<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 2054
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 3, 1999
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 reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 28, 1999 was $2,118,054.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of May 28, 1999. Common Shares,
without par value: 2,605,233 shares.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Shopsmith, Inc. Annual Report to Shareholders for the year ended
April 3, 1999 -- 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 28, 1999 -- 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 3, 1999, Shopsmith branded products accounted for
substantially all of the net sales of the Company. The Company manufactures
the majority of products sold (as measured by sales dollar volume).
Shopsmith MARK V, Special Purpose Tools 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 products 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.
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.
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.
<PAGE>
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 1999, 1998 and 1997.
Employees
The total number of persons employed by the Company (both full and part
time) as of June 1, 1999 was 133. 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 bar-
gaining 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 Fi-
nancial which are incorporated into this Report pursuant to Item 8 below.
<PAGE>
ITEM 2. Properties
Information concerning the facilities of the Company is set forth below.
Location Use Approximate
Square feet
Dayton, Ohio Manufacturing, Headquarters,
Distribution and Retail Store 115,000
Hilliard, Ohio Retail Store 7,000
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 purchased its manufacturing and headquarters building from its former
landlord in December 1998. The Hilliard, Ohio retail facilities are leased
until February 2004 with four-three year renewal options available
thereafter. The facilities were leased for the purpose of operating, on a
test basis, a pilot franchise store. The store was closed in March 1999,
and the Company is seeking subtenants for the premises.
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 66 Chairman of the Board, President and Chief
Executive Officer
William C. Becker 50 Vice President of Finance, Treasurer and Chief
Financial Officer
Robert L. Folkerth 42 Vice President, Sales and Marketing,
and Director
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. He has been a director of the Company
since 1994.
<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.22 in the Company's Annual Report
to Shareholders for the year ended April 3, 1999 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 3, 1999. The Company paid
no dividends in the fiscal years ended April 3, 1999 and April 4, 1998.
In June 1998, the Company issued stock options covering 25,000 common shares
to a key management employee. The options were issued under the Company's
1997 Stock Option Plan at an exercise price of $2.08 per share.
Shares issuable under the Company's 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 invest-
ment 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.21) in the Company's Annual Report to Shareholders for
the year ended April 3, 1999 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.19) of the Company's Annual Report
to Shareholders for the year ended April 3, 1999 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 10 and
under the heading "Selected Financial Data" p.21 of the Company's Annual
Report to Shareholders for the year ended April 3, 1999 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 28, 1999, 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 28, 1999.
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 28, 1999.
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 28, 1999.
<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 3, 1999 and April 4, 1998.
Consolidated Statements of Operations for the years ended
April 3, 1999, April 4, 1998 and April 5, 1997.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended April 3, 1999, April 4, 1998 and April 5,1997.
Consolidated Statements of Cash Flows for the
years ended April 3, 1999, April 4, 1998 and April 5, 1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
The following Financial Statement Schedules for the years ended
April 3, 1999, April 4,1998 and April 5, 1997 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 3, 1999, the Company did not file 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 8, 1999____________
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 8, 1999___________________
Director (Principal Executive Date
Officer)
June 8, 1999________________
Date /s/ John L. Schaefer
John L. Schaefer
Director
/s/ Robert L. Folkerth June 8, 1999___________________
Robert L. Folkerth Date
Vice President, Sales and Marketing,
Director
June 8, 1999________________ /s/ Brady L. Skinner
Date Brady L. Skinner
Director
June 8, 1999___________________
/s/ William C. Becker Date
William C. Becker
Vice President of Finance
(Principal Financial and
Accounting Officer)
June 8, 1999________________
Date
/s/ J. Michael Herr
J. Michael Herr
Director
June 8, 1999________________
Date
<PAGE>
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 3, 1999 and April 4, 1998 and for the years ended April 3, 1999,
April 4, 1998 and April 5, 1997, and have issued our report thereon dated
June 2, 1999. The financial statements and report are included in your
1999 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, 1999
<PAGE>
<TABLE>
SHOPSMITH INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED April 3, 1999, April 4, 1998 AND April 5, 1997
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE CHARGED BALANCE
AT TO COST DEDUCTIONS AT
BEGINNING AND FROM END
DESCRIPTION OF YEAR EXPENSES RESERVE OF YEAR
<S> <C> <C> <C> <C>
Reserves deducted
from assets to which
they apply:
YEAR ENDED
April 3, 1999
Allowance for
doubtful account
receivable $ 317,408 $ 134,519 $ 1,250 $ 450,677
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
</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 as of 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. *
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. *
<PAGE>
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. *
4.10 Promissory note and mortgage dated December 31, 1998 between
Mid-States Development Company and the Company related to the purchase
of the 6530 Poe Avenue, Dayton, Ohio property. Filed as exhibit 4.10
to the Company's quarterly report on Form 10-Q for the quarter ended
January 2, 1999. *
(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. *
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 10.13 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, April 3,
1999 and April 1,2000.). 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 April5, 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. *
<PAGE>
Other Material Contracts
10.10 1997 Stock Option Plan. Filed as exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended April 4, 1998. *
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. *
10.13 Purchase agreement, dated September 30, 1998 between Angeles
Partners XIV and the Company related to 6530 Poe Avenue, Dayton, Ohio
property. Filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended October 3, 1999. *
(13) Annual Report to Security Holders
13.1 Shopsmith, Inc. Annual Report to Shareholders For the year ended
April 3, 1999. 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 13.1
Shopsmith, Inc.
Annual Report to Shareholders
For the Year Ended
April 3, 1999
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Financial Highlights:
Fiscal Years Ended
April 3, April 4, April 5,
1999 1998 1997
<S> <C> <C> <C>
Results of Operations:
Net sales $ 17,575,601 $ 18,798,771 $ 18,469,161
Income before income taxes (761,069) 1,552,239 1,802,558
Income tax (expense) benefit 48,000 120,000 -
Net income (713,069) 1,672,239 1,802,558
Per Common Share:
Shareholders' equity $ 1.69 $ 1.97 $ 1.36
Dividends - - -
Diluted net income per share $ (0.27) $ .61 $ 0.66
Financial position:
Working capital $ 3,150,297 $ 4,037,133 $ 2,507,407
Total assets 10,024,632 8,076,565 6,548,821
Shareholders' equity 4,392,765 5,168,427 3,620,746
Current ratio 2.12 2.39 1.86
Total debt to equity ratio 1.28 0.56 0.81
Common shares outstanding 2,605,233 2,624,375 2,663,675
</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 19
Selected Financial Data 21
Shareholders' Information 22
Directors and Officers 23
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, mail selling and Internet 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:
This year has been a disappointing one at Shopsmith. Our Company
experienced a net loss in 1999 of $713,000 or $.27 per diluted share
following last year's net earnings of $1,672,000 at $.61 per diluted
share. Sales fell off last year's higher levels by 6% overall but with an
18% drop experienced in our demonstration and catalog /mail channels.
Gross margins declined because of the reduced volume and were also impacted
by market and capacity related adjustments. Additionally, loss provisions
were made to reflect our decision to discontinue unprofitable aspects of our
business. These include the pilot franchise store and participation in wood-
working shows. Demonstration sales efforts of our Crafter's Station product
have been suspended though we intend to sell the product through other
channels.
Selling expenses rose substantially in 1999 by $1,347,000 or 20% as we have
increased staffing levels aimed at improving efficiencies of operations and
learning more about the customers we serve. We also expanded promotional
efforts in an attempt to stem the sales decline. Additional costs were in-
curred to support new business ventures, including those that have been
discontinued or suspended.
The year has not been without its successes as the Shopsmith Internet
Catalog has performed above expectations. This site (URL www.shopsmith.com)
provides Shopsmith owners and prospects with information and demonstration
event schedules in addition to the on-line catalog of Shopsmith products.
While sales are not material to date, we are seeking ways to exploit this
selling opportunity by refining the functioning of the site, adding
information resources, encouraging more visits and expanding order size.
We introduced an improved rip fence during the year. This fence was
developed in collaboration with some of our enthusiastic customers and seeks
to enhance the versatility and functioning of our core Mark V product. A
new Mark V model, the 520, was created as a result of this introduction.
We have purchased our current headquarters building at 6530 Poe Avenue in
Dayton, Ohio from our former landlord. This acquisition is expected to
generate annual savings and locks in significant future occupancy costs at
current levels. While the debt assumed to finance the building increases
the Company's reported financial leverage, the actual cash outflow expended
by the Company to house its operations is about the same after the purchase
as it was before. Over time, however, the cash outflow to service the
related debt is expected to remain relatively constant while, given
inflationary pressures, cash outflows under the leasing alternative would
likely have been ever-increasing.
Our focus in our new fiscal year is to restore our core demonstration sales
and accessory businesses. We have a strong product line and the skills to
make it successful.
<PAGE>
As a concluding note, I'd like to express appreciation to Richard Snell and
Jack Schaefer for their years of dedicated and valuable service as members
of our Board of Directors. Richard stepped down from the Board in January
after serving as a director for almost 25 years. Jack, who was elected to
the Board in 1983, has decided not to stand for re-election at the upcoming
Annual Meeting of Shareholders. We commend and thank Richard and Jack for
being consistent sources of sound judgment and insightful guidance during
their tenure as directors.
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 at least annually with 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>
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 3, 1999 and April 4, 1998 and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for the years ended April 3, 1999, April 4, 1998 and April 5, 1997.
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 3, 1999 and
April 4, 1998 and the consolidated results of its operations and its cash
flows for the years ended April 3, 1999, April 4, 1998 and April 5, 1997,
in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
June 2, 1999
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Fiscal Years Ended
April 3, April 4, April 5,
1999 1998 1997
<S> <C> <C> <C>
Net sales $ 17,575,601 $ 18,798,771 $ 18,469,161
Cost of products sold 8,399,868 8,394,401 8,395,103
Gross margin 9,175,733 10,404,370 10,074,058
Selling expenses 7,962,068 6,615,118 5,729,345
Administrative expenses 2,031,973 2,452,926 2,671,917
Total operating expenses 9,994,041 9,068,044 8,401,262
Income (loss) from operations (818,308) 1,336,326 1,672,796
Interest income 102,991 125,722 72,676
Interest expense (68,367) (150) (614)
Other income, net 22,615 90,341 57,700
Income (loss) before income taxes (761,069) 1,552,239 1,802,558
Income tax benefit (Note 7) 48,000 120,000 -
Net income (loss) $ (713,069) $ 1,672,239 $ 1,802,558
Net income (loss) per common share (Note 9 ):
Basic $ (0.27) $ 0.63 $ 0.68
Diluted $ (0.27) $ 0.61 $ 0.66
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 3, April 4,
1999 1998
<S> <C> <C>
ASSETS (Notes 1 and 3)
Current Assets:
Cash (Note 2) $ 1,005,371 $ 316,669
Restricted cash (Note 2) 101,249 264,880
Short-term investments (Note 2) 989,122 2,851,355
Accounts receivable:
Trade, less allowance for doubtful accounts:
$450,677 in 1999 and $317,408 in 1998 758,548 518,417
Inventories (Note 2):
Finished products 1,268,357 732,735
Raw materials and work in process 1,142,551 1,569,055
Total inventories 2,410,908 2,301,790
Deferred income taxes (Note 7) 475,000 382,000
Prepaid expenses 225,157 310,160
Total current assets 5,965,355 6,945,271
Properties (Notes 2 and 10):
Land, building and improvements 3,151,407 190,835
Machinery, equipment and tooling 6,505,258 7,006,954
Total cost 9,656,665 7,197,789
Less accumulated depreciation and
amortization 6,200,696 6,711,089
Net properties 3,455,969 486,700
Deferred income taxes (Note 7) 584,000 629,000
Other assets 19,308 15,594
Total assets $ 10,024,632 $ 8,076,565
Continued
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 3, April 4,
1999 1998
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,342,957 $ 1,279,547
Current portion of long-term debt and
capital lease obligation (Note 10) 81,219 -
Customer advances 25,788 39,854
Accrued liabilities:
Compensation, employee benefits and
payroll taxes 377,453 657,154
Sales taxes payable 187,020 131,071
Accrued recourse liability 333,265 275,841
Accrued expenses 309,000 389,328
Other 158,356 135,343
Total current liabilities 2,815,058 2,908,138
Long-term debt and capital lease obligation
(Note 10) 2,816,809 -
Total liabilities 5,631,867 2,908,138
Contingencies (Note 11)
Shareholders' Equity (Notes 6 and 8):
Preferred shares- without par value;
authorized 500,000; none issued
Common shares- without par value;
authorized 5,000,000; issued and
outstanding 2,605,233 in 1999 and
2,624,375 in 1998 2,806,482 2,869,075
Retained earnings 1,586,283 2,299,352
Total shareholders' equity 4,392,765 5,168,427
Total Liabilities and Shareholders' Equity $ 10,024,632 $ 8,076,565
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Retained
Common Shares Earnings
Number Amount (Deficit) Total
<S> <C> <C> <C> <C>
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 6) 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 6) 700 1,672 1,672
Stock options exercised(Note 6) 22,000 42,020 42,020
Common shares repur-
chased (Note 8) (62,000) (168,250) - (168,250)
Balance April 4, 1998 2,624,375 2,869,075 2,299,352 5,168,427
Net loss for fiscal 1999 (713,069) (713,069)
Stock options exercised (Note 6) 6,858 4,594 4,594
Common shares repur-
chased (Note 8) (26,000) (67,187) - (67,187)
Balance April 3, 1999 2,605,233 $ 2,806,482 $ 1,586,283 $ 4,392,765
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
Fiscal Years Ended
April 3, April 4, April 5,
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (713,069) $ 1,672,239 $ 1,802,558
Adjustments to reconcile net income (loss)
to cash provided from operating activities:
Depreciation and amortization 214,165 206,437 212,203
Provision for doubtful accounts 191,749 229,858 135,122
(Gain) loss on disposal of properties 51,109 - (9,911)
Deferred income taxes (48,000) (140,000) (55,000)
Cash provided from (required for)
changes in assets and liabilities:
Restricted cash 163,631 (150,729) 200,484
Accounts receivable (260,133) (329,174) (261,529)
Inventories (109,118) (633,732) (157,099)
Other assets 81,289 6,306 (151,786)
Accounts payable and customer advances 49,344 81,200 336,530
Other current liabilities (395,390) (101,137) (618,308)
Cash provided from (used in)
operating activities (774,423) 841,268 1,433,264
Cash flows from investing activities:
Maturity of short-term investments 2,913,679 3,750,000 750,000
Purchase of short-term investments (1,051,446) (5,087,958) (1,522,526)
Property additions (336,404) (168,956) (127,804)
Proceeds from sale of property 16,111 - 9,911
Cash provided from (used in) investing
activities 1,541,940 (1,506,914) (890,419)
Cash flows from financing activities:
Common shares issued 4,594 43,692 8,708
Common shares repurchased (67,187) (168,250) -
Payments on long-term debt and capital
lease obligation (16,222) - (4,881)
Cash provided from (used in) financing
activities (78,815) (124,558) 3,827
Net increase (decrease) in cash 688,702 (790,204) 546,672
Cash:
At beginning of year 316,669 1,106,873 560,201
At end of year $ 1,005,371 $ 316,669 $ 1,106,873
<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, mail-order and internet 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:
1999 1998 1997
Interest $ 68,367 $ 150 $ 614
Income taxes (net of refunds) 19,573 52,116
In 1999, the Company purchased its land and building for $2,900,000, of
which $100,000 was paid in cash and the balance secured by a mortgage taken
by the seller. In addition, the Company entered into a capital lease
obligation for equipment in the amount of $114,250.
Cash
Depository transactions and disbursements are handled primarily by one local
financial institution. Approximately $101,000 and $265,000 was maintained
at April 3, 1999 and April 4, 1998, 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.
Short-term investments
The Company determines the appropriate classification for its short-term
investments, which, at April 3, 1999 and April 4, 1998, 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 3, 1999 and April 4, 1998 approximates their
amortized cost. Investments with maturities greater than six months are
classified as available for sale and recorded at fair value. At April 3,
1999 no investments had maturities in excess of six months. At April 4,
1998, the Company had approximately $1.6 million of available for sale securi-
ties extending beyond six months. The fair value of these securities at the
balance sheet dates approximates their cost.
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
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
Building 30 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. Valuation allowances to deferred tax assets are
provided to reflect doubtful realization of future tax benefits.
Installment Contracts
Retail installment contracts sold to financial institutions were
$9.2 million in 1999, $10.0 million in 1998 and $10.7 million in 1997. Of
these contracts, $ 7.4 million, $8.6 million and $9.0 million were sold with-
out recourse in 1999, 1998 and 1997, respectively. At April 3, 1999
approximately $2.6 million of installment contracts sold to a financial
institution with a recourse provision were still outstanding.
Fair Value of Financial Instruments
The fair value of financial instruments below is estimated using a
discounted cash flow analysis:
April 3, 1999 April 4, 1998
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets:
Short-term investments $ 989,122 $ 980,233 $ 2,851,355 $ 2,829,000
Liabilities:
Long-term debt $ 2,783,777 $ 2,847,000 - -
The carrying amounts of cash, accounts receivable and accounts payable
approximate their fair value.
Product Warranties
Products are warranted against defects in material and workmanship for one
year. Estimated costs are accrued for warranties presently in force.
<PAGE>
Research and Development Costs
Research and development costs were not material in 1999,1998 and 1997.
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.
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 years ended April 3, 1999 and April 4,
1998 were 52-week years while the year ended April 5, 1997 was a 53-week year.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued several Statements of
Financial Accounting Standards including the following:
SFAS No. 130, "Reporting Comprehensive Income," is effective for the current
fiscal year. 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. Components of
comprehensive income, as it applies to Shopsmith, would include the write-up
or write-down of securities held for sale to market value. The effects of
such adjustments to comprehensive income for either 1999 or 1998 are not mate-
rial and do not affect the Company's results of operations or financial
position.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for the current fiscal year. This statement
requires financial and descriptive information about operating segments to
be included in the annual financial statements. The Company has no
reportable segments within the meaning of the standard.
<PAGE>
3. Bank Line of Credit
As of April 3, 1999 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 1999 and 1998. The
agreement requires compliance with certain minimum net worth, working
capital, financial leverage and other miscellaneous covenants and expires
July 31, 1999. Substantially all tangible assets except for land and
building are pledged as collateral.
4. 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 $63,000,
$45,400 and $36,500 to this plan for 1999, 1998 and 1997, 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.
5. Leases
Operating lease obligations for the next five fiscal years are:
2000 $ 162,180
2001 133,193
2002 117,816
2003 65,300
2004 54,950
$ 533,439
Rent expense was $486,762 in 1999, $521,811 in 1998 and $422,700 in 1997.
6. 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 became 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). While no shares
were purchased under the plan in 1999, 700 and 4,500 shares were purchased
during 1998 and 1997.
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 expired in 1999.
In July 1995, the shareholders approved the 1995 option plan that provides
for the issuance of up to 250,000 shares. Also in 1995, options for 220,000
shares at $1.91 per share were granted under the plan to a group of
employees. Exercise of these options was contingent upon the achievement of
certain pre-tax income thresholds in 1995, 1996 and 1997. In any of those
years in which the Company's pre-tax income equaled or exceeded the
threshold, one third of the options became exercisable 75 days after that
year's end. Pre-tax income for 1995, 1996 and 1997 exceeded the applicable
thresholds and thus all of the options granted became 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. Options covering a total of 129,000 shares at an
average per share cost of $2.79 have been granted under the plan. Under the
terms of some of the options, satisfaction of certain pre-tax income
thresholds in fiscal 1998, 1999 and 2000 is a condition of exercise. The
earnings thresholds were not achieved in 1999 and 1998. Accordingly,
options covering 33,002 and 42,999 shares were cancelled in each of those
years. Those shares are available for re-grant under the plan.
<PAGE>
Additional information relating to the plans is as follows:
<TABLE>
<CAPTION>
1984 Plan 1988 Plan
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Granted - - - - - -
Cancelled - - 1,250 - - -
Expired - 19,000 - - - -
Available - - - - 1,557 1,557
Exercised - - - 6,858 - -
Average exercise price - - - 0.67 - -
Exercisable at year end 2,250 2,250 21,250 40,656 47,514 47,514
Outstanding at year end 2,250 2,250 21,250 40,656 47,514 47,514
Average option price $6.84 $6.84 $ 3.98 $ 0.98 $ 0.93 $ 0.93
1995 Plan 1997 Plan
1999 1998 1997 1999 1998 1997
Granted - 36,000 70,000 25,000 104,000 -
Cancelled 12,000 12,000 42,000 33,002 42,999 -
Expired - - - - - -
Available 31,191 19,191 43,191 197,001 188,999 -
Exercised - 22,000 - - - -
Average exercise price - 1.91 - - - -
Exercisable at year end 167,334 150,667 90,667 1,333 - -
Outstanding at year end 196,000 208,000 206,000 52,999 61,001 -
Average option price $ 1.91 $ 1.98 $ 1.84 $ 2.62 $ 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, net income (loss) and per share amounts would have been reduced to
the proforma amounts indicated in the table below.
1999 1998 1997
Net income (loss)- as reported $ (713,069) $ 1,672,239 $ 1,802,558
Net income (loss)- pro forma $ (737,834) $ 1,635,944 $ 1,777,675
Diluted earnings (loss) per share-
as reported $ (0.27) $ 0.61 $ 0.66
Diluted earnings (loss) per share-
pro forma $ (0.28) $ 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:
1999 1998 1997
Expected dividend yield 0% 0% 0%
Expected stock volatility 24% 13% 12%
Risk -free interest rate 5.25% 5.6% 6.4%
Expected life of options 5 years 5 years 5 years
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future results or amounts.
<PAGE>
7. Income taxes
The income tax provision (benefit) reflected in the consolidated statements
of operations is comprised
of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current
Federal $ - $ 20,000 $ 55,000
State and Local
Deferred (196,000) 533,000 587,000
Provision for income taxes before
effect of adjustment of
valuation allowances (196,000) 553,000 642,000
Effect of adjustment of valuation
allowances 148,000 (673,000) (642,000)
Income tax benefit $ (48,000) $ (120,000) $ -
</TABLE>
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 effect of the Company's reevaluation of the
realizability of future tax benefits. The 1999 valuation allowance was
established for the tax credits expiring in 2000 that the Company is
unlikely to realize.
The components of deferred tax assets and liabilities included in the
balance sheet are:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expenses not currently deductible $ 283,000 $ 257,000 $ 371,000
Inventory valuation 39,000 17,000 17,000
Allowance for doubtful accounts 153,000 108,000 116,000
Less valuation allowance - - (220,000)
Current 475,000 382,000 284,000
Tax loss carryforwards 402,000 295,000 714,000
Tax credit carryforwards 203,000 237,000 237,000
Accumulated depreciation 4,000 (26,000) (14,000)
Alternative minimum tax payments 123,000 123,000 103,000
Less valuation allowance (148,000) - (453,000)
Non- current 584,000 629,000 587,000
Total $ 1,059,000 $ 1,011,000 $ 871,000
</TABLE>
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. The
Company believes that it is more likely than not that these assets are
realizable and represent its best estimate based on the weight of available
evidence as prescribed in SFAS 109. If the Company is unable to generate
sufficient income in the future through operating results, increase in the
valuation allowance will be required through a charge to expense.
<PAGE>
The Company's effective tax rate differs from the U. S. statutory
rate as follows:
1999 1998 1997
Federal statutory rate (34.0%) 34.0% 34.0%
Non deductible expenses
principally meals and entertainment 4.1% 1.6% 1.4%
Change in valuation allowance 19.4% (43.3%) (35.6%)
Expiration of tax credits 4.5% 0.0% 0.0%
Other, net (0.3%) 0.0% 0.2%
(6.3%) (7.7%) 0.0%
Net operating losses and tax credits expire as follows:
Net Operating Tax
Losses Credits
2000 $ 148,000
2004 4,000
2005 23,000
2006 18,000
2007 10,000
2010 867,000 -
2019 316,000 -
$ 1,183,000 $ 203,000
8. 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 has repurchased 88,000 shares through April 3, 1999 under this plan.
9. 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:
Fiscal year ended
April 3,1999 April 4, 1998 April 5, 1997
Net income (loss) $ (713,069) $ 1,672,239 $ 1,802,558
Weighted average shares 2,602,947 2,658,475 2,662,342
Additional dilutive shares - 93,870 69,914
Total dilutive shares 2,602,947 2,752,345 2,732,256
Basic earnings (loss) per share $ (0.27) $ 0.63 $ 0.68
Diluted earnings (loss) per share $ (0.27) $ 0.61 $ 0.66
There were no additional dilutive shares included in the computation at
April 3, 1999 because the stock options were anti-dilutive.
<PAGE>
10.Long-term debt and capital lease obligation
In 1999 the Company purchased the building it had been leasing. The seller
financed the building purchase. The financing agreement, among other things,
provided for a $100,000 down payment and a secured mortgage note for
$2,800,000 at an 8.75% interest rate. The agreement requires $25,785 of
monthly principal and interest payments until January 1, 2003 at which time
the scheduled balance of $2,500,000 will become due and payable. The
outstanding balance is $2,783,777 at April 3, 1999. Scheduled maturities
are as follows:
2000 $ 68,544
2001 74,788
2002 81,601
2003 2,558,844
In 1999, the Company began acquiring certain operating software pursuant to
a capital lease agreement anticipated to total $160,000 when complete in the
Company's fiscal 2000. At April 3, 1999, the Company had incurred $114,250
under this agreement. There was no accumulated depreciation at April 3, 1999.
The lease obligation, which includes a lessor security interest, will be
payable over a five-year period beginning in 2000. Monthly payments are
anticipated to be approximately $3,300 including interest at 8.2 %.
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
A net loss of $713,000 or $.27 per diluted share was incurred on net sales
of $17,576,000 for the year ended April 3, 1999 compared to net earnings of
$1,672,000 or $.61 per diluted share on $18,799,000 of sales in
the preceding year. Sales declines of 18% were experienced in the Company's
demonstration and catalog-mail channels with unit shipments of the Company's
core product, the Mark V, 24.6% lower than in 1998 following a 7.6%
reduction from 1997. Sales declines in these channels of $2,873,000 were
partially offset by sales in new efforts-most notable of which was the
introduction of the Crafter's Station product which generated $1,680,000 of
new sales in 1999. As discussed below, demonstration sales of the Crafter's
Station were suspended in April 1999 though its sales continued through
other channels.
Gross profits declined on the reduced 1999 sales to $9,175,000 from
$10,404,000 realized in 1998. Overall margin rates declined to 52.2% of
sales from 55.3% reflecting additional provisions for obsolescence and
capacity related adjustments.
Selling expenses increased by $1,347,000 in part because of the costs to
support efforts initiated in 1999 including a pilot franchise store,
Internet catalogs and the Crafter's Station. In addition, the Company
expanded its staffing and marketing functions and increased promotional
expenses in an effort to reverse the downward sales trends.
In the fourth quarter of 1999, the Company abandoned its efforts to launch
a franchise store concept; discontinued its attempt to sell wood turning
merchandise via woodworking shows and suspended demonstration selling
efforts of its Crafter's Station product line. Collectively, 11% of total
sales were generated during fiscal 1999 from these efforts. A total of
$153,000 was charged to operations for inventory/tooling write-downs and
other termination costs. Administrative costs declined in the current
year by $421,000 mostly because of reduced incentive provisions.
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 operating loss and tax credit carryforwards would be
able to generate future tax benefits. The effect of the allowance was to
reduce the carrying value of the deferred tax asset. From that time, the
allowance has been reduced (and the asset was increased) to reflect expected
utilization of tax loss and credit carryforwards. Provisions for 1998 income
taxes of $553,000 were offset by elimination of $673,000 of previously
established valuation allowances. In 1999 the Company recognized a provision
for recoverable Federal income taxes of $230,000 reduced by $182,000 of tax
credits not expected to be realized.
Sales increased to $18,799,000 in fiscal 1998 from $18,469,000 in fiscal
1997 allowing for a $330,000 improvement in gross profits. Selling and
administrative expenses, however, increased by $667,000 mostly because of
the Company's decision to continue expansion of its advertising and
promotion to support demonstration sales. In 1998 net income declined to
$1,672,000 at $.61 per diluted share from $1,803,000 or $.66 per diluted
share in 1997.
<PAGE>
Liquidity and Capital
The 1999 net loss caused $774,000 to be used in operations during the year
compared to $841,000 and $1,433,000 provided by operations in 1998 and 1997
respectively. Liquidation of short-term investments funded cash
requirements in 1999 while favorable earnings, net of inventory expansion in
1998, favorably affected cash flows in the preceding two years.
The Company's assets include $1,059,000 of currently recoverable and
deferred income taxes at April 3, 1999. Presently management believes these
assets are realizable and represent their best estimate based on the weight
of available evidence as prescribed in SFAS 109.
In the third quarter of the current fiscal year the Company financed the
purchase of its present factory and headquarters building (as more fully
described in note 10 of the financial statements) for $2,900,000.
A $100,000 down payment was made with monthly payments of principal and
interest of $26,000 due until the year 2003 at which time a balloon payment
of $2.5 million will be due. The Company also utilized a capitalized lease
to finance financial software requiring $3,000 of monthly payments for a
five-year period.
The current ratio was 2.12 to 1 at April 3, 1999 compared to 2.39 to 1 a
year ago. The debt to equity ratio increased to 1.28 to 1 from .56 to 1 at
the first of the year largely because of the aforementioned purchase
transaction. 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 1999 capital expenditures relate to the aforementioned building
purchase and the acquisition of operating software. In 1998, capital
additions focused on tooling purchases. Computer equipment, replacement
tooling and machinery constitute major outlays in 1997.
<PAGE>
Year 2000 Impact
The year 2000 issue is related to computer software utilizing two digits
rather than four to define the year. As a result, any of the Company's
computer programs or any of the Company's suppliers that have date sensitive
software may cause system failures or generate incorrect data.
The Company has identified information technology applications that will
require modification to ensure year 2000 compliance. Evaluation and testing
of on-going programs is underway. Replacement of certain of these systems
has been identified and related software has been acquired. Non-information
technology systems are presently being evaluated. While no formal
contingency plan has been adopted, the Company believes that it will be able
to address Year 2000 issues as they arise without material disruption of its
business.
The Company has communicated with its major suppliers and financial
institutions to assess the impact on the Company's operations should they
fail to achieve Year 2000 compliance. Based on responses to date, many of
these third parties indicate programs in place without specific confirmation
of year 2000 compliance.
Costs incurred to date for year 2000 activities have not been material to
the Company. Also, the Company believes that its current estimate of total
costs of compliance will not have a material adverse impact on results of
operations or financial condition.
Achievement of year 2000 compliance is subject to a variety of risks beyond
the Company's control, including continued availability of personnel and
preparedness of third parties. The failure of the Company, its customers,
vendors, taxing and governmental authorities to achieve Year 2000 readiness
could adversely affect the Company's operations and/or financial condition.
Year 2000 failures could adversely affect aspects of the business such as
procurement of materials, scheduling of selling events, processing of sales
orders and functioning of the Company's Internet web pages.
Forward Looking Statements
The foregoing discussion and the Company's consolidated financial statements
contain certain forwardlooking statements that involve risks and
uncertainties, including but not limited to the following: (a) the adequacy
of operating cash flows over the next several years together with currently
available working capital to finance the operating needs of the Company,
(b)generation of future taxable income to utilize existing deferred tax
assets, (c) successful implementation of Year 2000 compliance by the Company
and its suppliers, (d) the absence of unanticipated costs and delays in
achieving Year 2000 compliance and (e) the Company's ability to effectively
address any other Year 2000 issues.
<PAGE>
SHOPSMITH INC. AND SUBSIDIARIES
Selected Financial Data
Five-Year Review of Performance
(Dollars in thousands except per share)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Summary of operations:
Net sales $ 17,576 $ 18,799 $ 18,469 $ 17,410 $ 17,728
Interest (income) expense (103) (126) (72) 2 101
Income (loss) before income
taxes and extraordinary item (761) 1,552 1,803 1,514 1,421
Income tax benefit (48) (120) - (743) -
Income (loss) before extraordinary
item (713) 1,672 1,803 2,257 1,421
Extraordinary item - - - 771 -
Net income (loss) (713) 1,672 1,803 3,028 1,421
Financial Position:
Working capital $ 3,150 $ 4,037 $ 2,507 $ 635 $ (918)
Property-net 3,456 487 524 609 613
Total assets 10,025 8,077 6,549 5,024 4,415
Long-term debt 2,817 - - - 923
Shareholders' equity 4,393 5,168 3,621 1,809 (1,225)
Per share information:
Income (loss) per share-basic:
Before extraordinary item $ (0.27) $ 0.63 $ 0.68 $ 0.85 $ 0.56
Extraordinary item - - - 0.29 -
Net income (0.27) 0.63 0.68 1.14 0.56
Income (loss) per share-diluted:
Before extraordinary item (0.27) 0.61 0.66 0.84 0.56
Extraordinary item - - - 0.29 -
Net income (0.27) 0.61 0.66 1.13 0.56
Shareholders' equity per share 1.69 1.97 1.36 0.68 (0.46)
Performance indicators:
Return on sales (%) (4.1) 8.9 9.8 17.4 8.0
Return on average shareholders'
equity(%) (14.9) 38.1 66.4 1,035.5 N/A
Return on average total assets
(%) (7.9) 22.9 31.2 64.1 24.8
Current ratio 2.12 2.39 1.86 1.20 0.81
Ratio of total debt to equity 1.28 0.56 0.81 1.78 N/A
Other information:
Number of employees at year end:
Full time 115 108 98 93 103
Part time 12 4 9 14 19
127 112 107 107 122
Average shares outstanding
(000's) 2,603 2,658 2,743 2,678 2,558
</TABLE>
<PAGE>
SHOPSMITH, INC. AND SUBSIDARIES
<TABLE>
Shareholders' information
Stock Quotations (Bid Prices)
<CAPTION>
<S> <C> <C>
Quarter ended High Low
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
July 4, 1998 2.69 1.97
October 3, 1998 2.31 1.16
January 2, 1999 1.75 1.13
April 3, 1999 2.00 0.88
</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 inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions. The
Transfer Agent's records showed 1,303 shareholders of record of the
Company's common shares on May 14, 1999.
Per Share Information:
Diluted Shareholders'
Income
(loss) Dividends Equity (Deficit)
1999 $ (0.27) $ - $ 1.69
1998 0.61 - 1.97
1997 0.66 - 1.36
1996 1.13 - 0.68
1995 0.56 - (0.46)
Shopsmith Market Makers
William V. Frankel & Co. Hill Thompson Magid & Co., Inc.
National Financial Services Corp. Sharpe Capita, Inc.
Wedbush Morgan Securities, Inc. Knight Securities, Inc.
Spear Leeds & Kellogg Capital Markets Paragon Capital Corp.
Herzog, Heine, Geduld, Inc Wien Securities Corp.
Annual meeting
Shopsmith's Annual Shareholders' Meeting will be held at 9:30 a.m. on
Wednesday, July 28, 1999 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
Audit Committee of the Board of Directors
John L. Schaefer, Edward A. Nicholson and Brady L. Skinner
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 PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the financial 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 3, 1999 and April 4, 1998
and for the years ended April 3, 1999, April 4, 1998 and April 5, 1997,
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 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-3-1999
<PERIOD-END> APR-3-1999
<CASH> 1,106,620
<SECURITIES> 989,122
<RECEIVABLES> 1,209,225
<ALLOWANCES> 450,677
<INVENTORY> 2,410,908
<CURRENT-ASSETS> 5,965,355
<PP&E> 9,656,665
<DEPRECIATION> 6,200,696
<TOTAL-ASSETS> 10,024,632
<CURRENT-LIABILITIES> 2,815,058
<BONDS> 2,816,809
<COMMON> 2,806,482
0
0
<OTHER-SE> 1,586,283
<TOTAL-LIABILITY-AND-EQUITY> 10,024,632
<SALES> 17,575,601
<TOTAL-REVENUES> 17,575,601
<CGS> 8,399,868
<TOTAL-COSTS> 9,994,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,367
<INCOME-PRETAX> (761,069)
<INCOME-TAX> (48,000)
<INCOME-CONTINUING> (713,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (713,069)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
