SECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549

FORM 10-KSBANNUAL REPORT PURSUANT TO SECTION 13 OR 15DOF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2001

 

Commission file number 0-12195THERMWOOD 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) ofthe Act Name of each exchange on which registered:

Shares of Common Stock without par value American Stock Exchange

Pacific Stock Exchange

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes [X] No [ ]

 

Check if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained in this form, and no disclosure will becontained, to the best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSBor any amendment to this Form 10-KSB. [X]

 

The issuer's revenues for its most recent fiscal year were$22,372,097.

 

The aggregate market value of the voting stock held bynon-affiliates of the issuer at October 25, 2001 based upon the closing price ofthe issuer's Common Stock as reported on the American Stock Exchange wasapproximately $2,905,883

 

The number of the Registrant's shares of Common Stockoutstanding as of October 25, 2001 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 of1934 and Current Reports filed on Form 8-K dated February and April, 1987, andits Registration Statement on Form 8-A filed under the Securities Act of 1934dated 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, 1997, July 31, 1998, July31, 1999 and July 31, 2000.

 

 

 
**PART I**
 
**Forward-Looking Statements

 **
This Annual Report on Form 10-KSB contains certainforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including, without limitation, statementscontaining the words "believes," "anticipates,""expects," and words of similar import. Such forward-lookingstatements involve known and unknown risks, uncertainties and other factorswhich may cause the actual results, financial condition, performance orachievements to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. Certain ofthese factors are discussed in more detail elsewhere in this Annual Report onForm 10-KSB, including, without limitation, "Business" and"Management's Discussion and Analysis of Financial Condition and Results ofOperations." Given these uncertainties, readers are cautioned not to placeundue reliance on such forward-looking statements. We disclaim any obligation toupdate any such forward-looking statements to reflect future events ordevelopments.
** 

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 aregenerally purchased from vendors under an OEM arrangement.

 

We divide our operations into three operating segments. OurMachining Products Division is responsible for marketing our machinery, hardwareand software products. Our Technical Services Division is responsible formarketing and providing our service, support and machine upgrade products.Thermwood Europe Ltd. is a British Company, which is a wholly owned subsidiaryof Thermwood Corporation and reports to the Machining Products Division. SeeNote L of Notes to the Consolidated Financial Statements incorporated byreference in Item 7 of Part II of this annual report for the financial resultsof our operating segments.

 

Our E-commerce Division, which will commence operationsduring the first quarter of fiscal 2002, will manage catalog sales in additionto operating an Internet based store and a distribution effort based on asoftware program called eCabinet Systems.

 
**Industry Background**
 
*Flexible Automation*
 

Prior to the availability of microprocessor-based machinerycontrol systems, there were only two manufacturing methods available: a manualoperation using humans to manipulate tools; or "hard automation"employing dedicated automatic machinery. High initial cost and limitedflexibility have made hard automation suitable only for applications involvinglarge volumes of identical parts. Using human labor traditionally producedsmaller volumes of parts, hand tools or machine tools operated manually.

 

In today's marketplace, competitive pressures demand agreater variety of products. Due to demographic and economic factors, neitherhard automation nor manual labor appears to be a feasible means of meeting thismanufacturing requirement.

 

The gap between hard automation and manual labor is currentlybeing filled by a variety of flexible automation equipment. This equipment isoften better suited to small and medium volumes of parts and is usually designedto perform a number of tasks utilizing the same computer-controlled machine.

 

Flexible automation equipment is manufactured in a variety offorms and addresses a number of applications. Specific markets have developedfor certain classes of equipment with a number of vendors offering products ineach of these niche markets. Many vendors, including Thermwood, build productsthat service several of the markets.

 

Flexible automation equipment is more economically feasibleduring 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 growthand decreases during periods of economic recession.
* 

Machine Control Systems*
 

Flexible automation equipment generally uses an electroniccomputer control known as Computer Numerical Control, commonly referred to asCNC control. This system uses sets of instructions appearing in blocks, eachcontaining information concerning a particular movement of the machine. Inoperation, the machine sequentially executes each block of instructions. Forexample, 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 ofother automated industrial equipment. This type of system differs from the olderNumerical Controls, referred to as NC, in that a CNC system contains one or morecomputers within the control mechanism providing more capability than a NCcontrol, which lacks a computer and simply executes instructions developedelsewhere.

 

Programming a CNC system can be accomplished in a variety ofways. These include inputting the block of information directly into a terminal,generating programs using a computer and a computer-aided design/computer aidedmanufacturing system, referred to as a CAD/CAM system, and moving the machine toa position and having the machine's controller create the block of instructionsor using an electronic probe to guide the machine through the desired path.

 

We design and manufacture our own CNC control, called the91000 SuperControl. We believe that we are the only company in our market thatbuilds its own CNC control. We also believe that our control offers features andcapabilities that other controls in the market do not offer. We also believethat these exclusive features offer it an advantage in the marketplace, butthere is no assurance that this is true.

 
**Machining Products Division - Products

 ***CNC Router - Systems and Packages

 

Our automated industrial systems are high-speed computercontrolled, fully automatic machining centers commonly called CNC routers. Wedesign these centers to perform a variety of tasks such as routing, drilling,sanding, carving, sawing and shaping wood parts, trimming of three dimensionalplastic parts, machining of aluminum honeycomb, drilling and high speedmachining of aluminum both vertically and horizontally, mortising, which meanscutting square holes in furniture, and sawing and squaring, which means cuttinginside square corners. They generally operate over larger table areas and athigher speeds than do conventional metalworking machine tools but cannot machinethe heavy materials and large cross sections that standard metalworking machinetools are capable of machining.

 

The CARTESIAN 5 systems utilize our proprietary SuperControlsystem and consist of one or more high-speed cutting, drilling or machiningheads and related tooling which move around a table under computer control toperform programmed operations. There are two basic types of systems, one wherethe table is fixed and the cutting heads move both left and right and back andforth, and the other where the table moves back and forth and the cutting headsmove only left and right. Both systems permit the heads to reach all points onthe table. Cutting is accomplished by metal bits, drills, and blades and waterjets. Additional motions or axes, which permit the head to both pivot and rotatecan be installed, thereby making three-dimensional cuts possible. Multiple andvarying cutting and drilling heads can be added allowing a number of differentmachining operations to be accomplished in a single cycle or multiple parts tobe machined simultaneously.

 

In the past, we focused on selling primarily standardmachinery with certain standard options. We sold this machinery"unbundled," which meant that we increased the base machine price bythe cost of the options, some necessary, which were added. In the last fiscalyear we changed our market approach to promoting packages and systems. We nowbundle our machine packages with the most commonly used options. The packageprice, while higher than the base machine price, is closer to the actual pricepaid by customers. Systems are machines, bundled with options, software andother support products intended to produce a specific end product. In the pastthe customer, and not Thermwood, was responsible for integrating and programmingthe various components to produce the end product. Now, when a customerpurchases a system, we deliver a product that is ready to manufacture thecustomer's final product. We believe that the reduced technical risk of a systemwill be appealing to customers despite the significantly higher cost. We alsobelieve that we are capable of successfully and profitably handling the newresponsibility although there is no assurance that this new approach willgenerate significant sales.

 

The CARTESIAN 5 Thermwood CNC router packages and systems areutilized principally in the woodworking, plastics, and to a lesser extent theaerospace industries. Current prices to end users range from approximately$49,000 to over $250,000 per system. The average price of a standard package isapproximately $100,000.

 
*Carving Router*
 

We offer one model of our CNC router line specificallyintended for intricate carving of three-dimensional wood parts such as chairlegs. This machine is capable of carving eight parts simultaneously. It isprogrammed using the electronic programming probe which traces a sample carvedpart. The CNC control automatically creates the program necessary to reproducethe sample carving. This product has been priced at approximately $350,000.

 
*Hardware Options*
 

Our Machining Products Division offers a variety of hardwareoptions for use with its CNC router line. Some of these options are included asa standard part of packages and systems while others can be purchased at thecustomer's discretion. These options include products designed and manufacturedby 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 ourequipment. These products are generally obtained through an arrangement with anoriginal equipment manufacturer, or OEM. This type of product includes, amongothers, the programming probe, vacuum pumps, dust collection systems as well asa variety of electronic hardware devices that work with our control system.

 
*Software Products*
 

The Software Technology Group, which operates as part of theMachining Products Division, markets software products that work with our CNCrouters. Although some of these products consist of proprietary softwaredeveloped by us, the majority are software packages obtained from third partyvendors under OEM arrangements.

 

We have signed OEM agreements with CNC Automation to sell aComputer Aided Design/Computer Aided Manufacturing package called MasterCAM;with Northwood Design, Inc to distribute a software package under the name"Final Finish"; and with CNC Automation, an existing ThermwoodAuthorized Dealer, to distribute their Panelmetrix, kitchen cabinet doorprogram. Existing agreements with Cabinet Vision, Inc. and its parent, PlanitCV, for the sale of it's "Solid Professional" kitchen design softwarewere cancelled in January 2001. During Fiscal 2001, the Software TechnologyGroup generated sales of $781,000.

 
**Technical Services Division - Products**
 

Our Technical Services Division products consist of customertraining, installation assistance, warranty service, field service, spare parts,upgrades and enhancements, the Advanced Support Program and catalog sales. Salesand service by this Division in fiscal 2001 accounted for approximately 27% ofour total sales.

 

The Technical Services Division earns revenues for customertraining, product installation and service after the warranty period. Ourstandard limited warranty covers one-year parts and labor; however, if atechnician must travel to the customer's site, the customer is required to paytravel costs. After the warranty period, both service labor and spare parts aresold to customers.
* 

Advanced Support Program*
 

During fiscal 1999 we created the Advanced Support Programfor CNC router customers. The primary purpose of this program is to offercustomers a low cost method of updating their Thermwood machines, minimizing thepossibility of a major service expense and providing us with an ongoing revenuestream. In order to join the program a customer must sign an agreement for aninitial 12-month period and then continue on a month by month basis. The cost ofthe program is currently $250 per month for each machine enrolled. In return,the customer receives an annual control system software update, a 35% discounton any hardware required for the update, an ongoing labor warranty but thecustomer pays travel expenses, a full parts and labor warranty on the controland various discounts on spare parts, upgrades and catalog purchases. There were131 machines enrolled in the program at the end of fiscal 2001.

 
**E-Commerce Division - Products**
 

The E-commerce Division is responsible for maintaining theCompany's Internet web site, for maintaining catalog sales operations andestablishing a web store for on-line ordering of catalog items, for managing atooling web site and tool sharpening service, for establishing an e-commercebusiness for the sale of cabinet hardware and other components and for corporatemarketing activities.
* 

Online/Catalog Sales*
 

We publish a CNC Router Supply Catalog that offers for salevarious tooling, supplies, support equipment and consumables that are used inthe operation of a CNC router. This catalog not only contains products for usewith our machines but also offers products specifically intended for use withcompetitors' machines. In addition to the printed catalog, items can bepurchased electronically through our web site. Tooling represented approximately$322,000 of the total catalog sales for fiscal 2001 of approximately $751,000.

 
*Tooling On The Web*
 

In addition to the catalog items above, we offer CNC routertooling through a web site called ToolingOnTheWeb.com. Various third-partyvendors supply the tooling offered on this web site. We offer to re-sharpentools purchased, subject to certain limitations and restrictions, free ofcharge, in order to entice customers to purchase tooling through this site.

 

We believe that tooling can be sharpened at very low cost byeliminating the machine setup normally required to accommodate various toolinggeometries. We have purchased and installed 16 tool grinding machines, one foreach geometry for which the service is being offered, in order to allow forsharpening without setup.

 

We introduced this new offering to the industry at the end ofFiscal 2000, which has generated a small, but growing level of sales. We believethat this program could result in significant sales and profits once theindustry becomes aware of its existence; however, there is no assurance thatsignificant sales will develop or that the program can be operated at a profit.

 

eCabinet Systems

 

In August 2001, we announced a new program that targets smallcustom cabinet manufacturers. The program is based around a software programthat helps cabinetmakers design their kitchen cabinets. During this designprocess, they can specify certain knobs, pulls, hinges and other hardware whichcan then be purchased through the program. These components are supplied bythird-party vendors who ship the product directly to the customer.

 

The software that drives this program is not complete and iscurrently being developed. Management expects to complete an initial version byearly November 2001 although there is no assurance it will be completed at thattime. Approximately 800 companies have requested a copy of the software program.There is no requirement that any products be purchased to obtain a copy of thesoftware; therefore, it is not known how many companies will purchase throughthe program nor is the extent of these purchases known.

 
*Marketing*
 

Our E-commerce Division conducts our marketing programs forThermwood.

 

The market for industrial automation equipment can be dividedinto a large number of applications in a variety of industries. We seek toproduce products that address specific applications in specific industries. Wealso attempt to provide complete, pre-engineered, standard systems that requirelittle or no engineering input from the end user. We design these systems foreasy installation, programming and use, so that they may be operated andmaintained by existing plant personnel without extensive training or technicalbackground.

 

Our systems are currently designed to operate at high qualityand reliability levels. In addition, we strive to support these systems withhigh quality technical services and assistance. Although our marketing strategyhas involved emphasis on small to medium-sized companies, we have also receivedorders from larger companies.

 

We generally sell our products through the assistance ofdealer networks established throughout North America and Europe. Dealers assistthe 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. Asof July 31, 2001, we had 19 authorized dealers marketing our products. Weusually require each dealer to execute a non-exclusive written agreement. Werequire a dealer to sell one machine within each six-month period in order toretain its dealership. Most dealers concentrate their sales efforts in specificgeographical areas and in particular industries such as woodworking or plastics,and sell only one of the Company's product lines. However, some market and sellproducts to more than one industry and sell both the CARTESIAN 5 systems and ourline of Woodcarving Routers**.**Although some dealers may handlenon-competing products manufactured by other companies, most dealers handle ourproducts exclusively.

 

One dealer accounted for approximately 12% of our sales forfiscal 2001. See Item 12. "Certain Relationships and RelatedTransactions" for information relating to our agreement with AutomatedAssociates which is owned by our president and his wife who is also an officerand director. This dealer sold to 21 different customers, none of whichaccounted for 10% or more of our sales in fiscal 2001.

 

No other dealer accounted for 10% or more of our business forthe current fiscal year. The loss of any large dealer could have a materiallyadverse effect on our business. Our business is not seasonal.

 

We have a wholly owned subsidiary, Carolina CNC, Inc., aNorth Carolina corporation, which operates as a dealer and conducts sales in thesoutheastern 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 theEuropean Community. During the 2001 fiscal year, the subsidiary had a net lossof $79,000. Its machine and service sales in Fiscal 2001 were approximately$1,795,000 or 8% of consolidated net sales.

 

Typically, we seek to develop sales leads through advertisingin trade magazines and product exhibitions at selected trade shows. We alsomaintain an extensive site on the Internet that offers both product informationand pricing. We then furnish such leads to dealers in the geographic area wherethe potential customer is located. The website also supplies the dealers withpromotional materials and sales aids, including product literature, a dealer'smanual, news letters, press releases and advertising, technical briefs, salesincentive programs and video of product demonstrations. We assist our dealers byproviding training for them and their customers. We encourage trainees andpotential customers to visit our manufacturing facilities where we maintainareas and machinery to demonstrate the operation and use of our products.

 

In addition to the above, we also seek to sell our productsthrough full service dealers in areas of the world where we do not have theability to perform the demonstration, training and service required. These fullservice dealers are responsible for all aspects of selling, installing, trainingand servicing our products. Currently we have this type of arrangement withdealers in Canada, Mexico, Australia, France, Malaysia and Israel.
** 

Product Development - R&D**
 

Our Vice President of Engineering directs our research anddevelopment and product development efforts. These efforts are intended tosimultaneously improve and enhance our product performance and capabilitieswhile reducing manufacturing costs. We have directed much of our productdevelopment effort during the last two years toward developing a variety ofcutting and machining heads and automatic tool changers for use on our CNCrouter line of equipment. We are continuing this development in an effort tobroaden the capability of this equipment and thus increase market size for theseproducts. In addition, we have an ongoing program to reduce the manufacturingcosts of our products and pass a portion of these reductions on to customers inthe form of price decreases.

 

We also developed the software interface between the CabinetVision Solid Professional software package and the Thermwood 91000 SuperControl.As part of this development, a fixture method and operating system was developedfor producing hardwood face frames for kitchen cabinets.

 

We have continued development efforts on the 91000SuperControl that is an updated version of the CNC control systems formerly usedon our equipment. We have completed the basic system development and arecurrently selling and shipping this control on our equipment.

 

We are directing our current efforts toward adding certainmore extensive and expensive features and capabilities. Some of the addedfeatures are a service guide and manual, Search mode,****maintenance videosand a service clock for improved guidance in customer maintenance. Anotherfeature is a 50-tool automatic tool changer 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 recordtheir set up and operations.

 

We plan to continue our research and development effortsprimarily directed toward the improvement of existing products, development ofnew products or product enhancements and reduction in manufacturing costs. Weutilize a variety of sources in our research and development efforts, includingemployees, vendor-engineering staffs, contract employees who are retained solelyfor specific projects, consultants and independent design firms.

 

For fiscal 2001 and 2000, we spent $633,000 and $685,000,respectively, for research and development. There was no customer-sponsoredresearch and development during fiscal 2001. We believe that expenditures needto continue to allow us to maintain a competitive position in the immediatefuture.

 
**Customers**
 

Although we have sold our industrial products to largecorporations, companies with annual sales approximating or exceeding $1 billion,our primary customer base is comprised of small to medium-sized manufacturers,companies with annual sales ranging from approximately $10 million toapproximately $500 million, located throughout the United States. No customeraccounted for more than 10% of our sales in fiscal 2001.

 

We generally require a purchaser of industrial products topay 30% of the sales price when placing the order, an additional 40% prior toshipment and the balance within 30 days after shipment. Charges for technicalservices and spare parts are due within 30 days after the services have beenperformed.

 

We offer our customers a one year limited warranty on partsand labor. The customer is responsible for travel expenses associated with thelabor portion of the warranty. In addition, we offer an optional AdvancedSupport Program that provides, for a monthly payment, additional warrantyprotection as well as an annual system software update and miscellaneousdiscounts. The limited warranty offered under this program covers parts andlabor on the control system and labor on the remainder of the machine.

 

 
**Backlog**
 

As of July 31, 2001, our backlog was approximately $1,878,000compared with a backlog of $2,100,000 as of July 31, 2000. Our backlog figuresgenerally include only written orders from customers, which we believe are firmand will be shipped within 12 weeks. Approximately 90% of the backlog is coveredby down payments from customers ranging from 25% to 30%. On orders where downpayments have not been required, we have normally obtained irrevocable lettersof credit for payment upon proof of shipment or lease documentation from anapproved leasing company.

 

Because of the possibility of customer changes in deliveryschedules or cancellation of orders, our backlog as of any particular date maynot be indicative of actual revenues for any subsequent period.
** 

Manufacturing and Production**
 

Our manufacturing facilities are located in Dale, Indiana. Wemanufacture essentially standard machines with certain options using a batchrather than a continuous flow or conventional production line process. Exceptfor demonstration models, we do not generally manufacture products without apurchase order although, in order to expedite the manufacturing process, certainbasic parts of machines may be fabricated before purchase orders are received.We purchase the major portion of our inventory to satisfy specific customerorders with the balance acquired from one to four months in advance of projectedorders.

 

We design, develop and engineer all of the products that wemanufacture. We fabricate the components contained in these products or purchasethem from outside suppliers. We fabricate such components as computer-basedelectronic control systems and the steel structure of the CARTESIAN 5 systems.Where possible, we utilize our own systems. We also use our own 91000 Controlsystems to operate conventional metalworking machine tools to fabricatecomponents.

 

We purchase raw materials from third party sources. Most rawmaterials and components, including those that are custom made, are eitherpurchased or available from several sources. One supplier accounted forapproximately 11% of total components purchased for the fiscal year ended July31, 2001. The materials purchased from this supplier are available from severalother sources.

 
**Competition

 

There are many manufacturers of CNC routers in the UnitedStates and abroad, particularly in Japan and Europe. Some of these manufacturersare larger, better financed and have more resources than we do.

 

Our primary competitors in the high speed machining CNCrouter market are a number of major domestic, Japanese and European firms suchas Shoda Iron Works, Heian, Shinks Anderson Machinery Works, Accurouter, MotionMaster and Komo Machine. There are a large number of companies offering routingequipment, and it is our opinion that the market cannot support all of them. Webelieve, however, that our ability to offer products that perform a variety offunctions and sell at low prices provides us with a competitive advantage butthere is no assurance that this is true.

 

Competition in CNC routers is based upon real and perceiveddifferences in equipment features, price, performance, reliability, service,marketing, financial strength and product development capability.

 

We seek to design our products for high levels of performanceand reliability while offering them at moderate prices.
** 

Patents, Trade Secrets and Trademarks

 **
We currently hold 28 domestic patents and have applicationspending in the United States for 31 additional patents. There is no assurancethat any additional patents will be granted. We do not believe that majorreliance can be placed on patents for the protection of our products, althoughpatent protection for our newly developed products is increasing.

 

We rely primarily upon trade secret laws, internalnon-disclosure safeguards and restrictions incorporated into our dealership,sales, employment and other agreements to protect our proprietary property andinformation. In addition, we have proprietary rights arrangements with ouremployees that provide for the disclosure and assignment by the employee to usof any discovery, invention or improvement relating to our business. While weare unaware of any breach of our security, competitors may develop similarproducts outside the protection of any measures that we take. In addition, itmay be difficult for us to police unauthorized use of our technology,particularly in foreign countries. We have been unsuccessful in prosecuting twoclaims in the United States for what we believed were prospective unauthorizeduse of proprietary rights. We have not been involved in any claims concerningpatent infringement.

 

We market our products under various trademarks, includingTHERMWOOD, CARTESIAN 5, 91000 SUPERCONTROL, ROUTER ART and PANEL-CAD. We havethree trademark registrations and one application for registration in the UnitedStates. We also have two foreign trademark registrations and applications forseven foreign registrations.
** 

Employees**
 

As of October 1, 2001, we had 150 full-time employees, 70 ofwhom were engaged in manufacturing, 18 in marketing, 14 in administration, 12 inengineering, six in research and development, and 30 in technical services. Noneof 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 requiressubstantial technical capabilities in many varied disciplines, ranging frommechanics and computer sciences to mathematics. Although we believe that thecapability and experience of our technical staff compare favorably with othersimilar manufacturers, there is no assurance that we can retain existingemployees or attract and hire the type of skilled employees we may need in thefuture.
** 

Item 2. Description of Property**
 

Our manufacturing facilities and executive offices arelocated in a 100,000 square foot building in Dale, Indiana, which we own. Webelieve that these facilities are in good condition and adequately satisfy ourcurrent requirements.

 
**Item 3. Legal Proceedings**
 

We are aware of no pending or threatened litigation, claimsor assessments with respect to us as of October 26, 2001.

 
**Item 4. Submission of Matters to a Vote of Security Holders**
 

None.
** 

 

PART II

 
**Item 5. Market for Common Equity and Related StockholderMatters**
 

Our Common Stock has been traded on the American StockExchange since 1989 and on the Pacific Stock Exchange since 1987. The followingtable sets forth the high and low per share sales prices for our Common Stock asreported on the American Stock Exchange for the fiscal years ended July 31, 2001and July 31, 2000, and for the interim periods indicated:

 
**Common Stock**Low Sales Price **High Sales Price
2001     
Fourth Quarter
$ 3.05 
$ 4.10 
Third Quarter
$ 3.70 
$ 3.80 
Second Quarter
$ 4.50 
$ 4.50 
First Quarter
$ 4.75 
$ 5.00     
2000     
Fourth Quarter
$ 5.25 
$ 6.50 
Third Quarter
$ 6.50 
$ 7.25 
Second Quarter
$ 5.25 
$ 6.00 
First Quarter
$ 4.63 
$ 5.88     
 

As of October 26, 2001, we had approximately 94 holders ofrecord of the Common Stock and****985,045 shares outstanding.
** **
We have never paid any dividends on our Common Stock. Thecurrent policy of the Board of Directors is to retain earnings, if any, tofinance the operation of our business. Accordingly, we do not anticipate payingany cash dividends to the holders of our Common Stock in the foreseeable future.

 

In October 2001, Thermwood filed an application to withdrawits Common Stock, no par value, and its 12% Subordinated Debentures Due 2014from listing and registration on the American Stock Exchange and the CommonStock from listing on the Pacific Exchange and to terminate registration of thesecurities under the Securities Exchange Act of 1934 (the "1934 Act").
** 

Item 6. Management's Discussion and Analysis of FinancialCondition and Results of Operations

 **
In this section, we explain our financial condition andresults of operations for the years ended July 31, 2001, 2000 and 1999**.
 ***Results of Operations

 

Net Sales

 *
Our net sales during these periods consisted of:

 

Net Sales by Industry Segment

($ in Millions)

 

Segment
2001
2000
1999
 

Machining Products Division
 

$ 14.4
 

64%
 

$ 17.8
 

68%
 

$ 15.1
 

68%
Technical Services Division
6.2
28%
6.1
24%
5.2
24%
Thermwood Europe Ltd.
1.8
6%
2.1
8%
1.7
8%
Net Sales
$ 22.4
100%
$ 26.0
100%
$ 22.0
100%
 

Our net sales for fiscal 2001 were $22,372,097, a decrease ofapproximately 14% from fiscal 2000 and an increase of approximately 1.6% fromfiscal 1999. Our machine sales for 2001 consisted of $14,342,389, of total netsales compared with $17,786,674 and $15,153,931 for 2000 and 1999, respectively.Sales of our technical services were $6,195,351 compared with $6,064,097 and$5,191,572 for 2000 and 1999, respectively. Our European sales for fiscal 2001were $1,795,679 or approximately 6% of our total net sales compared with$2,027,573 for 2000 and $l,675,518 for 1999. Our decrease in sales in both theUnited States and Europe was primarily due to a slower economy.

 

Our gross profit in these periods consisted of:

 

Gross Profit by Industry Segment

($ in Millions)

 

Segment
2001
2000
1999
Machining Products Division
$ 4.0
52%
$ 6.1
60%
$ 5.3
63%
Technical Services Division
3.0
39%
3.4
33%
2.5
30%
Thermwood Europe Ltd.
.7
9%
.7
7%
.6
7%
Total Gross Profit
$ 7.7
100%
$ 10.2
100%
$ 8.4
100%** **
Our gross profit for fiscal 2001 was $7,721,614, or 34.51% ofnet sales. The percentage of our current year gross profit to net sales hasdecreased from 39.12% and 38.42% for fiscal 2000 and 1999, respectively. Ourgross profit for the European operations was $690,676 or 38.46% of our netEuropean sales compared to $670,981, or 33.10% of our net European sales forfiscal 2000 and $653,096 or 38.98% for fiscal 1999. In our current fiscal year,our lower overall gross profit in the U.S. was affected by inefficiencies in theworkforce and lower absorption of fixed costs due to the slowing of productionand sales. While steps have been taken to reduce costs in fiscal 2002, we expectthe first quarter of fiscal 2002 to also reflect lower margins due to thecontinuation of a slow economy .

 
* 

 

 **Research and Development, Marketing, General andAdministrative Expenses*
 

Our research and development, marketing, general andadministrative expenses were $7,697,384 in fiscal 2001 compared to $8,142,569 infiscal 2000 and $7,309,305 in fiscal 1999.

 

These expenses were composed of the following:

 
**Expense **2001 **2000 **1999       
European Operations 
$ 619,000 
$ 715,000 
$ 832,000
Research and Development 
633,000 
685,000 
570,000
Marketing 
1,857,000 
1,623,000 
2,180,000
General and Administrative 
4,588,000 
5,120,000 
3,727,000
 

The major portion of our decreased research and development,marketing and general and administrative expenses from 2000 to 2001 wasattributable to general and administrative expenses. These expenses amounted toapproximately 60% of total research and development, marketing and general andadministrative expenses in Fiscal 2001 compared to approximately****63%****oftotal expenses in fiscal 2000. Our general and administrative expenses decreasedin the United States at the same time our European administrative expenses of$619,000 decreased approximately $96,000****from $715,000 in****2000.This decrease resulted primarily from a reduction in advertising and trade showexpenses in Europe and decreased employee profit sharing bonuses and charitablecontributions, primarily to schools, in the United States.

 
*Interest*
Our interest expense for fiscal 2001 was $1,062,859, anincrease of $50,987 from 2000 and an increase of $683,172 from 1999**.**Theincrease from 2000 and 1999 is due to increased borrowings on the line byapproximately $800,000 during fiscal 2000. The line balance remainedapproximately the same throughout fiscal 2001; however, this increase in theaverage outstanding balance was somewhat offset by a lowering of the interestrate from 10% to 7.25% during the period. Additionally, approximately $614,000in 2001 and 2000 was for interest on the 12% debentures issued in 1999 which aredue in 2014. Bond discount included in interest expense was $195,281 for fiscal2001 and $164,722 and $44,981 for fiscal 2000 and 1999, respectively**.**

 
*Operating income*
Our operating income for fiscal 2001 was $24,230 compared tooperating income of $2,015,352 and $1,150,663 in 2000 and 1999, respectively.The decrease in our operating income in 2001 from 2000 resulted primarily fromdecreased sales. Our European operations had an operating profit of $71,744 forfiscal 2001 compared to a loss of $44,293 and $178,849 for 2000 and 1999,respectively. Our fiscal 2001 net loss was $858,624, compared to net earnings of$407,950 and $637,913 in 2000 and 1999, respectively. Our federal income taxbenefit for fiscal 2001 was $194,314 compared to expense of $553,000 and$206,000 for fiscal years 2000 and 1999, respectively. Income taxes fluctuatedsignificantly between fiscal 1999 and fiscal 2001 due to various factorsincluding the utilization of net operating loss carryforwards in fiscal 1999,the non-deductibility of bond discount amortization of $195,000 and $165,000 in2001 and 1999, respectively, and net operating loss carrybacks utilized in 2001.
* 

Liquidity and Capital Resources*
 

At July 31, 2001, our working capital was $3,166,726 comparedto $3,651,577 at July 31, 2000. We had a positive cash flow from operatingactivities for the 2001 fiscal year in the amount of $485,208. Utilization ofexisting inventories and inventory purchase reductions were the primary reasonsfor our positive operating cash flow.

 

Our expenditures for fixed assets in the 2001 and 2000 fiscalyears were for normal replacements and purchases of labor saving equipment forproduction.

 

Our principal payments on lease obligations during the 2001fiscal year were for leased office equipment. Our cash flows used in financingactivities were primarily from a slight decrease in the bank line of credit.

 

On February 4, 1999, we entered into an option agreement topurchase 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, 2002and before January 1, 2004. We paid the director $5,000 for this option.

 

Our shareholders' equity decreased as a result of ouracquisition in April 1999 of an aggregate of 460,264 shares of our Common Stockfrom our shareholders in exchange for our 12% subordinated debentures payable in2014 in the aggregate principal amount of $5,062,882. We discounted thedebentures using an effective interest rate of 22% resulting in a net increasein 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 includedfollowing the "Index to Financial Statements and Schedules" appearingat the end of this Form 10-KSB.

 
**Item 8. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure**
 

None.

 

 

**PART III
 

Item 9. Directors, Executive Officers, Promoters and ControlPersons, Compliance With Section 16(a) of the Exchange Act

 **
Certain information about our directors and officers iscontained in the following table:

 
**Name **Age **Position
Kenneth J. Susnjara (1) 
54 
Chairman of the Board, President and Director
Linda S. Susnjara (1) 
52 
Secretary and Director
Michael P. Hardesty 
47 
Vice President of EngineeringRebecca F. Fuller
51Treasurer
David J. Hildenbrand 
44 
Vice President of Sales
Richard Kasten 
49 
Vice President of Technical Services
Clifton Crawford 
52 
Vice President of Thermwood.com
Donald L.Ubelhor 
44 
Vice-President of Manufacturing
Peter N. Lalos (2) 
67 
Director
Edgar Mulzer (2) 
83 
Director
Lee Ray Olinger (2) 
74 
Director
(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 andCompensation Committee of the Board of Directors.

 

All of our directors hold office until the next annualmeeting of our shareholders or until their successors have been elected andqualified. Officers serve at the discretion of our Board of Directors. Eachdirector 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 fourdirectors' meetings and is reimbursed for all related expenses.

 

Mr. Susnjara co-founded Thermwood in 1969 and has been adirector since inception and our Chairman, President and Chief Executive Officersince 1971. He also served as our Treasurer prior to March 1979 and again fromOctober 1983 to June 1985. He has devoted his full time to our business exceptfor a brief period in 1985 when he acted as our distributor**.**Mr. Susnjarais the author of books on furniture manufacturing entitled FurnitureManufacturing in the New Millennium and Three-Dimensional Trimming and Machiningand a book on industrial robotics entitled A Manager's Guide to IndustrialRobotics. See Item 12. "Certain Relationships and RelatedTransactions."

 

Mrs. Susnjara has been a director since 1985 and ourSecretary since 1989. She is and has been since 1985 the President of AutomationAssociates, Incorporated, a dealer of our industrial products. See Item 12."Certain Relationships and Related Transactions." Mrs. Susnjara is notactive in our business.

 

Mr. Hardesty has been our Vice President of Engineering sinceAugust 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 waspromoted to Vice President of Operations. He served in that capacity until May1985 when he became Vice President of the Machining Products Division, aposition he held until assuming his current position in 1988.

 

Mrs. Fuller joined us in 1981 and was promoted to accountingmanager in 1983 and controller in 1985. She assumed her current position asTreasurer in July 1993.

 

Mr. Hildenbrand became a Vice President in August 1988.Previously, we had employed him in various technician and sales managerpositions since 1977. He has also been a director of Thermwood Europe Ltd., oneof 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. Previouslyhe had been marketing manager and manager of technical services.

 

Mr. Ubelhor became Vice-President of Manufacturing in August1997. Previously, he had been our Production Manager since 1993.

 

Mr. Lalos has been engaged in the private practice of law inWashington 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 1989and as a director from April 1981 until July 1986. He was reelected to the Boardof Directors in December 1989. See Item 12. "Certain Relationships andRelated 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 currentlyretired. He became a director in September 1974 and has served continuously inthat capacity to the present. See Item 12. "Certain Relationships andRelated Transactions" in relation to an option we have purchased from Mr.Mulzer.

 

Mr. Olinger has been a director since December 1989. He hasbeen a director since 1949 and Chairman of the Board since 1986 of First Bank ofHuntingburg, a commercial bank in Huntingburg, Indiana.
** 

Compliance with Section 16 (a) of the Securities Exchange Actof 1934

 **
To our knowledge, based solely on a review of such materialsas are required by the Securities and Exchange Commission, no officer, directoror beneficial holder of more than ten percent of the Company's issued andoutstanding shares of Common Stock failed to timely file with the Securities andExchange Commission any form or report required to be so filed pursuant toSection 16 (a) of the Securities Exchange Act of 1934 during the fiscal yearended July 31, 2001.
** 

 

 

 

Item 10. Executive Compensation**
 

The following table sets forth the annual remuneration paidduring the fiscal years ended July 31, 2001, 2000 and 1999 to our ChiefExecutive Officer and to each of our executive officers whose total fiscal 2001remuneration exceeded $100,000.
** 

Summary Compensation Table**

**Annual compensation
 
**Name and principal position** 

Year** 

Salary** 

Bonus**Other annual

Compensation
(1)
Kenneth J. Susnjara,
2001
$108,000
$101,571
$4,900
Chairman of the Board,
2000
108,000
105,423
3.500
President and director
1999
108,000
130,814
6,400
Michael Hardesty,
2001
48,000
71,100
---
Vice-president Engineering
2000
48,000
73,796
---
1999
48,000
91,574
---

David Hildenbrand,
2001
45,000
36,221
---
Vice-president Sales
2000
45,000
70,659
---
1999
45,000
70,518
---
Rebecca Fuller,
2001
45,000
60,943
---
Treasurer
2000
44,583
63,254
---
1999
40,000
78,491
---
Clifton Crawford,
2001
45,000
63,450
---
Vice-president Thermwood.com
2000
41,250
63,254
---
 
**(1) Other annual compensation representsdirectors' fees paid to Mr. Susnjara.

 

Stock options for an additional 4,000 shares were issued toan officer under the Qualified Stock Option Plan in fiscal 1998 at prices inexcess of then current market prices. At July 31, 2001, the exercise prices ofsome of the unexercised options were less than the market price of our CommonStock**.** On September 6, 1994, registration statements on Form S-8 werefiled with the Securities and Exchange Commission under the Securities Act of1933 in connection with the registration of shares of our Common Stock under ourEmployee Incentive Stock Option Plan and Non-Qualified Stock Option Plan.

 

In 1985 the Board of Directors appointed Mr. Susnjara to theposition of President and Chief Executive Officer. In this position, he is toreceive a bonus based on our pre-tax profits as set forth below. See "ProfitSharing Plan" below.

 

Certain other officers may be entitled to participate in ourprofit sharing plan. See "Profit Sharing Plan" below.

 
*Profit Sharing Plan.*
 

In 1985, we instituted a management profit sharing plan. Thisplan was continued in an amended form for fiscal 2001. Covered under the planare the Chairman, the President, Vice President of Engineering, Vice Presidentof Sales, Vice President of Technical Services, Vice President of Manufacturing,Vice President of Thermwood.com, the Treasurer and various departmentalmanagers.

 

Under the plan, the Chairman is entitled to 5% of corporateoperating income. The Vice President of Sales, Vice President of TechnicalServices and Vice President of Marketing each are entitled to 5% of thedivisional operating income. The Vice President of Manufacturing and theTreasurer are each entitled to receive 2% and 3%, respectively, of the Corporateoperating income. Any divisional losses are to be subtracted from these amountsso that the total bonus paid does not exceed 25% of operating income.

 

Department managers are entitled to various bonuses basedupon productivity of their departments. Payments due under the plan accrue foreach six-month period and are thereafter paid in six monthly installments.Vesting of rights under the plan requires eligible participants to becontinually employed through the payment dates. Divisional losses of a fiscalyear must be recouped in the succeeding year, or years, in order to be eligiblefor 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 begranted to officers and other key employees. Options granted under the QualifiedPlan are intended to qualify as incentive stock options as defined in Section422A of the Internal Revenue Code.

 

The Qualified Plan is administered by the Board of Directorsand a Committee currently consisting of three members of the Board whichdetermines which persons are to receive options, the number of shares that maybe purchased under each option and the exercise prices. In the event an optioneevoluntarily terminates his employment with us, he has the right to exercise hisaccrued options within five days prior to such termination. However, we mayredeem any accrued options held by each optionee by paying him the differencebetween the option price and the then fair market value. If an optionee'semployment is involuntarily terminated, other than because of death, he also hasthe right to exercise his accrued options within 30 days of termination. Upondeath, his estate or heirs have one year to exercise his accrued options. Themaximum term of any option is ten years and the option price per share may notbe less than the fair market value of our shares on the date the option isgranted. However, options granted to persons owning more than 10% of our votingshares may not have a term in excess of five years and the option price pershare may not be less than 110% of fair market value at the date the option isgranted.

 

The aggregate fair market value of the shares of CommonStock, determined at the time the options are granted, with respect to whichincentive stock options are exercisable for the first time by such optioneeduring any calendar year, under all such plans, shall not exceed $100,000.Options must be granted within ten years from the effective date of thisQualified Plan.

 

Options granted under the Qualified Plan are not transferableother than by will or the laws of descent and distribution. Options grantedunder the Qualified Plan are protected by anti-dilution provisions increasingthe number of shares issuable thereunder and reducing the exercise price of suchoptions, under certain conditions. The life term of the Qualified Plan extendedto December 3, 2001**,** or on such earlier date as the Board of Directorsmay determine. Any option outstanding at the termination date will remainoutstanding at the termination date until it expires or is exercised in full,whichever occurs first.

 

Between December 1991 and July 2001, we granted ten yearoptions to acquire 69,600 shares of our Common Stock at exercise prices rangingfrom $5.00 to $10.66 under the Qualified Plan to 20 of our employees. All ofthese options are exercisable as of the date hereof.
* 

Non-qualified Stock Option Plan.

 *
Under our Non-qualified Stock Option Plan, options topurchase a maximum of 70,000 shares of our Common Stock may be granted toofficers, directors, and other key employees.

 

The Non-qualified Stock Option Plan is administered by theBoard of Directors and a committee of three members of the Board whichdetermines which persons are to receive such options, the number of shares thatmay be purchased under the options, the exercise prices, the time and manner ofexercise and other related matters.

 

In the event an optionee voluntarily terminates hisemployment or tenure with our consent or his employment or tenure is terminatedby us without cause, he generally has the right to exercise his accrued optionswithin 30 days after such termination unless the Committee elects other timeperiods. In all other cases of termination of the optionee's employment ortenure other than death, said options shall cease immediately. Upon death, hisestate or heirs have one year to exercise his accrued options.

 

The Committee may grant an optionee the right to surrenderall or a portion of his accrued options to us and receive from it the differencebetween the option price and the then fair market value. Options becomeexercisable in 25% installments each year beginning in the second year throughthe fifth year. Options are generally not transferable and are conditioned uponthe optionee remaining in our employ for at least one year from the date oftheir grant. Under the Non-qualified Plan, no option may be granted afterJanuary 1, 2005 and the exercise price of such options may not be less than thethen fair market value. It is within the Committee's discretion to grantanti-dilution provisions to each optionee. Under current federal income tax law,an employee, officer or director who is granted an option will not have anyincome upon the grant of an option and we will not be entitled to any deductionat that time. When an optionee exercises his option, ordinary income will berealized by him, measured by the excess of the fair market value of the sharesover the price paid for the shares. We will be entitled to a deduction equal tothe amount of income realized by the holder of the option. If the optioneesurrenders all or part of his option for a cash or Common Stock payment, he willrealize ordinary income in the amount of cash or fair market value of stockreceived. We will be entitled to a deduction equal to the amount of incomerealized by the optionee.

 

As of July 31, 2001, options to acquire 40,000 shares of ourCommon Stock at an average exercise price of $6.72 per share had been grantedunder the Non-qualified Plan to four of our directors and officers. Currentlyall of these options are exercisable.

 
*Other options.*
 

There are options to purchase an additional 120,000 sharesheld by our President. These options extend through October 18, 2005 and permitthe purchase of 60,000 shares at $15.00 per share and 60,000 shares at $30.00per 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 Plancovers all employees who have completed 12 months of continuous service prior toa plan entry date. Pursuant to the 401(k) Plan, eligible employees may makesalary deferral, before tax, contributions of up to 15% of their totalcompensation per plan year up to a specified maximum contribution as determinedby the Internal Revenue Service. We also make a matching contribution of 25% ofemployees' contributions up to 5% of their annual salaries and an additionalmatch of 10% of contributions between 6% and 8% of employees' salaries.
** **
The 401(k) Plan also includes provisions which authorize usto make discretionary contributions. Such contributions, if made, are allocatedamong all eligible employees as determined under the 401(k) Plan. The trusteeunder the 401(k) Plan is Merrill Lynch of Evansville, Indiana. It invests theassets of each participant's account in funds at the direction of suchparticipant.
** 

 

 

Item 11. Security Ownership of Certain Beneficial Owners andManagement:**
 

The following table sets forth certain information regardingour Common Stock ownership, including shares issuable upon conversion ofoutstanding debentures and upon exercise of options owned as of July 31, 2001 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:
**Names and        Addresses        of Beneficial        Owners****Shares        Owned at        July 31,        2001**Percentage        of Total        Outstanding        Shares        Owned
**Shares Owned        Including        Those        Underlying         Exercisable        Options and         Convertible        Securities**
**Percentage        of Total        Outstanding        Shares Owned**        Kenneth J. Susnjara (1)        And Linda Susnjara378,220(2)38.40528,22044.65        Edgar Mulzer        401 10th Street        Tell City, Indiana        47586208,052(3)21.12218,05218.43        Peter N. Lalos        14312 Darnstown        Road        Gaithersburg,        Maryland 20878
8,0000.8122,0001.86        Lee Ray Olinger        c/o First Bank of        Huntingburg        4th and Main Street        Huntingburg, IN        47542------------        All Officers and        Directors        as a Group (10        persons)598,89760.80803,89767.55
 

(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. Susnjarawho are husband and wife. Accordingly, each may be deemed to be a beneficialowner of the securities owned by the other.

(3) Mr. Mulzer has given us an option to purchase all ofthese shares during the two-year period commencing on January 1, 2002. Pleaseread the information under the heading "Certain Relationships and RelatedTransactions" for an illustration of how exercise of that option wouldaffect 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 majorshareholder who is not active in our management, gave us an option to purchasehis shares at a price of $15.00 per share. We can exercise this option at anytime after January 1, 2002 and before January 1, 2004. We paid Mr. Mulzer $5,000for this option. We have secured this option to further our plans to assure thatcontrol of Thermwood remains with Kenneth and Linda Susnjara.

 

Transactions with Mr. & Mrs. Susnjara
** **
Mr. and Mrs. Susnjara are the owners of Automation AssociatesIncorporated, a dealer of our machine products. The agreement between AutomationAssociates and us contains the same terms and conditions as with our otherdealers. We sold no products to Automation Associates during fiscal 2001, butpaid Automation Associates $304,796 in commissions during the year for assistingin effecting sales of approximately $1,950,000. This amount representsapproximately 12% of our gross sales for fiscal 2001. Automation Associates alsoleases space from us at what we believe is a fair market rate. Rental paymentswere $2,400 during fiscal years 2001 and 2000.

 

Transactions with Peter Lalos

 

Lalos & Keegan, a law firm in which Mr. Lalos is thesenior partner, accrued fees of $152,000, $204,000, and $183,000, for the fiscalyears 2001, 2000, and 1999, respectively. All outstanding balances have beenpaid subsequently.

 

We believe that the terms of the transactions between ouraffiliated parties and us as described in this section are as fair as those thatwe would have obtained if these transactions had been effected with independentthird parties. Each transaction was approved by a majority of the disinteresteddirectors. In the future, all such transactions will continue to be approved bya majority of the disinterested directors.
* *
Recent Stock Transactions by Affiliates

 

Mr. and Mrs. Susnjara purchased a total of 116,000 sharesover a period of nine months during fiscal 2001. This is the only transaction inour shares effected by affiliates in fiscal 2001 and 2000.

 

To our knowledge, neither we nor any of our affiliates,directors or executive officers have purchased or sold any Common Stock in thelast sixty days. Thermwood Corporation repurchased 2,600 shares in September2001.
** *** 

 
**PART IV**
 
**Item 13. Exhibits and Reports on Form 8-K:**
 

(a) The following documents are filed as a part of thisreport:

1. Financial Statements:

 

Index to Financial Statements:Page Reference

Independent Auditors' Report 22

 

Financial Statements:

Consolidated Balance Sheets - July 31, 2001 and 2000 23

 

Consolidated Statements of Operations - Years ended

July 31, 2001, 2000 and 1999 25

 

Consolidated Statements of Shareholders' Equity - Years

Ended July 31, 2001, 2000 and 1999 26

 

Consolidated Statements of Cash Flows - Years ended

July 31, 2001, 2000 and 1999 27

 

Notes to Consolidated Financial Statements 28

 

All other schedules are omitted because they are notrequired, or are inapplicable or the information is otherwise shown in thefinancial statements or notes thereto.

 

(b) Reports on Form 8-K:

 

None.

 

 

 

 

 

SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, we have duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 

Date:

October 29, 2001
/s/ Kenneth J. Susnjara
Kenneth J. Susnjara, Chairman of the Board and              President (Principle Executive Officer)
 

Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed by the following persons on behalf ofThermwood Corporation and in the capacities and on the dates indicated:

 

Date:

October 29, 2001
/s/ Kenneth J. Susnjara
Kenneth J. Susnjara, Chairman of the Board and              President (Principal Executive Officer)

 

Date:

October 29, 2001
/s/ Rebecca F. Fuller
Rebecca F. Fuller, Treasurer (Principal              Financial and Accounting Officer)

 

Date:

October 29, 2001
/s/ Linda S. Susnjara
Linda S. Susnjara, Secretary

 

Date:

October 29, 2001
/s/ Peter N. Lalos
Peter N. Lalos, Director

 

Date:

October 29, 2001
/s/ Edgar Mulzer
Edgar Mulzer, Director

 

Date: October 29, 2001

/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 sheetsof Thermwood Corporation and subsidiaries as of July 31, 2001 and 2000, and therelated consolidated statements of operations, shareholders' equity and cashflows for each of the years in the three-year period ended July 31, 2001. Theseconsolidated financial statements are the responsibility of the Company'smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States of America. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Thermwood Corporation and subsidiaries as of July 31, 2001 and 2000,and the results of their operations and their cash flows for each of the yearsin the three-year period ended July 31, 2001, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

 

KPMG LLP

Indianapolis, Indiana

September 14, 2001

 

 

 

 

 

 

 

 
**THERMWOOD CORPORATION**CONSOLIDATED BALANCE SHEETS
**July 31**2001**2000**Assets**Current assets
Cash
$ 79,182
$ ---
Accounts receivable, less allowance for
doubtful accounts of $52,000 for 2001 and $41,000 for 2000
1,760,085
2,128,826
Income taxes recoverable
473,785
---
Inventories
5,494,357
6,592,461
Deferred income taxes
388,000
542,000
Prepaid expenses
595,419
458,506**Total current assets
8,790,828
9,721,793**Property and Equipment
Land
73,260
73,260
Buildings and improvements
2,132,618
2,106,668
Furniture and equipment
3,857,286
3,852,367
Construction in progress
16,553
51,782
Less accumulated depreciation
(3,575,520)
(3,312,777)
**Net property and equipment**
2,504,197
2,771,300**Other assets
Patents,
127,925
152,191
Bond issuance costs less accumulated amortization
397,154
429,080
Deferred income taxes
373,000
274,000
**Total other assets**
898,079
855,271**Total assets
$ 12,193,104

$ 13,348,364
See accompanying notes to consolidated financial      statements.
 

 

 

 

 

 

 **THERMWOOD CORPORATION**CONSOLIDATED BALANCE SHEETS**July 31**2001**2000**Liabilities and Shareholders' Equity**Current liabilities
Accounts payable
$ 894,924
$ 1,232,491
Checks issued in excess of bank balance
---
104,752
Accrued compensation and payroll taxes
242,437
371,696
Customer deposits
885,050
580,978
Other accrued liabilities
615,125
755,787
Current portion of capital lease obligations
33,316
36,858
Note payable to bank
2,953,250
2,987,654
**Total current liabilities**
5,624,102
6,070,216**Long-term liabilities, less current portion
Capital lease obligations
---
33,618
Debentures payable, net of unamortized discount of
$1,746,030 for 2001 and $1,885,120 for 2000
3,075,452
2,936,362**Total long-term liabilities
3,075,452
2,969,980**Shareholders' equity
Common stock, no par value, 4,000,000 shares authorized,
985,045 shares issued and outstanding
for 2001 and 2000
7,953,077
7,953,077
Accumulated deficit
(4,571,672)
(3,713,048)
Foreign currency translation
112,145
68,139
**Total shareholders' equity**
3,493,550
4,308,168**Total liabilities and shareholders' equity
$ 12,193,104

$ 13,348,364

See accompanying notes to consolidated financial      statements.
 

 

 

 

 **THERMWOOD CORPORATION**CONSOLIDATED STATEMENTS OF OPERATIONS**Years Ended July 31**2001**2000**1999**Sales
Machine sales
$17,791,689
$22,820,238
$19,725,888
Technical services
6,585,207
6,064,097
5,191,572
24,376,896
28,884,335
24,917,460
Less commissions
2,004,799
2,916,021
2,896,439**Net sales
22,372,097
25,968,314
22,021,021**Cost of sales
Machines
11,160,181
13,145,479
10,858,701
Technical services
3,490,302
2,664,914
2,702,352**Total cost of sales
14,650,483
15,810,393
13,561,053**Gross profit
7,721,614

10,157,921

8,459,968
Research and development, marketing,
administrative and general expenses
7,697,384
8,142,569
7,309,305**Operating income
24,230

2,015,352

1,150,663**Other income (expense):

Interest expense
(1,062,859)
(1,011,872)
(379,687)
Other
(14,309)
(3,390)
107,098
Other expense, net
(1,077,168)

(1,015,262)

(272,589)**Earnings (loss) before income taxes and extraordinary loss
(1,052,938)
1,000,090
878,074
Income tax benefit (expense)
194,314
(553,000)

(206,000)**Earnings (loss) before extraordinary loss
(858,624)

447,090

672,074
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 (loss)
($858,624)
$ 407,950
$ 637,913**Earnings per share:**
 
Basic
$(0.87)
$0.41
$0.49
Diluted
$(0.87)
$0.41
$0.49
See accompanying notes to consolidated financial      statements
**THERMWOOD CORPORATION**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY**

 
**Common Stock****Shares**Amount**Subscriptions      Receivable**Accumulated Other Comprehensive Income**Accumulated**Deficit****Total
Balances at July 31, 1998
1,431,109
$10,742,636
(35,625)
---
(4,758,911)
5,948,100
Conversion of 12% debentures,      net of related bond issuance      costs and unamortized discount
 

 

14,200
 

 

65,775
 

 

---
 

 

---
 

 

---
 

 

65,775
Conversion of common stock to
12% bonds due 2014
(460,264)
(2,855,334)
---
---
---
(2,855,334)
Net earnings
---
---
---
---
637,913
637,913
Balances at July 31, 1999
985,045
$7,953,077
(35,625)
---
(4,120,998)
3,796,454
Forgiveness of subscriptions      Receivable
 

---
 

---
 

35,625
 

---
 

---
 

35,625
Comprehensive income:
Currency translation adjustment
---
---
---
68,139
---
68,139
Net earnings
---
---
---
---
407,950
407,950
Total comprehensive income
476,089
Balances at July 31, 2000
985,045
$7,953,077
---
68,139
(3,713,048)
4,308,168
Comprehensive loss:
Currency translation adjustment
---
---
---
44,006
---
44,006
Net loss
---
---
---
---
(858,624)
(858,624)
Total comprehensive loss
(814,618)
Balances at July 31, 2001
985,045
$7,953,077
---
112,145
(4,571,672)
3,493,550
See accompanying notes to consolidated financial statements.

 
**THERMWOOD CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 **
 **Years Ended July 31**2001**2000**1999**Cash Flows From Operating Activities:
 

Net earnings (loss)
 

$ (858,624)
 

$ 407,950
 

$ 637,913
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
684,129
653,945
489,854
Provision for inventories
---
---
165,000
Loss on disposal of equipment
1,607
100,802
---
Deferred income taxes
55,000
164,000
(87,000)
Forgiveness of subscriptions receivable
---
35,625
---
Changes in operating assets and liabilities:
Accounts receivable
320,218
(225,961)
(229,039)
Income taxes recoverable
(473,785)
135,457
(135,457)
Inventories
1,066,876
(1,325,696)
(72,583)
Prepaid expenses and other
(114,966)
32,169
(66,784)
Accounts payable and other accrued expenses
(461,311)
294,584
(87,797)
Customer deposits
266,064
(499,359)
264,022
Net cash provided by (used in) operating activities
485,208

(187,344)

1,047,747**Cash Flows From Investing Activities:
Proceeds from the sale of equipment
3,480
33,193
---
Purchases of patents, property and equipment
(233,190)
(625,580)
(459,043)
Net cash used in investing activities
(229,710)

(592,387)

(459,043)**Cash Flows From Financing Activities:
Principal payments on lease obligations
(37,160)
(37,049)
(8,915)
Redemption of debentures
---
(160,247)
(112,761)
Bond issuance costs
---
---
(502,024)
Net borrowings on note payable to bank
(34,404)
791,334
---
Checks issued in excess of bank balance
(104,752)
104,752
---
Net cash provided by (used in) financing activities
(176,316)

698,790

(623,700)
Increase (decrease) in cash
79,182

(80,941)

(34,996)
Cash at beginning of year
---
80,941
115,937
Cash at end of year
$ 79,182

$ ---

$ 80,941
See accompanying notes to consolidated financial      statements.** 

 

THERMWOOD CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES :

 

General:**
 

The consolidated financial statements include the accounts ofThermwood Corporation and its wholly-owned subsidiaries, Thermwood EuropeLimited, a United Kingdom company, CNC Carolina, Inc., a dealer in NorthCarolina, and Thermwood Capital Corporation, a leasing company (together, the"Company" or "Thermwood"). There was no revenue generated in2001, 2000 or 1999 from Thermwood Capital Corporation.

 

Thermwood operates within a single industry called industrialautomation equipment and manufactures high technology machining systems. TheCompany sells its products primarily through the assistance of dealer networksestablished throughout the United States and Europe. One dealer accounted forapproximately 12% of the Company's business in fiscal 2001; however, no customeraccounted for more than 10% of sales in fiscal 2001, 2000 or 1999. The loss ofany large dealer could have a material adverse effect on the Company's business.

 

Thermwood also offers a variety of technical services. Theseservices include training, installation assistance, preventive maintenance andupgrading and enhancement of installed products as technology advances. TheTechnical Services Division also has responsibility for the quality control ofthe Company's machine products during their manufacture. Technical services aremarketed to current customers as well as to companies that purchase Thermwoodequipment in the used market.

 

The Company is not dependent upon a single supplier or only afew suppliers.

 
**Principles of Consolidation:

 **
All significant intercompany transactions and accounts havebeen eliminated in consolidation.

 
**Use of Estimates and Assumptions:

 **
The preparation of financial statements in conformity withgenerally accepted accounting principles requires the Company to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported amounts ofrevenues and expenses. Actual results could differ from those estimates.

 
**Reclassifications:**
 

Certain amounts presented in prior years' financialstatements have been reclassified to conform to the current year presentation.
** 

Revenues and Warranties:

 **
The manufacturing process may extend over several months andadvance cash deposits are normally required from customers. Sales are recordedwhen machines are accepted by the customer and shipped. Technical servicesrevenues are recognized when the related services are completed. Estimated costsof product warranties are charged to cost of sales at the time of sale. Revenueson long-term upgrade and extended warranty agreements are recognized ratablyover the life of the related agreement.

 
**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 assetspurchased and at the present value of minimum lease payments for assets acquiredunder capital leases. The carrying value of property and equipment is assessedwhen 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 theestimated useful lives of the assets, as shown below:

 

Buildings and improvements 10 to 30 years

Furniture and equipment 3 to 10 years

 

Depreciation expense for 2001, 2000 and 1999 was $467,201,$458,236 and $414,746, respectively.

 
**Patents**
 

The cost of patents is amortized straight line over theestimated useful lives of the respective assets, ranging from 10 to 17 years.

 
**Research and Development:**
 

Research and development costs are expensed as incurred.Expenditures for research and development were approximately $633,000, $685,000and $570,000 during 2001, 2000 and 1999, respectively.
** 

Customer Deposits:**
 

Customer deposits are recorded as a current liability with nooffset against costs incurred on work-in-process. As of July 31,2001 and 2000,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 31were determined as follows:

 

 **2001****2000****1999****Basic**Diluted**Basic**Diluted**Basic**Diluted
Earnings:
Earnings (loss) before      extraordinary loss
($858,624)
($858,624)
$447,090
$447,090
$672,074
$672,074
Add interest expense on      convertible debentures
---
---
---
13,200
---
13,830
Add amortization of discount      on debentures and      issuance costs
---
---
---
2,476
---
2,490
Income tax effects of earnings      adjustments
---
---
---
(6,270)
---
(6,528)
Earnings (loss) available to      common shareholders
(858,624)
(858,624)
447,090
456,496
672,074
681,866
Extraordinary loss, net of tax      benefit
---
---
(39,140)
(39,140)
(34,161)
(34,161)
Net earnings (loss) available to      common shareholders
($858,624)
($858,624)
$407,950
$417,356
$637,913
$647,705Weighted-average shares:Outstanding985,045985,045985,045
985,0451,290,5211,290,521
Incremental shares related to      dilutive stock options---------1,082---9,300
Incremental shares related to      convertible bonds---------22,000---22,000Total weighted-average shares985,045985,045985,0451,008,1271,290,5211,321,821Earnings per share:
Earnings (loss) available to      common shareholders
($.087)
($.087)
$0.45
$0.45$0.52$0.52
Extraordinary loss, net of      income taxes------
(.04)
(.04)(.03)(.03)Net earnings (loss)($.087)($.087)$0.41$0.41$0.49$0.49
 

In 2001, 22,000 shares related to convertible bonds wereexcluded from the computation of diluted earnings per share due to their anti-dilutiveeffect. In 2001, 2000 and 1999, 229,600 options, 230,518 options and 201,300options, respectively, were excluded from the computation of diluted earningsper share due to their anti-dilutive effect.
** 

Income Taxes:**
 

Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement amounts for assets and liabilities and their respective tax bases.Deferred tax assets and liabilities are measured using enacted tax rates whichapply to taxable income in the years in which those temporary differences areexpected to****reverse**.**The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period the change isenacted. A valuation allowance is provided when it is more likely than not thatsome portion or all of net deferred tax assets will not be realized.
** 

NOTE B -- INVENTORIES:**
 

Inventories at July 31 consist of:

 

 **2001**2000
Finished goods
$ 707,681
$ 713,197
Work-in-process
1,004,828
892,375
Raw materials
3,781,848
4,986,889

$ 5,494,357
$ 6,592,461** 

 

 

NOTE C -- LEASES:**
 

The Company leases equipment under a capital lease whichexpires in fiscal 2002. The Company also has several noncancelable operatingleases, primarily for office equipment, that expire over the next 5 years.Amounts included in property and equipment at July 31, 2001 and 2000 relating tocapital leases are as follows:

 

 **2001**2000
Furniture and equipment
$ 110,245
$ 110,245
Less accumulated amortization
(73,497)
(39,811)
$ 36,503
$ 70,434** **
Future minimum lease payments as of July 31, 2001 are asfollows:

 **Capital**Operating
Years ending July 31:**Leases**Leases
2002
$ 37,994
$ 138,000
2003
---
123,500
2004
---
123,500
2005
---
123,500
2006
---
123,500
Total minimum lease payments
$ 37,994
$ 632,000
Less amounts representing interest at an interest rate          of 8%        
 

(4,678)
$ 33,316
 

Total operating lease expense for 2001 was $160,000, and$127,000 for 2000 and 1999.

 
**NOTE D -- NOTE PAYABLE TO BANK:**
 

At July 31, 2001, $2,953,250 was outstanding under the Company's$5,000,000 line of credit. The line of credit bears interest payable monthly atthe bank's money market prime rate plus .5% (7.25% at July 31, 2001). The lineis secured by the tangible assets of the Company and expires in January 2002.Management expects to renew the line under terms similar to the existingagreement.

 
**NOTE E -- DEBENTURES PAYABLE:**
 

In 1993, the Company completed a public offering of 2,070units totaling $2,070,000. Each unit consisted of one Convertible Debenture inthe principal amount of $1,000 bearing interest at 12% per year and 500Redeemable Warrants. The bonds were issued at a discount of $254,573, which isbeing amortized using the interest method.

 

The debentures, which mature in February 2003, areconvertible, unless previously redeemed, into shares of Common Stock at a priceof $5.00 per share, subject to anti-dilutive adjustments. Interest is payablequarterly. Thermwood may, on 30 days written notice redeem the debentures, inwhole or in part, if the closing price of the Common Stock for the immediatelypreceding 30 consecutive trading days equals or exceeds $12.50 per share. Theredemption price will be 105% plus accrued interest through the date ofredemption.

 

During fiscal year ended July 31, 1999 holders tendered$71,000 of the debentures for conversion into 14,200 common shares**.**Duringfiscal 2001 and 2000, no debentures were tendered for conversion. At July 31,2001, there were $110,000 in principal of these debentures outstanding.

 

In April 1999, the Company acquired an aggregate of 460,264shares 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 effectiveinterest 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 $147,400at 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 Companyrepurchased 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 therelated tax benefit of $23,000. The Company repurchased no debentures in fiscal2001.

 
** 

NOTE F -- COMMON STOCK OPTIONS:**
 

Thermwood has both a qualified and a nonqualified stockoption plan. The Company applies APB Opinion No. 25, "Accounting for StockIssued to Employees" and related Interpretations in accounting for theseplans. Had compensation cost been determined based on the fair value at thegrant date for awards under those plans consistent with the method of Statementof Financial Accounting Standards No. 123 (FAS 123), net earnings and earningsper share would have been reduced to the pro forma amounts indicated below:

 

 
2001
2000
1999
Net Earnings (loss)
As Reported
($858,624)
$407,950
$637,913
Pro Forma
(858,624)
324,975
637,913
Basic Earnings Per Share
As Reported
($0.87)
$0.41
$0.49
Pro Forma
(0.87)
0.33
0.49
Diluted Earnings Per Share
As Reported
(0.87)
0.41
0.49
Pro Forma
(0.87)
0.33
0.49
 

The effects of applying FAS 123 in this pro forma disclosureare not indicative of future amounts. The fair value of each option is estimatedon the date of grant using the Black-Scholes option pricing model with thefollowing assumptions for grants in fiscal 2000 : no dividend yield; expectedvolatility of 37 percent; risk-free interest rate of 6 percent; and expectedlives of ten years for all options. No options were granted in fiscal years 2001and 1999.

 

The Company reserved 80,000 shares of Common Stock forissuance under the qualified plan. Options to purchase 71,600 of the shares havebeen granted, including options for 21,000 shares granted in fiscal 2000**.**None of these options were exercised during fiscal 2001 and options for 2,000shares expired.****As of July 31, 2001, options for 69,600 shares wereexercisable, the range of exercise prices for these options was $6.50 to $8.32.At July 31, 2001, the weighted-average exercise price of options was $7.73 andthe weighted-average remaining contractual life was 5.3 years. These optionsvest at the date of grant and must be exercised within ten years of the grantdate.

 

The nonqualified plan provides for the issuance of options topurchase up to 70,000 shares of Common Stock of which options to purchase 40,000shares were outstanding and exercisable as of July 31, 2001. The range ofexercise prices for these options was $5.625 to $10.00. No options were grantedunder this plan in 2001, 2000 or 1999. At July 31, 2001, the weighted-averageexercise price of options was $6.72 and the weighted-average remainingcontractual life was 5 years. These options vest at the date of grant and mustbe exercised within ten years of the grant date.

 

Options to purchase an additional 120,000 shares are held bythe Company's president. These options extend through October 18, 2005, arefully vested and permit the purchase of 60,000 shares at $15.00 per share and60,000 shares at $30.00 per share.

 

 

A summary of Common Stock options for the years ended July 31follows:

 

 **2001**2000**1999**Weighted Average**Weighted Average**Weighted Average
**Shares**Exercise Price**Shares**Exercise Price**Shares**Exercise Price
Outstanding at beginning of year
231,600
$ 15.23
210,600
$ 16.10
214,600
$15.96
Granted
---
---
21,000
6.50
---
---
Canceled/expired
2,000
9.69
---
---
4,000
8.44
Exercised
---
---
---
---
---
---
Outstanding at end of year
229,600
$ 15.28
231,600
$ 15.23

210,600
$ 16.10
Exercisable at end of year
229,600
231,600
210,600
Weighted average fair value of
options granted during the year
$ ---
$3.95
$ ---** 

NOTE G -- RELATED PARTY TRANSACTIONS:**
 

Director and shareholder - A director and shareholder is apartner in the law firm retained as the Company's outside counsel. Totalexpenses for legal services from the firm were $152,000, $204,000 and $183,000for 2001, 2000 and 1999, respectively. The Company had accounts payable of$32,619, and $31,515 at July 31, 2000, and 1999 respectively, relating to suchlegal services. There were no legal expenses payable to the firm at July 31,2001.
** **
President and secretary - The president and secretary of theCompany, who are husband and wife and are also directors of the Company, are theowners of a dealership which leases office space from and sells equipment forthe Company. The Company primarily sells its machines directly to the purchaserwithin this dealer's region; however, sales may also be made directly to thedealer who in turn sells the machines to the purchaser. The agreement betweenthe Company and the dealer is a standard agreement similar to other dealeragreements entered into by the Company. Rent income from the dealership was$2,400 for 2001, 2000 and 1999. Sales commissions of****$304,796, $697,901and $669,125 were paid to the dealership during 2001, 2000 and 1999,respectively, for assisting in effecting sales.
** 

 

NOTE H -- INCOME TAXES:**
 

Income taxes for the years ended July 31 were allocated asfollows:

 

 **2001**2000**1999
Earnings (loss) before extraordinary loss
$ (194,314)
$ 553,000
$ 206,000
Extraordinary loss
---
(23,000)
(11,000)
Total income tax expense (benefit)
$ (194,314)
$ 530,000
$ 195,000
 

Income taxes for the years ended July 31 consist of:

 

 **2001**2000**1999
Federal:
Current expense (benefit)
$ (219,314)
$ 308,000
$ 240,000
Deferred expense (benefit)
51,000
151,000
(80,000)
(168,314)
459,000
160,000
State:
Current expense (benefit)
(30,000)
58,000
42,000
Deferred expense (benefit)
4,000
13,000
(7,000)
(26,000)
71,000
35,000
Total income tax expense (benefit)
$ (194,314)
$ 530,000
$ 195,000
 

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:**2001**2000**1999
Earnings (loss) before income taxes
$ (1,052,938)
$ 1,000,090
$ 878,074
Expected income tax expense (benefit)
$ (390,000)
$ 370,000
$ 325,000
Bond discount amortization
51,000
83,000
12,000
Losses of foreign subsidiary
150,000
90,000
83,000
Extraordinary loss
---
(23,000)
(11,000)
Utilization of loss carryforwards
---
---
(170,000)
Other
(5,314)
10,000
(44,000)
Total actual income tax expense (benefit)
$ (194,314)
$ 530,000)
$ 195,000
 

 

 

The tax effects of significant temporary differences representedby deferred tax assets and deferred tax liabilities at July 31 are as follows:

 

 **2001**2000**1999
Deferred tax assets attributable to:
Property and equipment
$ 344,000
$ 253,000
$ 318,000
Accounts receivable
19,000
41,000
25,000
Inventory valuation
96,000
284,000
300,000
Warranty reserves
107,000
125,000
122,000
Tax credit carryforwards
140,000
---
174,000
Contributions
34,000
34,000
---
Other
21,000
79,000
41,000
Net deferred tax assets
$ 761,000
$ 816,000
$ 980,000
 

In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that all or some portionof the deferred tax assets will not be realized. The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences become deductible.Management considers projected future taxable income and tax planning strategiesin making this assessment. Based upon the level of historical taxable income andprojections for future taxable income over the periods in which temporarydifferences are expected to reverse, management believes it is more likely thannot the Company will realize the benefits of these deductible differences atJuly 31, 2001.
** 

 

NOTE I -- ADDITIONAL INFORMATION:

 **
Other accrued liabilities at July 31 consist of:
** **
 **2001**2000
Property taxes
$ 54,214
$ 89,071
Accrued warranties
289,117
300,463
Other
271,794
366,253

$ 615,125
$ 755,787**Cash Flow Information:**
 

The Company paid cash for interest in the amount of$1,062,860, $787,781 and $320,913 during 2001, 2000 and 1999, respectively. TheCompany paid cash for income taxes in the amount of $222,000, $195,000 and$371,675 during 2001, 2000 and 1999, respectively.

 
*Non-cash Investing and Financing Activities:*
 

During fiscal 1999, bonds with face value of $71,000 wereconverted 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 fornew computer software.

 
**NOTE J -- PENSION AND PROFIT SHARING PLAN:

 **
Thermwood has a deferred income 40l(k) savings plan for itsemployees. 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 2001, 2000 and 1999 amountedto $70,738, $60,695 and $54,844, respectively. The Company also has a managementprofit sharing plan. Profit sharing expense amounted to $766,263, $1,215,681 and$739,354 for fiscal 2001, 2000 and 1999, respectively.
** 

NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS**
 

The carrying value of cash, accounts receivable, income taxesreceivable, accounts payable and accrued expenses approximates fair valuebecause of the short maturity of these financial instruments.

The note payable approximates fair value because the interestrate fluctuates with prime. The Company's debentures are not actively traded.However, management believes the fair value of the debentures at July 31, 2001and 2000, approximates the recorded value, as the effective interest rateapproximates the current estimated market rate of interest.
**NOTE L - SEGMENTS**
 

The Company's operations are divided into the following threeoperating segments: the Machining Products Division, which is responsible formarketing machinery, hardware and software products; the Technical ServicesDivision, which is responsible for marketing service, support, upgrade andcatalog products; and Thermwood Europe Ltd., a British Company, which is awholly-owned subsidiary of Thermwood Corporation responsible for marketing andservicing machines throughout Europe.

 

 

The accounting policies of the segments are the same as thosedescribed in the summary of significant accounting policies.
** 

2001**
 
 

 

($'s in Millions)
 

 

Machining Products Division
 

Technical Services Division
 

 

Thermwood Europe Ltd.
 

 

 

Total
Net sales
$
14.4
$
6.2
$
1.8
$
22.4
Operating income
(.9)
.2
.7
---
Interest expense
.8
.3
---
1.1
Depreciation and amortization
.5
.2
---
.7
Income tax expense
(.14)
(.06)
---
(.2)
Total assets
8.1
3.5
.6
12.2
Capital expenditures
.2
---
---
.2
 
**2000**
 
 

 

($'s in Millions)
 

 

Machining Products Division
 

Technical Services Division
 

 

Thermwood Europe Ltd.
 

 

 

Total
Net sales
$
17.9
$
6.1
$
2.0
$
26.0
Operating income
.5
1.7
(.2)
2.0
Interest expense
.7
.2
.1
1.0
Depreciation and amortization
.5
.2
---
.7
Income tax expense
.4
.2
---
.6
Total assets
9.8
2.5
1.0
13.3
Capital expenditures
.6
---
---
.6
 
**1999**
 
 

 

($'s in Millions)
 

 

Machining Products Division
 

Technical Services Division
 

 

Thermwood Europe Ltd.
 

 

 

Total
Net sales
$
15.1
$
5.2
$
1.7
$
22.0
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
Capital expenditures
.5
---
---
.5
 

 

 

 
**Quarterly Financial Information (Unaudited)

 

Thermwood Corporation and Subsidiaries**
 

 

In thousands, except per share data
First

Quarter
Second

Quarter
Third

Quarter
Fourth

Quarter
Total

Year
2001
Net sales
$
5,705
5,973
4,953
5,741
22,372
Gross profit
2,056
2,053
1,528
2,085
7,722
Operating income (loss)
390
103
(478)
9
24
Net earnings (loss)
5
(36)
(534)
(294)
(859)
Loss per share
Basic
.01
(.04)
(.54)
(.30)
(.87)
Diluted
.01
(.04)
(.54)
(.30)
(.87)
Inventories
6,212
5,594
5,958
5,494
2000
Net sales
$
6,283
6,236
6,953
6,496
25,968
Gross profit
2,661
2,368
2,349
2,780
10,158
Operating income
736
454
478
347
2,015
Net earnings (loss)
288
192
74
(146)
408
Earnings (loss) per share
Basic
.29
.19
.08
(.15)
.41
Diluted
.29
.19
.08
(.15)
.41
Inventories
5,846
6,273
5,836
6,592
During the Company's annual physical inventory during thefourth quarter of fiscal 2001, certain labor and overhead costs were identifiedin inventory which related to inventory which was sold to customers in previousquarters. Gross profit and operating income for the quarters ended October 31,2000, January 31, 2001, and April 30, 2000 have been decreased from amountspreviously reported by the Company on Forms 10-QSB by $39,000, $93,000 and$155,000, respectively, net earnings for the quarters ended October 31, 2000,January 31, 2001, and April 30, 2000 have been decreased from amounts previouslyreported by the Company on Forms 10-QSB by $23,000, $56,000, and $93,000,respectively, and inventories as of October 31, 2000, January 31, 2001, andApril 30, 2001 have decreased by $39,000, $132,000, and $287,000, respectively,as a result of these losses.**********************************************************************************************************************************************************************************************************************************