ShopSmith, Inc. 10-Q/Quarter Ended June 29, 2002
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— June 29 2002       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   (Zip Code)
Executive Offices)    

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  (XBOX)   No  (BOX)  

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of July 19,2002.

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

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CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
CONSOLIDATED STATEMENTS 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
EX-4.10.1 Amendment to Promissory Note
EX-4.13.1 Amend & Restated Demand Promissory Note
EX-99.2 Certification by John R. Folkerth, CEO
EX-99.3 Certification by Mark May, CFO


Table of Contents

SHOPSMITH, INC. AND SUBSIDIARIES

INDEX

               
          Page No.
         
Part I. Financial information:
       
   
Item 1. Financial Statements
       
   
Consolidated Balance Sheets-
       
     
June 29, 2002 and March 30, 2002
    3-4  
   
Statements of Consolidated Operations and
       
     
Retained Earnings — Three Months
       
     
Ended June 29, 2002 and June 30, 2001
    5  
   
Consolidated Statements of Cash Flows-
       
     
Three Months Ended June 29, 2002 and June 30, 2001
    6  
   
Notes to Consolidated Financial Statements
    7-8  
   
Item 2. Management’s Discussion and Analysis
       
     
of Financial Condition and Results
       
     
of Operations
    9-10  
   
Item 3. Quantitative and qualitative disclosures
       
     
about market risk
    11  
Part II. Other Information
    12  

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

                         
            June 29   March 30
            2002   2002
           
 
            (Unaudited)        
       
ASSETS
               
Current Assets:
               
 
Cash and equivalents
  $ 1,225     $ 76,324  
 
Restricted cash
    198,570       151,585  
 
Accounts receivable:
               
   
Trade, less allowance for doubtful accounts:
               
   
$814,165 on June 29 and $774,708 on March 30
    830,103       1,642,366  
 
Inventories
               
     
Finished products
    1,054,897       875,888  
     
Raw materials and work in process
    1,144,156       1,427,369  
 
 
   
     
 
       
Total inventories
    2,199,053       2,303,257  
 
Prepaid expenses
    274,636       218,660  
 
 
   
     
 
       
Total current assets
    3,503,587       4,392,192  
Properties:
               
 
Land, building and improvements
    3,148,348       3,143,908  
 
Machinery, equipment and tooling
    6,720,879       6,714,886  
 
 
   
     
 
       
Total cost
    9,869,227       9,858,794  
 
Less accumulated depreciation and amortization
    7,085,452       7,029,128  
 
 
   
     
 
       
Net properties
    2,783,775       2,829,666  
Long term portion of accounts receivable
               
 
Trade, less allowance for doubtful accounts
               
 
$139,521 on June 29 and $116,432 on March 30
    328,625       215,476  
Other assets
    2,303       2,303  
 
 
   
     
 
Total assets
  $ 6,618,290     $ 7,439,637  
 
 
   
     
 

Continued

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

                         
            June 29   March 30
            2002   2002
           
 
            (Unaudited)        
     
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 836,101     $ 1,582,636  
 
Note payable
    400,000       400,000  
 
Current portion of long-term debt and capital lease obligation
    158,667       104,836  
 
Customer advances
    97,259       126,181  
Accrued liabilities:
               
 
Compensation, employee benefits and payroll taxes
    138,659       289,559  
 
Sales taxes payable
    53,643       80,570  
 
Accrued recourse liability
    131,444       147,786  
 
Accrued expenses
    321,852       257,544  
 
Other
    69,082       75,470  
 
 
   
     
 
       
Total current liabilities
    2,206,707       3,064,582  
Long-term debt and capital lease obligation
    2,452,144       2,479,344  
 
 
   
     
 
       
Total liabilities
    4,658,851       5,543,926  
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 June 29 and March 30
    2,806,482       2,806,482  
 
Retained deficit
    (847,043 )     (910,771 )
 
 
   
     
 
       
Total shareholders’ equity
    1,959,439       1,895,711  
 
 
   
     
 
Total liabilities and shareholders’ equity
  $ 6,618,290     $ 7,439,637  
 
 
   
     
 

See notes to consolidated financial statements.

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

                   
      Three Months Ended
     
      June 29   June 30
      2002   2001
     
 
      (Unaudited)   (Unaudited)
Net sales
  $ 3,415,012     $ 3,037,505  
Cost of products sold
    1,617,905       1,408,193  
 
   
     
 
Gross margin
    1,797,107       1,629,312  
Selling expenses
    1,249,412       1,549,513  
Administrative expenses
    425,110       538,569  
 
   
     
 
 
Total operating expenses
    1,674,522       2,088,082  
Income (loss) from operations
    122,585       (458,770 )
Non-recurring gain from demutualization
               
 
of insurance company
           
Interest income
    23,430       19,228  
Interest expense
    85,403       59,197  
Other income, net
    3,116       3,879  
 
   
     
 
Income (loss) before taxes
    63,728       (494,860 )
Income tax benefit
           
Net income (loss)
    63,728       (494,860 )
Retained earnings:
               
 
Beginning
    (910,771 )     879,502  
 
   
     
 
 
Ending
  $ (847,043 )   $ 384,642  
 
   
     
 
Net income (loss) per common share
               
(Note 3)
               
 
Basic
  $ 0.02     $ (0.19 )
 
   
     
 
 
Diluted
  $ 0.02     $ (0.19 )
 
   
     
 

See notes to consolidated financial statements

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW

                     
        Three Months Ended
       
        June 29   June 30
        2002   2001
       
 
        (Unaudited)   (Unaudited)
       
 
Cash flows from operating activities:
               
Net income (loss)
  $ 63,728     $ (494,860 )
 
Adjustments to reconcile net income (loss) cash provided from operating activities:
               
 
Depreciation and amortization
    56,324       64,310  
 
Provision for doubtful accounts
    26,794       111,979  
 
Cash provided from (required for) changes in assets and liabilities:
               
   
Restricted cash
    (46,985 )     174,718  
   
Accounts receivable
    672,320       (261,107 )
   
Inventories
    104,204       (197,918 )
   
Other assets
    (55,976 )     (30,240 )
   
Accounts payable and customer advances
    (775,457 )     (162,096 )
   
Other current liabilities
    (136,249 )     (87,835 )
 
   
     
 
Cash used in operating activities
    (91,297 )     (883,049 )
Cash flows from investing activities:
               
 
Property additions
    (10,433 )     (16,156 )
 
Proceeds from sale of property
          31,921  
 
   
     
 
Cash provided from (used in) investing activities
    (10,433 )     15,765  
Cash flows from financing activities:
               
 
Increase in revolving loan
          237,000  
 
Payments on long-term debt and capital lease obligation
    26,631       (20,021 )
 
   
     
 
Cash provided from financing activities
    26,631       216,979  
 
   
     
 
Net decrease in cash
    (75,099 )     (650,305 )
Cash:
               
 
At beginning of period
    76,324       651,530  
 
   
     
 
 
At end of period
  $ 1,225     $ 1,225  
 
   
     
 

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SHOPSMITH, INC. AND SUBSIDIARIES
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 June 29, 2002 and June 30, 2001 to present the financial statements fairly. However, the results of operations for the three 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 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 30, 2002.
 
2.   The provision for income taxes is as follows:
                 
    Three Months Ended
    June 29   June 30
    2002   2001
   
 
Income (loss) before income taxes
  $ 63,728     $ (494,860 )
 
   
     
 
Provision for (recoverable) income taxes:
               
Income tax benefit (expense)
  $     $  
 
   
     
 

    Taxable income for the quarter ended June 29, 2002 was offset by a net operating loss carry forward (The remaining net operating loss carry forward asset of $1,401,000 was not shown as an asset because of a valuation allowance against the Company’s ability to realize the tax 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:
                 
    Three Months Ended
    June 29   June 30
    2002   2001
   
 
Net income (loss)
  $ 63,728     $ (494,860 )
 
   
     
 
Weighted average shares
    2,605,233       2,605,233  
Additional dilutive shares
           
 
   
     
 
Total dilutive shares
    2,605,233       2,605,233  
 
   
     
 
Basic income (loss) per share
  $ 0.02     $ (0.19 )
 
   
     
 
Diluted income (loss) per share
  $ 0.02     $ (0.19 )
 
   
     
 

    There were no additional dilutive shares included in the computation at June 29, 2002 and June 30, 2001 because the stock options were anti-dilutive.

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4.   During fiscal 2002, Shopsmith entered into an arrangement with John R. Folkerth, the Company’s CEO, which allows the Company to borrow up to $500,000 with interest at twelve percent. The maximum authorized borrowing was increased to $600,000 in July 2002. Substantially all personal property except for certain receivables are pledged as collateral. Interest is due monthly and the note is payable on demand. At June 29, 2002, there was $400,000 outstanding under this arrangement. Borrowings from Mr. Folkerth are subject to Mr. Folkerth’s approval and are payable upon demand by Mr. Folkerth.

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

Results of Operations

Shopsmith manufactures and sells woodworking products. Our core product, the Mark V is sold directly to consumers through demonstration sales events and indirectly to consumers through distributors, primarily Lowe’s where Shopsmith also conducts sales demonstrations, along with smaller amounts through other efforts. Mark V sales demonstrations are done in shopping malls, at home shows, and at state fairs. Other woodworking products and accessories are sold through mail and Internet channels. Shopsmith recognizes revenue for these orders at the time of product shipment.

First quarter sales increased to $3,415,000 or 12.4% from $3,037,000 generated a year ago. This increase in volume was primarily in our mail and internet sales channel, which together increased $252,000 over last year. Demonstration sales of the Mark V continued the shift in location from mall and high-traffic locations to demonstrations done within Lowe’s stores. In total, demonstration sales were up slightly.

Gross margin rates decreased by one percentage point compared to last year, reflecting the lower margin earned on demonstration sales within Lowe’s stores. Operating expenses were reduced by $413,000 to $1,675,000 in the current fiscal year from $2,088,000 last year. Operating expenses were reduced by improved expense control on Mark V sales events, as well as through reductions in compensation costs. Employee benefit costs were reduced in the quarter by $53,000 due to proceeds from the Anthem insurance demutualization.

In fiscal 2003, Shopsmith has implemented a employee salary reduction plan. As part of this plan, fiscal 2003 pre-tax income above $100,000 will be used to return the amount of the reduction and to pay an additional incentive equal to the amount of the reduction, as income permits. The effect of this plan on the first quarter was to reduce expenses by $18,000.

Provisions for recoverable Federal income taxes ($0 in both FY2003 and FY 2002) are based on estimated annual effective rates, less a valuation reserve. The zero Federal income tax amount in FY2003 was due to the utilization of the net loss carryforwards.

Because of the factors above, a net income of $64,000 or $.02 per diluted share was earned in the quarter ended June 29, 2002 compared to a net loss of $495,000 or $.19 per diluted share for the same period of last year.

Liquidity and Financial Position

Cash used in operations totaled $91,000 in the current year compared with $883,000 for the first quarter of the preceding year. A reduction in payables partially offset by decreases in receivables and inventory, was the main reason for the cash usage in the current quarter. The cash usage in the first quarter follows the Company’s seasonal pattern.

The current ratio was 1.59 to 1 at June 29, 2002 compared to 1.43 to 1 at the beginning of the current fiscal year. The debt to equity ratio decreased to 2.38 to 1 from 2.92 to 1 at March 30, 2002.

During fiscal 2002, Shopsmith entered into an arrangement with John R. Folkerth, the Company’s CEO, which allows the Company to borrow up to $500,000 with interest at twelve percent. The maximum authorized borrowing was increased to $600,000 in July 2002. Substantially all personal property except for certain receivables are pledged as collateral. Interest is due monthly and the note is payable on demand. At June 29, 2002, there was $400,000 outstanding under this arrangement. Borrowings from Mr. Folkerth are subject to Mr. Folkerth’s approval and are payable upon demand by Mr. Folkerth.

In 1999, the Company purchased the building it had been leasing. The seller financed the building purchase. The financing agreement provided for a $100,000 down payment and a secured mortgage note for $2,800,000 at an 8.75% interest rate. The note was payable in monthly installments of $25,785 with the balance being due and payable in full on January 1, 2003. In March 2002, the agreement was amended to continue the $25,785 monthly payments of

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principal and interest until January 1, 2006 at which time the scheduled balance of approximately $2,180,000 will become due and payable.

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: (i) the operating cash flows together with currently available working capital may be inadequate to finance the operating needs of the Company; and (ii) the demand loan extended to the Company by Mr. John R. Folkerth (as described above) could be called prior to the Company being in a position to repay or refinance the loan.

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Item 3.   Quantitative and qualitative disclosures about market risk.

              Not applicable.

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PART II. OTHER INFORMATION

Item 6.

(a)   Exhibits:

  4.   Instruments Defining the Rights of Security Holders, Including Indentures
     
4.10.1   Amendment to Promissory note dated March 11, 2002 with Mid-States Development.
4.13.1   Amended and Restated Demand Promissory note dated July 3, 2002 payable to John R. Folkerth in the maximum principal amount of $600,000 (or lesser amount borrowed)

  99.   Additional Exhibits
     
99.2   Certification of the 10-Q by John R. Folkerth, the Company’s CEO.
99.3   Certification of the 10-Q by Mark A. May, the Company’s CFO.

(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:  August 13, 2002        

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