 square foot building in Dale, Indiana, which we own. We believe
that these facilities are in good condition and adequately satisfy our
current requirements.
Item 3. Legal Proceedings
We are aware of no pending or threatened litigation, claims or
assessments with respect to us as of July 31, 1999 other than Precision
Plastics, Inc. vs. Thermwood Corporation et al, Case No. CIVF-98-5841
OWW DLE, alleging breach of contract, breach of the covenant of good
faith and fair dealing, fraud-intentional misrepresentation, fraud-
negligent misrepresentation, fraud-concealment of a material fact and
rescission, and seeking damages in an amount according to proof and
punitive and exemplary damages in an unspecified amount, in connection
with the sale of a machine. Counsel is of the opinion that the
allegations in the Precision litigation are without merit, we have good
defenses and should prevail and that any unlikely adverse judgment in
the matter would not have a material effect on our financial affairs.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock has been traded on the American Stock Exchange since
1989 and on the Pacific Stock Exchange since 1987. The following table
sets forth the high and low per share sales prices for the Common Stock
as reported on the American Stock Exchange for the fiscal years ended
July 31, 1999 and July 31, 1998, and for the interim periods indicated:
<TABLE>
Common Stock Low Sales Price High Sales Price
1999
<S> <C> <C>
Fourth Quarter $ 4.87 $ 7.38
Third Quarter $ 4.63 $ 6.19
Second Quarter $ 5.63 $ 8.13
First Quarter $ 6.06 $ 10.38
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
</TABLE>
On January 5, 1998 a 5-1 reverse split was effected; the above prices
give retroactive effect to the split.
On April 27, 1999, $5,062,882 in principal amount of 12% subordinated
debenture bonds due April 27, 2014 were issued in exchange for 460,264
shares of our Common Stock. The bonds were listed on the American Stock
Exchange starting April 27, 1999.
As of October 12, 1999, there were approximately 215 holders of
record of the Common Stock and 985,045 shares outstanding.
We have never paid any dividends on our Common Stock. The current
policy of the Board of Directors is to retain earnings, if any, to
finance the operation of our business. Accordingly, it is anticipated
that no cash dividends will be paid to the holders of the Common Stock
in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
In this section, we explain our financial condition and results of
operations for the years ended July 31, 1999, 1998 and 1997.
Results of Operations
Net Sales
Net sales during these periods consisted of:
<TABLE>
Net Sales by Industry Segment
($ in Millions)
Segment 1999 1998 1997
---------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Machining
Products Division - U.S. $14.8 68% $15.4 71% $13.1 74%
Thermwood Europe Ltd. 1.7 8% 1.8 8% 1.0 5%
----- ---- ----- ---- ----- ----
Total Machining Products 16.5 76% 17.2 79% 14.1 79%
Technical Services Division 5.2 24% 4.6 21% 3.7 21%
----- ---- ----- ---- ----- ----
Net Sales $21.7 100% $21.8 100% $17.8 100%
===== ==== ===== ==== ===== ====
</TABLE>
Net sales for fiscal year 1999 were $21,725,883, a decrease of less
than 1% from fiscal year 1998, and a 22% increase from fiscal year
1997. Machine sales for 1999 consisted of $16,534,311 of total net
sales compared with $17,181,745 and $14,184,305 for 1998 and 1997,
respectively. European sales included in this number for fiscal year
1999 were $1,675,518 or approximately 8% of total net sales compared
with $1,734,716 for 1998 and $l,035,484 for 1997. Technical services
were $5,191,572 compared with $4,657,784 and $3,660,548 for 1998 and
1997, respectively.
Gross profit in these periods consisted of:
<TABLE>
Gross Profit by Industry Segment
($ in Millions)
Segment 1999 1998 1997
--------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Machining
Products Division - U.S. $ 5.3 63% $ 6.5 74% $ 4.8 69%
Thermwood Europe Ltd. .6 7% .7 8% .4 6%
------ ---- ----- ---- ----- ----
Total Machining Products 5.9 70% 7.2 82% 5.2 75%
Technical Services Division 2.5 30% 1.6 18% 1.7 25%
Total Gross Profit $ 8.4 100% $ 8.8 100% $ 6.9 100%
====== ==== ====== ==== ====== ====
</TABLE>
Gross profit for fiscal year 1999 was $8,459,968, or 38.94% of net
sales. The percentage of current year gross profit to net sales has
decreased from last year's 40.48% and increased slightly from 38.84 for
1997. Gross profit for the European operations was $653,096 or 38.98%
of net sales compared to $695,121, or 40.48% of net European sales for
fiscal 1998 and $374,021 or 36.12% for fiscal 1997. In the current
year, the lower gross profit for machining products in the U.S. was
affected by a higher turnover of production employees and inexperience
in the workforce. We expect the first quarter of fiscal year 2000 to
reflect higher margins due to better production efficiency due to a
more experienced workforce and improved manufacturing processes.
Although we anticipate that gross profit percentages from operations
should improve during 2000, no assurance to this effect can be given
The higher gross profit of 48% of net sales for the technical
services division in fiscal year 1999 was due to higher sales,
primarily consisting of non-warranty and spare parts. Cost of sales
for the technical services division in 1999 was lower than in 1998;
however, cost of sales in fiscal year 1998 was higher than normal
because of higher than normal repair and warranty charges.
Research and Development, Marketing, General and Administrative Expenses
Research and development, marketing, general and administrative
expenses were $7,309,350.in fiscal year 1999, compared to $6,413,160 in
1998 and $4,794,563 in 1997.
These expenses were composed of the following:
<TABLE>
Expense 1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
European Operations $ 832,000 $1,052,000 $ 570,000
Research and Development 570,000 314,000 216,000
Marketing 2,180,000 1,444,000 1,201,000
General and Administrative 3,727,000 3,603,000 2,808,000
</TABLE>
The major portion of the increased research and development, marketing
and general and administrative expenses from 1998 to 1999 was
attributable to marketing and research and development expenses. These
expenses amounted to 38% of total expenses in fiscal 1999 compared to
approximately 27% of total expenses in fiscal year 1998. At the same
time that marketing and research and development expenses increased in
the United States, European administrative expenses of $832,000
decreased approximately $220,000 from $1,052,000 in 1998. This
decrease resulted primarily from a different approach to advertising
and show expense and the closing of the Vienna office. European
expenses in fiscal 1997 were not for a full year. Increased wages and
benefits and legal expenses related to an uncompleted 1-for-37,000
reverse stock split also contributed to the higher level of expenses in
the United States.
Interest expense for fiscal year 1999 was $379,642, an increase of
$147,895 from 1998 and an increase of $303,956 from 1997. The increase
from 1997 is due to interest on a $3.5 million line of credit from
Dubois County Bank proceeds from which we used to repurchase preferred
stock in the amount of $2,546,320. Additionally, approximately
$160,000 was for interest on the 12% debentures issued in 1999 which
are due in 2014.
Operating income for fiscal year 1999 was $1,150,618 compared to
operating income of $2,428,463 and $2,111,353 in 1998 and 1997,
respectively. The decrease in operating income in 1999 from 1998 and
1997 resulted primarily from increased research and development,
marketing, and general and administrative expenses. The European
operations had an operating loss of $178,849 for fiscal year 1999
compared to $356,644 and $195,971 for 1998 and 1997, respectively.
Fiscal year 1999 net earnings were $637,913, compared to net earnings
of $1,317,886 and $1,235,824 in 1998 and 1997, respectively. Federal
income tax expense for fiscal year 1999 was $206,000 compared to
$848,000 and $819,000 for fiscal years 1998 and 1997, respectively. Income
taxes were less than expected because of our utilization of remaining tax
carryforwards.
Liquidity and Capital Resources
At July 31, 1999, our working capital was $3,061,769 compared to
$5,324,458 at July 31, 1998. We had a positive cash flow from operating
activities for the 1999 fiscal year in the amount of $1,047,747. Net
earnings of $637,913, along with the add-back of other non-cash
expenses such as depreciation and amortization of $535,015, and an
increase in customer deposits contributed to a positive cash flow.
However, an increase in accounts receivable decreased cash resources.
During fiscal year 1998, our 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 were for normal replacements
and purchases of labor-saving equipment for production along with the
purchase of new software and hardware for us to become Y2K compliant.
Principal payments on lease obligations during the 1999 fiscal year
were for leased office equipment. Cash outflows from financing
activities included bond issuance costs of $502,000 and the repurchase
of bonds with a face value of $147,400 at a cost of $112,761.
On September 4, 1998, we filed a preliminary proxy statement and
Schedule 13E-3 with the Securities and Exchange Commission relating to
a reverse stock split (and proposed a modified 1-for-37,000 exchange
ratio). We also proceeded with steps to obtain financing for the
transaction. We intended to borrow $14,000,000 to finance the reverse
stock split. On October 16, 1998, we determined that we were unable to
obtain acceptable financing for the reverse stock split and decided not
to proceed with the transaction. All professional fees related to this
transaction were expensed in fiscal year 1999.
On September 3, 1998, we entered into an option to purchase the shares
of Common Stock held by Edgar Mulzer, a major shareholder and director
, during a period commencing November 1, 1999 and ending October 31,
2002 for a price equivalent to $15.50 per share. This agreement was
contingent upon the 1-for-37,000 reverse stock split being successfully
completed. Since the Board decided not to proceed with the reverse
stock split, the option agreement between us and Mr. Mulzer terminated.
On February 4, 1999, Mr. Mulzer gave us an option to purchase his
shares at a price of $15.00 per share. We can exercise this option at
any time after January 1, 2002 and before January 1, 2004. We paid Mr.
Mulzer $5,000 for this option.
Shareholders' equity decreased as a result of our acquisition in April
1999 of an aggregate of 460,264 shares of our Common Stock from our
shareholders in exchange for 12% subordinated debentures payable in
2014 in the aggregate principal amount of $5,062,882. The debentures
were discounted using an effective interest rate of 22% resulting in a
net increase in bonds payable and a decrease in Common Stock of
$2,889,700.
Year 2000 Issues
Our failure to adequately prepare our computers and software to be year
2000 compliant could disrupt our business and materially and adversely
affect our operations. Many currently installed computer systems and
software products use two digits rather than four to define the
applicable year. In other words, date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to
track inventory, issue purchase orders, write checks or engage in
similar normal business activities.
During the fiscal year ended July 31, 1998, we began a risk evaluation
of potential Year 2000 issues and formed a Year 2000 Committee which
consists of the Chief Executive Officer, Vice-President of Engineering,
Information Systems Manager and two other employees. The Committee's
purpose is to assess all risks, analyze current systems, including all
information technology and non-information technology systems,
coordinate upgrades and replacements and report the current and
projected status of all known Year 2000 compliance issues.
During the assessment phase, we identified computer-related systems and
software with potential Year 2000 problems. In the first quarter of
fiscal 1999, we began corresponding with the vendors that had not
supplied Year 2000 statements, requesting the Year 2000 compliance
status of their products. Responses received to date from vendors
have not indicated any Year 2000 problems. We have identified
alternative vendors should our current vendors fail to perform due to
Year 2000 problems; however, use of some of these vendors would be
inconvenient and could be costly. Moreover, we have not contacted
these alternate vendors to determine whether they are Year 2000
compliant.
As a precaution, we plan to stock additional inventory from our non-
U.S. vendors prior to the beginning of the year 2000.
One mission-critical system, the inventory shop floor control software,
was not Year 2000 compliant. This software tracked incoming orders,
inventory levels, material requirements planning, shop floor control,
labor tracking, shipping and administrative and financial tracking
functions. We have purchased a new system that is Year 2000 compliant
and, in our judgment, superior to the system we were using. The new
system was installed during the fourth quarter of fiscal 1999.
Upgrades to all of the non-mission critical systems have been completed
as of July 31, 1999.
We estimate that the replacement or remedial costs for our Year 2000
compliance issues will be less than $150,000 and will consist of
software and hardware upgrades that include new features which are
combined with Year 2000 corrections. The majority of these costs have
been expensed as incurred or capitalized and depreciated, as
appropriate, during fiscal 1999.
We have tested the machine control systems and related computer
software which we sell and we believe that such equipment is Year 2000
compliant.
We estimate that the worst case Year 2000 issue scenario would occur if
the new inventory shop floor control software is not Year 2000
compliant. At that point, we would look to alternate vendors. We
believe that there are a number of alternate vendors that claim to have
Year 2000 compliant software. In the event that we are unable to
integrate Year 2000 compliant software from any of these vendors, we
would be forced to hire additional staff and return to manual methods
of tracking inventory and purchasing raw materials. We believe that we
could implement this contingency plan within a short period of time.
However, until such time as this contingency plan took effect, our
ability to manufacture could be materially disrupted. In addition,
during the time that we were required to operate under this plan, our
results of operations would be adversely affected primarily due to the
resulting increased administrative expense, and higher raw materials
inventory levels that would be needed to assure that we would have
sufficient raw materials to avoid disruption of production.
Item 7. Financial Statements
The information called for by this Item 7 is included following the
"Index to Financial Statements and Schedules" appearing at the end of
this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act
Certain information about our directors and officers is contained in
the following table:
<TABLE>
Name Age Position
- ----------------------- ---- ---------------------------------------------
<S> <C> <S>
Kenneth J. Susnjara (1) 52 Chairman of the Board, President and Director
Linda S. Susnjara (1) 50 Secretary and Director
Michael P. Hardesty 45 Vice President of Engineering
Rebecca F. Fuller 49 Treasurer
David J. Hildenbrand 42 Vice President of Sales
Richard Kasten 47 Vice President of Technical Services
Donald L.Ubelhor 42 Vice-President of Manufacturing
Peter N. Lalos (2) 65 Director
Edgar Mulzer (2) 81 Director
Lee Ray Olinger (2) 72 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
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 our
business except for a brief period in 1985 when he acted as our
distributor. Mr. Susnjara is the author of books on furniture
manufacturing entitled Furniture Manufacturing in the New Millennium
and Three-Dimensional Trimming and Machining and a book on industrial
robotics entitled A Manager's Guide to Industrial Robotics. See Item
12. ("Certain Relationships and Related Transactions.)
Mrs. Susnjara has been a director since 1985 and Secretary since 1989.
She is and has been since 1985 the President of Automation Associates,
Incorporated, a dealer of our industrial products. See Item 12.
"Certain Relationships and Related Transactions." Mrs. Susnjara is not
active in our business.
Mr. Hardesty has been our Vice President of Engineering since August
1988. He joined us 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 us 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 in August 1988. Previously, we
had employed him in various technician and sales manager positions
since 1977. He has also been a director of Thermwood Europe Ltd., one
of our wholly owned subsidiaries, since July 1996.
Mr. Ubelhor became Vice-President of Manufacturing in August 1997.
Previously, he had been our Production Manager since 1993.
Mr. Kasten became a Vice President in December 1993. Previously, we
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 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 12. "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 in September 1974 and has
served continuously in that capacity to the present. See Item 12.
"Certain Relationships and Related Transactions" in relation to an
option we have purchased from Mr. Mulzer on February 4, 1999, to
purchase his shares at a price of $15.00 per share. We can exercise
this option at any time after January 1, 2002 and before January 1,
2004. We paid Mr. Mulzer $5,000 for this option.
Mr. Olinger has been a director since December 1989. He has been a
director since 1949 and Chairman of the Board since 1986 of First Bank
of Huntingburg, a commercial bank in Huntingburg, Indiana.
Compliance with Section 16 (a) of the Securities Exchange Act of 1934
To our 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, 1999.
Item 10. Executive Compensation
The following table sets forth the annual remuneration paid during the
fiscal years ended July 31, 1999, 1998 and 1997 to our Chief Executive
Officer and to each of our executive officers whose total fiscal 1999
remuneration exceeded $100,000 and to all officers as a group.
<TABLE>
Summary Compensation Table
Annual compensation
-------------------------------
Other annual
Name and principal position Year Salary Bonus compensation (1)
- --------------------------- ----- --------- --------- ------------
<S> <C> <C> <C> <C>
Kenneth J. Susnjara, 1999 $108,000 $130,814 $3,500
Chairman of the Board, 1998 108,000 146,664 6,400
President and director 1997 63,000 83,242 3,700
Michael Hardesty, 1999 48,000 91,574 0
Vice-president Engineering 1998 48,000 100,565 0
1997 48,000 102,165 0
David Hildenbrand 1999 45,000 70,518 0
Vice-president Sales 1998 45,000 122,239 0
1997 45,000 116,779 0
Rebecca Fuller, Treasurer 1999 40,000 78,491 0
1998 40,000 86,199 0
1997 40,000 87,570 0
All other officers as a group:
(2) persons 1999 80,000 74,957 0
(2) persons 1998 80,000 78,893 0
(1) person 1997 40,000 29,172 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
under the Qualified Stock Option Plan in fiscal year 1998 at prices in
excess of then current market prices. At July 31, 1999, the exercise
prices of some of the unexercised options were less than the market
price of our 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 our Common Stock under our 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 our pre-tax profits as set forth below. See
"-Profit Sharing Plan" below.
Certain other officers may be entitled to participate in our profit
sharing plan. See "-Profit Sharing Plan" below.
Profit Sharing Plan.
In 1985, we instituted a management profit sharing plan. This plan was
continued in an amended form for fiscal year 1999. Covered under the
plan are the Chairman, the President, Vice President of Engineering,
Vice President of Sales, Vice President of Technical Services, Vice
President of Manufacturing, 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 a 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 our Employee Incentive Stock Option Qualified Plan (the
"Qualified Plan"), options to purchase a maximum of 80,000 shares of
our Common Stock may be granted to officers and other key employees.
Options granted under the Qualified Plan are intended to qualify as
incentive stock options as defined in Section 422A of the Internal
Revenue Code.
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 prices. In
the event an optionee voluntarily terminates his employment with us, he
has the right to exercise his accrued options within 5 days prior to
such termination. However, we may redeem any accrued options held by
each optionee by paying him the difference between the option price and
the then fair market value. If an optionee's employment is
involuntarily terminated, other than because of death, he also has the
right to exercise his accrued options within 30 days of termination.
Upon death, his estate or heirs have one year to exercise his accrued
options. The maximum term of any option is ten years and the option
price per share may not be less than the fair market value of our
shares on the date the option is granted. However, options granted to
persons owning more than 10% of our voting shares 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.
Between December 1991 and August 1997, we granted ten year options to
acquire 50,600 shares of our Common Stock at exercise prices ranging
from $5.00 to $10.66 under the Qualified Plan to 20 of our employees.
All of these options are exercisable as of the date hereof.
Non-qualified Stock Option Plan.
Under our Non-qualified Stock Option Plan, options to purchase a
maximum of 70,000 shares of our Common Stock may be granted to
officers, directors, and other key employees.
The Non-qualified Stock Option 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 options, 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 our consent or his employment or tenure is terminated by us
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 us 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 our
employ for at least one year from the date of their 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 we 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. We
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.
We will be entitled to a deduction equal to the amount of income
realized by the optionee.
As of July 31, 1999 options to acquire 40,000 shares of our Common
Stock at an average exercisable price of $8.91 per share have been
granted under the Non-qualified Stock Option Plan to four of our
directors and officers. Currently all of these options are
exercisable.
Other options.
There are options to purchase an additional 120,000 shares held by our
President. These options extend through October 18, 2005 and permit
the purchase of 60,000 shares at $15.00 per share and 60,000 shares at
$30.00 per share.
Section 401(k) Plan
We 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. We also make 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 us to make
discretionary contributions. Such contributions, if made, are
allocated among all eligible employees as determined under the 401(k)
Plan. The trustee under the 401(k) Plan is Merrill Lynch of
Evansville, Indiana. It invests the assets of each participant's
account in funds at the direction of such participant.
Item 11. Security Ownership of Certain Beneficial Owners and
Management:
The following table sets forth certain information regarding our Common
Stock ownership, including shares issuable upon conversion of
outstanding debentures and upon exercise of options owned as of July
31, 1999 by
(a) each person known by us to own beneficially more than 5% of our
outstanding Common Stock,
(b) each director, and
(c) 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 Owners Owned at Outstanding Options and Outstanding
July 31, Shares Convertible Shares Owned
1999 Owned Securities
<S> <C> <C> <C> <C>
Kenneth J. Susnjara(1)
And Linda Susnjara 261,420 (2) 26.54 411,420 34.29
Edgar Mulzer
401 10th Street
Tell City, Indiana 47586 208,052 (3) 21.12 218,052 18.18
Peter N. Lalos
14312 Darnstown Road
Gaithersburg,
Maryland 20878 8,000 0.81 22,000 1.83
Lee Ray Olinger
c/o First Bank of
Huntingburg
4th and Main Street
Huntingburg, IN 47542 0 0 0 0
All Officers and
Directors as a Group
(9 persons) 481,002 48.83 676,002 56.35
</TABLE>
(1) The address of these shareholders is care of Thermwood, Old
Buffaloville Road, P.O. Box 436, Dale, Indiana 47523.
(2) These shares are owned jointly by Mr. and Mrs. Susnjara who are
husband and wife. Accordingly, each may be deemed to be a beneficial
owner of the securities owned by the other.
(3) Mr. Mulzer has given us an option to purchase all of these shares
during the two-year period commencing on January 1, 2002. Please read
the information under the heading "Certain Relationships and Related
Transactions" for an illustration of how exercise of that option would
affect ownership and control of Thermwood.
Item 12. Certain Relationships and Related Transactions:
Transactions With Edgar Mulzer
On February 4, 1999, Edgar Mulzer, a director and major shareholder who
is not active in our management, gave us an option to purchase his
shares at a price of $15.00 per share. We can exercise this option at
any time after January 1, 2002 and before January 1, 2004. We paid Mr.
Mulzer $5,000 for this option. We have secured this option to further
our plans to assure that control of Thermwood remains with Kenneth and
Linda Susnjara.
Transactions with Mr. & Mrs. Susnjara
Mr. and Mrs. Susnjara are the owners of Automation Associates
Incorporated, a dealer of our machine products. The agreement between
us and Automation Associates contains the same terms and conditions as
with our other dealers. We sold no products to Automation Associates
during fiscal year 1999, but paid Automation Associates $669,125 in
commissions during the year for assisting in effecting sales of
approximately $4,500,000. This amount represents approximately 25% of
our gross sales for fiscal year 1999. Automation Associates also
leases space from us at what we believe is a fair market rate. Rental
payments were $2,400 during fiscal years 1999 and 1998.
Transactions with Peter Lalos
Lalos & Keegan, a law firm in which Mr. Lalos is the senior partner,
accrued fees of $183,000, $95,000, and $77,000, for the fiscal years
1999, 1998, and 1997, respectively. All outstanding balances have been
paid subsequently.
We believe that the terms of the transactions between us and our
affiliated parties as described in this section are as fair as those
which we 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.
Recent Stock Transactions by Affiliates
We have not purchased any shares of our Common Stock since August 1,
1996. Edgar Mulzer purchased on the open market 340 shares at $7.81 per
share and 2,000 shares at $7.20 per share in December 1996. Mr. and
Mrs. Susnjara purchased on the open market 400 shares at $7.625 per
share on May 1, 1998, 400 shares at $7.625 on May 4, 1998, and 600
shares at $7.625 per share on May 5, 1998. In addition, Mr. and Mrs.
Susnjara converted debentures into 10,000 shares of Common Stock on
September 2, 1998. Peter Lalos purchased 620 shares at $7.80 and 40
shares at $8.80 per share in May 1997 and 200 shares at $12.35 per
share and 140 shares at $12.40 per share in November 1997. These are
the only transactions in our shares effected by such individuals since
August 1, 1996.
To our knowledge, neither we nor any of our affiliates, directors or
executive officers has purchased or sold any Common Stock in the last
sixty days.
PART IV
Item 13. Exhibits 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 21
Financial Statements:
Consolidated Balance Sheets - July 31, 1999 and 1998 22
Consolidated Statements of Operations - Years ended
July 31, 1999, 1998 and 1997 24
Consolidated Statements of Shareholders' Equity - Years
Ended July 31, 1999, 1998 and 1997 25
Consolidated Statements of Cash Flows - Years ended
July 31, 1999, 1998 and 1997 26
Notes to Consolidated Financial Statements 27
All other schedules are omitted because they are not required, or are
inapplicable or the information is otherwise shown in the financial
statements or notes thereto.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the we have duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
October 28, 1999 /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
Thermwood Corporation and in the capacities and on the dates indicated:
Date:
October 25, 1999 /s/ Kenneth J. Susnjara
Kenneth J. Susnjara, Chairman of the
Board and President (Principal Executive
Officer)
Date:
October 25, 1999 /s/ Rebecca F. Fuller
Rebecca F. Fuller, Treasurer (Principal
Financial and Accounting Officer)
Date:
October 25, 1999 /s/ Linda S. Susnjara
Linda S. Susnjara, Secretary
Date:
October 25, 1999 /s/ Peter N. Lalos
Peter N. Lalos, Director
Date:
October 25, 1999 /s/ Edgar Mulzer
Edgar Mulzer, Director
Date: October 25, 1999
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, 1999 and 1998,
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, 1999. 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, 1999 and 1998,
and the results of their operations and their cash flows for each of
the years in the three-year period ended July 31, 1999, in conformity
with generally accepted accounting principles.
KPMG LLP
Indianapolis, Indiana
September 10, 1999
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
1999 1998
------------- -------------
Assets
Current assets
<S> <C> <C>
Cash $ 80,941 $ 115,937
Accounts receivable, less allowance for
doubtful accounts of $68,000 for
1999 and $20,000 for 1998 1,902,865 1,673,826
Income taxes recoverable 135,457 0
Inventories 5,266,765 5,359,182
Deferred income taxes 655,000 694,000
Prepaid expenses 422,536 491,209
------------ ------------
Total current assets 8,463,564 8,334,154
------------ ------------
Property and Equipment
Land 73,260 73,260
Buildings and improvements 2,051,882 1,977,659
Furniture and equipment 3,503,586 3,131,306
Construction in progress 0 6,257
------------ ------------
Less accumulated depreciation (2,861,869) (2,540,992)
------------ ------------
Net property and equipment 2,766,859 2,647,490
------------ ------------
Other assets
Patents, trademarks and other 145,608 139,933
Bond issuance costs less
accumulated amortization 481,179 4,089
Deferred income taxes 325,000 199,000
------------ ------------
Total other assets 951,787 343,022
------------ ------------
Total assets $ 12,182,210 $ 11,324,666
============ ============
</TABLE>
See accompanying notes to consolidated
financial statements.
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
1999 1998
-------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities
<S> <C> <C>
Accounts payable $ 1,144,634 $ 1,136,896
Accrued compensation and payroll taxes 286,907 498,224
Customer deposits 1,080,337 816,315
Other accrued liabilities 656,849 552,066
Current portion of capital lease
obligations 36,748 6,195
Note payable to bank 2,196,320 0
------------ ------------
Total current liabilities 5,401,795 3,009,696
------------ ------------
Long-term liabilities, less current
portion
Capital lease obligations 70,777 0
Note payable to bank 0 2,196,320
Debentures payable, net of
unamortized discount of
$2,107,345 for 1999 and
$10,450 for 1998 2,913,184 170,550
------------ ------------
Total long-term liabilities 2,983,961 2,366,870
------------ ------------
Shareholders' equity
Common stock, no par value,
4,000,000 shares authorized,
985,045 and 1,431,109 shares
issued and outstanding for 1999
and 1998, respectively 7,953,077 10,742,636
Accumulated deficit (4,120,998) (4,758,911)
------------ ------------
3,832,079 5,983,725
Less subscriptions receivable 35,625 35,625
------------ ------------
Total shareholders' equity 3,796,454 5,948,100
------------ ------------
Total liabilities and shareholders' equity $ 12,182,210 $ 11,324,666
============ ============
</TABLE>
See accompanying notes to consolidated
financial statements.
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended July 31
1999 1998 1997
------------ ----------- ------------
Sales
<S> <C> <C> <C>
Machine sales $19,430,750 $20,199,191 $16,420,313
Technical services 5,191,572 4,657,784 3,660,548
------------ ----------- -----------
24,622,322 24,856,975 20,080,861
Less commissions 2,896,439 3,017,446 2,301,446
------------ ----------- -----------
Net sales 21,725,883 21,839,529 17,779,415
------------ ----------- -----------
Cost of sales
Machines 10,563,563 9,981,401 8,841,911
Technical services 2,702,352 3,016,505 2,031,588
------------ ----------- -----------
Total cost of sales 13,265,915 12,997,906 10,873,499
------------ ----------- -----------
Gross profit 8,459,968 8,841,623 6,905,916
Research and development,
marketing, administrative and
general expenses 7,309,350 6,413,160 4,794,563
------------ ----------- -----------
Operating income 1,150,618 2,428,463 2,111,353
------------ ----------- -----------
Other income (expense):
Interest expense (379,642) (231,747) (75,686)
Other 107,098 (30,830) 19,157
------------ ----------- -----------
Other expense, net (272,544) (262,577) (56,529)
------------ ----------- -----------
Earnings before income
taxes and extraordinary loss 878,074 2,165,886 2,054,824
Income tax expense (206,000) (848,000) (819,000)
------------ ----------- -----------
Earnings before
extraordinary loss $ 672,074 $ 1,317,886 $ 1,235,824
------------ ----------- -----------
Extraordinary loss on repurchase of
bonds, net of income tax
benefit of $11,000 (34,161) 0 0
------------ ----------- -----------
Net earnings $ 637,913 $ 1,317,886 $ 1,235,824
============ =========== ===========
Earnings per share:
Basic $0.49 $0.89 $0.70
Diluted $0.49 $0.86 $0.69
============ =========== ===========
</TABLE>
See accompanying notes to
consolidated financial statements
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock
Subscriptions Accumulated
Shares Amount Shares Amount Receivable Deficit
-------- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at
July 31, 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)
---------- ---------- --------- ----------- --------- -----------
Subscriptions
received 0 0 0 0 19,125 0
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
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)
--------- -------- --------- ----------- -------- -----------
Conversion of 12%
debentures, net
of related bond
issuance costs
and unamortized
discount 0 0 14,200 65,775 0 0
Conversion of
common stock to
12% bonds due 2014 0 0 (460,264) (2,855,334) 0 0
Net earnings 0 0 0 0 0 637,913
------- ----------- --------- ----------- -------- -----------
Balances at
July 31, 1999 0 0 985,045 $7,953,077 ($35,625)($4,120,998)
======= =========== ========= =========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31
1999 1998 1997
------------ ------------- -------------
Cash Flows From Operating
Activities:
<S> <C> <C> <C>
Net earnings $ 637,913 $1,317,886 $1,235,824
Adjustments to reconcile net
earnings to net cash
provided by operating activities:
Depreciation and amortization 535,015 368,261 338,274
Provision for inventories 165,000 68,000 0
Gain on disposal of equipment 0 48,936 0
Deferred income taxes (87,000) 1,109,000 412,000
Changes in operating assets
and liabilities:
Accounts receivable (229,039) 128,743 (990,029)
Inventories (72,583) (809,181) (1,288,664)
Prepaid expenses and
other assets (66,784) (118,922) (32,864)
Accounts payable and other
accrued expenses (98,797) (798,976) 1,704,136
Customer deposits 264,022 (90,795) 413,101
--------- ---------- ----------
Net cash provided by
operating activities 1,047,747 1,222,952 1,791,778
--------- ---------- ----------
Cash Flows From Investing Activities:
Purchases of patents,
property and equipment (459,043) (1,242,887) (457,599)
--------- ---------- ---------
Net cash used by
investing activities (459,043) (1,242,887) (457,599)
Cash Flows From Financing Activities:
Principal payments on
lease obligations (8,915) (7,478) (8,065)
Redemption of debentures (112,761) 0 0
Bond issuance costs (502,024) 0 0
Redemption of preferred stock 0 (2,546,320) (550,800)
Payment of dividends on
preferred stock 0 (43,255) (285,204)
Note payable to bank 0 2,196,320 0
Proceeds from subscriptions receivable 0 19,125 3,375
Proceeds from exercise of stock options 0 5,000 0
--------- ---------- -----------
Net cash used by financing
activities (623,700) (376,608) (840,694)
--------- ---------- -----------
Increase (decrease) in cash (34,996) (396,543) 493,485
Cash at beginning of year 115,937 512,480 18,995
--------- ---------- -----------
Cash at end of year $ 80,941 $ 115,937 $ 512,480
========= ========== ===========
</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 (together, the "Company"
or "Thermwood"). There was no revenue generated in 1999 or 1998 from
Thermwood Capital Corporation, a leasing company.
Thermwood operates within a single industry 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. One dealer accounted
for approximately 25% of the Company's business in fiscal 1999; however, no
customer accounted for more than 10% of sales in fiscal 1999, 1998 or
1997. The loss of any large dealer could have a material adverse effect on
the Company's business.
Thermwood 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 machine 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 1999 amounted to
approximately 24% of total gross sales
Thermwood's machining systems are utilized principally in the woodworking,
plastics and boating industries. The Company is not dependent upon a
single supplier or only a few suppliers.
Principles of Consolidation:
All significant intercompany transactions and accounts have been eliminated
in consolidation.
Use of Estimates and Assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company 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. Revenues on long-term upgrade and warranty
agreements are recognized ratably over the life of the related agreement.
Estimated costs of product warranties are charged to cost of sales at the
time of sale.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment:
Property and equipment are recorded at cost for assets purchased and at the
present value of minimum lease payments for assets acquired under capital
leases. The carrying value of property and equipment is assessed when
factors indicating an impairment are present. If an impairment is present,
the assets are reported at the lower of carrying value or fair value.
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 1999, 1998 and 1997 was $414,746, $345,890 and
$304,716, respectively.
Research and Development:
Research and development costs are expensed as incurred. Expenditures for
research and development were approximately $570,000, $314,000 and $216,000
during 1999, 1998 and 1997, 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, 1999 and 1998,
substantially all of the deposits had no incurred work-in-process cost.
Earnings Per Share:
Earnings per share for each of the three years ended July 31 were
determined as follows:
<TABLE>
1999 1998 1997
----------------- --------------------- -------------------
Basic Diluted Basic Diluted Basic Diluted
-------- -------- --------- ----------- --------- ---------
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Earnings before
extraordinary
loss $672,074 $672,074 $1,317,886 $1,317,886 $1,235,824 $1,235,824
Less preferred
stock dividend 0 0 (43,255) (43,255) (285,204) (285,204)
Add interest
expense on
convertible
debentures 0 13,830 0 47,180 0 62,580
Add amortization of
discount on
debentures and
issuance costs 0 2,490 0 4,701 0 13,120
Income tax effects
of earnings
adjustments 0 (6,528) 0 (19,196) 0 (28,009)
Earnings available
to common
shareholders 672,074 681,866 1,274,631 1,307,316 950,620 998,311
Extraordinary loss,
net of tax benefit
of $11,000 (34,161) (34,161) 0 0 0 0
-------- --------- ---------- ---------- ----------- ----------
Net earnings
available to
common
shareholders $637,913 $647,705 $1,274,631 $1,307,316 $950,620 $998,311
========= ========= ========== ========== =========== ==========
Weighted-average
shares:
Outstanding 1,290,521 1,290,521 1,424,676 1,424,676 1,349,143 1,349,143
Incremental
shares related
to dilutive
stock options 0 9,300 0 55,872 0 36,255
Incremental shares
related to
convertible bonds 0 22,000 0 36,200 0 60,200
--------- --------- ---------- ---------- ----------- ----------
Total weighted-
average
shares 1,290,521 1,321,821 1,424,676 1,516,748 1,349,143 1,445,598
========= ========= ========== ========== =========== ==========
Earnings per share:
Income before
extraordinary
earnings $0.52 $0.52 $0.89 $0.86 $0.70 $0.69
Extraordinary loss,
net of income
taxes (.03) (.03) 0 0 0 0
--------- -------- --------- -------- ---------- ---------
Net earnings $0.49 $0.49 $0.89 $0.86 $0.70 $0.69
========= ======== ========= ======== ========== =========
</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:
1999 1998
<S> <C> <C>
Finished goods $ 937,662 $ 651,398
Work-in-process 1,112,684 1,541,258
Raw materials 3,216,418 3,166,526
------------- ------------
$ 5,266,765 $ 5,359,182
</TABLE>
NOTE C -- LEASES:
Amounts included in property and equipment at July 31, 1999 and 1998
relating to capital leases are as follows:
<TABLE>
1999 1998
----------- ----------
<S> <C> <C>
Furniture and equipment $ 110,245 $ 17,081
----------- ----------
110,245 17,081
Less accumulated amortization (3,062) (13,095)
----------- ----------
$ 107,183 $ 3,986
========== ==========
</TABLE>
Future minimum lease payments as of July 31, 1999 are as follows:
<TABLE>
Capital Operating
Years ending July 31: Leases Leases
--------------------- ---------- ----------
<C> <C> <C>
2000 $ 41,460 $ 127,100
2001 41,460 127,100
2002 37,994 127,100
2003 0 127,100
2004 0 127,100
--------- ---------
Total minimum lease payments $ 120,914 $ 635,500
Less amounts representing
interest at an interest
rate of 8% (13,389)
---------
$ 107,525
=========
</TABLE>
Total operating lease expense for 1999, 1998 and 1997 was $127,000,
$119,000 and $44,000 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, 1999, $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% (8.5% at July 31, 1999). The line is secured by the
tangible assets of the Company and expires in January 2000. Management
expects to renew the line under terms similar to the existing agreement.
NOTE E -- DEBENTURES 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 Common Stock at a price of $5.00 per
share, subject to anti-dilutive adjustments. Interest is payable
quarterly. Thermwood may, on 30 days written notice redeem the debentures,
in whole or in part, if the closing price of the 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 years ended July 31, 1999 and 1998, holders tendered $71,000
and $120,000 of the debentures for conversion into 14,200 and 24,000,
common shares, respectively. At July 31, 1999, there were $110,000 in
principal of these debentures outstanding.
The Company acquired in April 1999 an aggregate of 460,264 shares of its
Common Stock from Company shareholders in exchange for 12% subordinated
debentures payable in 2014 in the aggregate principal amount of $5,062,882.
The subordinated debentures were discounted using an effective interest
rate of 22% resulting in a net increase in bonds payable of $2,855,334. In
July 1999 the Company repurchased debentures with a face value of $147,400
at a cost of $112,761. This transaction resulted in an extraordinary loss
of $34,161, net of the related tax benefit of $11,000.
NOTE F -- COMMON STOCK OPTIONS:
Thermwood 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 to 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), net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
1999 1998 1997
----------- ------------ ------------
Net Earnings
<S> <C> <C> <C>
As Reported $637,913 $1,317,886 $1,235,824
Pro Forma 637,913 1,308,962 1,214,168
Basic Earnings Per Share
As Reported $0.49 $0.89 $0.70
Pro Forma 0.49 0.89 0.69
Diluted Earnings Per Share
As Reported 0.49 0.86 0.69
Pro Forma 0.49 0.86 0.68
</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 for grants in fiscal years 1998 and 1997: no
dividend yield for all years; expected volatility of 35 percent and 56
percent for 1998 and 1997, respectively, risk-free interest rates of 4.7
percent and 6.2 percent for 1998 and 1997, respectively, expected lives of
ten years for all options. No options were granted in fiscal year 1999.
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. None of these options were exercised during fiscal year 1999. As
of July 31, 1999, 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, 1999.
Other options to purchase 120,000 shares have been granted by the Board of
Directors, all of which were outstanding and exercisable as of July 31,
1999. The option to purchase these shares was granted to the President of
the Company. The option extends through October 18, 1999 and permits the
purchase of 60,000 shares at $15.00 per share and 60,000 shares at $30.00
per share.
A summary of Common Stock options for the years ended July 31 follows:
<TABLE>
1999 1998 1997
------------------ ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
--------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 214,600 $9.15 226,600 $ 15.90 211,600 15.95
Granted 0 0 4,000 10.63 15,000 14.75
Canceled/expired 4,000 8.44 10,000 9.38 0 0
Exercised 0 0 6,000 5.00 0 0
Outstanding at
end of year 210,600 $16.10 214,600 $ 9.15 226,600 $15.90
---------- --------- -------- --------- --------- -------
Exercisable at
end of year 210,600 214,600 226,600
========== ======== =======
Weighted average fair
value of options granted
during the year $ 0 $ 3.66 $ 6.90
========== ======== =======
</TABLE>
NOTE G -- SHAREHOLDERS' EQUITY:
The Company is authorized to issue 2,000,000 shares of non-voting preferred
stock, no par value Series A Preferred Stock, of which 1,000,000 shares
were issued and 738,000 shares were outstanding at July 31, 1997. 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,
representing all outstanding shares.
NOTE H -- RELATED PARTY TRANSACTIONS:
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 $183,187, $94,954 and $76,699 for 1999,
1998 and 1997, respectively. The Company had accounts payable of $32,619,
$31,515 and $14,462 at July 31, 1999, 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 Company primarily sells its machines directly to the
purchaser within this dealer's region; however, sales may also be made
directly to the dealer who in turn sells the machines to the purchaser.
The agreement between the Company and the dealer is a standard agreement
similar to other dealer agreements entered into by the Company.
Rent income from the dealership was $2,400 for 1999 and 1998 and $6,800 for
1997. Sales commissions of $669,125, $627,816 and $447,667 were paid to
the dealership during 1999, 1998, and 1997, respectively, for assisting in
effecting sales.
NOTE I -- INCOME TAXES:
Income taxes for the years ended July 31 were allocated as follows:
1999 1998 1997
------------ ------------ -----------
Earnings before
extraordinary loss $ (206,000) $ (848,000) $ (819,000)
Extraordinary loss 11,000 0 0
---------- ---------- ----------
Total income tax expense $ (195,000) $ (848,000) $ (819,000)
Income taxes for the years ended July 31 consis of:
<TABLE>
1999 1998 1997
----------- ----------- ------------
Federal:
<S> <C> <C> <C>
Current (expense) benefit $ (240,000) $ 308,000 $ (407,000)
Deferred (expense) benefit 80,000 (1,019,000) (379,000)
----------- ----------- -------------
(160,000) (711,000) (786,000)
=========== =========== =============
State:
Current expense (42,000) (47,000) 0
Deferred expense 7,000 (90,000) (33,000)
----------- ----------- ------------
(35,000) (137,000) (33,000)
----------- ----------- ------------
Total income tax expense $ (195,000) $ (848,000) $ (819,000)
=========== =========== ============
</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>
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
Earnings before income taxes $ 878,074 $2,165,886 $2,054,824
Expected income tax expense $ (325,000) $ (801,000) $ (760,000)
Effect of non-deductible items (28,000) (19,000) (14,000)
Extraordinary loss 11,000 0 0
Utilization of loss
carryforwards 170,000 0 0
Other (23,000) (28,000) (45,000)
------------- ----------- -------------
Total actual income tax
(expense) benefit $ (195,000) $ (848,000) $ (819,000)
============= =========== =============
</TABLE>
The tax effects of significant temporary differences represented by deferred tax
assets and deferred tax liabilities at July 31 are as follows:
<TABLE>
1999 1998 1997
----------- ------------ -----------
Deferred tax assets
attributable to:
<S> <C> <C> <C>
Property and equipment $ 318,000 $ 185,000 $ 0
Inventory valuation 300,000 245,000 246,000
Warranty reserves 122,000 79,000 73,000
Net operating loss
carryforwards 0 196,000 1,812,000
Other tax carryforwards 174,000 155,000 0
Other 66,000 33,000 3,000
----------- ----------- ------------
Deferred tax assets 980,000 893,000 2,134,000
----------- ----------- ------------
Deferred tax liability
attributable to:
Property and equipment 0 0 132,000
----------- ----------- ------------
Net deferred tax assets $ 980,000 $ 893,000 $2,002,000
=========== =========== ============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that all or some portion of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which temporary
differences are expected to reverse, management believes it is more likely
than not the Company will realize the benefits of these deductible
differences at July 31, 1999.
NOTE J -- ADDITIONAL INFORMATION:
Other accrued liabilities at July 31 consist of:
1999 1998
----------- ----------
Property taxes $ 87,013 $ 79,282
Income taxes 0 14,002
Accrued warranties 329,735 212,339
Other 240,101 246,443
----------- ----------
$ 656,849 $ 552,066
=========== ==========
Cash Flow Information:
The Company paid cash for interest in the amount of $320,913, $200,319
and $69,739 during 1999, 1998 and 1997, respectively. The Company paid
cash for income taxes in the amount of $371,675, $77,024 and $30,000
during 1999, 1998 and 1997, respectively.
Non-cash Investing and Financing Activities:
During fiscal years 1999, 1998 and 1997, bonds with face values of
$71,000, $120,000 and $462,000, respectively, were converted to 14,200,
24,000 and 92,400 shares of Common Stock. A capital lease obligation of
$110,000 was incurred in fiscal 1999 when the Company entered into a lease
for new computer software.
NOTE K -- PENSION AND PROFIT SHARING PLAN:
Thermwood 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 fiscal years 1999, 1998 and 1997 amounted to $54,844,
$48,759 and $35,840, respectively. The Company also has a management
profit sharing plan. Profit sharing expense amounted to $739,354, $603,978
and $647,407 for fiscal years 1999, 1998 and 1997, respectively.
NOTE L - SEGMENTS
The Company's operations are divided into the following three operating
segments: the Machining Products Division, which is responsible for
marketing machinery, hardware and software products; the Technical Services
Division, which is responsible for marketing service, support, upgrade and
catalog products; and Thermwood Europe Ltd., a British Company, which is a
wholly-owned subsidiary of Thermwood Corporation responsible for marketing
and servicing machines throughout Europe.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
<TABLE>
1999
----------------------------------------------
Machining Technical Thermwood
($'s in Millions) Products Services Europe Total
Division Division Ltd.
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales $14.8 $ 5.2 $ 1.7 $21.7
Operating income .8 .5 (.2) 1.1
Interest expense .2 .1 .1 .4
Depreciation
and amortization .4 .1 0 .5
Income tax expense .2 0 0 .2
Total assets 8.1 2.9 1.0 12.0
</TABLE>
<TABLE>
1998
-------------------------------------------------
Machining Technical Thermwood
($'s in Millions) Products Services Europe Total
Division Division Ltd.
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales $15.4 $4.6 $ 1.8 $21.8
Operating income 2.7 .1 (.4) 2.4
Interest expense .1 0 .1 .2
Depreciation and
amortization .3 .1 0 .4
Income tax expense .6 .2 0 .8
Total assets 7.9 2.4 1.0 11.3
</TABLE>
<TABLE>
1997
----------------------------------------------------
Machining Technical Thermwood
($'s in Millions) Products Services Europe Total
Division Division Ltd.
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $13.1 $ 3.7 $ 1.0 $17.8
Operating income 2.0 .3 (.2) 2.1
Interest expense .1 0 0 .1
Depreciation and
amortization .2 .1 0 .3
Income tax expense .6 .2 0 .8
Total assets 8.3 2.0 .1 11.3
</TABLE>
