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, 2000
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
Shares of Common Stock without par value
Name of each exchange on which registered:
American Stock Exchange
Pacific Stock Exchange
Check 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-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $28,615,896.
The aggregate market value of the voting stock held by non-affiliates
of the issuer at October 24, 2000 based upon the closing price of the
issuer's Common Stock as reported on the American Stock Exchange was
approximately $2,322,475.
The number of the Registrant's shares of Common Stock outstanding as of
October 24, 2000 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, 1996, July 31, 1997, July 31, 1998 and July 31, 1999.
PART I
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995, including, without limitation, statements
containing the words "believes," "anticipates," "expects," and words of
similar import. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the
actual results, financial condition, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Certain of these factors are discussed in more detail elsewhere in this
Annual Report on form 10-K, including, without limitation, "Description
of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-
looking statements. We disclaim any obligation to update any such
forward-looking statements to reflect future events or developments.
Item 1. Business
General
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.
We divide our operations into three operating segments. These are 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. See Note K of Notes to
the Consolidated Financial Statements incorporated by reference in Item
7 of Part II of this annual report for the financial results of our
operating segments.
Our Vice President of Production directs the production organization,
which is responsible for all manufacturing. We operate manufacturing
as a cost center by allocating costs to each Division for the
manufactured products it sells.
Our Vice President of Engineering directs research and development,
product and production engineering. We allocate the costs for these
activities to the Machining Products and Technical Services Divisions.
Our Marketing Manager manages the Marketing Group . He reports directly
to our 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. Using human labor
traditionally produced smaller volumes of parts, 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, referred to as 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 system, referred to as a CAD/CAM
system, and 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 manufacturers 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 - Products
CNC Router - Systems and Packages
Our automated industrial systems are high-speed computer controlled,
fully automatic machining centers commonly called CNC routers. We
design these centers 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 both vertically and
horizontally, mortising, which means cutting square holes in furniture,
and sawing and squaring, which means cutting inside square corners.
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 machining.
The CARTESIAN 5 systems utilize our 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 and water jets.
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 or multiple parts to be machined simultaneously.
In the past, we focused on selling primarily standard machinery with
certain standard options. We sold this machinery "unbundled," which
meant that we increased the base machine price by the cost of the
options, some necessary, which were added. In the last fiscal year we
changed our market approach to promoting packages and systems. We now
bundle our machine packages with the most commonly used options. The
package price, while higher than the base machine price, is closer to
the actual price paid by customers We believe that the overall result
of this change will be positive although there are no assurances that
this is so.Systems are machines, bundled with options, software and
other support products intended to produce a specific end product. In
the past the customer, and not Thermwood, was responsible for
integrating and programming the various components to produce the end
product. Now, when a customer purchases a system, we deliver a product
which is ready to manufacture the customer's final product. We believe
that the reduced technical risk of a system will be appealing to
customers despite the significantly higher cost. We also believe that
we are capable of successfully and profitably handling the new
responsibility although there is no assurance that this new approach
will generate significant sales and if such sales are generated that we
can successfully discharge our responsibility for making the systems
function in customers' facilities
The CARTESIAN 5 Thermwood CNC router packages and systems are utilized
principally in the woodworking, plastics, and to a lesser extent the
aerospace industries. Current prices to end users range from
approximately $49,000 to over $250,000 per system. The average price
of a standard package is approximately $100,000.Carving Router.
We have offered one model of our CNC router line 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 the electronic programming probe which traces a
sample carved part. The CNC control automatically creates the program
necessary to reproduce the sample carving. This product has been
priced at approximately $150,000 and sales of this product have been
below expectation. For this reason, we have suspended marketing and
sales of this product and have announced that it will be redesigned and
re-introduced in the future.
We anticipate that the new carving router will be capable of carving
eight parts instead of six, will offer more powerful routing heads and
will be priced at approximately $300,000. Management expects the new
design will be more successful despite the higher price although there
is no assurance of that success.
Hardware Options
Our Machining Products Division offers a variety of hardware options
for use with its CNC router line. Some of these options are included
as a standard part of packages and systems while others can be
purchased at the customer's discretion. 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 arrangement
with an original equipment manufacturer, or OEM,. 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, the majority are software
packages obtained from third party vendors under OEM arrangements.
We have signed OEM agreements 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 it's "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 2000, the Software Technology Group generated
sales of $517,000.
Technical Services Division - Products
Our 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 this Division in fiscal 2000 accounted for
approximately 21% of our total sales.
The Technical Services Division earns revenues for customer training,
product installation and service after the warranty period. Our
standard limited warranty covers one-year parts and labor; however, if
a technician must travel to the customer's 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 we created the Advanced Support Program 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 and then continue
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 but the
customer pays travel expenses, a full parts and labor warranty on the
control and various discounts on spare parts, upgrades and catalog
purchases. There were 110 machines enrolled in the program at the end
of fiscal 2000.
Thermwood.com
During fiscal 2000, we established a new division called Thermwood.com.
This division is responsible for maintaining the Company's Internet web
site, for maintaining catalog sales operations and establishing a web
store for on-line ordering of catalog items, for establishing a tooling
web site and tool sharpening service, and for corporate marketing
activities.
Online/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, items can be purchased electronically through our web
site. Tooling represented approximately $166,000 of the total catalog
sales for fiscal 2000 of approximately $500,000.
Tooling On The Web
In addition to the catalog items above, we offer CNC router tooling
through a web site called ToolingOnTheWeb.com. Various third-party
vendors supply the tooling offered on this web site. We offer to re-
sharpen tools purchased, subject to certain limitations and
restrictions, free of charge, in order to entice customers to purchase
tooling through this site.
We believe that tooling can be sharpened at very low cost by
eliminating the machine setup normally required to accommodate various
tooling geometries. We have purchased and installed 16 tool grinding
machines, one for each geometry for which the service is being offered,
in order to allow for sharpening without setup.
We introduced this new offering to the industry at the end of Fiscal
2000 and which has generated a small, but growing level of sales. We
believe that this program could result in significant sales and profits
once the industry becomes aware of its existence; however, there is no
assurance that significant sales will develop or that the program can
be operated at a profit.
Marketing
Our Thermwood.com division conducts our marketing programs for
Thermwood. Our other divisions pay compensation to the Thermwood.com
division for this service.
The market for industrial automation equipment can be divided into a
large number of applications in a variety of 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. We design these systems for easy installation, programming
and use, so that they 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 high quality 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 the Company in making sales and are paid on a commission basis
for this service. Commissions generally range from 10% to 20% of our
published retail prices. As of July 31, 2000, we had 15 authorized
dealers marketing our products. We usually require each dealer to
execute a non-exclusive written agreement. We require a dealer to sell
one machine within each six-month period in order to retain its
dealership. Most dealers concentrate their sales efforts in specific
geographical areas and in particular industries such as woodworking or
plastics, and sell only one of the Company's product lines. However,
some market and sell products to more than one industry and sell both
the CARTESIAN 5 systems and our line of Woodcarving Routers. Although
some dealers may handle non-competing products manufactured by other
companies, most dealers handle our products exclusively.
One dealer accounted for approximately 16% of our sales for fiscal
2000. See Item 12. "Certain Relationships and Related Transactions"
for information relating to our agreement with Automated Associates
which is owned by our president and his wife who is also an officer and
director. This dealer sold to 39 different customers, none of which
accounted for 10% or more of our sales in fiscal 2000.
No other dealer accounted for 10% or more of our business for the
current 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 2000 fiscal year, the subsidiary
had a net loss of $242,000. Its machine and service sales in Fiscal
2000 were approximately $2,028,000 or 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 such leads 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 our 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 has responsibility for the quality
control of our industrial products during their manufacture. The
Technical Services Division also operates the Advanced Support Program
as well as Catalog Sales.
We market technical services to current customers as well as to
companies that purchase used Thermwood equipment. The Division also
markets products from its supply catalog to customers that operate CNC
router products manufactured by competitors. We maintain a toll-free
service line 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
Our Vice President of Engineering directs our research and development
and product development efforts. These efforts are intended to
simultaneously improve and enhance our product performance and
capabilities while reducing manufacturing costs. We have directed much
of our product development effort during the last two years toward
developing a variety of cutting and machining heads and automatic tool
changers for use on our CNC router line of equipment. We are
continuing this development in an effort to broaden the capability of
this equipment and thus increase market size for these products. In
addition, we have an ongoing program to reduce the manufacturing costs
of our products and pass a portion of these reductions on to customers
in the form of price decreases.
We also developed the software interface between the Cabinet Vision
Solid Professional software package and the Thermwood 91000
SuperControl. As part of this development, a fixture method and
operating system was developed for producing hardwood face frames for
kitchen cabinets.
We have continued development efforts on the 91000 SuperControl that is
an updated version of the CNC control systems formerly used on our
equipment. We have completed the basic system development and are
currently selling and shipping this control on our equipment.
We are directing our current efforts toward adding certain more
extensive and expensive features and capabilities. Some of the added
features are a service guide and manual, Searchmode, maintenance videos
and a service clock for improved guidance in customer maintenance.
Another feature is a 50-tool automatic toolchanger and a sanding head for
the turret. We are developing a 12' Model 53 because of increased
popularity of 12' stock. We are adding a VHS player and a close up
camera so that customers can record their set up and operations.
We plan to continue our research and development efforts primarily
directed toward the improvement of existing products, development of
new products or product enhancements 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 fiscal 2000 and 1999, we spent $685,000 and $570,000, respectively,
for research and development. There was no customer-sponsored research
and development during fiscal 2000. 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,
for example, companies with annual sales approximating or exceeding $1
billion, our primary customer base is comprised of small to medium-
sized manufacturers, for example. 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 fiscal 2000.
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 date of invoice. 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.
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 class for two people as part of the
purchase price of a new machine. This class is conducted at our
headquarters in Dale, Indiana. We also offer formal training for our
major software products.
Backlog
As of July 31, 2000, our backlog was approximately $2,100,000 compared
with a backlog of $5,059,000 as of July 31, 1999. Substantially all of
this backlog will be manufactured and delivered prior to January 31,
2001.
Our 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 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. We purchase the
major portion of our inventory 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
manufacture. We fabricate the components contained in these products
or purchase them from outside suppliers. We fabricate such components
as computer-based electronic control systems and the steel structure of
the CARTESIAN 5 systems. Where possible, we utilize our own systems.
We also use our own 91000 Control systems to operate conventional
metalworking machine tools to fabricate components.
We purchase raw materials 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 17% of total components purchased for the fiscal year
ended July 31, 2000. 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, better financed and have more resources than we do.
Our primary competitors in the high speed machining CNC router market
are a number of major domestic, Japanese and European firms such as
Shoda Iron Works, Heian, Shinks Anderson Machinery Works, Accurouter,
Motion Master and Komo Machine. 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 28 domestic patents and have applications pending in
the United States for 19 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, it may be difficult for us to
police unauthorized use of our technology, particularly in foreign
countries. 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.
We market our products 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, 2000, we had 160 full-time employees, 80 of whom were
engaged in manufacturing, 18 in marketing, 14 in administration, 12 in
engineering, six in research and development, and 30 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, 2000 other than Precision
Plastics, Inc. vs. Thermwood Corporation, Civil Action No.CVF-98-5841
REC DLB in the U.S. District Court for the Eastern District of
California, 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, seeking damages in an amount according to proof and
punitive and exemplary damages in an unspecified amount; Virtually
Anything, Ltd. Vs. Thermwood (Europe) Ltd. Case No. LE901549 I the
Leicester County Courat, England, alleging breach of contract and
seeking damages in the amount of $43,569; and David Valdez and Kathleen
Valdez vs. Thermwood Corporation, Cause No. 4:99CV 0l935 FRB, alleging
negligence in the installation and programming of a machine and seeking
damages in the amount of $150,000.
The Precision Plastics litigation has been settled with the conveyance
to us of a certain machine and other equipment having a total value of
$84,744 and the payment by us of the amount of $195,000 less $20,000
recoverable from a co-defendant for a loss of $90,256. The Virtually
Anything litigation has been completed with a judgment having been
rendered against us and an award of damages in the stipulated amount of
approximately $43,569 to be awarded along with an award of attorneys
fees estimated to be approximately between $15,000 and $21,000 under
current currency exchange rates. In view of the amount of the judgment
and the substantial cost of an appeal of the judgment, we have decided
not to pursue an appeal of such judgment. In the Valdez et al
litigation, counsel is of the opinion that the allegations are without
merit, we have good defenses and should prevail and that any unlikely
adverse judgment in such litigation 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
Our 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 our 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
2000
<S> <C> <C>
Fourth Quarter $ 5.25 $ 6.50
Third Quarter $ 6.50 $ 7.25
Second Quarter $ 5.25 $ 6.00
First Quarter $ 4.625 $ 5.875
1999
Fourth Quarter $ 4.87 $ 7.38
Third Quarter $ 4.63 $ 6.19
Second Quarter $ 5.63 $ 8.13
First Quarter $ 6.06 $ 10.38
</TABLE>
On April 27, 1999, we issued $5,062,882 in principal amount of our 12%
subordinated debenture bonds due April 27, 2014 in exchange for 460,264
shares of our Common Stock. The bonds were listed on the American Stock
Exchange starting April 27, 1999.
As of October 18, 2000, we had approximately 204 holders of record of
the Common Stock and 985,045 shares outstanding.
We have never paid any dividends on our Common Stock. The current
policy of the Board of Directors is to retain earnings, if any, to
finance the operation of our business. Accordingly, we do not
anticipate paying any cash dividends to the holders of our Common Stock
in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
In this section, we explain our financial condition and results of
operations for the years ended July 31, 2000, 1999 and 1998.
Results of Operations
Net Sales
Our net sales during these periods consisted of:
<TABLE>
Net Sales by Industry Segment
($ in Millions)
Segment 2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Machining Product
Division - U.S. $17.6 68% $14.8 68% $15.4 71%
Thermwood Europe Ltd. 2.0 8% 1.7 8% 1.8 8%
----- ----- -----
Total Machining
Products 19.6 76% 16.5 76% 17.2 79%
Technical Services
Division 6.1 24% 5.2 24% 4.6 21%
----- ----- -----
Net Sales $25.7 100% $21.7 100% $21.8 100%
===== ===== =====
</TABLE>
Our net sales for fiscal 2000 were $25,699,875, an increase of
approximately 18% from fiscal 1999 and 1998. Our machine sales for 2000
consisted of $19,635,778 of total net sales compared with $16,534,311
and $17,181,745 for 1999 and 1998, respectively. Our European sales
included in this number for fiscal 2000 were $2,027,573 or
approximately 8% of our total net sales compared with $1,675,518 for
1999 and $l,734,716 for 1998. Sales of our technical services were
$6,064,097 compared with $5,191,572 and $4,657,784 for 1999 and 1998,
respectively. Our increase in sales in both the United States and
Europe was primarily due to lowering of prices on two machines. This
move also provided more income for technical services because we made
allocations for installation and warranty to that division based on the
number of machines we sold.
Our gross profit in these periods consisted of:
Gross Profit by Industry Segment
($ in Millions)
<TABLE>
Segment 2000 1999 1998
------------ -------------- ------------
Machining Products
<S> <C> <C> <C> <C> <C> <C>
Division - U.S. $6.1 60% $5.3 63% $6.5 74%
Thermwood Europe Ltd. .7 7% .6 7% .7 8%
---- ---- ----
Total Machining Products 6.8 67% 5.9 70% 7.2 82%
Technical Services Division 3.4 33% 2.5 30% 1.6 18%
----- ---- ----
Total Gross Profit $10.2 100% $8.4 100% $8.8 100%
===== ==== ====
</TABLE>
Our gross profit for fiscal 2000 was $10,157,921, or 39.52% of net
sales. The percentage of our current year gross profit to net sales
has increased from last year's 38.94% and decreased from 40.48% for
1998. Our gross profit for the European operations was $670,981 or
33.09% of our net European sales compared to $653,096, or 38.98% of our
net European sales for fiscal 1999 and $695,121 or 40.48% for Fiscal
1998. In our current fiscal year, our slightly higher overall gross
profit in the U.S. was affected by a more experienced workforce. We
expect the first quarter of fiscal 2001 to reflect higher margins due
to better production efficiency, additional experience in the workforce
and improved manufacturing processes. Although we anticipate that
gross profit percentages from operations should improve during 2001, no
assurance to this effect can be given.
Our higher gross profit of 56% of net sales for the technical services
division in fiscal 2000 was due to higher sales, primarily consisting
of non-warranty and spare parts. The cost of sales percentage for the
technical services division in 2000 was lower than in 1999 and 1998
because of improved manufacturing processes and reduced prices for in-
house and purchased parts.
Research and Development, Marketing, General and Administrative
Expenses
Our research and development, marketing, general and administrative
expenses were $8,143,047 in fiscal 2000 compared to $7,309,305 in
fiscal 1999 and $6,413,160 in fiscal 1998.
<TABLE>
These expenses were composed of the following:
Expense 2000 1999 1998
<S> <C> <C> <C>
European Operations $ 715,000 $ 832,000 $1,052,000
Research and Development 685,000 570,000 314,000
Marketing 1,623,000 2,180,000 1,444,000
General and Administrative 5,120,000 3,727,000 3,603,000
</TABLE>
The major portion of our increased research and development, marketing
and general and administrative expenses from 1999 to 2000 was
attributable to general and administrative expenses. These expenses
amounted to 63% of total expenses in Fiscal 2000 compared to
approximately 50% of total expenses in fiscal 1999. At the same time
that our general and administrative expenses increased in the United
States, our European administrative expenses of $715,000 decreased
approximately $117,000 from $832,000 in 1999. This decrease resulted
primarily from a continuing different approach to advertising and show
expenses. Increased wages and benefits and contributions contributed
to the higher level of expenses in the United States.
Our interest expense for fiscal 2000 was $1,011,872, an increase of
$632,185 from 1999 and an increase of $780,125 from 1998. The increase
from 1999 and 1998 is due to interest on a $5 million line of credit
from Old National Bank, which was increased from $3.5 in fiscal 1999.
We increased borrowings on the line by approximately $800,000 by the
end of fiscal 2000. Additionally, approximately $614,000 was for
interest on the 12% debentures issued in 1999 which are due in 2014.
Bond discount included in interest expense was $164,722 for fiscal 2000
and $44,981 for fiscal 1999. Our operating income for fiscal 2000 was
$2,014,874 compared to operating income of $1,150,663 and $2,428,463 in
1999 and 1998, respectively. The increase in our operating income in
2000 from 1999 resulted primarily from increased sales even though
research and development, marketing, and general and administrative
expenses increased from 1999. In 1999 increased research and
development, marketing, and general and administrative expenses
contributed to an operating income lower than 1998. Our European
operations had an operating loss of $44,293 for fiscal 2000 compared to
$178,849 and $356,6440 for 1999 and 1998, respectively. Our fiscal
2000 net earnings were $407,950, compared to net earnings of $637,913
and $1,317,886 in 1999 and 1998, respectively. Our federal income tax
expense for fiscal 2000 was $552,522 compared to $206,000 and $848,000
for fiscal years 1999 and 1998, respectively. Our income taxes were
less than expected in 1999 because of our utilization of remaining tax
carryforwards. However, our income tax expense in 2000 is higher
because we cannot deduct bond discount amortization, which is included
in interest expense from income for income tax purposes. This expense
was $165,000 for fiscal 2000 and $44,000 for fiscal 1999.
Liquidity and Capital Resources
At July 31, 2000, our working capital was $3,651,577 compared to
$3,061,769 at July 31, 1999. We had a negative cash flow from operating
activities for the 2000 fiscal year in the amount of $255,483. Cash
used for increased inventories and a decrease in customer deposits were
the primary reasons for our negative cash flow.
Our expenditures for fixed assets in the 2000 and 1999 fiscal years
were for normal replacements and purchases of laborsaving equipment for
production along with the purchase of new software and hardware for us
to become Y2K compliant.
Our principal payments on lease obligations during the 2000 fiscal year
were for leased office equipment. Our cash flows from financing
activities were primarily from an increase in the bank line of credit.
Outflows included our repurchase of bonds with a face value of $204,000
at a cost of $160,247.
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. We expensed all professional fees
related to this transaction in fiscal 1999.
On February 4, 1999, we entered into an option agreement to purchase
the Common Stock held by a director and shareholder 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 the director
$5,000 for this option.
Our 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 our 12% subordinated debentures
payable in 2014 in the aggregate principal amount of $5,062,882. We
discounted the debentures using an effective interest rate of 22%
resulting in a net increase in bonds payable and a decrease in Common
Stock of $2,855,334.
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> <C>
Kenneth J. Susnjara (1) 53 Chairman of the Board, President and Director
Linda S. Susnjara (1) 51 Secretary and Director
Michael P. Hardesty 46 Vice President of Engineering
Rebecca F. Fuller 50 Treasurer
David J. Hildenbrand 43 Vice President of Sales
Richard Kasten 48 Vice President of Technical Services
Clifton Crawford 51 Vice President of Thermwood.com
Donald L. Ubelhor 43 Vice-President of Manufacturing
Peter N. Lalos (2) 66 Director
Edgar Mulzer (2) 82 Director
Lee Ray Olinger (2) 73 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 of our directors hold office until the next annual meeting of our
shareholders or until their successors have been elected and qualified.
Officers serve at the discretion of our 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 our Chairman, President and Chief Executive Officer since
1971. He also served as our 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 our 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. Kasten became a Vice President in December 1993. Previously, we
had employed him as a manager of applications since 1990.
Mr. Crawford became a Vice President in May 2000. Previously he had
been marketing manager and manager of technical services.
Mr. Ubelhor became Vice-President of Manufacturing in August 1997.
Previously, he had been our Production Manager since 1993.
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 our 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.
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, 2000.
Item 10. Executive Compensation
The following table sets forth the annual remuneration paid during the
fiscal years ended July 31, 2000, 1999 and 1998 to our Chief Executive
Officer and to each of our executive officers whose total fiscal 2000
remuneration exceeded $100,000 and to all of our officers as a group.
<TABLE>
Summary Compensation Table
Annual compensation
Other
Name and principal position Year Salary Bonus annual
compensation
(1)
<S> <C> <C> <C> <C>
Kenneth J. Susnjara, 2000 $108,000 $105,423 $ ---
Chairman of the Board, 1999 108,000 130,814 3,500
President and director 1998 108,000 146,664 6,400
Michael Hardesty, 2000 48,000 73,796 ---
Vice-president Engineering 1999 48,000 91,574 ---
1998 48,000 100,565 ---
David Hildenbrand, 2000 45,000 70,659 ---
Vice-president Sales 1999 45,000 70,518 ---
1998 45,000 122,239 ---
Rebecca Fuller, 2000 44,583 63,254 ---
Treasurer 1999 40,000 78,491 ---
1998 40,000 86,199 ---
Clifton Crawford, 2000 41,250 63,254 ---
Vice-president Thermwood.com
</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 1998 at prices in
excess of then current market prices. At July 31, 2000, 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 2000. 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, Vice President of Thermwood.com, the
Treasurer and various departmental managers.
Under the plan, the Chairman is entitled to 5% of corporate operating
income. The Vice President of Sales, Vice President of Technical
Services and Vice President of Marketing 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 , 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 five 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 July 2000, we granted ten year options to
acquire 71,600 shares of our Common Stock at exercise prices ranging
from $5.00 to $10.66 under the Qualified Plan to 21 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
Non-qualified 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 current 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, 2000, options to acquire 40,000 shares of our Common
Stock at an average exercisable price of $6.72 per share had been
granted under the Non-qualified 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 called 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, 2000 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 31,2000 Shares Convertible Shares Owned
Owned Securities
<S> <C> <C> <C> <C>
Kenneth J. Susnjara(1) 261,420(2) 26.54 411,420 34.29
And Linda Susnjara
Edgar Mulzer
401 10th Street
Tell City, Indiana 208,052(3) 21.12 218,052 18.18
47586
Peter N. Lalos
14312 Darnstown Road 8,000 0.81 22,000 1.83
Gaithersburg,
Maryland 20878
Lee Ray Olinger
c/o First Bank of
Huntingburg
4th and Main Street
Huntingburg, IN --- --- --- ---
47542
All Officers and
Directors 481,002 48.83 676,002 56.35
as a Group(9 persons)
</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
Automation Associates and us contains the same terms and conditions as
with our other dealers. We sold no products to Automation Associates
during fiscal 2000, but paid Automation Associates $697,901 in
commissions during the year for assisting in effecting sales of
approximately $3,500,000. This amount represents approximately 16% of
our gross sales for fiscal 2000. Automation Associates also leases
space from us at what we believe is a fair market rate. Rental
payments were $2,400 during fiscal years 2000 and 1999.
Transactions with Peter Lalos
Lalos & Keegan, a law firm in which Mr. Lalos is the senior partner,
accrued fees of $204,000, $183,000, and $95,000, for the fiscal years
2000, 1999, and 1998, respectively. All outstanding balances have been
paid subsequently.
We believe that the terms of the transactions between our affiliated
parties and us as described in this section are as fair as those that
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
Mr. and Mrs. Susnjara converted debentures into 10,000 shares of Common
Stock on September 2, 1998. This is the only transaction in our shares
effected by affiliates in fiscal 1999 and 2000.
To our knowledge, neither we nor any of our affiliates, directors or
executive officers have purchased or sold any Common Stock in the last
sixty days.
PART IV
Item 13. Exhibits and Reports on Form 8-K:
<TABLE>
(a) The following documents are filed as a part of this report:
1. Financial Statements:
<S> <C>
Index to Financial Statements: Page Reference
Independent Auditors' Report 23
Financial Statements:
Consolidated Balance Sheets - July 31, 2000 and 1999 24
Consolidated Statements of Operations - Years ended
July 31, 2000, 1999 and 1998 26
Consolidated Statements of Shareholders' Equity - Years
Ended July 31, 2000, 1999 and 1998 27
Consolidated Statements of Cash Flows - Years ended
July 31, 2000, 1999 and 1998 28
Notes to Consolidated Financial Statements 29
</TABLE>
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.
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 25, 2000 /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, 2000 /s/ Kenneth J. Susnjara
Kenneth J. Susnjara, Chairman of the
Board and President (Principal Executive
Officer)
Date:
October 25, 2000 /s/ Rebecca F. Fuller
Rebecca F. Fuller, Treasurer (Principal
Financial and Accounting Officer)
Date:
October 25 2000 /s/ Linda S. Susnjara
Linda S. Susnjara, Secretary
Date:
October 25, 2000 /s/ Peter N. Lalos
Peter N. Lalos, Director
Date:
October 25, 2000 /s/ Edgar Mulzer
Edgar Mulzer, Director
Date: October 25, 2000
/s/ Lee Ray Olinger
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, 2000 and 1999,
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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999,
and the results of their operations and their cash flows for each of
the years in the three-year period ended July 31, 2000, in conformity
with accounting principles generally accepted in the United States of
America.
KPMG LLP
Indianapolis, Indiana
September 15, 2000
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
2000 1999
----------------------------------
Assets
Current assets
<S> <C> <C>
Cash $ --- $ 80,941
Accounts receivable, less
allowance for doubtful accounts
of $41,000 for 2000 and $68,000
for 1999 2,128,826 1,902,865
Income taxes recoverable --- 135,457
Inventories 6,592,461 5,266,765
Deferred income taxes 542,000 655,000
Prepaid expenses 458,506 422,536
----------- ----------
Total current assets 9,721,793 8,463,564
----------- ----------
Property and Equipment
Land 73,260 73,260
Buildings and improvements 2,106,668 2,051,882
Furniture and equipment 3,852,367 3,503,586
Construction in progress 51,782 ---
Less accumulated depreciation (3,312,777) (2,861,869)
------------ ------------
Net property and equipment 2,771,300 2,766,859
------------ ------------
Other assets
Patents, trademarks and other 152,191 145,608
Bond issuance costs less
accumulated amortization 429,080 481,179
Deferred income taxes 274,000 325,000
------------- ------------
Total other assets 855,271 951,787
------------- ------------
Total assets $ 13,348,364 $ 12,182,210
============= ============
See accompanying notes to consolidated
financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31
2000 1999
---------------------------------
Liabilities and Shareholders' Equity
Current liabilities
<S> <C> <C>
Accounts payable $ 1,232,491 $ 1,144,634
Checks issued in excess of bank balance 104,752 ---
Accrued compensation and payroll taxes 371,696 286,907
Customer deposits 580,978 1,080,337
Other accrued liabilities 755,787 656,849
Current portion of capital lease obligations 36,858 36,748
Note payable to bank 2,987,654 2,196,320
------------- ------------
Total current liabilities 6,070,216 5,401,795
Long-term liabilities, less current portion
Capital lease obligations 33,618 70,777
Debentures payable, net of unamortized
discount of $1,885,120 for 2000 and
$2,107,345 for 1999 2,936,362 2,913,184
------------- -----------
Total long-term liabilities 2,969,980 2,983,961
------------- -----------
Shareholders' equity
Common stock, no par value,
4,000,000 shares authorized,
985,045 shares issued and outstanding
for 2000 and 1999 7,953,077 7,953,077
Accumulated deficit (3,713,048) (4,120,998)
Foreign currency translation 68,139 ---
------------ ------------
4,308,168 3,832,079
Less subscriptions receivable --- 35,625
------------ ------------
Total shareholders' equity 4,308,168 3,796,454
------------ ------------
Total liabilities and shareholders' equity $ 13,348,364 $ 12,182,210
============ ============
See accompanying notes to
consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended July 31
2000 1999 1998
------------- ------------- -----------
Sales
<S> <C> <C> <C>
Machine sales $22,551,799 $19,430,750 $20,199,191
Technical services 6,064,097 5,191,572 4,657,784
------------ ----------- -----------
28,615,896 24,622,322 24,856,975
Less commissions 2,916,021 2,896,439 3,017,446
------------ ----------- -----------
Net sales 25,699,875 21,725,883 21,839,529
Cost of sales
Machines 12,877,040 10,563,563 9,981,401
Technical services 2,664,914 2,702,352 3,016,505
----------- ----------- -----------
Total cost of sales 15,541,954 13,265,915 12,997,906
----------- ----------- ----------
Gross profit 10,157,921 8,459,968 8,841,623
Research and development, marketing,
administrative and general expenses 8,142,569 7,309,305 6,413,160
---------- ---------- -----------
Operating income 2,015,352 1,150,663 2,428,463
---------- ---------- -----------
Other income (expense):
Interest expense (1,011,872) (379,687) (231,747)
Other (3,390) 107,098 (30,830)
---------- ---------- -----------
Other expense, net (1,015,262) (272,589) (262,577)
---------- ---------- -----------
Earnings before income
taxes and extraordinary loss 1,000,090 878,074 2,165,886
Income tax expense (553,000) (206,000) (848,000)
---------- ---------- ----------
Earnings before extraordinary loss 447,090 672,074 1,317,886
Extraordinary loss on repurchase of
bonds, net of income tax benefit of
$23,000 and $11,000
for fiscal 2000 and 1999, respectively (39,140) (34,161) ---
---------- ------------ ----------
Net earnings $ 407,950 $ 637,913 $1,317,886
========== =========== ===========
Earnings per share:
Basic $0.41 $0.49 $0.89
Diluted $0.41 $0.49 $0.86
========== =========== ==========
See accompanying notes to
consolidated financial statements
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumu-
lated
Preferred Stock Common Stock Other Accumu-
----------------- ---------------------Subscrip- Compre- lated
Shares Amount Shares Amount tions hensive Deficit
Receivable Income
------ ---------- --------- ----------- --------- ------- --------
Balances at
July 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 738,000 $2,546,320 1,400,109 $10,599,285 ($24,750) --- ($6,033,542)
Subscriptions
received --- --- --- --- 19,125 --- ---
Preferred
dividends paid --- --- --- --- --- --- (43,255)
Redemption of
preferred
stock (738,000) (2,546,320) --- --- --- --- ---
Conversion of
12% debentures,
net of related
bond issuance
costs and unamortized
discount --- --- 24,000 108,351 --- --- ---
Exercise of
qualified stock
options --- --- 1,000 5,000 --- --- ---
Exercise of
other stock
options --- --- 6,000 30,000 (30,000) --- ---
Net earnings --- --- --- --- --- --- 1,317,886
------- -------- ---------- ----------- --------- ------ -----------
Balances at
July 31,
1998 --- --- 1,431,109 $10,742,636 ($35,625) ---($4,758,911)
Conversion of
12% debentures,
net of related
bond issuance
costs and
unamortized
discount --- --- 14,200 65,775 --- --- ---
Conversion of
common stock to
12% bonds due
2014 --- --- (460,264) (2,855,334) --- --- ---
Net earnings --- --- --- --- --- --- 637,913
------ ------- -------- ---------- ---------- -------- ----------
Balances at
July 31
1999 --- --- 985,045 $7,953,077 ($35,625) ---($4,120,998)
Forgiveness of
subscriptions
receivable --- --- --- --- 35,625 --- ---
Currency
translation
adjustment --- --- --- --- --- 68,139 ---
Net earnings --- --- --- --- --- --- 407,950
------ ------- ------- ---------- -------- --------- -------------
Balances at
July 31,
2000 --- $ --- 985,045 $7,953,077 $ --- $68,139 ($3,713,048)
====== ======= ======= ========== ======== ========= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
THERMWOOD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31
2000 1999 1998
----------- ------------ -------------
Cash Flows From Operating
Activities:
<S> <C> <C> <C>
Net earnings $ 407,950 $ 637,913 $1,317,886
Adjustments to reconcile net
earnings to net cash
provided by operating activities:
Extraordinary loss on
repurchase of bonds 39,140 34,161 ---
Depreciation and amortization 653,945 489,854 368,261
Provision for inventories --- 165,000 68,000
Loss on disposal of equipment 100,802 --- 48,936
Deferred income taxes 164,000 (87,000) 1,109,000
Forgiveness of subscriptions
receivable 35,625 --- ---
Changes in operating assets
and liabilities:
Accounts receivable (225,961) (229,039) 128,743
Income taxes recoverable 135,457 (135,457) ---
Inventories (1,325,696) (72,583) (809,181)
Prepaid expenses and other
assets (35,970) (66,784) (118,922)
Accounts payable and other
accrued expenses 294,584 (87,797) (798,976)
Customer deposits (499,359) 264,022 (90,795)
---------- ---------- ------------
Net cash provided by (used for)
operating activities (255,483) 1,047,747 1,222,952
Cash Flows From Investing
Activities:
Proceeds from the sale of equipment 33,193 --- ---
Purchases of patents, property
and equipment (625,580) (459,043) (1,242,887)
---------- ---------- -----------
Net cash used by investing
activities (592,387) (459,043) (1,242,887)
---------- ----------- ------------
Cash Flows From Financing
Activities:
Principal payments on lease
obligations (37,049) (8,915) (7,478)
Redemption of debentures (160,247) (112,761) ---
Bond issuance costs --- (502,024) ---
Redemption of preferred stock --- --- (2,546,320)
Payment of dividends on preferred stock --- --- (43,255)
Net borrowings on note payable to bank 791,334 --- 2,196,320
Checks issued in excess of bank
balance 104,752 --- ---
Proceeds from subscriptions
receivable --- --- 19,125
Proceeds from exercise of stock options --- --- 5,000
---------- ---------- -----------
Net cash used by financing
activities 698,790 (623,700) (376,608)
---------- ----------- ------------
Effect of exchange rates on cash 68,139 --- ---
---------- ----------- ------------
Decrease in cash (80,941) (34,996) (396,543)
Cash at beginning of year 80,941 115,937 512,480
-------- --------- ------------
Cash at end of year $ --- $ 80,941 $115,937
======== =========== ============
See accompanying notes to consolidated
financial statements.
</TABLE>
THERMWOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES :
General:
The consolidated financial statements include the accounts of Thermwood
Corporation and its wholly-owned 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 2000 or 1999 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 16% of the Company's business in fiscal 2000; however, no
customer accounted for more than 10% of sales in fiscal 2000, 1999 or 1998.
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.
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.
Reclassifications:
Certain amounts presented in prior years' financial statements have been
reclassified to conform to the current year presentation.
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 2000, 1999 and 1998 was $458,236, $414,746 and
$345,890, respectively.
Research and Development:
Research and development costs are expensed as incurred. Expenditures for
research and development were approximately $685,000, $570,000 and $314,000
during 2000, 1999 and 1998, respectively.
Customer Deposits:
Customer deposits are recorded as a current liability with no offset
against costs incurred on work-in-process. As of July 31,2000 and 1999,
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>
2000 1999 1998
----------------- ------------------ ----------------------
Basic Diluted Basic Diluted Basic Diluted
--------- ------- --------- -------- ----------- ----------
Earnings:
Earnings
before
extra-
ordinary
<S> <C> <C> <C> <C> <C> <C>
loss $447,090 $447,090 $672,074 $672,074 $1,317,886 $1,317,886
Less
preferred
stock
dividend --- --- --- --- (43,255) (43,255)
Add interest
expense on
convertible
debentures --- 13,200 --- 13,830 --- 47,180
Add amorti-
zation of
discount
on deben-
tures and
issuance
costs --- 2,476 --- 2,490 --- 4,701
Income tax
effects of
earnings
adjustments --- (6,270) --- (6,528) --- (19,196)
Earnings
available
to common
share- -------- --------- ----------- -------- ------------ -------------
holders 447,090 456,496 672,074 681,866 1,274,631 1,307,316
Extra-
ordinary
loss, net
of tax
benefit (39,140) (39,140) (34,161) (34,161) --- ---
--------- ---------- ----------- --------- ----------- -------------
Net ear-
nings
available
to common
share-
holders $407,950 $417,356 $637,913 $647,705 $1,274,631 $1,307,316
========== ========== ========== ========= =========== =============
Weighted-average
shares:
Outstan-
ding 985,045 985,045 1,290,521 1,290,521 1,424,676 1,424,676
Incremental
shares
related to
dilutive
stock
options --- 1,082 --- 9,300 --- 55,872
Incremental
shares
related to
convertible
bonds --- 22,000 --- 22,000 --- 36,200
--------- ---------- --------- ---------- --------- ------------
Total
weighted-
average
shares 985,045 1,008,127 1,290,521 1,321,821 1,424,676 1,516,748
========= ========== ========= ========== ========= ============
Earnings per
share:
Income before
extraor-
dinary
earnings $0.45 $0.45 $0.52 $0.52 $0.89 $0.86
Extraordinary
loss, net of
income taxes (.04) (.04) (.03) (.03) --- ---
-------- --------- --------- --------- --------- ------------
Net earnings $0.41 $0.41 $0.49 $0.49 $0.89 $0.86
======== ========= ========= ========= ========= ============
</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:
2000 1999
------------- --------------
<S> <C> <C>
Finished goods $ 713,197 $ 937,662
Work-in-process 892,375 1,112,684
Raw materials 4,986,889 3,216,418
------------- --------------
$ 6,592,461 $ 5,266,765
============= ==============
</TABLE>
NOTE C -- LEASES:
Amounts included in property and equipment at July 31, 2000 and 1999
relating to capital leases are as follows:
<TABLE>
2000 1999
---------- -----------
<S> <C> <C>
Furniture and equipment $ 110,245 $ 110,245
Less accumulated amortization (39,811) (3,062)
---------- ----------
$ 70,434 $ 107,183
========== ==========
Future minimum lease payments as of July 31, 2000 are as follows:
Capital Operating
Years ending July 31: Leases Leases
---------- ----------
2001 $ 41,460 $ 127,100
2002 37,994 127,100
2003 --- 127,100
2004 --- 127,100
2005 --- 127,100
--------- ---------
Total minimum lease payments $ 79,454 $ 635,500
Less amounts representing
interest at an interest
rate of 8% (5,529)
---------
$ 70,476
=========
</TABLE>
Total operating lease expense for 2000, 1999 and 1998 was $127,000,
$127,000 and $119,000 respectively.
NOTE D -- NOTES PAYABLE TO BANK:
During 2000, the Company's $3,500,000 line of credit with a bank was
increased to $5,000,000. At July 31, 2000, $2,987,654 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% (10% at July 31,
2000). The line is secured by the tangible assets of the Company and
expires in January 2001. 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. During fiscal 2000, no debentures were
tendered for conversion. At July 31, 2000, there were $110,000 in principal
of these debentures outstanding.
In April 1999, the Company acquired 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. In fiscal 2000 the
Company repurchased debentures with a face value of $204,000 at a cost of
$160,247. These transactions resulted in an extraordinary loss of $39,140,
net of the related tax benefit of $23,000.
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 for these plans. Had
compensation cost been determined based on the fair value at the grant date
for awards under those plans consistent with the method of Statement of
Financial Accounting Standards No. 123 (FAS 123), net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
2000 1999 1998
-------- -------- ---------
Net Earnings
<S> <C> <C> <C>
As Reported $407,950 $637,913 $1,317,886
Pro Forma 324,975 637,913 1,308,962
Basic Earnings Per Share
As Reported $0.41 $0.49 $0.89
Pro Forma 0.33 0.49 0.89
Diluted Earnings Per Share
As Reported 0.41 0.49 0.86
Pro Forma 0.33 0.49 0.86
</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 2000 and 1998: no dividend
yield; expected volatility of 37 percent and 35 percent, respectively; risk-
free interest rate of 6 percent and 4.7 percent, respectively; and 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 71,600 of the shares have been
granted, including options for 21,000 shares granted in fiscal 2000. None
of these options were exercised during fiscal 2000. As of July 31, 2000,
options for 71,600 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, 2000.
Options to purchase an additional 120,000 shares are held by the Company's
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.
<TABLE>
A summary of Common Stock options for the years ended July 31 follows:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
-------- --------- ------- ------- -------- --------
Outstanding at
beginning
<S> <C> <C> <C> <C> <C> <C>
of year 210,600 $16.10 214,600 9.15 226,600 $ 15.90
Granted 21,000 6.50 --- --- 4,000 10.63
Canceled/expired --- --- 4,000 8.44 10,000 9.38
Exercised --- --- --- --- 6,000 5.00
-------- --------- ------- -------- -------- -------
Outstanding at
end of year 231,600 $15.23 210,600 $16.10 214,600 $ 9.15
======== ========= ======= ======== ======== =======
Exercisable at
end of year 231,600 210,600 214,600
======== ======= =======
Weighted average
fair value of
options granted
during the year $3.95 $ --- $ 3.66
========= ======== ========
</TABLE>
NOTE G -- 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 $204,000, $183,000 and $95,000 for 2000,
1999 and 1998, respectively. The Company had accounts payable of $32,619,
and $31,515 at July 31, 2000, and 1999 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 2000, 1999 and 1998. Sales
commissions of $697,901, $669,125 and $627,816 were paid to the dealership
during 2000, 1999 and 1998, respectively, for assisting in effecting sales.
NOTE H -- INCOME TAXES:
<TABLE>
Income taxes for the years ended July 31 were allocated as follows:
2000 1999 1998
---------- ---------- -----------
Earnings before
<S> <C> <C> <C>
extraordinary loss $ (553,000) $ (206,000) $ (848,000)
Extraordinary loss 23,000 11,000 ---
----------- ----------- ------------
Total income tax expense $ (530,000) $ (195,000) $ (848,000)
=========== =========== ============
</TABLE>
<TABLE>
Income taxes for the years ended July 31 consist of:
2000 1999 1998
----------- ----------- -----------
Federal:
<S> <C> <C> <C>
Current (expense) benefit $(308,000) $(240,000) $ 308,000
Deferred (expense) benefit (151,000) 80,000 (1,019,000)
----------- ---------- -----------
(459,000) (160,000) (711,000)
----------- ---------- -----------
State:
Current expense (58,000) (42,000) (47,000)
Deferred expense (13,000) 7,000 (90,000)
----------- ---------- -----------
(71,000) (35,000) (137,000)
----------- ---------- -----------
Total income tax expense $(530,000) (195,000) (848,000)
=========== ========== ===========
</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>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Earnings before income taxes $ 999,612 $ 878,074 $2,165,886
=========== ========== ==========
Expected income tax expense $ (370,000) $(325,000) $ (801,000)
Bond discount amortization (83,000) (12,000) ---
Losses of foreign subsidiary (90,000) (83,000) ---
Effect of other permanent
differences (24,000) (17,000) (19,000)
Extraordinary loss 23,000 11,000 ---
Utilization of loss carryforwards --- 170,000 ---
Other 14,000 61,000 (28,000)
------------- ------------ ------------
Total actual income tax expense $ (530,000) $ (195,000) $ (848,000)
============= ============ ============
</TABLE>
The tax effects of significant temporary differences represented by deferred tax
assets and deferred tax liabilities at July 31 are as follows:
<TABLE>
2000 1999 1998
------------- ----------- ------------
Deferred tax assets
attributable to:
<S> <C> <C> <C>
Property and equipment $ 253,000 $ 318,000 $ 185,000
Accounts receivable 41,000 25,000 7,000
Inventory valuation 284,000 300,000 245,000
Warranty reserves 125,000 122,000 79,000
Net operating loss carryforwards --- --- 196,000
Other tax carryforwards --- 174,000 155,000
Contributions 34,000 --- ---
Other 79,000 41,000 26,000
----------- ---------- -----------
Net deferred tax assets $ 816,000 $ 980,000 $ 893,000
=========== ========== ===========
</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, 2000.
NOTE I -- ADDITIONAL INFORMATION:
<TABLE>
Other accrued liabilities at July 31 consist of:
2000 1999
---------- ----------
<S> <C> <C>
Property taxes $ 89,071 $ 87,013
Accrued warranties 300,463 329,735
Other 451,042 240,101
---------- ----------
$ 840,576 $ 656,849
========== ==========
</TABLE>
Cash Flow Information:
The Company paid cash for interest in the amount of $787,781, $320,913
and $200,319 during 2000, 1999 and 1998, respectively. The Company paid
cash for income taxes in the amount of $195,000, $371,675 and $77,024
during 2000, 1999 and 1998, respectively.
Non-cash Investing and Financing Activities:
During fiscal 1999, bonds with face value of $71,000 were converted to
14,200 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 J -- 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 2000, 1999 and 1998 amounted to $60,695,
$54,844 and $48,759, respectively. The Company also has a management
profit sharing plan. Profit sharing expense amounted to $1,215,681,
$739,354 and $603,978 for fiscal 2000, 1999 and 1998, respectively.
NOTE K - SEGMENTS
The Company's operations are divided into the following three operating
segments: the Machining Products Division, which is responsible for
marketing machinery, hardware and software products; the Technical Services
Division, which is responsible for marketing service, support, upgrade and
catalog products; and Thermwood Europe Ltd., a British Company, which is a
wholly-owned subsidiary of Thermwood Corporation responsible for marketing
and servicing machines throughout Europe.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
<TABLE>
2000
---------------------------------------------------
Machining Technical Thermwood
($'s in Millions) Products Services Europe Total
Division Division Ltd.
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 17.6 $ 6.1 $ 2.0 $ 25.7
Operating income .5 1.7 (.2) 2.0
Interest expense .7 .2 .1 1.0
Depreciation and
amortization .5 .2 0 .7
Income tax expense .4 .2 0 .6
Total assets 9.8 2.5 1.0 13.3
</TABLE>
<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>
