Shopsmith, Inc.--Form 10-Q for the Q/E 12-29-2001
TABLE OF CONTENTS

Part I. Financial information:
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
CONSOLIDATED STATEMENT OF CASH FLOW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and qualitative disclosures about market risk.
PART II. OTHER INFORMATION
SIGNATURES
EX. 4.13--DEMAND FOR PROMISSORY NOTE
EX. 10.15--RECEIVABLES FACTORING AGREEMENT


Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15 (d)
Of the Securities Exchange Act of 1934

         
For the quarter ended—
December 29 2001
                Commission File Number 0-9318

SHOPSMITH, INC.


(Name of Registrant)
     
Ohio   31-0811466

 
(State of Incorporation)   (IRS Employer Identification Number)
 
         
6530 Poe Avenue
Dayton, Ohio
    45414  

   
 
(Address of Principal
Executive Offices)
  (Zip Code)

Registrant’s Telephone 937-898-6070

 

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 the number of shares outstanding of each of the registrant’s classes of common stock as of January 25, 2002.

Common shares, without par value:    2,605,233 shares.


Table of Contents

SHOPSMITH, INC. AND SUBSIDIARIES

INDEX

     
    Page No.
   

Part I. Financial information:

         Item 1. Financial Statements

     
Consolidated Balance Sheets-
        December 29, 2001 and March 31, 2001
  3-4
 
Statements of Consolidated Operations and
      Retained Earnings - Three and Nine Months
      Ended December 29, 2001 and December 30, 2000
      5
 
Consolidated Statements of Cash Flows-
      Nine Months Ended December 29, 2001 and
      December 30, 2000
      6
 
Notes to Consolidated Financial Statements   7-8
 
Item 2. Management’s Discussion and Analysis
      of Financial Condition and Results
      of Operations
      9
 
Item 3. Quantitative and qualitative disclosures
      about market risk
     11
     
Part II. Other Information    12

-2-


Table of Contents

SHOPSMITH INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
                       
          December 29   March 31
          2001   2001
         
 
          (Unaudited)        
ASSETS                

               
Current Assets:
               
 
Cash and equivalents
  $ 316,493     $ 651,530  
 
Restricted cash
          174,718  
 
Investments
    153,381        
 
Accounts receivable:
               
   
Trade, less allowance for doubtful accounts:
               
   
$1,092,486 on December 29 and $924,250 on March 31
    1,262,516       673,689  
 
Inventories
    2,669,289       2,168,225  
 
Deferred income taxes (Note 2)
    584,000       498,000  
 
Prepaid expenses
    261,892       431,912  
 
 
   
     
 
     
Total current assets
    5,247,571       4,598,074  
 
Properties:
               
   
Land, building and improvements
    3,143,908       3,161,199  
   
Machinery, equipment and tooling
    6,714,278       6,627,918  
 
 
   
     
 
     
Total cost
    9,858,186       9,789,117  
   
Less accumulated depreciation and amortization
    6,970,239       6,782,561  
 
 
   
     
 
     
Net properties
    2,887,947       3,006,556  
 
Deferred income taxes (Note 2)
    696,000       782,000  
 
Long term portion of accounts receivable Trade, less allowance for doubtful accounts $99,658 on December 29 and $70,999 on March 31
    208,755       167,954  
Other assets
    2,303       2,303  
 
 
   
     
 
Total assets
  $ 9,042,576     $ 8,556,887  
 
 
   
     
 

Continued

-3-


Table of Contents

SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

                       
          December 29   March 31
          2001   2001
         
 
          (Unaudited)        
LIABILITIES AND SHAREHOLDERS' EQUITY                

               
Current liabilities:
               
 
Accounts payable
  $ 1,997,577     $ 1,113,380  
 
Note payable
    400,000        
 
Current portion of long-term debt and capital lease obligation
    2,595,529       84,910  
 
Customer advances
    145,611       169,003  
Accrued liabilities:
               
 
Compensation, employee benefits and payroll taxes
    271,412       278,443  
 
Sales taxes payable
    83,506       144,606  
 
Accrued recourse liability
    163,474       235,303  
 
Accrued expenses
    288,059       182,804  
 
Other
    84,811       93,990  
 
 
   
     
 
     
Total current liabilities
    6,029,979       2,302,439  
Long-term debt and capital lease obligation
    13,580       2,568,464  
 
 
   
     
 
     
Total liabilities
    6,043,559       4,870,903  
Shareholders’ equity:
               
 
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 shares on December 29 and March 31
    2,806,482       2,806,482  
 
Retained earnings
    192,535       879,502  
 
 
   
     
 
     
Total shareholders’ equity
    2,999,017       3,685,984  
 
 
   
     
 
Total liabilities and shareholders’ equity
  $ 9,042,576     $ 8,556,887  
 
 
   
     
 

See notes to consolidated financial statements.

-4-


Table of Contents

SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS

                                   
      Three Months Ended   Nine Months Ended
     
 
      December 29   December 30   December 29   December 30
      2001   2000   2001   2000
     
 
 
 
      (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
        (restated)     (restated)
                       
Net sales
  $ 4,617,061     $ 4,148,057     $ 10,943,202     $ 11,818,721  
Cost of products sold
    2,387,571       1,935,195       5,362,391       5,569,639  
 
   
     
     
     
 
Gross margin
    2,229,490       2,212,862       5,580,811       6,249,082  
Selling expenses
    1,901,997       1,825,759       4,969,104       5,465,193  
Administrative expenses
    404,047       344,421       1,324,924       1,207,607  
 
   
     
     
     
 
 
Total operating expenses
    2,306,044       2,170,180       6,294,028       6,672,800  
Income (loss) before other income and expense
    (76,554 )     42,682       (713,217 )     (423,718 )
Non-recurring gain from demutualization of insurance company
    153,381             153,381        
Interest income
    20,218       11,943       53,996       30,625  
Interest expense
    65,645       62,125       189,911       157,364  
Other income, net
    2,029       2,244       8,784       7,045  
 
   
     
     
     
 
Income (loss) before taxes
    33,429       (5,256 )     (686,967 )     (543,412 )
Income tax benefit
                       
 
   
     
     
     
 
Net income (loss)
    33,429       (5,256 )     (686,967 )     (543,412 )
Retained earnings:
                               
 
Beginning
    159,106       457,438       879,502       995,594  
 
   
     
     
     
 
 
Ending
  $ 192,535     $ 452,182     $ 192,535     $ 452,182  
 
   
     
     
     
 
Net loss per common share (Note 3) Basic
  $ 0.01     $ (0.00 )   $ (0.26 )   $ (0.21 )
 
   
     
     
     
 
 
Diluted
  $ 0.01     $ (0.00 )   $ (0.26 )   $ (0.21 )
 
   
     
     
     
 

See notes to consolidated financial statements

-5-


Table of Contents

SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW

                       
          Nine Months Ended
         
          December 29   December 30
          2001   2000
         
 
          (Unaudited)   (Unaudited)
                  (restated)
Cash flows from operating activities:
               
Net loss
  $ (686,967 )   $ (543,412 )
 
Adjustments to reconcile net loss to cash provided from operating activities:
               
   
Depreciation and amortization
    187,678       214,826  
   
Provision for doubtful accounts
    195,027       225,885  
   
Stock from Insurance Demutualization
  (153,381 )  
   
Cash provided from (required for) changes in assets and liabilities:
               
     
Restricted cash
    174,718       (68,201 )
     
Accounts receivable
    (824,655 )     (258,176 )
     
Inventories
    (501,064 )     (113,172 )
     
Other assets
    170,020       224,273  
     
Accounts payable and customer advances
    860,805       (184,139 )
     
Other current liabilities
    (43,884 )     (377,630 )
 
   
     
 
Cash used in operating activities
    (468,322 )     (879,746 )
Cash flows from investing activities:
               
 
Property additions
    (69,069 )     (48,741 )
 
   
     
 
Cash used in investing activities
    (222,450 )     (48,741 )
Cash flows from financing activities:
               
 
Increase note payable
    400,000        
 
Payments on long-term debt and capital lease obligation
    (44,265 )     (155,297 )
 
   
     
 
Cash provided from (used in) financing activities
    355,735       (155,297 )
 
   
     
 
Net decrease in cash
    (335,037 )     (1,083,784 )
Cash:
               
 
At beginning of period
    651,530       1,301,387  
 
   
     
 
 
At end of period
  $ 316,493     $ 217,603  
 
   
     
 

-6-


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   In the opinion of management, all adjustments (consisting of only normal and recurring adjustments) have been made as of December 29, 2001 and December 30, 2000 to present the financial statements fairly. However, the results of operations for the nine months then ended are not necessarily indicative of results for the fiscal year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual financial statements. The financial statements for the prior year have been restated for a change in accounting policy. The financial statements accompanying this report should be read in conjunction with the financial statements and notes thereto included in the Annual Report to Shareholders for the year ended March 31, 2001.
 
2.   The provision for income taxes is as follows:
                                 
    Three Months Ended   Nine Months Ended
    December 29   December 30   December 29   December 30
    2001   2000   2001   2000
   
 
 
 
Income (loss) before income taxes
  $ 33,429     $ (5,256 )   $ (686,967 )   $ (543,412 )
 
   
     
     
     
 
Provision for (recoverable) income taxes:
                               
Current
                       
Deferred
    18,000       3,000       (217,000 )     (168,000 )
Change in valuation allowance
    (18,000 )     (3,000 )     217,000       168,000  
 
   
     
     
     
 
Net provision for (recoverable) income taxes
  $     $     $     $  
 
   
     
     
     
 

    The Company has deferred tax assets amounting to $1,280,000 at December 29, 2001 and March 31, 2001 which 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 management assumptions and resulting projections of future operating results including projected increases in the number of Lowes events. For the current year through December 29, 2001 the Company has established a $217,000 valuation allowance against its provision for recoverable income taxes because of the uncertainty of realizing its benefit.
 
3.   Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects 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:

-7-


Table of Contents

                                 
    Three Months Ended   Nine Months Ended
    December 29   December 30   December 29   December 30
    2001   2000   2001   2000
   
 
 
 
Net income (loss)
  $ 33,429     $ (5,256 )   $ (686,967 )   $ (543,412 )
 
   
     
     
     
 
Weighted average shares
    2,605,233       2,605,233       2,605,233       2,605,233  
Additional dilutive shares
    8,400                    
 
   
     
     
     
 
Total dilutive shares
    2,613,633       2,605,233       2,605,233       2,605,233  
 
   
     
     
     
 
Basic income (loss) per share
  $ 0.01     $ (0.00 )   $ (0.26 )   $ (0.21 )
 
   
     
     
     
 
Diluted income (loss) per share
  $ 0.01     $ (0.00 )   $ (0.26 )   $ (0.21 )
 
   
     
     
     
 

There were no additional dilutive shares included in the computation at December 30, 2000 because the stock options were anti-dilutive.

     
4.   An arrangement exists with John R. Folkerth, the Company’s CEO, which allows for up to $500,000 in borrowing with interest at twelve percent. Substantially all assets except for certain receivables are pledged as collateral. At December 29, 2001, there was $400,000 outstanding under this arrangement.

-8-


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results
             of Operations

Results of Operations

Third quarter sales increased to $4,617,000 or 11.3% from $4,148,000 generated a year ago. This quarter, Shopsmith began sales to Lowes through demonstration sales events held at Lowe’s stores. The increase in the Company’s field demonstration sales channel resulting from these events was the primary cause of the sales increase. The sales to Lowe’s do result in a lower margin percentage that is offset by reductions in occupancy costs that are normally incurred at demonstration sales events. On a year-to-date basis sales have declined by $876,000 or 7.4% to $10,943,000.

Gross margin rates decreased by five and one tenth of a percentage point compared to last year. Operating expenses increased to $2,306,000 in the current fiscal year from $2,170,000 last year. For the year, gross margin rates decreased by one and nine tenths of a percentage point from last year.

Provisions for recoverable Federal income taxes ($0 in FY2002 and FY 2001) are based on estimated annual effective rates, less a valuation reserve.

A net income of $33,000 or $.01 per diluted share was experienced in the quarter ended December 29, 2001 (after taking into account the non-recurring gain described below) compared to a restated net loss of $5,000 or $.00 per diluted share for the same period of last year. On a year-to-date basis, a net loss of $687,000 or .26 per diluted share was experienced compared to a restated net loss of $543,000 or .21 per diluted share for last year.

Non-recurring Gain from Demutualization of Insurance Company

During the third quarter, the Company received a stock distribution from its mutual insurance carrier in connection with the carrier’s conversion to a publicly-held corporation (demutualization). The Company has recorded the distribution at its fair value and recognized the resulting non-recurring gain of $153,000.

Liquidity and Financial Position

Cash used in operations totaled $468,000 in the current year compared with $880,000 for the preceding year. Net losses of $687,000 were the main reason for the cash usage this year.

Shopsmith has concluded arrangements with Lowe’s to do Mark V sales demonstration events within Lowe’s stores. This venture (which started at the end of October) has resulted in additional cash requirements for both receivables and for startup costs. The company has entered into an one year agreement with Metro Financial Services to factor the receivables generated from the sales to Lowes. CitiFinance has notified Shopsmith that they will be terminating their consumer financing agreement with Shopsmith. With the increasing volume of sales done through events within Lowe’s stores, the volume of consumer financing had substantially decreased.

The Huntington National line of credit agreement terminated November 14, 2001. The Company has an arrangement to borrow up to $500,000 from John Folkerth, the Company’s CEO. At the end of the third quarter, Shopsmith had borrowed $400,000 on a secured basis from John Folkerth. Borrowings from Mr. Folkerth are subject to Mr. Folkerth’s approval and are payable upon demand by Mr. Folkerth.

The Company’s assets include $1,280,000 of deferred income tax assets at December 29, 2001. Presently, the Company believes that these assets are realizable and represent management’s best estimate based on the weight of available evidence as prescribed in SFAS 109. If the Company is unable to generate sufficient operating income in the future, a valuation allowance will have to be established by means of a charge against operating results.

The current ratio was .84 to 1 at December 29, 2001 compared to 2.00 to 1 at the beginning of the current fiscal year. The change in current ratio was due to a balloon payment of $2,500,000 on the Company’s mortgage that is due December 2002. The debt to equity ratio increased to 2.12 to 1 from 1.32 to 1 at March 31, 2001.

The company has now experienced losses in the last three fiscal years as well as the year to date in the current year. Continuation of operating losses will negatively affect the Company’s liquidity as a result of negative cash flow caused by the losses.

-9-


Table of Contents

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 together with currently available working capital to finance the operating needs of the Company and (b) generation of future taxable income to utilize existing deferred tax assets, (c) ability of the Company to extend or refinance the $2,500,000 mortgage payment that becomes due in December 2002, and (d) the continuation of, or the obtaining of alternative credit arrangements to replace the borrowing and factoring arrangements the Company currently has in place with Mr. John R. Folkerth and Metro Financial Services, respectively.

-10-


Table of Contents

Item 3. Quantitative and qualitative disclosures about market risk.

       Not applicable.

-11-


Table of Contents

PART II. OTHER INFORMATION

(a) Exhibits:

  (4)   Instruments Defining the Rights of Security Holders, Including Indentures

      (4.13) Demand promissory note and Security Agreement with John Folkerth dated November 13, 2001.

  (10)   Material Contracts

      (10.15) Receivables factoring agreement with Metro Financial Services dated December 27, 2001.

(b) Reports on Form 8-K:

     None

SIGNATURES

     Pursuant to the requirements of the Securities and 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/  Mark A. May

Mark A. May
Vice President of Finance (Principal
Financial and Accounting Officer)

Date:   February 8, 2002

-12-