<PAGE> 1
Exhibit 13.1
[SHOPSMITH, INC. LOGO]
SHOPSMITH, INC.
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
APRIL 1, 2000
<PAGE> 2
Shopsmith, Inc. 2000 Annual Report
SHOPSMITH INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Financial Highlights:
Fiscal Years Ended
-----------------------------------------------
April 1, April 3, April 4,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Results of Operations:
Net sales $ 19,554,170 $ 17,575,601 $ 18,798,771
Income (loss) before income taxes (981,689) (761,069) 1,552,239
Income tax (expense) benefit 302,000 48,000 120,000
Net income (loss) (679,689) (713,069) 1,672,239
Per Common Share:
Shareholders' equity $ 1.43 $ 1.69 $ 1.97
Dividends - - -
Diluted net income per share (0.26) $ (0.27) $ 0.61
Financial position:
Working capital $ 2,347,804 $ 3,150,297 $ 4,037,133
Total assets 9,553,360 10,024,632 8,076,565
Shareholders' equity 3,713,076 4,392,765 5,168,427
Current ratio 1.73 2.12 2.39
Total debt to equity ratio 1.57 1.28 0.56
Common shares outstanding 2,605,233 2,605,233 2,624,375
</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 2
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Shopsmith, Inc. 2000 Annual Report
To our Shareholders
This year was one in which the focus was to restore our core Mark V
demonstration efforts and accessory business. While much was achieved with
increases in sales in most operating channels, our additional efforts fell short
of earning a net profit in fiscal 2000. Our Company experienced a net loss of
$680,000 or $.26 per diluted share in the current year compared to a loss of
$713,000 or $.27 per diluted share in 1999.
Sales grew by 11% to $19,554,000 or $1,979,000 more than last year reflecting
our efforts to expand the core business. This increase was achieved despite the
early fiscal 2000 decision to suspend sales of the Crafter's Station product
line that generated $1,680,000 of sales in the previous year. Unit sales of our
core product, the Mark V, rose by 21.5% over last year when compared to last
year's 24.6% decline from two years ago. The new upgrade fence system introduced
last year has been well received by existing owners and new customers alike. Our
demonstration sales channel and traveling academies experienced sizable gains as
did our catalog and mail sales. Moreover, Internet sales more than tripled as
our site (www.shopsmith.com) contains newly designed web pages targeting new
prospects for the Mark V.
Gross margins improved by over 15% to $10,610,000 from $9,176,000 a year ago
primarily on the increased volume. Margin rates also improved this year as our
additional sales programs achieved better returns. Net operating expenses
increased to $11,384,000 or 58.2% of sales in 2000 from $9,994,000 or 56.9% of
sales last year. During the year the Company increased sales recruiting and
training efforts, along with expenditures to attract new customers.
The Company has continued expansion of its product education programs in 2000.
The Traveling Academy program is designed to enhance woodworkers' confidence and
proficiency in the use of Shopsmith equipment. It also exposes the prospect to
the many other products and accessories that Shopsmith has in easy reach of all
prospective customers. Shopsmith is committed to be the woodworking education
leader.
A direct marketing inquiry acquisition program was re-introduced in the year to
attract prospective buyers in all our corporate sales channels. We have also
developed more effective invitations to our demonstration events as well as much
improved local media advertising. Seasonal selling programs to existing
customers have also been expanded.
We have made strong investments in gaining and servicing our customers this year
and have brought to life our new positioning statement - We work hard to be
your..."Lifetime Woodworking Partner."
John R. Folkerth
Chairman of the Board
Chief Executive Officer
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Shopsmith, Inc. 2000 Annual Report
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.
Mark A. May,
Vice President of Finance
Chief Financial Officer
John R. Folkerth,
Chairman of the Board
Chief Executive Officer
Page 4
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Shopsmith, Inc. 2000 Annual Report
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 1, 2000 and April 3, 1999 and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years ended April 1, 2000, April 3, 1999 and April 4, 1998. 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 1, 2000 and April 3, 1999 and the
consolidated results of its operations and its cash flows for the years ended
April 1, 2000, April 3, 1999, and April 4, 1998, in conformity with generally
accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
June 7, 2000
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Shopsmith, Inc. 2000 Annual Report
<TABLE>
<CAPTION>
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended
--------------------------------------------------
April 1, April 3, April 4,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $ 19,554,170 $ 17,575,601 $ 18,798,771
Cost of products sold 8,944,137 8,399,868 8,394,401
------------ ------------ ------------
Gross margin 10,610,033 9,175,733 10,404,370
Selling expenses 9,216,909 7,962,068 6,615,118
Administrative expenses 2,167,893 2,031,973 2,452,926
------------ ------------ ------------
Total operating expenses 11,384,802 9,994,041 9,068,044
Income (loss) from operations (774,769) (818,308) 1,336,326
Interest income 48,450 102,991 125,722
Interest expense (271,073) (68,367) (150)
Other income, net 15,703 22,615 90,341
------------ ------------ ------------
Income (loss) before income taxes (981,689) (761,069) 1,552,239
Income tax benefit (Note 7) 302,000 48,000 120,000
------------ ------------ ------------
Net income (loss) $ (679,689) $ (713,069) $ 1,672,239
============= ============ ============
Net income (loss) per common share (Note 9):
Basic $ (0.26) $ (0.27) $ 0.63
============= ============ ============
Diluted $ (0.26) $ (0.27) $ 0.61
============= ============ ============
</TABLE>
See notes to consolidated financial statements.
Page 6
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Shopsmith, Inc. 2000 Annual Report
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 1, April 3,
2000 1999
---- ----
ASSETS (Notes 1 and 3)
---------------------------------------------
<S> <C> <C>
Current Assets:
Cash and equivalents (Note 2) $ 1,301,387 $ 1,005,371
Restricted cash (Note 2) 104,970 101,249
Short-term investments (Note 2) - 989,122
Accounts receivable:
Trade, less allowance for doubtful accounts:
$646,756 in 2000 and $450,677 in 1999 622,887 758,548
Inventories (Note 2):
Finished products 1,164,350 1,268,357
Raw materials and work in process 1,358,835 1,142,551
----------- -----------
Total inventories 2,523,185 2,410,908
Deferred income taxes (Note 7) 569,000 475,000
Prepaid expenses 426,214 225,157
----------- -----------
Total current assets 5,547,643 5,965,355
----------- -----------
Properties (Notes 2 and 10):
Land, building and improvements 3,161,199 3,151,407
Machinery, equipment and tooling 6,568,403 6,505,258
----------- -----------
Total cost 9,729,602 9,656,665
Less accumulated depreciation and
amortization 6,501,718 6,200,696
----------- -----------
Net properties 3,227,884 3,455,969
----------- -----------
Deferred income taxes (Note 7) 757,000 584,000
----------- -----------
Other assets 20,833 19,308
----------- -----------
Total assets $ 9,553,360 $10,024,632
=========== ===========
</TABLE>
Continued
Page 7
<PAGE> 8
<TABLE>
<CAPTION>
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 1, April 3,
2000 1999
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 1,469,298 $ 1,342,957
Current portion of long-term debt and
capital lease obligation (Note 10) 189,038 81,219
Customer advances 26,863 25,788
Accrued liabilities:
Compensation, employee benefits and
payroll taxes 372,235 377,453
Sales taxes payable 193,162 187,020
Accrued recourse liability 390,369 333,265
Accrued expenses 298,717 309,000
Other 260,157 158,356
----------- ------------
Total current liabilities 3,199,839 2,815,058
Long-term debt and capital lease obligation (Note 10) 2,640,445 2,816,809
----------- ------------
Total liabilities 5,840,284 5,631,867
----------- ------------
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; shares issued and
outstanding 2,605,233 2,806,482 2,806,482
Retained earnings 906,594 1,586,283
----------- ------------
Total shareholders' equity 3,713,076 4,392,765
----------- ------------
Total Liabilities and Shareholders' Equity $ 9,553,360 $ 10,024,632
=========== ============
</TABLE>
See notes to consolidated financial statements.
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Shopsmith, Inc. 2000 Annual Report
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shares Retained
Number Amount Earnings Total
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
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 repurchased (Note 6) (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 repurchased (Note 6) (26,000) (67,187) - (67,187)
--------- ---------- ----------- -----------
Balance April 3, 1999 2,605,233 2,806,482 1,586,283 4,392,765
Net loss for fiscal 2000 - - (679,689) (679,689)
--------- ---------- ----------- -----------
Balance April 1, 2000 2,605,233 $2,806,482 $ 906,594 $3,713,076
========= ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
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Shopsmith, Inc. 2000 Annual Report
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------
April 1, April 3, April 4,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (679,689) $ (713,069) $ 1,672,239
Adjustments to reconcile net income (loss) to
cash provided from operating activities:
Depreciation and amortization 301,022 214,165 206,437
Provision for doubtful accounts 383,262 191,749 229,858
(Gain) loss on disposal of properties - 51,109 -
Deferred income taxes (267,000) (48,000) (140,000)
Cash provided from (required for) changes
in assets and liabilities:
Restricted cash (3,721) 163,631 (150,729)
Accounts receivable (188,500) (260,133) (329,174)
Inventories (112,277) (109,118) (633,732)
Other assets (202,582) 81,289 6,306
Accounts payable and customer advances 127,416 49,344 81,200
Other current liabilities 90,445 (395,390) (101,137)
----------- ----------- ----------
Cash provided from (used in) operating activities (551,624) (774,423) 841,268
----------- ----------- ----------
Cash flows from investing activities:
Maturity of short-term investments 989,122 2,913,679 3,750,000
Purchase of short-term investments - (1,051,446) (5,087,958)
Property additions (72,937) (336,404) (168,956)
Proceeds from sale of property - 16,111 -
----------- ----------- ----------
Cash provided from (used in) investing activities 916,185 1,541,940 (1,506,914)
----------- ----------- ----------
Cash flows from financing activities:
Common shares issued - 4,594 43,692
Common shares repurchased - (67,187) (168,250)
Payments on long-term debt and capital lease obligation (68,545) (16,222) -
----------- ----------- ----------
Cash provided from (used in) financing activities (68,545) (78,815) (124,558)
----------- ----------- ----------
Net increase (decrease) in cash 296,016 688,702 (790,204)
Cash:
At beginning of year 1,005,371 316,669 1,106,873
----------- ----------- ----------
At end of year $ 1,301,387 $ 1,005,371 $ 316,669
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
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Shopsmith, Inc. 2000 Annual Report
SHOPSMITH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
The Company's sole business activity is the marketing and sales 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 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 (refunded) for the following items:
2000 1999 1998
---- ---- ----
Interest $271,073 $ 68,367 $ 150
Income taxes (net of refunds) (33,478) - 19,573
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. Also in 1999, the Company entered into a capital lease obligation for
equipment in the amount of $114,250.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represents all checking accounts and short-term cash
investments having maturities of 90 days or less. Depository transactions and
disbursements are handled primarily by one local financial institution, which
provides FDIC coverage of $100,000 per depositor. The Company's accounts
periodically exceed FDIC limits. Approximately $105,000 and $101,000 was
maintained at April 1, 2000 and April 3, 1999, 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, consisted only of U.S. Government or
Government backed debt securities of less than six months. 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 those securities
at April 3, 1999 approximated amortized cost. 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+.
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:
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Shopsmith, Inc. 2000 Annual Report
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 recognizes 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 $8.2 million in
2000, $9.2 million in 1999 and $10.0 million in 1998. Of these contracts, $ 6.5
million, $ 7.4 million and $8.6 million were sold without recourse in 2000, 1999
and 1998 respectively. At April 1, 2000 approximately $3.0 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:
<TABLE>
<CAPTION>
April 1, 2000 April 3, 1999
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Short-term investments $ 989,122 $ 980,233
Liabilities:
Long-term debt $ 2,715,233 $2,689,165 $2,783,777 $2,847,000
</TABLE>
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate their fair value.
PRODUCT WARRANTIES
Products are warranted against defects in material and workmanship for two
years. Estimated costs are accrued for warranties presently in force.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were not material in 2000, 1999 and 1998.
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.
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Shopsmith, Inc. 2000 Annual Report
ADVERTISING EXPENSES
The Company recognizes media expenses in the period that related demonstration
events occur. Catalog expenses are charged to operations on the date of mailing.
Such expenses were approximately $2.7 million, $2.4 million, and $2.3 million in
2000, 1999 and 1998 respectively.
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 1, 2000, April 3, 1999 and April 4,
1998 were all 52-week years.
BUSINESS SEGMENTS
The Company has only one operating segment within the meaning of SFAS Number
131.
3. BANK LINE OF CREDIT
As of April 1, 2000 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 one-half of one percent above the bank's prime
rate. No amounts were outstanding under this arrangement during fiscal 2000 and
1999. The agreement requires compliance with certain minimum net worth, working
capital, financial leverage and other miscellaneous covenants and expires July
31, 2000. The Company is in compliance with all covenants at April 1,2000.
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 charged approximately $57,000, $63,000 and
$45,400 to operations for 2000,1999 and 1998, respectively.
The Company provides certain health care and life insurance benefits to
substantially all employees. These benefits are provided by insurance.
5. LEASES
Operating lease obligations for the next
five fiscal years are:
2001 $ 130,639
2002 113,278
2003 57,115
2004 41,979
2005 7,302
---------
$ 350,313
=========
Rent expense was approximately $221,000 in 2000, $487,000 in 1999 and $522,000
in 1998.
6. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
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Shopsmith, Inc. 2000 Annual Meeting
All options outstanding at the beginning of the year under the 1988 Director
Option Plan and the 1984 Option Plan were cancelled or expired. No additional
options may be granted under either 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.
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
2000 and 1999, 700 shares were purchased during 1998.
In July 1995, the shareholders approved the 1995 option plan that provides for
the issuance of up to 250,000 shares. Within the past three fiscal years 105,000
options were granted in 2000, none in 1999 and 36,000 options in 1998. As to the
2000 awards, grants are contingent upon the achievement of certain pre-tax
income thresholds in 2001, 2002 and 2003.
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.
Earnings thresholds attached to 114,000 shares granted in fiscal 1998 and 1999
were not achieved. Accordingly, options covering 37,999, 33,002 and 42,999
shares were cancelled in 2000, 1999 and 1998 respectively. Options granted in
2000 for 80,000 shares include pre-tax earnings thresholds for 2001 through
2003.
In February 2000, the Company adopted The 2000 Director Stock Option Plan that
permits non-employee directors to purchase up to a maximum of 72,000 common
shares. Effective in fiscal 2000, options for 6,000 shares (2,000 for each
non-employee director) were granted at an average option price of $.69 per
share. The plan provides for annual grants of options for 2,000 shares to each
non-employee director immediately following each Annual Meeting of Shareholders.
Additional information relating to certain of the plans the plans is as follows:
<TABLE>
<CAPTION>
1984 Plan 1988 Plan
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Granted - - - - - -
Cancelled - - - 37,932 - -
Expired 2,250 - 19,000 2,724 - -
Available - - - - - 1,557
Exercised - - - - 6,858 -
Average exercise price - - - - 0.67 -
Exercisable at year end - 2,250 2,250 - 40,656 47,514
Outstanding at year end - 2,250 2,250 - 40,656 47,514
Average option price $ - $ 6.84 $ 6.84 $ - $ 0.98 $ 0.93
1995 Plan 1997 Plan
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Granted 105,000 - 36,000 80,000 25,000 104,000
Cancelled 54,000 12,000 12,000 37,999 33,002 42,999
Expired 40,000 - - - - -
Available 13,000 31,191 19,191 155,000 197,001 188,999
Exercised - - 22,000 - - -
Average exercise price - - 1.91 - - -
Exercisable at year end 102,000 167,334 150,667 5,000 1,333 -
Outstanding at year end 207,000 196,000 208,000 95,000 52,999 61,001
Average option price $ 1.29 $ 1.91 $ 1.98 $ 0.92 $ 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
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss)- as reported $ (679,689) $(713,069) $1,672,239
Net income (loss)- pro forma $ (711,689) $(737,834) $1,635,944
Diluted earnings (loss) per share- as reported $ (0.26) $ (0.27) $ 0.61
Diluted earnings (loss) per share- pro forma $ (0.27) $ (0.28) $ 0.59
</TABLE>
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Shopsmith, Inc. 2000 Annual Report
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.
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:
2000 1999 1998
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock volatility 22% 24% 13%
Risk -free interest rate 6.60% 5.25% 5.60%
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.
7. INCOME TAXES
The income tax benefit (provision) reflected in the consolidated statements of
operations is comprised of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current $ 35,000 $ - $ (20,000)
Deferred 119,000 196,000 (533,000)
-------- --------- ---------
Provision for income taxes before
effect of adjustment of
valuation allowances 154,000 196,000 (553,000)
Effect of adjustment of valuation
allowances 148,000 (148,000) 673,000
-------- --------- ---------
Income tax benefit (expense) $302,000 $ 48,000 $ 120,000
======== ========= =========
</TABLE>
The change in the valuation allowance for each year represents the effect of the
Company's reevaluation of the realizability of future tax benefits. The 1999
valuation allowance was established for unrealizable tax credits that expired in
2000.
The components of deferred tax assets and liabilities included in the balance
sheet are:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Expenses not currently deductible $ 323,000 $283,000 $ 257,000
Inventory valuation 26,000 39,000 17,000
Allowance for doubtful accounts 220,000 153,000 108,000
Less valuation allowance - - -
------------ ---------- -----------
Current 569,000 475,000 382,000
------------ ---------- -----------
Tax loss carryforwards 611,000 402,000 295,000
Tax credit carryforwards 55,000 203,000 237,000
Accumulated depreciation 1,000 4,000 (26,000)
Alternative minimum tax payments 90,000 123,000 123,000
Less valuation allowance - (148,000) -
------------ ---------- -----------
Non- current 757,000 584,000 629,000
------------ ---------- -----------
Total $ 1,326,000 $1,059,000 $ 1,011,000
------------ ---------- -----------
</TABLE>
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Shopsmith, Inc. 2000 Annual Report
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.
The Company's effective tax rate differs from the U. S. statutory rate as
follows:
2000 1999 1998
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
----- ----- -----
Non deductible expenses
principally meals and entertainment (3.2%) (4.1%) 1.6%
Change in valuation allowance 15.1% (19.4%) (43.3%)
Expiration of tax credits (15.1%) (4.5%) 0.0%
Other, net (0.1%) 0.3% 0.0%
------- ------- -------
30.7% 6.3% (7.7%)
======= ======= =======
Net operating losses and tax credits expire as follows:
Net Operating Tax
Losses Credits
------------- ---------
2004 $ 4,000
2005 23,000
2006 18,000
2007 10,000
2010 867,000 -
2019 316,000 -
2020 614,000 -
---------- ---------
$1,797,000 $ 55,000
========== =========
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 1, 2000 under this plan.
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Shopsmith, Inc. 2000 Annual Report
9. EARNINGS PER SHARE
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>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (679,689) $ (713,069) $1,672,239
=========== =========== ==========
Weighted average shares 2,605,233 2,602,947 2,658,475
Additional dilutive shares - - 93,870
---------- ---------- ---------
Total dilutive shares 2,605,233 2,602,947 2,752,345
========== ========== =========
Basic earnings (loss) per share $ (0.26) $ (0.27) $ 0.63
========== ========== =========
Diluted earnings (loss) per share $ (0.26) $ (0.27) $ 0.61
========== ========== =========
</TABLE>
There were no additional dilutive shares included in the computation at April 1,
2000 and April 3, 1999 because the stock options were anti-dilutive.
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 $2,715,233
at April 1, 2000. Scheduled maturities are as follows:
2001 $ 74,788
2002 81,601
2003 2,558,844
In 1999, the Company acquired certain operating software pursuant to a capital
lease agreement. The agreement is expected to be cancelled with the lessor in
fiscal 2001. Accordingly, the $114,250 amount advanced has been classified as a
current liability.
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.
Additionally, the Company and over 500 other potentially responsible parties
(PRP's) 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
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Shopsmith, Inc. 2000 Annual Report
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 PRP's, including the Company. The
Company declined to accept the proposal.
In May 2000 the Company received a demand for indemnification with respect to
the costs of environmental cleanup of a manufacturing facility occupied by a
subsidiary of the Company in the early 1980s. The claimant has undertaken
remediation of the property at the direction of the Missouri Department of
Natural Resources. The claimant alleges (i) that investigation and remediation
will cost approximately $2,700,000, (ii) that the Company is required under the
terms of a 1980 agreement to indemnify for all costs, and (iii) that the Company
may also be liable under CERCLA for a portion of the clean-up costs. The
claimant has demanded payment of $900,000 in settlement of the claim. Under the
terms of the 1980 agreement, whether the Company is required to indemnify turns
on whether the subsidiary initiated or continued, following its occupancy of the
premises, practices that resulted in contamination of the premises. The Company
does not believe the subsidiary initiated or continued such practices.
Based on available information, the Company believes its share of the estimated
costs associated with the ultimate resolution of these matters will not be
material to the results of operations or the financial position of the Company.
Page 18
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Shopsmith, Inc. 2000 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
2000-1999
---------
The Company experienced a loss of $680,000 or $.26 per diluted share for its
year ended April 1, 2000 compared to a 1999 loss of $713,000 at $.27 per diluted
share. Overall, sales increased to $19,554,000 or $1,979,000 and 11% more than
last year's $17,576,000 amounts. Improved demonstration sales efforts together
with expansion of the Internet, catalog and mail sales and traveling academies
were the principal reasons for the increase in sales. Sales growth was
experienced despite suspension of the Crafter's Station product line that
generated $1,680,000 of sales in 1999. Unit shipments of the Company's core
product, the Mark V were 21.5 % higher than a year ago.
Gross margin improved by $1,434,000 to $10,610,000 in fiscal 2000 primarily on
the expanded volume. Overall margin rate improved to 54.3% of sales from 52.2 %
a year ago as additional sales programs achieved better results.
Net operating expenses increased to $11,384,000 or 58.2% of sales, from
$9,994,000 or 56.9% of sales last year. During the year the Company increased
its sales recruiting and training efforts along with expenditures to attract new
customers. In the fiscal year 1999, the Company purchased the building it was
leasing. The impact of the transaction decreased operating expenses by $207,000
and increased other expenses (interest expense) by $296,000.
1999-1998
---------
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 that 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 margin declined on the reduced 1999 sales to $9,176,000 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 fiscal 1999 by $421,000 mostly because of
reduced incentive provisions.
1998-1997
---------
Sales increased to $18,799,000 in fiscal 1998 from $18,469,000 in fiscal 1997.
Overall gross margins improved as a percentage of sales to 55.3% from 54.5%
reported the previous year. This represented a $330,000 increase in gross margin
or 3.3%, primarily on increased unit profitability. Selling and administrative
expenses, however, increased by $667,000 mostly because of the Company's
decision to continue expan-
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Shopsmith, Inc. 2000 Annual Report
sion 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.
LIQUIDITY AND CAPITAL
---------------------
Cash used in operations for the year ended April 1, 2000 totaled $552,000
compared to $774,000 a year ago. Net losses of $680,000 and $713,000 together
with increases in receivable balances and inventory levels in both years
together with event prepayments in 2000 and liquidation of payables in 1999 were
the main reasons for cash usage. Maturing short-term investments of $989,000 and
$1,862,000 were utilized in the current and past year respectively to fund the
operating cash requirements.
The Company's assets include $1,326,000 of deferred tax assets at April 1, 2000.
Presently the Company believes that these assets are realizable and represent
the best estimate based on the weight of available evidence as prescribed in
SFAS 109. Realization of these assets is dependent upon generation in the future
of sufficient income to utilize the tax benefits upon which the assets are
based. Management will continue to evaluate these assets and the need for
valuation allowances based on near-term operating results and longer-term
projections. If the Company is unable to generate sufficient operating income in
the future, the valuation will have to be adjusted by means of a charge against
operating results.
The current ratio was 1.73 to 1 at April 1, 2000 compared to 2.12 to 1 a year
ago. The debt to equity ratio increased to 1.57 to 1 from 1.28 to 1 at the first
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.
As described in footnote 11 to the consolidated financial statements included in
this report, in May 2000 the Company received a demand for indemnification with
respect to the costs of environmental clean-up of a manufacturing facility
occupied by a subsidiary of the Company in the early 1980s. While the Company
believes that the ultimate resolution of this matter will not be material to the
results of operations or its financial position, successful prosecution of the
claim by the claimant against the Company would have a material adverse effect
on the Company.
CAPITAL EXPENDITURES
--------------------
Computer software was the main capital item purchased in 2000. Capital
expenditures in1999 consist of the acquisition of the manufacturing and office
facilities and purchases of operating software
YEAR 2000 IMPACT
----------------
The year 2000 issue was 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
could have caused system failures or generate incorrect data. No significant
year 2000 issues have occurred through the current date.
FORWARD LOOKING STATEMENTS
--------------------------
The foregoing discussion and the Company's consolidated financial statements
contain certain forward-looking 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, and (c) the resolution
without material liability or expense of certain claims pending against the
Company as described in Note 11 to Consolidated Financial Statements.
Page 20
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Shopsmith, Inc. 2000 Annual Report
SHOPSMITH INC. AND SUBSIDIARIES
Selected Financial Data
<TABLE>
<CAPTION>
Five-Year Review of Performance
(Dollars in thousands except per share)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of operations:
Net sales $ 19,554 $ 17,576 $ 18,799 $ 18,469 $ 17,410
Interest income 48 103 126 72 30
Interest(expense) (271) (68) - - (32)
Income (loss) before income
taxes and extraordinary item (982) (761) 1,552 1,803 1,514
Income tax benefit (302) (48) (120) - (743)
Income (loss) before extraordinary
item (680) (713) 1,672 1,803 2,257
Extraordinary item - - - - 771
Net income (loss) (680) (713) 1,672 1,803 3,028
Financial Position:
Working capital $ 2,348 $ 3,150 $ 4,037 $ 2,507 $ 635
Property-net 3,228 3,456 487 524 609
Total assets 9,553 10,025 8,077 6,549 5,024
Long-term debt 2,640 2,817 - - -
Shareholders' equity 3,713 4,393 5,168 3,621 1,809
Per share information:
Income (loss) per share-basic:
Before extraordinary item $ (0.26) $ (0.27) $ 0.63 $ 0.68 $ 0.85
Extraordinary item - - - - 0.29
Net income (0.26) (0.27) 0.63 0.68 1.14
Income (loss) per share-diluted:
Before extraordinary item (0.26) (0.27) 0.61 0.66 0.84
Extraordinary item - - - - 0.29
Net income (0.26) (0.27) 0.61 0.66 1.13
Shareholders' equity per share 1.43 1.69 1.97 1.36 0.68
Performance indicators:
Return on sales (%) (3.5) (4.1) 8.9 9.8 17.4
Return on average shareholders'
equity(%) (16.8) (14.9) 38.1 66.4 1,035.5
Return on average total assets (%) (6.9) (7.9) 22.9 31.2 64.1
Current ratio 1.73 2.12 2.39 1.86 1.20
Ratio of total debt to equity 1.57 1.28 0.56 0.81 1.78
Other information:
Number of employees at year end:
Full time 114 115 108 98 93
Part time 16 12 4 9 14
--- --- -- -- ---
130 127 112 107 107
Average shares outstanding (000's) 2,605 2,603 2,658 2,743 2,678
------ ------ ------ ------ ------
</TABLE>
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Shopsmith, Inc. 2000 Annual Report
SHOPSMITH, INC. AND SUBSIDARIES
Shareholders' information
Stock Quotations (Bid Prices)
Quarter ended High Low
----------------------------------------------------
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
July 3, 1999 $ 0.97 $ 0.69
October 2, 1999 0.97 0.44
January 1, 2000 0.94 0.41
April 1, 2000 0.81 0.63
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
approximately 1,300 shareholders of record of the Company's common shares on May
24, 2000.
Per Share Information:
Diluted Shareholders'
Income (loss) Dividends Equity
2000 $ (0.26) $ - $ 1.43
1999 (0.27) - 1.69
1998 0.61 - 1.97
1997 0.66 - 1.36
1996 1.13 - 0.68
Shopsmith Market Makers
William V. Frankel & Co. Hill Thompson Magid & Co., Inc.
Wien Securities Corp. Sharpe Capital, Inc.
Wedbush Morgan Securities, Inc. Knight Securities, Inc.
Spear Leeds & Kellogg Capital Markets Paragon Capital Corp.
Herzog, Heine, Geduld, Inc
Annual meeting
Shopsmith's Annual Shareholders' Meeting will be held at 9:30 a.m. on
Wednesday, July 26, 2000 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:
Mark A. May, Vice President of Finance
Shopsmith, Inc.
6530 Poe Avenue
Dayton, Ohio 45414
937-898-6070 Extension 713
Page 22
<PAGE> 23
Shopsmith, Inc. 2000 Annual Report
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
Brady L. Skinner, Audit Partner, Brady, Ware & Schoenfeld Inc. Dayton, Ohio
Audit Committee of the Board of Directors
J. Michael Herr, Edward A. Nicholson and Brady L. Skinner
Corporate Vice Presidents
Robert L. Folkerth, Vice President, Sales and Marketing
Mark A. May, Vice President of Finance and Chief Financial Officer
Lawrence R. Jones, Vice President, Operations
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 23
