SHOPSMITH, INC.
10-K REPORT
FOR THE
YEAR ENDED April 4, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________ to __________________
Commission file number 0-9318
SHOPSMITH, INC.____________________
(Exact name of registrant as specified in its charter)
Ohio____________ ____31-0811466______
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
____6530 Poe Avenue, Dayton, Ohio________ _45414____
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: _(937) 898-6070_
Securities registered pursuant to Section 12(b) of the Act:
_Title of Each Class_ Name of Each Exchange on
None _____which registered_____
None
Securities registered pursuant to Section 12(g) of the Act:
__Common Shares___
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes_X__ No____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by refer-
ence in Part III of this Form 10-K or any amendment to this Form
10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of May 28, 1998 was $5,708,890.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of May 28, 1998. Common Shares, without
par value: 2,610,375 shares.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Shopsmith, Inc. Annual Report to Shareholders for the year
ended April 4, 1998 -- Only such portions of the Annual Report
as are specifically incorporated by reference under Part I and II
of this Report shall be deemed filed as part of this Report.
Shopsmith, Inc. Proxy Statement for its Annual Meeting of
Shareholders to be held July 29, 1998 -- Definitive copies of the
Proxy Statement will be filed with the Commission within 120 days
after the end of the Company's fiscal year. Only such portions of
the Proxy Statement as are specifically incorporated by reference
under Parts II and III of this Report shall be deemed filed as part
of this Report.
<PAGE>
PART I
ITEM 1. Business
Shopsmith, Inc., an Ohio corporation organized in 1972 (the Company"), is
engaged in the production and marketing of power woodworking tools designed
primarily for the home workshop. The principal line of power tools
marketed under the name "Shopsmith," a registered trademark, dates back to
1946 and was purchased by the Company in 1972.
The line is built around the Shopsmith MARK V, a multi-purpose tool, and
includes separate function special purpose tools that may be mounted on the
MARK V or used independently. The Company distributes these tools directly
to consumers through demonstration programs (at which sales representatives
solicit orders), telephone sales solicitation and mail order. During the
fiscal year ended April 4, 1998, Shopsmith branded products accounted for
substantially all of the net sales of the Company. The Company manufac-
tures the majority of products sold (as measured by sales dollar volume).
Shopsmith MARK V, Special Purpose Tools, Crafters Station and Major
Accessories
The Shopsmith MARK V is a compact power woodworking tool which performs the
functions of five separate tools: a table saw, a wood lathe, a disc sander,
a horizontal boring machine, and a vertical drill press. The engineering
of the MARK V is such that special purpose tools may be mounted on and
powered by the MARK V. The special purpose tools, a jointer, a beltsander,
a bandsaw, a planer, a scroll saw, and a strip sander, may also be operated
as free standing tools with a stand and power system.
Other major accessories include MARK V accessories such as a lathe
duplicator, which allows a woodworker to duplicate original turnings and a
dust collector that, when used with the appropriate fixtures for the
MARK V 510 and other Shopsmith products, provides for virtually dust- free
woodworking.
During the fiscal year ended April 4, 1998, the Company designed and began
to market the Crafter's Station. This product, which is an enhancement of
a product currently offered by the Company, is a variable-speed table saw
that can also power many of the Company's other accessories.
The Company also offers a line of accessories to its power tool line. These
accessories, only a few of which are manufactured by the Company, include
casters, custom saw blades, and molding attachments. Shopsmith accessories
are sold directly to the consumer through the same marketing channels used
for the Shopsmith power tool line.
<PAGE>
Seasonality and Working Capital
The Company's business is seasonal, with the rate of incoming orders being
lowest during the summer months. Consequently, working capital needs are
higher during this period of the fiscal year and the Company generally
experiences a tightening of its liquidity position.
Raw Materials and Components
The principal components and materials used by the Company in the production
of its products include aluminum die castings, iron sand castings, metal
stampings, screw machine products, plastics and electric motors The
Company relies on sole sources of supply for some of its components and
materials. To reduce costs, the Company uses foreign producers as sources
for some parts and products.
Competition
The power woodworking equipment business is highly competitive and the
MARK V and the Company's other products must compete against the single
purpose tools sold by Delta, Power Matic, Black and Decker,Sears, and other
domestic and foreign corporations.
The Company considers quality, customer service, method of marketing, price
and value to be the principal bases of competition in the power woodworking
equipment industry.
Research and Development
From time to time, the Company engages in limited research and development
programs to develop new products, and to improve existing products and
current operating methods. Research and development costs were not
material in 1998, 1997 and 1996.
Employees
The total number of persons employed by the Company (both full and part
time) as of June 5, 1998 was 112. The Company considers its employee
relations to be satisfactory, and to date the Company has not experienced a
work stoppage due to a labor dispute. The Company has no collective
bargaining contracts.
Environmental Compliance
The Company believes that it materially complies with all statutory and
administrative requirements related to the environment and pollution
control. For a discussion of certain environmental related contingencies
to which the Company is subject, reference is made to Note 11 to the
Consolidated Financial Statements which are incorporated into this Report
pursuant to Item 8 below.
<PAGE>
ITEM 2. Properties
Information concerning the facilities of the Company, which is
leased, is set forth below.
Location Use Approximate Expiration Renewal
Square Date of Options
Feet Lease
Dayton, Ohio Manufactur-
ing, Head-
quarters,
Distribution
and Retail Store 115,000 August 1999 1- 5 year
Hilliard, Ohio Retail Store 7,000 February 2004 4- 3 year
The buildings and the Company's machinery and equipment are well maintained.
The Company's production facility currently operates one shift per day. The
Company is presently engaged in negotiations to purchase its Manufacturing
and headquarters building.
ITEM 3. Legal Proceedings
The Company is not a party to any legal proceedings other than litigation
which, under the instructions to this item, need not be described. For a
discussion of certain environmental related contingencies to which the
Company is subject, reference is made to Note 11 to the Consolidated
Financial Statements which are incorporated into this Report pursuant to
Item 8 below.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Officers are elected annually by the Board of Directors. The
executive officers of the Company are as follows:
Name Age Position
John R. Folkerth 65 Chairman of the Board, President, Chief
Executive Officer and Director
William C. Becker 49 Vice President of Finance, Treasurer
and Chief Financial Officer
Robert L. Folkerth 41 Vice President,Sales and Marketing
John R. Folkerth is the founder of the Company and has been a
director and the Chief Executive Officer of the Company since 1972.
William C. Becker has been Vice President of Finance and Chief
Financial Officer since October 1982.
Robert L. Folkerth was named Vice President, Sales and marketing,in April
1996. Before accepting that position with the Company, Mr. Folkerth was
Vice President of Finance of Digitron, a manufacturer of automotive
components, from 1991 until 1996.
<PAGE>
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters.
The market and shareholder information required by Item 5 is set forth
under the heading "Shareholders' Information" (p. 21 in the Company's
Annual Report to Shareholders for the year ended April 4, 1998 (which
report is included as Exhibit 13.1 to this Report). Such information is
incorporated herein by reference.
There are certain debt covenant requirements described in Note 3 of the
Company's Annual Report for the year ended April 4, 1998. The Company paid
no dividends in the fiscal years ended April 4, 1998 and April 5, 1997.
In July 1997 the Company issued stock options covering 99,000 Common Shares
under the Company's 1997 Stock Option Plan. The options were issued to
executive officers and other key management employees of the Company.
The options are exercisable at a price ranging from $2.88 to $3.17 per
share. In November 1997 the Company issued another stock option to another
key management employee. That option covers 5,000 shares and
is exercisable at a price of $2.84 per share.
Shares issuable under the 1997 Stock Option Plan have not been registered
under the Securities Act of 1933. The grant of the foregoing options was
exempt from the registration provisions of the Securities Act of 1933
(i) as a transaction not involving a sale of securities, since no
investment decision was required on the part of the option recipients,
and/or (ii) under Section 4(2) of such Act as a transaction not involving
a public offering. It is anticipated that the Common Shares subject to
the options will be registered under the Securities Act of 1933 prior to
exercise of the options.
ITEM 6. Selected Financial Data
The information required by Item 6 is set forth under the heading "Selected
Financial Data" (p.20) in the Company's Annual Report to Shareholders for
the year ended April 4, 1998 and is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by Item 7 is set forth under the heading
"Management's Discussion and Analysis" (p.18) of the Company's Annual
Report to Shareholders for the year ended April 4, 1998 and is incorporated
herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable.
ITEM 8. Financial Statements and Supplementary Data
The information required by Item 8 is set forth at pages 3 through 11 and
under the heading "Selected Financial Data" p.20 of the Company's Annual
Report to Shareholders for the year ended April 4, 1998 and is incorporated
herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated herein by reference
from the Company's Proxy Statement for its Annual Meeting of Shareholders
to be held July 29, 1998, except for certain information concerning the
executive officers of the Company which is set forth in Part I of this
Report.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference
from the Company's Proxy Statement for its Annual Meeting of Shareholders
to be held July 29, 1998.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by reference
from the Company's Proxy Statement for its Annual Meeting of Shareholders
to be held July 29, 1998.
ITEM 13. Certain Relationships and Related Transactions
The information required by item 13 is incorporated herein by reference from
the Company's Proxy Statement for its Annual Meeting of Shareholders to be
held July 29, 1998.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules,and Reports on Form 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Shopsmith, Inc. and its
subsidiaries are incorporated by reference as part of this Report at
Item 8 hereof.
Report of Independent Auditors.
Consolidated Balance Sheets as of April 4, 1998 and April 5, 1997.
Consolidated Statements of Operations for the years
ended April 4, 1998, April 5, 1997 and March 30, 1996.
Consolidated Statements of Changes in Shareholders'Equity (Deficit) for
the years ended April 4, 1998, April 5, 1997,
and March 30, 1996.
Consolidated Statements of Cash Flows for the years ended April 4, 1998,
April 5, 1997 and March 30, 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
The following Financial Statement Schedules for the years ended
April 4, 1998, April 5, 1997 and March 30, 1996 are included
in this report.
Report of Independent Auditors
Schedule II- Valuation and Qualifying Accounts
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information
is given in the financial statements or notes thereto.
Individual financial statements of the registrant have been omitted since
the registrant is primarily an operating company and all consolidated
subsidiaries are wholly- owned.
3. Exhibits
The Exhibits that are filed with this Report are listed in the Exhibit
Index. All management contracts or compensatory plans or arrangements
are indicated on the Exhibit Index.
(b) Reports on Form 8-K
During the quarter ended April 4, 1998, the Company did not file any
reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SHOPSMITH, INC.
By/s/ John R. Folkerth
John R. Folkerth
Chairman of the Board
and Chief Executive Officer
June 9, 1998____________
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John R. Folkerth /s/ Edward A. Nicholson
John R. Folkerth Edward A. Nicholson
Chairman of the Board, Director
Chief Executive Officer and June 9, 1998___________________
Director (Principal Executive Date
Officer)
June 9, 1998________________
Date
/s/ John L. Schaefer
John L. Schaefer
Director
/s/ Robert L. Folkerth June 9, 1998___________________
Robert L. Folkerth Date
Vice President, Sales and Mar-
keting, Director
June 9, 1998________________
Date /s/ Brady L. Skinner
Brady L. Skinner
Director
June 9, 1998___________________
/s/ William C. Becker Date
William C. Becker
Vice President of Finance
(Principal Financial and /s/ Richard L. Snell
Accounting Officer) Richard L. Snell
June 9, 1998________________ Director
Date June 9, 1998___________________
Date
/s/ J. Michael Herr
J. Michael Herr
Director
June 9, 1998________________
Date
<PAGE>
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Shopsmith, Inc.
Dayton, Ohio
We have audited the financial statements of Shopsmith, Inc. and
Subsidiaries as of April 4, 1998 and April 5, 1997 and for the years
ended April 4, 1998, April 5, 1997 and March 30, 1996, and have issued our
report thereon dated June 3, 1998. The financial statements and report
are included in your 1998 Annual Report to Shareholders and are incorporated
herein by reference. Our audits also included the financial statement
schedule of Shopsmith, Inc. and Subsidiaries listed on Item 14. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on
our audit.
In our opinion, this financial statement schedule, when considered
in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
June 3, 1998
<PAGE>
<TABLE>
SHOPSMITH INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED April 4, 1998, April 5, 1997 AND March 30, 1996
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE CHARGED
AT TO COST DEDUCTIONS BALANCE
BEGINNING AND FROM AT END
DESCRIPTION OF YEAR EXPENSES RESERVE OF YEAR
<S> <C> <C> <C> <C>
Reserves deducted
from assets to which
they apply:
YEAR ENDED
April 4, 1998
Allowance for
doubtful accounts
receivable $ 342,617 $ 99,528 $ 124,737 $ 317,408
YEAR ENDED
April 5, 1997
Allowance for
doubtful accounts
receivable $ 235,007 $ 135,122 $ 27,512 $ 342,617
YEAR ENDED
March 30, 1996
Allowance for
doubtful accounts
receivable $ 94,728 $ 263,445 $123,166 $ 235,007
</TABLE>
<PAGE>
SHOPSMITH, INC.
INDEX TO EXHIBITS
Exhibit No. and Document
(3) Articles of Incorporation and By-laws
3.1 Amended Articles of Incorporation of Shopsmith, Inc., filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-8
(Reg.No. 33-26463).*
3.2 Amended Code of Regulations of Shopsmith, Inc., filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-8
(Reg. No. 33-26463). *
(4) Instruments Defining the Rights of Security
Holders, Including Indentures
4.1 Loan and Security Agreement, dated September 1, 1989 among
Shopsmith, Inc.,Shopsmith Woodworking Promotions, Inc., Shopsmith Canada
Inc., and Huntington National Bank, including the form of the Revolving
Note issued in connection therewith. Filed as Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the year ended
March 31, 1990. *
4.2 First Amendment to Loan and Security Agreement, dated
July 11, 1990 among Shopsmith, Inc., Shopsmith Woodworking Promotions,Inc.,
Shopsmith Canada, Inc.,Shopsmith Woodworking Centers Ltd. Co., and
Huntington National Bank, including the form of the Revolving Note
issued in connection therewith. Filed as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1991. *
4.3 Second Amendment to Loan and Security Agreement, dated
April 23, 1991 among Shopsmith, Inc., Shopsmith Woodworking Promotions,
Inc., Shopsmith Canada Inc., Shopsmith Woodworking Centers Ltd. Co. and
Huntington National Bank, including the form of the Revolving Note issued
in connection therewith. Filed as Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1991. *
<PAGE>
4.4 Third Amendment to Loan and Security Agreement, dated
June 21, 1993 among Shopsmith, Inc., Shopsmith Woodworking Promotions, Inc.,
Shopsmith Canada Inc., Shopsmith Woodworking Centers Ltd. Co., and
Huntington National Bank,including the form of the Revolving Note issued
in connection therewith. Filed as exhibit 4.4 to the Company's Annual
Report on Form 10-K for the year ended April 3, 1993. *
4.5 Note Modification Agreement, dated as of June 21, 1993 among
Shopsmith, Inc.,Shopsmith Woodworking Promotions, Inc., Shopsmith Canada
Inc., Shopsmith Woodworking Centers Ltd. Co. and the Huntington
National Bank. Filed as exhibit 4.5 to the Company's Annual Report on
Form 10-K for the year ended April 3, 1993. *
4.6 Fourth Amendment to Loan and Security Agreement dated
October 5, 1993 among Shopsmith, Inc.,Shopsmith Woodworking Promotions,
Inc., Shopsmith Canada Inc., Shopsmith Woodworking Centers Ltd. Co.,
and Huntington National Bank. Filed as Exhibit 4.6 to the Company's
Current Report on Form 8-K dated November 1,1993. *
4.7 Letter agreement dated April 26, 1994 between Huntington
National Bank and Shopsmith, Inc.,Shopsmith Woodworking Promotions, Inc.,
Shopsmith Canada Inc., and Shopsmith Woodworking Centers Ltd. Co.
Filed as exhibit 4.9 to the Company's Annual Report on Form 10-K for
the year ended April 2, 1994. *
4.8 Fifth Amendment to Loan and Security Agreement dated
June 30, 1995 between Huntington National Bank and Shopsmith, Inc.
Filed as exhibit 4.12 to the Company's quarterly report on Form 10-Q
for the quarter ended July 1, 1995. *
4.9 Sixth Amendment to Loan and Security Agreement dated
July 1, 1996 between Huntington National Bank and Shopsmith, Inc.
Filed as exhibit 4.12 to the Company's quarterly report on Form 10-Q
for the quarter ended September 28, 1996. *
(10) Material Contracts
Management Contracts and Compensatory Plans or Arrangements
10.1 Plan for Providing Tax Return Preparation for Chief Executive
Officer, as adopted by the Company's Board of Directors on February 14,
1985. Filed as exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended April 3, 1993. *
<PAGE>
10.2 1984 Stock Option Plan, as amended on February 9, 1987
and June 11, 1992. Filed as exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended April 5, 1997. *
10.3 Shopsmith, Inc. 1988 Director Option Plan,effective
September 1, 1988, as amended on July 29, 1989, June 11, 1992 and July
31, 1996.Filed as exhibit 10.3 to the Company's Annual Report on Form 10-K
for the year ended April 5, 1997. *
10.4 Disability Plan for Executive Officers, as adopted by the
Company's Board of Directors on November 5, 1991. Filed as Exhibit 10.1
to the Company's Annual Report on Form 10-K for the year ended
March 31, 1992. *
10.5 Nonstatutory Stock Option granted by the Company on
June 21, 1993 to John R. Folkerth for the purchase, for a period of
10 years from the date of grant of 20,000 Common Shares of the Company
at a purchase price of $3.00 per share. Filed as Exhibit 10.7.1 to the
Company's Annual Report on Form 10-K for the year ended
April 2, 1994. *
10.6 Incentive compensation plan in effect for the fiscal year
ended April 1, 1995 (A substantially identical plan was adopted for the
fiscal years to end March 30, 1996, April 5, 1997, April 4, 1998 and
April 3, 1999.). Filed as Exhibit 10.7.2 to the Company's Annual Report
on Form 10-K for the year ended April 1, 1995. *
10.7 1995 Stock Option Plan. Filed as exhibit 4.3 to the Company's
Registration Statement on Form S-8 (Reg. No. 33-64663) *
10.8 Amendment to Shopsmith Inc. 1984 Stock Option Plan dated
November 5, 1996. Filed as exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended April 5,1997. *
10.9 Amendment to Shopsmith, Inc. 1995 Stock Option Plan dated
November 5, 1996. Filed as exhibit 10.9 to the Company's Annual Report
on Form 10-K for the year ended April 5,1997. *
Other Material Contracts
10.10 1997 Stock Option Plan. **
10.11 Agreement of Lease, dated August 15, 1987 between Angeles
Partners XIV and the Company relating to 6530 Poe Avenue, Dayton, Ohio
property, as amended on September 28, 1990. Filed as Exhibit 10.2
to the Company's Annual Report on Form 10-K for the year ended
March 31 1991. *
<PAGE>
10.12 Shopsmith Inc. Savings Plan, effective April 1, 1997.
Filed as exhibit 10.10 to the Company's annual report on Form 10-K for
the year ended April 5, 1997. *
(13) Annual Report to Security Holders
13.1 Shopsmith, Inc. Annual Report to Shareholders for the year
ended April 4, 1998. Only such portions of the Annual Report as are
specifically incorporated by reference under Parts I, II, and IV
of this Report shall be deemed filed as part of this Report. **
(21) Subsidiaries of the Registrant
21.1 Subsidiaries of the Registrant. **
(23) Consents of Experts and Counsel
23.1 Consent of Crowe, Chizek and Company L.L.P. Independent
Public Accountants to incorporation by reference. **
(27) Financial Data Schedule
27.1 Financial Data Schedule **
(99) Additional Exhibits
99.1 Shopsmith, Inc. Employee Stock Purchase Plan. Filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K dated August 26,
1993. *
______________________
* Previously filed
** Filed herewith
<PAGE>
EXHIBIT 10.10
SHOPSMITH, INC.
1997 STOCK OPTION PLAN
Section 1. Purposes.
The purposes of the 1997 Stock Option Plan (the "Plan") are
(i) to provide incentives to officers and other key employees of
the Company upon whose judgment, initiative and efforts the long-
term growth and success of the Company are largely dependent; (ii)
to assist the Company in attracting and retaining key employees of
proven ability; and (iii) to increase the identity of interests of
such key employees with those of the Company's shareholders by pro-
viding such employees options to acquire Shares of the Company,
Stock Appreciation Rights and Limited Rights.
Section 2. Definitions.
(a) "Acquisition Transaction" means (i) the merger or con-
solidation of the Company into or with another corporation, if the
Company (or another corporation controlled by the Company immedi-
ately prior to such transaction) will not be the surviving corpora-
tion or will become a subsidiary of another corporation not con-
trolled by the Company immediately prior to such transaction, (ii)
the sale of all or substantially all of the assets of the Company,
or (iii) the liquidation of the Company.
(b) "Affiliate" means a person, corporation or other entity
controlling, controlled by or under common control with the Com-
pany.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Committee referred to in Section 4.
(f) "Company" means Shopsmith, Inc.; when used in the Plan
with reference to employment, "Company" shall include any Subsidi-
ary of the Company.
(g) "Designation of Beneficiary" means the written designation by the
Holder of the person or entity to receive the Holder's
options and any related Stock Appreciation Rights and Limited
Rights upon the Holder's death, which designation shall be in such
form as prescribed by the Committee and filed with the Committee or
an officer designated by the Committee.
<PAGE>
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(i) "Fair Market Value" means the fair market value of a
Share as determined by the Committee, based on quoted market prices
(if any).
(j) "Family Members" means children, stepchildren, grand-
children, parents, stepparents, grandparents, spouse, siblings (in-
cluding half-brothers and sisters), nephews, nieces and in-laws.
(k) "Grantee" means the person who received the option and
any related Stock Appreciation Right or Limited Right from the Com-
pany.
(l) "Holder" means the person(s) or entity who owns the op-
tion and any related Stock Appreciation Right or Limited Right,
whether the Grantee, Transferee, heir or other beneficiary.
(m) "Incentive Stock Option" means an option granted under
the Plan or any other plan of the Company that qualifies as an in-
centive stock option under Section 422 of the Code.
(n) "Limited Right" means the right defined in Section 11(a).
(o) "Nonstatutory Option" means an option granted under the
Plan that by its term does not qualify as an Incentive Stock Op-
tion.
(p) "Qualified Domestic Relations Order" means a qualified
domestic relations order as defined in the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder.
(q) "Share" or "Shares" means the Common Shares, without par
value, of the Company.
(r) "Stock Appreciation Right" means the right defined in
Section 10(a).
(s) "Subsidiary" means any corporation or other entity more
than 50% of the voting interests of which are owned or controlled,
directly or indirectly, by the Company.
(t) "Tax Date" means the date as of which the amount of a
withholding tax payment with respect to the exercise of an option
is calculated.
<PAGE>
(u) "Tender Offer" means a tender offer or a request or in-
vitation for tenders or an exchange offer subject to regulation un-
der Section 14(d) of the Exchange Act and the rules and regulations
thereunder, as the same may be amended, modified or superceded from
time to time.
(v) "Transferee" means the person who received the option
and any related Stock Appreciation Right or Limited Right from the
Grantee during the Grantee's lifetime in accordance with the Plan.
Section 3. Shares Subject to the Plan.
The maximum number of Shares that may be issued under the Plan
is 250,000, subject to the adjustment provided in Section 13. Such
Shares may be either authorized and unissued or treasury Shares.
Any Shares subject to an option that for any reason has terminated
or expired or has been canceled prior to being fully exercised may
again be subject to option under the Plan. Shares covered by an
option as to which option rights have terminated by reason of the
exercise of a Stock Appreciation Right or Limited Right, and Shares
that have been surrendered to, or withheld by, the Company to sat-
isfy all or a portion of the option price or a tax withholding ob-
ligation, shall not be available for the grant of options under the
Plan.
Section 4. Administration.
The Plan shall be administered by a Committee of the Board.
The Committee shall have and exercise all the power and authority
granted to it under the Plan. Subject to the provisions of the
Plan, the Committee shall in its sole discretion determine the per-
sons from the class described in Section 5(a) to whom, and the
times at which, options shall be granted; whether and to what ex-
tent any option that is granted shall be accompanied by Stock Ap-
preciation Rights or and/or Limited Rights; the number of Shares to
be subject to each option and each Stock Appreciation Right or Lim-
ited Right; the option price per Share; and the duration and other
terms of each option. The Committee shall also interpret the Plan,
prescribe, amend and rescind rules and regulations relating to the
Plan, and make all other determinations necessary or advisable for
the administration of the Plan, and such determinations shall be
conclusive. A majority of the Committee shall constitute a quorum,
and the acts of a majority of the members present at a meeting at
which a quorum is present, or acts reduced to or approved in writ-
ing by all members of the Committee, shall be acts of the Commit-
tee.
<PAGE>
Section 5. Eligibility.
(a) Grant of Options. The Committee may grant one or more
Incentive Stock Options or Nonstatutory Options to any officer or
other key employee of the Company.
(b) Grant of Stock Appreciation Rights and Limited Rights.
Any option or portion thereof granted under the Plan may include a
Stock Appreciation Right and/or Limited Right. Such right may be
granted at the time the option is granted, or it may be granted in
respect of an outstanding option at any time prior to its exercise,
cancellation, termination or expiration.
Section 6. Options and Option Terms.
(a) Option Agreement. The terms of each option granted un-
der the Plan, including designation as either an Incentive Stock
Option or a Nonstatutory Option, shall be set forth in a written
stock option agreement approved by the Committee.
(b) Terms of All Options. The following terms and provi-
sions shall apply to all options granted under the Plan:
(1) Except as set forth in Section 7(b), no option may
be granted under the Plan at a purchase price per Share (the
"Option Price") that is less than the Fair Market Value of a
Share on the date the option is granted.
(2) No option may be exercised more than ten years af-
ter the date of grant of the option.
(3) At the time an option is granted, the Committee may
provide that the option may be exercised in full or in part
only after the passage of a specified period or periods of
time following the date of grant or only if specified condi-
tions have been satisfied.
(4) Except as provided in Sections 6(b)(5) and 6(b)(6),
an option may be exercised only if the Grantee has been con-
tinuously employed by the Company since the date of grant of
the option. Whether authorized leave of absence or absence
for military or governmental service shall constitute a termi-
nation of employment shall be determined by the Committee.
<PAGE>
(5) At the time an option is granted, or at such other
time as the Committee may determine, the Committee may provide
that, if the Grantee of the option ceases to be employed by
the Company for any reason (including retirement or disabil-
ity) other than death, the option will continue to be exercis-
able by the Holder (to the extent it was exercisable on the
date the Grantee ceased to be employed) for such additional
period (not to exceed the remaining term of such option) after
such termination of employment as the Committee may provide.
(6) At the time an option is granted, or at such other
time as the Committee may determine, the Committee may provide
that, if the Grantee of the option dies while employed by the
Company or while the Holder is entitled to the benefits of any
additional exercise period established by the Committee with
respect to such option in accordance with Section 6(b)(5),
then the option will continue to be exercisable (to the extent
it was exercisable on the date of death) by the person or per-
sons (including the Holder's estate) to whom the Holder's
rights with respect to such option have passed by will or by
the laws of descent and distribution or, if permitted by Sec-
tion 12(a), the Holder's designated beneficiary, for such ad-
ditional period after death (not to exceed the remaining term
of such option) as the Committee may provide.
(7) In the event any Acquisition Transaction is author-
ized or approved by either the Board or the shareholders of
the Company, the Committee shall have the authority in its
sole discretion to cancel, effective upon not less than 30
days' notice, any option granted under the Plan. Promptly af-
ter such cancellation, the Company shall pay in cash to the
Holder of each canceled option an amount equal to the excess
of the aggregate Fair Market Value on the effective date of
such cancellation of the Shares then subject to the option
(whether or not the option is then fully exercisable) over the
aggregate Option Price of such Shares.
(8) At the time an option is granted, the Committee may
provide for any restrictions or limitations on the exercise of
the option and/or on the transferability of the Shares issu-
able upon the exercise of such option, or specify other terms,
conditions and restrictions in addition to those set forth
herein, as it may deem appropriate.
<PAGE>
(9) Subject to the ten-year limitation set forth in
Section 6(b)(2), the Committee may waive or modify at any
time, either before or after the granting of an option, any
condition, limitation or restriction with respect to the exer-
cise of such option imposed by or pursuant to this Section 6
or in Section 7 in such circumstances as the Committee may, in
its discretion, deem appropriate; provided, however, that any
such waiver or modification with respect to an outstanding op-
tion shall be subject to the same limitations applicable to
amendments to outstanding options, as set forth in Section
6(b)(10).
(10) Subject to the terms and provisions of the Plan,
the Committee may amend any outstanding option; provided, how-
ever, that (i) no such amendment may reduce the Option Price
of the option (except to set forth an adjustment in the Option
Price made pursuant to Section 13) or extend the maximum term
during which the option, if fully vested, may be exercised,
and (ii) if the amendment would adversely affect the rights of
the Holder of the option, the consent of such Holder to such
amendment must be obtained.
Section 7. Additional Provisions Applicable to Incentive Stock Op-
tions.
(a) The following additional terms and provisions shall ap-
ply to all Incentive Stock Options granted under the Plan, notwith-
standing any provision of Section 6(b) to the contrary:
(1) No Incentive Stock Option shall be granted to an
officer or other employee who possesses directly or indirectly
(as provided in Section 424(d) of the Code) at the time of
grant more than 10% of the voting power of all classes of
capital shares of the Company, any Subsidiary or any parent of
the Company unless (i) the Option Price is at least 110% of
the Fair Market Value of the Shares subject to the Incentive
Stock Option on the date the Incentive Stock Option is
granted, and (ii) the Incentive Stock Option is not exercis-
able after the expiration of five years from the date of
grant.
(2) The aggregate Fair Market Value (determined as of
the time an Incentive Stock Option is granted) of Shares with
respect to which Incentive Stock Options are exercisable for
the first time by any individual in any calendar year shall
not exceed $100,000, or such other maximum amount permitted by
the Code.
<PAGE>
(3) No Incentive Stock Option may be granted after June 10, 2007.
(b) The Committee may grant Incentive Stock Options and/or
Nonstatutory Options from time to time to employees of the Company
who formerly were employed by a corporation with which the Company
or a Subsidiary entered into a transaction described in Section
424(a) of the Code in substitution for Incentive Stock Options or
Nonstatutory Options, as the case may be, held by such persons.
Any options so granted shall be on such terms and conditions as may
be necessary for the grant to be treated as a substitution under
Section 424(a) of the Code. To the extent contemplated by Section
424(a) of the Code, any options so granted need not comply with the
restrictions set forth in Section 6(b)(1) and 7(a)(1) above.
Section 8. Procedure for Exercise of Options; Payment.
An option granted under the Plan may be exercised by the
Holder of an option giving written notice of exercise to the Com-
mittee or to an officer of the Company designated by the Committee.
The Option Price for the Shares purchased shall be paid in full at
the time such notice is given. An option shall be deemed exercised
on the date the Committee receives written notice of exercise, to-
gether with full payment for the Shares purchased. The Option
Price shall be paid to the Company either (i) in cash, (ii) by de-
livery to the Company of Shares already-owned by the optionee,
(iii) by the retention by the Company of Shares to be issued upon
the exercise of such option, or (iv) any combination of cash, al-
ready-owned Shares and/or retained Shares. The Committee may, how-
ever, at any time and in its discretion, adopt guidelines limiting
or restricting the use of already-owned Shares and retained Shares
to pay all or any portion of the Option Price. To the extent that
payment is being made by retention by the Company of Shares to be
issued, payment shall be deemed to have been made at the time the
Holder gives written instructions to the Company to so retain
Shares. In the event already-owned Shares or retained Shares are
used to pay all or a portion of the Option Price, the amount cred-
ited for payment shall be the Fair Market Value of the already-
owned Shares or retained Shares on the date the option is exer-
cised.
<PAGE>
Section 9. Tax Withholding.
With the approval of the Committee and subject to Section
12(b), the Grantee of an option may elect to have the Company re-
tain from the Shares to be issued upon the exercise of such option
a number of Shares, or may deliver to the Company a number of al-
ready-owned Shares, having a Fair Market Value on the Tax Date
equal to all or any part of the federal, state and local withhold-
ing tax payments (whether mandatory or permissive) to be made on
behalf of the Grantee with respect to the exercise of the option
(up to a maximum amount determined by the Grantee's top marginal
tax rate) in lieu of making such payments in cash. The Committee
may establish from time to time rules or limitations with respect
to the exercise of the rights described in this paragraph.
Section 10. Stock Appreciation Rights.
(a) Definition. "Stock Appreciation Right" means the right
of a Holder to surrender his or her right to purchase all or any
portion of the Shares that the Holder is then eligible to purchase
under the related option (such Shares being herein referred to as
"Unpurchased Shares") and to receive from the Company, without pay-
ment to the Company, cash equal to the excess of the Fair Market
Value of the Unpurchased Shares on the date the Holder exercises
his or her option for this purpose over the aggregate Option Price
of the Unpurchased Shares.
(b) Restrictions on Exercise. A Stock Appreciation Right
shall be exercisable only at such times as the related option is
exercisable (and to the extent that the related option is then ex-
ercisable) and only at such times that the Fair Market Value of a
Share exceeds the Option Price under the related option.
(c) Cancellation. The right of a Holder to exercise a Stock
Appreciation Right shall be canceled if and to the extent that the
related option or any related Limited Right is exercised. The
right of a Holder to exercise an option or any related Limited
Right shall be canceled if and to the extent that Shares covered by
such option are used to calculate cash received upon the exercise
of a related Stock Appreciation Right.
(d) Procedure for Exercise. A Holder shall exercise a Stock
Appreciation Right by giving written notice of such exercise,
specifying the number of Shares as to which the right is exercised,
to the Committee or to an officer of the Company designated by the
Committee. Provided the exercise is valid and in accordance with
the terms of the Plan, the Company shall promptly pay to the Holder
the cash to which he or she is entitled.
<PAGE>
Section 11. Limited Rights.
(a) Definition. "Limited Right" means the right of a
Holder, upon the happening of an event permitting exercise de-
scribed in Section 11(c), to surrender his or her right to purchase
all or any portion of the Shares that the Holder is then eligible
to purchase under the related option and to receive from the Com-
pany a cash payment based upon the relevant exercise value set
forth in Section 11(d).
(b) Grant of Limited Rights. The Committee may grant Lim-
ited Rights with respect to any option granted under the Plan ei-
ther at the time the option is granted or at any time thereafter
prior to the exercise, cancellation, termination or expiration of
such option. The number of Limited Rights covered by any such
grant shall not exceed, but may be less than, the number of Shares
covered by the related option. The term of any Limited Right shall
be the same as the term of the option to which it relates. The
right of a Holder to exercise a Limited Right shall be canceled if
and to the extent that the related option is exercised or canceled,
and the right of a Holder to exercise an option and any related
Stock Appreciation Right shall be canceled if and to the extent a
related Limited Right is exercised.
(c) Events Permitting Exercise of Limited Rights. A Limited
Right shall be exercisable only if and to the extent that the re-
lated option is exercisable; provided, however, that notwithstand-
ing the foregoing, a Limited Right related to an Incentive Stock
Option shall not be exercisable unless the Fair Market Value of a
Share on the date of exercise exceeds the Option Price of a Share
subject to the related option. A Limited Right that is otherwise
exercisable may be exercised only during the following periods:
(1) during a period of 30 days following the date of
expiration of a Tender Offer (other than an offer by the Com-
pany) for Shares, if the offeror acquires Shares pursuant to
such Tender Offer;
(2) during a period of 30 days following the date of
approval by the shareholders of the Company of a definitive
agreement to become a party to an Acquisition Transaction;
<PAGE>
(3) during a period of 30 days following the date upon
which the Company is provided a copy of a Schedule 13D (filed
pursuant to Section 13(d) of the Exchange Act) indicating that
any "person" or "group" (as such terms are defined in Sec-
tion 13(d)(3) of such act) other than John R. Folkerth or a
member of his family or an Affiliate of Mr. Folkerth or his
family, has become the holder of 25% or more of the outstand-
ing voting shares of the Company; and
(4) during a period of 30 days following a change in
the composition of the Board of Directors such that individu-
als who were members of the Board of Directors on the date one
year prior to such change (or who were elected, or were nomi-
nated for election by the Company's shareholders, with the af-
firmative vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such
one-year period) no longer constitute a majority of the Board
of Directors (such a change in composition is hereinafter re-
ferred to as a "Change in Composition of the Board").
(d) Exercise of Limited Rights. Upon the exercise of a Lim-
ited Right, the Holder thereof shall receive from the Company a
cash payment equal to the excess of: (i) the aggregate "exercise
value" on the date of exercise (determined as provided below) of
that number of Shares as is equal to the number of Limited Rights
being exercised over (ii) the aggregate Option Price under the re-
lated option of that number of Shares as is equal to the number of
Limited Rights being exercised. A Holder shall exercise a Limited
Right by giving written notice of such exercise to the Committee or
its designee. A Limited Right shall be deemed exercised on the
date the Committee or its designee receives such written notice.
Provided the exercise is valid and in accordance with the terms of
the Plan, the Company shall promptly pay to the Holder the cash to
which he or she is entitled.
The "exercise value" of a Limited Right on the date of exer-
cise shall be:
(1) in the case of an exercise during a period de-
scribed in Section 11(c)(1), the highest price per share paid
pursuant to any Tender Offer that is in effect any time during
the 60-day period prior to the date that the Limited Right is
exercised;
<PAGE>
(2) in the case of an exercise during a period de-
scribed in Section 11(c)(2), the greater of: (i) the highest
sale price of a Share during the 30-day period prior to the
date of shareholder approval of the Acquisition Transaction,
as reported on the trading system on which the Shares are then
traded, or (ii) the highest fixed or formula per share price
payable pursuant to the Acquisition Transaction (if determin-
able on the date of exercise);
(3) in the case of an exercise during a period de-
scribed in Section 11(c)(3), the greater of: (i) the highest
sale price of a Share during the 30-day period prior to the
date the Company is provided with a copy of the Schedule 13D,
as reported on the trading system on which the Shares are then
traded, or (ii) the highest acquisition price of a Share shown
on such Schedule 13D; and
(4) in the case of an exercise during a period de-
scribed in Section 11(c)(4), the highest sale price of a share
during the 30-day period prior to the date of the Change in
Composition of the Board, as reported on the trading system on
which the Shares are then traded.
Notwithstanding the foregoing, in no event shall the exercise
value of a Limited Right issued in connection with an Incentive
Stock Option exceed the maximum permissible exercise value for such
a right under the Code and the regulations and interpretations is-
sued pursuant thereto. Any securities or property that form part
or all of the consideration paid for Shares pursuant to a Tender
Offer or Acquisition Transaction shall be valued at the higher of
(1) the valuation placed on such securities or property by the per-
son making such Tender Offer or the other party to such Acquisition
Transaction, or (2) the value placed on such securities or property
by the Committee. In the event that the Shares are not traded on
any trading system, any determination of exercise value that is to
be made with reference to a trading system shall instead be made
with reference to the Fair Market Value of a Share.
<PAGE>
Section 12. Non-Transferability.
(a) General Rule. Except as otherwise provided in this Sec-
tion 12, options, Stock Appreciation Rights and Limited Rights may
not be sold, pledged, assigned, hypothecated or transferred other
than by Designation of Beneficiary, or if none, by will or the laws
of descent and distribution upon the Holder's death, and may be ex-
ercised during the lifetime of the Grantee only by such Grantee or
by his or her guardian or legal representative. All grants under
the Plan, with the exception of Incentive Stock Options and any
Stock Appreciation Rights or Limited Rights relating thereto, may
be transferred pursuant to a Qualified Domestic Relations Order.
(b) Permitted Transfers. Subject to this Section 12(b) and
except as the Committee may otherwise prescribe from time to time,
the Committee may act to permit the transfer or assignment of an
option (together with any related Stock Appreciation Right or Lim-
ited Right) by a Grantee for no consideration to the Grantee's Fam-
ily Members, trusts for the sole benefit of the Grantee's Family
Members or partnerships whose only partners are Family Members of
the Grantee; provided, however, that any such permitted transfer or
assignment shall not apply to an option that is an Incentive Stock
Option (but only if nontransferability is necessary in order for
the option to qualify as an Incentive Stock Option) and to any
Stock Appreciation Rights or Limited Rights related to an Incentive
Stock Option. Any permitted transfer or assignment of an option
and any Stock Appreciation Right or Limited Right related thereto
shall only be effective upon receipt by the Committee or an officer
of the Company designated by the Committee of an instrument accept-
able in form and substance to the Committee that effects the trans-
fer or assignment and that contains an agreement by the Transferee
to accept and comply with all the terms and conditions of the stock
option award and the Plan. A Transferee shall possess all the same
rights and obligations as the Grantee under the Plan, except that
the Transferee can subsequently transfer such option and any re-
lated Stock Appreciation Rights or Limited Rights only by (i) des-
ignation of beneficiary or, if none, will or the laws of descent
and distribution, or (ii) a transfer to a beneficiary or partner if
the Transferee is a trust or partnership, respectively.
<PAGE>
Unless the Committee otherwise prescribes, upon the exercise
of a Nonstatutory Option or its related Stock Appreciation Rights
or Limited Rights by a Transferee, when and as permitted in accor-
dance with this Section 12(b), the Grantee is required to satisfy
the applicable withholding tax obligations by paying cash to the
Company with respect to any income recognized by the Grantee upon
the exercise of such option, Stock Appreciation Right or Limited
Right by the Transferee. If the Grantee does not satisfy the ap-
plicable withholding tax obligations on the exercise date of the
option or related Stock Appreciation Right or Limited Right, the
Company shall, in the case of the exercise of an option, retain
from the Shares to be issued to the Transferee upon the exercise of
the option a number of Shares having a Fair Market Value on the Tax
Date equal to the mandatory withholding tax payable by the Grantee
or, in the case of the exercise of a Stock Appreciation Right or
Limited Right, deduct from the cash to be delivered to the Trans-
feree such amount as is equal to the mandatory withholding taxes
payable by the Grantee.
Section 13. Adjustments Upon Changes in Capitalization.
In the event of a change in outstanding Shares by reason of a
Share dividend, recapitalization, merger, consolidation, split-up,
combination or exchange of shares, or the like, the maximum number
of Shares subject to option during the existence of the Plan, the
number of Shares subject to each outstanding option and any related
Stock Appreciation Right or Limited Right, and the Option Price of
each outstanding option shall be appropriately adjusted by the Com-
mittee, whose determination in each case shall be conclusive.
Section 14. Conditions Upon Granting of Options, Stock Apprecia-
tion Rights and Limited Rights and Issuance of Shares.
No option, Stock Appreciation Right or Limited Right shall be
granted and Shares shall not be issued upon the exercise of an op-
tion unless the grant or the issuance, as the case may be, shall
comply with all relevant provisions of state and federal law, in-
cluding, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or trading
system upon which the Shares may then be listed or traded.
Section 15. Amendment and Termination of Plan.
(a) Amendment. The Board may from time to time amend the
Plan in such respects as the Board may deem advisable except that,
other than with the approval of the shareholders of the Company:
<PAGE>
(1) the maximum number of Shares that may be optioned
under the Plan cannot be increased except in accordance with
Section 13;
(2) the class of employees eligible for the grant of
options may not be changed;
(3) except as provided in Section 7(b), no option may
be granted under the Plan at an Option Price that is less than
the Fair Market Value of a Share on the date the option is
granted; and
(4) no option may be granted that is exercisable more
than ten years after the date of grant of the option.
(b) Termination. The Board may at any time terminate the
Plan.
(c) Effect of Termination. Any termination of the Plan
shall not adversely affect any option, Stock Appreciation Right or
Limited Right previously granted and such option, Stock Apprecia-
tion Right or Limited Right shall remain in full force and effect
as if the Plan had not been terminated.
Section 16. Notices.
Each notice relating to the Plan shall be in writing and
delivered in person or by first class mail (which may, but
need not, be certified or registered mail) to the proper ad-
dress. Each notice shall be deemed to have been given on the
date of actual receipt. Each notice to the Company or the
Committee shall be addressed as follows: Stock Option Commit-
tee, c/o Corporate Treasurer, Shopsmith, Inc., 6530 Poe Ave-
nue, Dayton, Ohio 45414-2591. Each notice to a Holder of an
option shall be addressed to such Holder at the Holder's ad-
dress shown on the records of the Company. Anyone to whom a
notice may be given under the Plan may designate a new address
by written notice to the other party to that effect.
Section 17. Employment.
Neither the Plan nor the grant or award of any option,
Stock Appreciation Right or Limited Right under the Plan shall
confer upon any employee the right to continued employment
with the Company or affect in any way the right of the Company
to terminate the employment of an employee at any time and for
any reason.
Section 18. Savings Provisions.
<PAGE>
With respect to persons subject to Section 16 of the Ex-
change Act, transactions under the Plan are intended to comply
with all applicable conditions of Rules 16b-3 or any successor
rule promulgated under the Exchange Act. To the extent any
provision of the Plan or action by the Board or the Committee
fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Board or
the Committee.
Section 19. Shareholder Approval.
The Plan shall become effective upon its approval by the
affirmative vote of the holders of a majority of the outstand-
ing Shares. Prior to the time such approval is obtained, the
Committee may grant options under the Plan so long as (i) no
such option will become exercisable prior to such shareholder
approval, and (ii) all such options will terminate if such
shareholder approval is not obtained within one year after the
date of the grant.
Section 20. Governing Law.
This Plan shall be governed by and construed in accor-
dance with Ohio law.
<PAGE>
EXHIBIT 13.1
Shopsmith, Inc.
Annual Report to Shareholders
For the Year Ended
April 4, 1998
<PAGE>
SHOPSMITH, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Financial Highlights:
Fiscal Years Ended
April 4, April 5, March 30,
1998 1997 1996
<S> <C> <C> <C>
Results of operations:
Net sales $ 18,798,771 $ 18,469,161 $ 17,409,832
Income before income taxes and
extraordinary item 1,552,239 1,802,558 1,513,890
Income tax benefit 120,000 - 743,000
Income before extraordinary item 1,672,239 1,802,558 2,256,890
Extraordinary item - - 770,824
Net income 1,672,239 1,802,558 3,027,714
Per Common Share:
Shareholders' equity $ 1.97 $ 1.36 $ 0.66
Dividends - - -
Diluted earnings per share:
Income before income taxes and
extraordinary item 0.56 0.66 0.57
Income before extraordinary item 0.61 0.66 0.84
Extraordinary item - - 0.29
Net income $ 0.61 $ 0.66 $ 1.13
Financial position:
Working capital $ 4,037,133 $ 2,507,407 $ 634,742
Total assets 8,076,565 6,548,821 5,024,214
Shareholders' equity 5,168,427 3,620,746 1,809,480
Current ratio 2.39 1.86 1.20
Total debt to equity ratio 0.56 0.81 1.78
Common shares outstanding 2,624,375 2,663,675 2,659,175
</TABLE>
Contents
Letter to Shareholders 3
Reporting Responsibility 4
Report of Independent Auditors 5
Consolidated Financial Statements 6
Notes to Consolidated Financial Statements 11
Management's Discussion and Analysis 18
Selected Financial Data 20
Shareholders' Information 21
Directors and Officers 22
Corporate Profile
Headquartered in Dayton, Ohio, Shopsmith, Inc. is recognized as a leader in
the production and marketing of quality woodworking tools. The Company
distributes these tools and other woodworking products directly to consumers
through demonstration and mail selling channels. The name "Shopsmith" is a
registered trademark that the Company applies to the majority of the
products it produces. The Company's common shares are traded in the
over-the-counter market.
<PAGE>
To our Shareholders:
I am pleased to report continued success at Shopsmith for 1998. While we
did not quite match last year's excellent results when our earnings of
$1,803,000 were 9.8% of sales, we did earn a respectable $1,672,000
(8.9% of sales). Diluted earnings per share amounted to $.61 compared with
$.66 of a year ago.
Revenues increased by 2% in 1998 to $18,799,000 from $18,469,000 last year.
Gross margins moved upwards by $330,000 or 3.3% on increased volume and unit
profitability. Selling and administrative expenses increased by $667,000 or
7.9%, primarily due to additional advertising and promotion in the current
year when compared to 1997. Evaluations of the productivity of these
expanded 1998 programs are continuing. Our 1998 results benefited from a
$53,000 increase in interest income.
The Company recognized a tax benefit of $120,000 in 1998 because of the
elimination of the deferred Federal income tax valuation allowance of
$673,000 offsetting a provision for $553,000 of Federal income taxes. This
adjustment in the allowance is the result of favorable earnings trends at
Shopsmith over the last three-year period.
Testing has been initiated for a franchise store arrangement combining
retail sales, shop time-sharing, education and service- all in one facility.
Current efforts are centered upon this concept and the development of a
working business model. We will pursue establishment of franchise units
once the model has been completely evaluated and a proven business formula
has been developed.
We have successfully tested the Crafter's Station- a new product developed
in 1998. The Crafter's Station, adapted from our current Power Station unit,
functions as a table saw and is a multi-purpose power source for many
Shopsmith accessories. This new unit will allow the user to perform the many
woodworking operations required in craft activities. The product, offered at
a lower price than the Mark V, will be directed to customers other than our
typical Mark V buyers. Product deliveries commenced in April 1998.
A new Rip Fence was developed in 1998 and will be in production during our
second fiscal quarter of 1999. It has significant new features that we
believe to be an attractive upgrade to our current product line. We are
offering this product to our current Mark V users.
The Company is looking to add to customer convenience and to improve its
skills in electronic marketing. Adding to our web-site (www. shopsmith.com)
which currently serves to provide product and company information, we are
planning to promote our products through an electronic catalog.
<PAGE>
Our financial position strengthened significantly in 1998. Working capital
has grown by $1.5 million to $4.0 million by the end of 1998 - with marked
improvement in current ratios to 2.39 from 1.86 last year. Our debt to
equity ratio has shown similar improvement- down to .56 from .81 last year.
No borrowings were required this year, thus internally generated cash flows
have allowed us to invest accumulated expansion-related funds and to augment
1998 financial income.
In October 1997 the Board of Directors approved a plan under which the
Company may repurchase up to 200,000 shares in market and other transactions
from time to time. Through April 4, 1998, 62,000 shares have been
repurchased at an aggregate cost of $168,250.
We are certainly gratified by the success of the past four years. I
especially thank our circle of friends including customers; associates,
lenders and suppliers who helped bring this about. We are continuing to
invest in the future and are looking forward to enhanced values for you--our
shareholders.
John R. Folkerth
Chairman of the Board
Chief Executive Officer
<PAGE>
REPORTING RESPONSIBILITY
Shopsmith's management is responsible for the preparation and integrity of
the consolidated financial statements presented in this Annual Report. These
statements have been prepared in conformity with generally accepted
accounting principles using the best estimates and judgments of management.
Management believes that the Company's accounting control systems provide
reasonable assurance that assets are safeguarded and that financial
information is reliable.
Independent public accountants are selected annually by the Board of
Directors, subject to approval by shareholders, to audit the financial
statements. Their audit includes a review of the internal control structure
to the extent they considered necessary and selective tests of transactions
to support their report, which follows.
The Audit Committee, comprised of outside directors, meets regularly with
management and the independent public accountants to review financial
reporting, internal accounting controls, and audit results.
William C. Becker,
Vice President of Finance
Chief Financial Officer
John R. Folkerth,
Chairman of the Board
Chief Executive Officer
<PAGE>
Crowe Chizek
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Shopsmith, Inc.
Dayton, Ohio
We have audited the accompanying consolidated balance sheets of Shopsmith,
Inc.and Subsidiaries as of April 4, 1998 and April 5, 1997 and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for the years ended April 4, 1998, April 5, 1997,
and March 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Shopsmith, Inc. and Subsidiaries as of April 4, 1998 and April 5, 1997 and
the consolidated results of its operations and its cash flows for the years
ended April 4, 1998, April 5, 1997 and March 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
June 3, 1998
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Fiscal years Ended
April 4, April 5, March 30,
1998 1997 1996
<S> <C> <C> <C>
Net sales $ 18,798,771 $ 18,469,161 $ 17,409,832
Cost of products sold 8,394,401 8,395,103 8,426,553
Gross margin 10,404,370 10,074,058 8,983,279
Selling expenses 6,615,118 5,729,345 4,770,037
Administrative expenses 2,452,926 2,671,917 2,723,534
Total operating expenses 9,068,044 8,401,262 7,493,571
Income from operations 1,336,326 1,672,796 1,489,708
Interest income 125,722 72,676 30,893
Interest expense (150) (614) (32,678)
Other income, net 90,341 57,700 25,967
Income before income taxes
and extraordinary item 1,552,239 1,802,558 1,513,890
Income tax benefit (Note 8) 120,000 - 743,000
Income before extraordinary item 1,672,239 1,802,558 2,256,890
Extraordinary item-gain from
extinguishment of debt
(Notes 4 and 6) - - 770,824
Net income $ 1,672,239 $ 1,802,558 $ 3,027,714
Net income per common share
(Note 10 ):
Basic:
Before extraordinary item $ 0.63 $ 0.68 $ 0.85
Extraordinary item - - 0.29
Net income $ 0.63 $ 0.68 $ 1.14
Diluted:
Before extraordinary item $ 0.61 $ 0.66 $ 0.84
Extraordinary item - - 0.29
Net income $ 0.61 $ 0.66 $ 1.13
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 4, April 5,
1998 1997
<S> <C> <C>
ASSETS (Notes 1 and 3)
Current Assets:
Cash (Note 2) $ 316,669 $ 1,106,873
Restricted cash (Note 2) 264,880 114,151
Short-term investments (Note2) 2,851,355 1,513,397
Accounts receivable:
Trade, less allowance for doubtful accounts:
$317,408 in 1998 and $342,617 in 1997 518,417 419,101
Inventories (Note 2):
Finished products 732,735 562,346
Raw materials and work in process 1,569,055 1,105,712
Total inventories 2,301,790 1,668,058
Deferred income taxes (Note 8) 382,000 284,000
Prepaid expenses 310,160 329,902
Total current assets 6,945,271 5,435,482
Properties (Notes 2 and 6):
Machinery, equipment and tooling 7,006,954 6,841,126
Leasehold improvements 190,835 190,835
Total cost 7,197,789 7,031,961
Less accumulated depreciation and
amortization 6,711,089 6,507,780
Net properties 486,700 524,181
Deferred income taxes (Note 8) 629,000 587,000
Other assets 15,594 2,158
Total assets $ 8,076,565 $ 6,548,821
Continued
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 4, April 5,
1998 1997
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,279,547 $ 1,179,261
Customer advances 39,854 58,940
Accrued liabilities:
Compensation, employee benefits and
payroll taxes 657,154 860,994
Sales taxes payable 131,071 148,703
Accrued recourse liability 275,841 145,511
Accrued expenses 389,328 413,648
Other 135,343 121,018
Total current liabilities 2,908,138 2,928,075
Contingencies (Note 11)
Shareholders' Equity (Notes 7 and 9):
Preferred shares- without par value;
authorized 500,000; none issued
Common shares- without par value;
authorized 5,000,000; issued and
outstanding 2,624,375 in 1998 and
2,663,675 in 1997 2,869,075 2,993,633
Retained earnings 2,299,352 627,113
Total shareholders' equity 5,168,427 3,620,746
Total Liabilities and Shareholders' Equity $ 8,076,565 $ 6,548,821
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIT)
<CAPTION>
Retained
Common Shares Earnings
Number Amount (Deficit) Total
<S> <C> <C> <C> <C>
Balance April 1, 1995 2,654,566 $ 2,978,460 $(4,203,159) $(1,224,699)
Net income for fiscal 1996 3,027,714 3,027,714
Common shares issued
under employee stock
purchase plan (Note 7) 3,800 6,465 6,465
Stock options exercised
(Note 7) 809 - - -
Balance March 30, 1996 2,659,175 2,984,925 (1,175,445) 1,809,480
Net income for fiscal 1997 1,802,558 1,802,558
Common shares issued
under employee stock
purchase plan (Note 7) 4,500 8,708 - 8,708
Balance April 5, 1997 2,663,675 2,993,633 627,113 3,620,746
Net income for fiscal 1998 1,672,239 1,672,239
Common shares issued
under employee stock
purchase plan (Note 7) 700 1,672 1,672
Stock options exercised
(Notes 7 and 9) 22,000 42,020 42,020
Common shares repurchased
(Note 9) (62,000) (168,250) - (168,250)
Balance April 4, 1998 2,624,375 $ 2,869,075 $ 2,299,352 $ 5,168,427
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
Fiscal Years Ended
April 4, April 5, March 30,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,672,239 $1,802,558 $3,027,714
Adjustments to reconcile net income
to cash provided from operating activities:
Depreciation and amortization 206,437 212,203 212,663
Provision for doubtful accounts 229,858 135,122 263,445
(Gain) loss on disposal of properties - (9,911) -
Decrease in restructuring reserve - - (294,229)
Deferred income taxes (140,000) (55,000) (816,000)
Gain on extinguishment of debt - - (770,824)
Cash provided from (required for) changes
in assets and liabilities:
Restricted cash (150,729) 200,484 35,614
Accounts receivable (329,174) (261,529) 138,964
Inventories (633,732) (157,099) 223,208
Other current assets 19,742 (152,786) (16,883)
Other assets (13,436) 1,000 -
Accounts payable and customer advances 81,200 336,530 (997,807)
Other current liabilities (101,137) (618,308) 227,512
Cash provided from operating activities 841,268 1,433,264 1,233,377
Cash flows from investing activities:
Maturity of short-term investments 3,750,000 750,000 750,000
Purchase of short-term investments (5,087,958) (1,522,526) (748,912)
Property additions (168,956) (127,804) (208,242)
Proceeds from sale of property - 9,911 -
Cash (used in) investing activities (1,506,914) (890,419) (207,154)
Cash flows from financing activities:
Common shares issued 43,692 8,708 6,465
Common shares repurchased (168,250) - -
Decrease in term loan - - (323,310)
Decrease in accounts payable longterm - - (496,649)
Decrease in capital lease obligations - (4,881) (13,443)
Cash provided from (used in) financing
activities (124,558) 3,827 (826,937)
Net increase (decrease) in cash (790,204) 546,672 199,286
Cash:
At beginning of year 1,106,873 560,201 360,915
At end of year $ 316,669 $ 1,106,873 $ 560,201
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SHOPSMITH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description
The Company's sole business activity is the marketing and selling of quality
woodworking products in the United States through demonstration, telephone
solicitation and mail-order selling channels and, to a limited degree,
through dealers in the United States, Canada and the United Kingdom.
Shopsmith branded products account for substantially all of net sales. The
majority of these products (as measured by dollar value) are manufactured by
the Company.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company and its subsidiaries, after elimination of significant intercompany
balances and transactions.
Statement of Cash Flows
Following is supplementary information relating to the consolidated
statement of cash flows:
Cash paid for the following items: 1998 1997 1996
Interest $ 150 $ 614 $ 32,678
Income taxes (net of refunds) 19,573 52,116 50,000
Cash
Depository transactions and disbursements are handled primarily by one
local financial institution. Approximately $264,000 and $114,000 was
maintained at April 4, 1998 and April 5, 1997, respectively in an account
restricted for use in funding the Company's recourse obligations should the
Company be unable to do so itself through its normal operations.Cash and
cash equivalents include highly liquid debt instruments purchased with
maturities ranging up to one year.
Short-term investments
The Company determines the appropriate classification for its short-term
investments, which, at April 4, 1998 and April 5, 1997, consist only of U.S.
Government or Government backed debt securities, at the time of purchase and
reevaluates this determination at each balance sheet date. By policy of the
Board of Directors, the Company's short-term investments may consist only of
U.S. Government backed debt securities or corporate obligations rated not
less than A1 or A+.The Company classifies investments with maturities of less
than six months as held to maturity and values them at amortized cost. The
fair value of such investments at April 4, 1998 andApril 5, 1997
approximates their amortized cost. Investments with maturities greater than
six months are classified as available for sale and recorded at fair value.
At April 4, 1998 and April 5, 1997, the Company had approximately $1.6
million and $1 million of available for sale securities maturing from
October 1999 to February 2000. The fair value of these securities at the
balance sheet dates approximates their cost.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
<PAGE>
Properties
Properties are stated at cost. Depreciation and amortization are provided
primarily using the straight-line method over estimated useful lives that
range as follows:
Machinery, equipment and tooling 3 to 12 years
Leasehold improvements 3 to 10 years
Maintenance and repairs are charged to expense, unless they significantly
lengthen useful economic lives of the property. When an asset is retired or
sold, its cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized.
Income Taxes
The Company accounts for income taxes using the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Installment Contracts
Retail installment contracts sold to financial institutions were $10.0
million in fiscal 1998, $10.7 million in fiscal 1997 and $9.7 million in
fiscal 1996. Of these contracts, $8.6 million, $9.0 million, and $7.5
million were sold without recourse in fiscal 1998, 1997 and 1996,
respectively. At April 4, 1998 approximately $1.8 million of installment
contracts sold to a financial institution with a recourse provision were
still outstanding.
Product Warranties
Products are warranted against defects in material and workmanship for one
year. Estimated costs are accrued for warranties presently in force.
Research and Development Costs
Research and development costs were not material in 1998, 1997 and 1996.
Income per Common Share
Basic Income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflect reduced per share amounts that would have
resulted if stock options had been converted into common stock.
Environmental Remediation Costs
Costs incurred to investigate and remediate contaminated sites are
expensed. Liabilities for these expenditures are recorded when it is
probable that obligations have been incurred and the amounts can be
reasonably estimated.
<PAGE>
Estimates
In preparing financial statements, management must make estimates and
assumptions. These estimates and assumptions affect the amounts reported
for assets, liabilities, revenue and expenses, as well as affecting the
disclosures provided. Future results could differ from the current
estimates. Areas involving the use of management's estimates and
assumptions include the allowance for doubtful accounts, inventory cost,
depreciation of property and equipment, deferred income tax valuation
allowances, product warranty accruals and other accrued liabilities.
Fiscal Year
Shopsmith's fiscal year follows a 52/53-week pattern consistent with its
fiscal year for tax purposes. The year ended April 4, 1998 was a 52-week
year while the year ended April 5, 1997 was a 53-week year and the year
ended March 30, 1996 was a 52-week year.
Recent Accounting Pronouncements
During the current fiscal year, the Financial Accounting Standards Board
issued several Statements of Financial Accounting Standards including the
following:
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. This statement establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income includes net income and all other changes
in shareholders' equity except those resulting from investments and
distributions to owners.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements issued for periods
beginning after December 15, 1997. This statement requires financial and
descriptive information about an entity's operating segments to be included
in the annual financial statements.
Neither of these authoritative pronouncements, when implemented, is expected
to impact the reported financial position or results of operations of the
Company. The Company is currently evaluating how it will present
comprehensive income and segment information in future financial statements.
3. Bank Line of Credit
As of April 4, 1998 a revolving credit agreement provided for maximum
short-term borrowing of $500,000 subject to certain limitations based upon
inventory levels. Interest is charged at the bank's prime rate. No amounts
were outstanding under this arrangement during fiscal 1998 and 1997. The
agreement requires compliance with certain minimum net worth, working
capital, financial leverage and other miscellaneous covenants and expires
June 30, 1999. Substantially all tangible assets are pledged as collateral.
4. Accounts Payable Restructuring
In June 1995, the Company paid about $860,000 in satisfaction of about
$1,473,000 in debt under a voluntary payment plan that was agreed with
creditors in May 1994. The resultant $613,000 gain was recorded in fiscal
1996 as an extraordinary item.
<PAGE>
5. Employee Benefit Plans
Shopsmith maintains a defined contribution employee benefit plan covering
substantially all employees. The Company matches employee contributions of
up to four percent of compensation at rates of 25 or 50 percent, depending
on amounts contributed by employees. The Company contributed $45,400,
$36,500 and $26,400 to this plan for 1998, 1997 and 1996, respectively.
The Company provides certain health care and life insurance benefits to
substantially all employees. These benefits are provided through a
combination of insurance and self-insurance deductibles.
6. Leases
Leases on real estate (manufacturing, storage, office and retail store
premises) and equipment expire through fiscal 2004. In October 1995, the
Company paid about $294,000 in satisfaction of about $452,000 in debt under
an early lease cancellation agreement that was reached in December 1994.
The resultant $158,000 gain was recorded in fiscal 1996 as an extraordinary
item.
The lease on the Company's manufacturing and headquarters building expires
during fiscal 2000.
Operating lease obligations for the next five fiscal years are:
1999 $ 541,337
2000 289,543
2001 60,249
2002 52,541
2003 52,541
$ 996,211
Rent expense was $521,811 in 1998, $422,700 in 1997 and $379,100 in 1996.
7. Stock Options and Employee Stock Purchase Plan
In July 1988, the shareholders approved the 1988 Director Option Plan that
provides for the issuance of up to 52,500 shares. Pursuant to options
granted under the plan, an outside director of the Company could choose
individually to be compensated for services by payment of a cash retainer or
by being awarded stock options with values at time of issuance approximately
equal to the cash retainer. Options are exercisable over ten years
beginning one year from the date of grant. The plan originally included
stock appreciation rights. These rights were surrendered by affected
participants in December 1996.
The Company also has a stock option plan approved in 1984 that permits the
granting of options to employees to purchase stock at the market value on
the date of grant. Options are for a term of either five or ten years and
become exercisable in annual installments beginning one year from the date
of grant. No additional options may be granted under the 1984 plan.
In June 1993, the Company granted a non-qualified stock option, outside the
1988 and 1984 plans, for 20,000 shares to an employee to purchase stock at
$3.00 per share. The option becomes exercisable in annual installments
beginning one year from the date of grant and expires on June 20, 2003.
<PAGE>
In August 1993, the Company adopted an employee stock purchase plan, which
permits eligible employees and directors of Shopsmith to purchase from time
to time up to 250,000 Shopsmith common shares directly from the Company
without payment of brokerage fees. The purchase price of the shares
purchased under the plan is the market price of the shares (based upon a
five-day average closing price at the time of purchase). A total of 700,
4,500 and 3,800 shares were purchased under the plan during fiscal 1998,
1997 and 1996.
In March 1994, the Company granted an option for 35,000 shares at the
then-current market price of $1.92 per share to the lessor of its
headquarters and manufacturing buildings in exchange for an agreement to
reduce the space leased. The option expires five years from the date of
grant.
In July 1995, the shareholders approved the 1995 option plan that provides
for the issuance of up to 250,000 shares. Pursuant to options granted under
the plan, the shareholders ratified the grant of options, which are
contingent upon the achievement of certain pre-tax income thresholds in
fiscal 1995, 1996 and 1997, for 220,000 shares at $1.91 per share to a group
of employees under this plan. In any of those years in which the Company's
pre-tax income equals or exceeds the threshold, one third of the options
will become exercisable 75 days after that year's end. In any of those
years where the Company's pre-tax income is less than the established
thresholds, one third of the options will terminate. Fiscal 1995, 1996 and
1997 pre-tax income exceeded the applicable thresholds and thus all of the
options granted will become exercisable in accordance with the plan.
In July 1997, the shareholders approved the 1997 option plan, which
provides for the issuance of up to 250,000 shares pursuant to options
granted under the plan. A total of 104,000 shares were granted at an average
share cost of $2.98 to a group of employees. The plan provides for certain
pre-tax income thresholds in fiscal 1998, 1999 and 2000. The earnings
thresholds were not achieved in 1998 and options covering 27,999 shares
were cancelled. Options covering an additional 15,000 shares were cancelled
under the plan as the result of the resignation of an option holder.
Additional information relating to the option plans is as follows:
<PAGE>
<TABLE>
<CAPTION>
1984 Plan 1988 Plan
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Granted - - - - - -
Cancelled - 1,250 10,500 - - -
Expired 19,000 - - - - -
Available - - - 1,557 1,557 1,557
Exercised - - - - - -
Average exercise price - - - - - -
Exercisable at year end 2,250 21,250 22,500 47,514 47,514 47,514
Outstanding at year end 2,250 21,250 22,500 47,514 47,514 47,514
Average option price $ 6.84 $ 3.98 $ 4.17 $ 0.93 $ 0.93 $ 0.93
1995 Plan 1997 Plan
1998 1997 1996 1998 1997 1996
Granted 36,000 70,000 - 104,000 - -
Cancelled 12,000 42,000 51,191 42,999 - -
Expired - - - - - -
Available 19,191 43,191 71,191 188,999 - -
Exercised 22,000 - 809 - - -
Average exercise price $1.91 -$ 1.91 - - -
Exercisable at year end 150,667 90,667 59,333 - - -
Outstanding at year end 208,000 206,000 178,000 61,001 - -
Average option price $ 1.98 $ 1.84 $ 1.91 $ 2.97 $ - $ -
</TABLE>
Except for outstanding options, the plans terminate in ten years.
In accordance with the provisions of Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company applies APB Opinion 25 and related Interpretations in accounting
for its stock option plans and, accordingly, does not recognize compensation
cost. If the Company had elected to recognize compensation cost based on
the fair value of the options granted at grant date as prescribed by SFAS
123, 1998 and 1997 net income and earnings per share would have been reduced
to the proforma amounts indicated in the table below.
1998 1997
Net income- as reported $ 1,672,239 $ 1,802,558
Net income- pro forma $ 1,635,944 $ 1,777,675
Diluted earnings per share- as reported $ 0.61 $ 0.66
Diluted earnings per share- pro forma $ 0.59 $ 0.65
The fair value of each options grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
1998 1997
Expected dividend yield 0% 0%
Expected stock volatility 13% 12%
Risk -free interest rate 5.6% 6.4%
Expected life of options 5 years 5 years
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. Because no options were granted in 1996
there are no proforma amounts to report for 1996.
<PAGE>
8. Income taxes
The income tax provision (benefit) reflected in the consolidated statements
of operations is comprised of the following:
1998 1997 1996
Current
Federal $ 20,000 $ 55,000 $ 50,000
State and Local 23,000
Deferred 533,000 587,000 517,000
Provision for income taxes before
effect of adjustment of
valuation allowances 553,000 642,000 590,000
Effect of adjustment of valuation
allowances (673,000) (642,000) (1,333,000)
Income tax benefit $ (120,000) $ $ (743,000)
The income tax provision attributable to the 1996 extraordinary item is
$262,000 and is completely offset by the change in the valuation adjustment.
The change in the valuation allowance for each year represents the
realization of tax benefits of temporary differences and net operating loss
carryforwards that reversed during the respective periods. Also, the change
represents the Company's reevaluation of the realizability of future tax
benefits because of its continued profitability. Deferred income taxes
reflect the impact of temporary differences between the amount
of assets and liabilities recorded for financial reporting purposes and such
amounts as measured by tax laws and regulations.
<PAGE>
The components of deferred tax assets and liabilities included
in the balance sheet are:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expenses not currently deductible $ 257,000 $ 371,000 $ 565,000
Inventory valuation 17,000 17,000 14,000
Allowance for doubtful accounts 108,000 116,000 80,000
Less valuation allowance - (220,000) (406,000)
Current 382,000 284,000 253,000
Tax loss carryforwards 295,000 714,000 1,201,000
Tax credit carryforwards 237,000 237,000 237,000
Accumulated depreciation (26,000) (14,000) (16,000)
Alternative minimum tax payments 123,000 103,000 50,000
Less valuation allowance - (453,000) (909,000)
Non- current 629,000 587,000 563,000
Total $ 1,011,000 $ 871,000 $ 816,000
</TABLE>
The Company's effective tax rate differs from the U. S. statutory rate
as follows:
1998 1997 1996
Federal statutory rate 34.0% 34.0% 34.0%
Non deductible expenses
principally meals and entertainment 1.6% 1.4% 0.9%
Change in valuation allowance (43.3%) (35.6%) (88.1%)
Other, net 0.0% 0.2% 4.1%
(7.7%) 0.0% (49.1%)
Net operating losses and tax credits expire as follows:
Net Operating Tax
Losses Credits
1999 $34,000
2000 148,000
2004 4,000
2005 23,000
2006 18,000
2007 10,000
2010 867,000 -
$867,000 $237,000
9. Stock repurchase
In October 1997, the Company's Board of Directors approved a plan under
which the Company may repurchase up to 200,000 common shares in market and
other transactions from time to time. Such transactions will be at the
discretion of the Company and the plan will continue indefinitely. The
Company repurchased 62,000 shares through April 4, 1998. Of that amount,
22,000 shares were acquired upon the exercise of a stock option. The cost
of these optioned shares amounting to $63,250 exceeded proceeds by $21,230.
An additional 14,000 shares were purchased subsequent to the balance sheet
date. This subsequent transaction had no significant effect on reported
earnings per share for the year ended April 4, 1998.
<PAGE>
10. Earnings per share
Dual presentation of basic and diluted earnings per share is
required by SFAS No. 128. Basic earnings per share are computed
by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflect reduced per share amounts that would have resulted if
stock options had been converted into common stock. The
following reconciles amounts reported in the financial
statements:
<TABLE>
<CAPTION>
Fiscal Years Ended
April 4, April 5, March 30,
1998 1997 1996
<S> <C> <C> <C>
Income before extraordinary item $1,672,239 $1,802,558 $2,256,890
Extraordinary item - - 770,824
Net income $1,672,239 $1,802,558 $3,027,714
Weighted average shares 2,658,475 2,662,342 2,654,566
Additional dilutive shares 93,870 69,914 21,051
Total dilutive shares 2,752,345 2,732,256 2,675,617
Basic earnings per share:
Income before extraordinary item $ 0.63 $ 0.68 $ 0.85
Extraordinary item - - 0.29
Net income $ 0.63 $ 0.68 $ 1.14
Diluted earnings per share:
Income before extraordinary item $ 0.61 $ 0.66 $ 0.84
Extraordinary item - - 0.29
Net income $ 0.61 $ 0.66 $ 1.13
</TABLE>
11. Contingencies
The Company is involved in various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the Company. Many
of these matters are covered in whole or in part by insurance. Management
believes that any liability that may result would not have a material effect
on the consolidated financial position or results of operations of the
Company. Additionally, the Company and over 500 other potentially
responsible parties were ordered by the Environmental Protection Agency
(EPA), under the federal "Superfund" legislation, to take action to secure a
landfill in Huber Heights, Ohio. The extent and nature of the
contamination, insurance coverage available to the Company and the
participation by additional PRP's in the clean up of this site are not fully
known at this time. The EPA has been focusing on the top 104 PRP's that
sent over 1,000 yards of waste to the site. The Company is number 62 in the
volumetric list of generators. However, there is no evidence that the
Company sent hazardous substances to the site. It has been preliminarily
estimated that the clean up of the site will cost approximately $20 million.
In May 1997, the EPA extended a settlement proposal with potential
responsible parties, including the Company. The Company declined to accept
the proposal. Based on available information, the Company believes its share
of the estimated costs associated with the ultimate resolution of this
matter will not be material to the results of operations or the financial
position of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net income was $1,672,000 or $.61 per diluted share on net sales of
$18,799,000 for the year ended April 4, 1998 compared with $1,803,000 or
$.66 per diluted share on sales of $18,469,000 for the preceding year.
Overall gross margins improved as a percentage of sales to 55.3% from 54.5%
reported in the previous year. This represents a $330,000 increase in
gross margin or 3.3%, primarily on increased unit profitability. Selling and
administrative expenses increased by $667,000 in 1998 mainly because of the
Company's decision to continue expansion of its advertising and promotional
efforts to support field sales. Evaluations of the productivity of these
programs are continuing.
The Company's core product is the Mark V and nearly all of the other current
products serve as accessories to it. Mark V units sold in 1998 were 7.6%
lower than in 1997. Mark V unit sales for 1997 were 2.9% greater than 1996.
The Crafter's Station, an adaptation of the Company's Power Station, has been
developed for initial shipments in April 1998. This new product and related
accessories will be directed to customers other than our typical Mark V
buyers.
In 1994, a deferred income tax valuation allowance of $3,051,000 was
established because of the uncertainty that the Company's net deferred tax
assets including its net operating loss and tax credit carryforwards would
be able to generate future tax benefits. The changes (Note 8) to the
deferred income tax valuation allowance for 1998, 1997 and 1996 represent
the realization of tax benefits of temporary differences which reversed
during the respective periods. Also, because of favorable earnings trends
through 1998, the Company was able to eliminate all such valuation reserves.
Because of the allowance reversal, a total tax benefit of $120,000 was
recognized in 1998.
Net income for 1996 of $3,028,000 or $1.13 per diluted share included
extraordinary gains of $771,000 at $.29 per diluted share and a $743,000
income tax benefit at $.27 per diluted share. As discussed in Notes 4 and 6
to the Consolidated Financial Statements, the Company availed itself during
1996 of early-payment discount features of both a voluntary payment plan
that was approved by affected creditors in June 1994 and an early lease
cancellation agreement that was reached in December 1994. The discounts
amounted to $613,000 or $.23 per diluted share and $158,000 or $.06 per
diluted share, respectively, and were recorded as extraordinary items.
Liquidity and Capital
Cash of $841,000 was provided from operations in 1998 compared with
$1,433,000 and $1,233,000 in 1997 and 1996 respectively. The major 1998 to
1997 variation in operating cash flows relate to increases in accounts
receivable and inventories for new ventures and products. Investing
activities consisted of tooling purchases and other plant additions totaling
$169,000 and in increased short-term investments of $1,338,000. The Company
used $168,000 to redeem common shares during 1998 as described more fully in
Note 9 to the financial statements.
<PAGE>
Working capital grew by 61% to $ 4,037,000 from $2,507,000 at the beginning
of the fiscal year. In addition, total shareholders' equity climbed to
$5,168,000 which is 43% above last year's levels. Liquidity and debt/equity
measures improved as a result with the current ratio improving to 2.39 from
1.86 last year. The debt to equity measure improved to .56 from .81 at the
beginning of the year.
A revolving credit agreement provides for maximum short-term borrowing of
$500,000 subject to certain limitations based on inventory levels. See
note 3 to the Consolidated Financial Statements for further discussion
regarding this credit facility. Management believes current and available
financial resources to be sufficient to meet operating needs.
Capital Expenditures
Fiscal 1998 capital expenditures related primarily to tooling purchases.
In fiscal 1997, capital additions were focused on upgrades of computer
equipment, replacement tooling and machinery. Fiscal 1996 capital additions
consisted mainly of the development of promotional video programs and on
tooling and die replacements.
Contingent matters
The Company has identified computer-related applications that will require
modification to ensure Year 2000 compliance. External and internal
resources are being utilized in this effort. Modification of the most
significant processes is substantially complete. The Company plans on
completing the testing process by December 31, 1998.
The Company has communicated with significant third parties about their
readiness to meet the Year 2000 issues. However, there is no guarantee that
the systems ofthese other companies on which the Company relies will be
timely converted,or that their failure would not have a material adverse
affect on the Company.
The total cost to the Company for the Year 2000 compliance issues has not
been and is not expected to be material to its financial position, results
of operations or cash flows in any given year. Costs and estimates to
complete the Year 2000 modification and testing are based on management's
best estimates about future events and other factors. However, there can be
no guarantee that these estimates will be achieved and actual results could
differ from these plans.
For a discussion of certain environmental related contingencies to which the
Company is subject, reference is made to Note 11 to the Consolidated
Financial Statements.
Forward-Looking Statements
The foregoing discussion and the Company's consolidated financial statements
contain certain forward-looking statements that involve risks and
uncertainties, including the following: (i) management's belief that the
Company must increase its distribution capabilities and introduce
competitive products in order to increase sales, (ii) the expectation that
the Company must continue to invest in the development of wood working
products in order to meet customer demands and (iii) the adequacy of
operating cash flows over the next several years together with currently
available working capital to finance the growth needs of the Company. As a
result, the Company's actual results could differ materially from the
results discussed in the forward-looking statements.
<PAGE>
Five-Year Review of Performance
<TABLE>
(In thousands except per share)
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Summary of operations:
Net sales $ 18,799 $ 18,469 $ 17,410 $ 17,728 $ 48,039
Interest (income) expense (126) (72) 2 101 414
Income (loss) before income
taxes and extraordinary item 1,552 1,803 1,514 1,421 (8,675)
Income tax benefit (120) - (743) - -
Income (loss) before extra-
ordinary item 1,672 1,803 2,257 1,421 (8,675)
Extraordinary item - - 771 - -
Net income (loss) 1,672 1,803 3,028 1,421 (8,675)
Financial Position:
Working capital $ 4,037 $ 2,507 $ 635 $ (918) $ (2,133)
Property-net 487 524 609 613 933
Total assets 8,077 6,549 5,024 4,415 7,033
Long-term debt - - - 923 1,644
Shareholders' equity 5,168 3,621 1,809 (1,225) (2,803)
Per share information:
Income (loss) per share-basic:
Before extraordinary item $ 0.63 $ 0.68 $ 0.85 $ 0.56 $ (3.58)
Extraordinary item - - 0.29 - -
Net income 0.63 0.68 1.14 0.56 (3.58)
Income (loss) per share-diluted:
Before extraordinary item 0.61 0.66 0.84 0.56 (3.58)
Extraordinary item - - 0.29 - -
Net income 0.61 0.66 1.13 0.56 (3.58)
Shareholders' equity per share 1.97 1.36 .68 (0.46) (1.16)
Performance indicators:
Return on sales (%) 8.9 9.8 17.4 8.0 (18.0)
Return on average shareholders'
equity(%) 38.1 66.4 1,035.5 N/A (588.7)
Return on average total assets(%)22.9 31.2 64.1 24.8 (73.9)
Current ratio 2.39 1.86 1.20 0.81 0.74
Ratio of total debt to equity 0.56 0.81 1.78 N/A N/A
Other information:
Number of employees at year end:
Full time 108 98 93 103 169
Part time 4 9 14 19 120
112 107 107 122 289
Average shares outstanding(000's)2,658 2,743 2,678 2,558 2,415
</TABLE>
<PAGE>
SHOPSMITH, INC. AND SUBSIDIARIES
<TABLE>
Shareholders' information
Stock Quotations (Bid Prices)
<CAPTION>
<S> <C> <C>
Quarter ended High Low
June 29, 1996 $ 2.12 $ 1.31
September 28, 1996 2.50 2.12
December 28, 1996 2.56 2.19
April 5, 1997 2.56 2.25
July 5, 1997 3.00 2.06
October 4, 1997 3.00 2.18
January 3, 1998 3.00 2.50
April 4, 1998 3.00 2.50
</TABLE>
The common shares of the Company are traded in the over-the-counter market.
The above stock quotations were obtained from daily broker quotation
("Pink") sheets and reflect interdealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions. The
Transfer Agent's records showed 1,330 shareholders of record of the
Company's common shares on May 28, 1998.
Per Share Information:
Diluted Shareholders'
Income
(loss) Dividends Equity(Deficit)
1998 $ 0.61 $ - $ 1.97
1997 0.66 - 1.36
1996 1.13 - 0.68
1995 0.56 - (0.46)
1994 (3.58) - (1.16)
Shopsmith Market Makers
William V. Frankel & Co. Hill, Thompson, Magid
Troster Singer Corp. Sharpe Capital
Wedbush, Morgan Securities Knight Securities
M. H. Meyerson & Co. Fidelity Capital Markets
Nash Weiss & Co. Paragon Capital
Herzog, Heine & Geduld
Annual meeting
Shopsmith's Annual Shareholders' Meeting will be held at 9:30 a.m. on
Wednesday, July 29, 1998 at the Company's office and manufacturing facility
located at 6530 Poe Avenue, Dayton, Ohio.
Corporate contact
Shareholders desiring a copy of the Shopsmith Inc. Annual Report on
Form 10-K or other information on the Company should direct a request to:
William C. Becker, Vice President of Finance
Shopsmith, Inc.
6530 Poe Avenue
Dayton, Ohio 45414
937-898-6070 Extension 700
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
Directors and Officers
Board of Directors
John R. Folkerth, Chairman of the Board, President and Chief Executive
Officer, Shopsmith, Inc., Dayton, Ohio
Robert L. Folkerth, Vice President, Sales and Marketing,
Shopsmith, Inc., Dayton, Ohio
J. Michael Herr, Thompson Hine & Flory LLP, Attorneys-at-Law, Dayton, Ohio
Edward A. Nicholson, President, Robert Morris College,
Coraopolis, Pennsylvania
John L. Schaefer, Vice President (retired) The James River Corporation,
Dayton, Ohio
Brady L. Skinner, Audit Partner, Brady, Ware & Schoenfeld Inc.
Dayton, Ohio
Richard L. Snell, Chief Executive Officer, Tipp Machine and Tool, Inc.,
Tipp City, Ohio
Audit Committee of the Board of Directors
John L. Schaefer, Brady L. Skinner and Richard L. Snell
Corporate Vice Presidents
William C. Becker, Vice President of Finance and Chief Financial Officer
Robert L. Folkerth, Vice President, Sales and Marketing
General Information
Transfer agent and registrar:
The Fifth Third Bank, Cincinnati, Ohio
Independent Auditors:
Crowe, Chizek and Company LLP, Columbus, Ohio
General Counsel:
Thompson Hine & Flory LLP, Dayton, Ohio
Equal Employment Opportunity Statement: It is the policy of Shopsmith, Inc.
to give equal opportunity to all qualified persons without regard to race,
color, sex, age, marital status, handicap, religion or national origin.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF SHOPSMITH, INC.
Name of Subsidiary
and Name Under Which
Subsidiary Does State of
Business Incorporation
1. Shopsmith Woodworking
Promotions, Inc. Ohio
2. Jefferson City Tool
Company Ohio
3. Shopsmith Woodworking Centers
Ltd. Co. Ohio
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIS ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Shopsmith, Inc. and Subsidiaries on Form S-8 (Registration No.33-26463,
33-64663, 33-67898, and 333-17437) of our report on our audits of the
consolidated financial statements and financial statement schedule of
Shopsmith, Inc. and Subsidiaries as of April 4, 1998 and April 5, 1997
and for the years ended April 4, 1998, April 5, 1997 and March 30, 1996,
which report is included in this Annual Report on Form 10-K.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
June 3, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-04-1998
<PERIOD-END> APR-04-1998
<CASH> 581,549
<SECURITIES> 2,851,355
<RECEIVABLES> 835,825
<ALLOWANCES> 317,408
<INVENTORY> 2,301,790
<CURRENT-ASSETS> 6,945,271
<PP&E> 7,197,789
<DEPRECIATION> 6,711,089
<TOTAL-ASSETS> 8,076,565
<CURRENT-LIABILITIES> 2,908,138
<BONDS> 0
<COMMON> 2,869,075
0
0
<OTHER-SE> 2,299,352
<TOTAL-LIABILITY-AND-EQUITY> 8,076,565
<SALES> 18,798,771
<TOTAL-REVENUES> 18,798,771
<CGS> 8,394,401
<TOTAL-COSTS> 9,068,044
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> 1,552,239
<INCOME-TAX> (120,000)
<INCOME-CONTINUING> 1,672,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,672,239
<EPS-BASIC> .63
<EPS-DILUTED> .61
</TABLE>
