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-- Commission File Number 0-9318
September 30, 1995
SHOPSMITH, INC.
(Name of Registrant)
Ohio 31-0811466
(State of Incorporation) (IRS Employer
Identification Number
6530 Poe Avenue 45414
Dayton, Ohio (Zip Code)
(Address of Principal
Executive Offices)
Registrant's Telephone 513-898-6070
Not Applicable
Former name, former address and former fiscal year, if changed
since last report
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 September 30, 1995.
Common shares, without par value: 2,656,166 shares.
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SHOPSMITH, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1995 and April 1, 1995 3-4
Statements of Consolidated Operations and
Accumulated Deficit- Three and Six Months
Ended September 30, 1995 and October 1, 1994 5
Consolidated Statements of Cash Flows
Six Months Ended September 30, 1995 and
October 1, 1994 6
Notes to Financial Statements 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-11
Part II. Other Information 12
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, April 1,
ASSETS 1995 1995
<S> <C> <C>
Current assets:
Cash............................. $ 56,609 $ 360,915
Restricted cash.................. 306,790 350,249
Short-term investments........... -- 741,959
Notes and accounts receivable:
Trade - less allowance for
doubtful accounts; $120,987
at September 1 and $94,728 at
April 1...................... 549,886 451,662
Inventories...................... 1,638,605 1,734,167
Deferred taxes................... 136,000 --
Prepaid expenses................. 244,604 160,233
Total current assets...... 2,932,494 3,799,185
Property:
Machinery, equipment & tooling... 6,708,871 6,676,156
Leasehold improvements........... 189,265 189,265
Total..................... 6,898,136 6,865,421
Less accumulated depreciation
and amortization............... 6,357,617 6,252,420
Property - net............ 540,519 613,001
Deferred income taxes............... 471,000 --
Other assets....................... 3,158 3,158
Total..................... $ 3,947,171 $ 4,415,344
<FN>
See notes to financial statements.
</TABLE>
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<TABLE>
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, April 1,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1995
<S> <C> <C>
Current liabilities:
Accounts payable.................... $ 1,144,232 $ 2,423,643
Term note, current.................. 62,158 60,027
Capital lease obligations -
current........................... 14,295 13,443
Customer advances................... 81,473 88,448
Accrued liabilities:
Compensation and related
accounts........................ 370,582 775,355
Sales tax payable................. 125,925 138,975
Reserve for restructuring......... 213,174 294,229
Other............................. 936,661 922,899
Total current liabilities....... 2,948,500 4,717,019
Accounts payable, less current portion -- 496,649
Term note, less current portion 389,874 421,494
Capital lease obligations less
current portion..................... -- 4,881
Total liabilities............... 3,338,374 5,640,043
Shareholders' equity:
Preferred shares - without par
value; authorized 500,000......... -- --
Common shares - without par value;
authorized 5,000,000; outstanding
2,656,166 at September 1 and
2,654,566 at April 1.............. 2,980,936 2,978,460
Accumulated deficit................. (2,372,139) (4,203,159)
Total shareholders' equity
(deficit)..................... 608,797 (1,224,699)
Total........................... $ 3,947,171 $ 4,415,344
<FN>
See notes to financial statements.
</TABLE>
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<TABLE>
SHOPSMITH, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS AND ACCUMULATED DEFICIT
<CAPTION>
Three Months Ended Six Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales............... $ 3,686,689 $ 3,463,388 $ 6,836,415 $ 6,774,046
Cost of products sold... 1,826,166 1,933,336 3,468,786 3,741,387
Gross profit............ 1,860,523 1,530,052 3,367,629 3,032,659
Selling expenses........ 785,853 738,970 1,575,145 1,751,951
Administrative expenses. 635,923 486,597 1,176,084 920,888
Total selling and
administrative
expenses........... 1,421,776 1,225,567 2,751,229 2,672,839
Income from operations.. 438,747 304,485 616,400 359,820
Interest expense........ (13,524) (38,490) (13,517) (78,796)
Other income (exp)- net. 3,898 (735) 8,525 23,585
Income before income
taxes and extra-
ordinary item......... 429,121 265,260 611,408 304,609
Income tax benefit...... 607,000 -- 607,000 --
Income before
extraordinary item.... 1,036,121 265,260 1,218,408 304,609
Extraordinary item-
gain from extinguish-
ment of debt -- -- 612,612 --
Net income.............. 1,036,121 265,260 1,831,020 304,609
Accumulated (deficit):
Beginning of period... (3,408,260) (5,584,557) (4,203,159) (5,623,906)
End of period......... $(2,372,139) $(5 319,297) $(2,372,139) $(5,319,297)
Weighted average number
of common shares
outstanding...........
(Note 6).............. 2,678,870 2,498,492 2,678,403 2,448,368
Income per common share:
Before extraordinary
item................ $ .39 $ .11 $ .45 $ .12
Extraordinary item... $ -- $ -- $ .23 $ --
Net income............ $ .39 $ .11 $ .68 $ .12
<FN>
See notes to financial statements.
</TABLE>
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<TABLE>
SHOPSMITH, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended
September 30, October 1,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income............................ $1,831,020 $ 304,609
Adjustments to reconcile net
income to cash provided by
(required for) operating activities:
Provision for doubtful accounts... 93,779 60,112
Loss on disposal of properties.... -- 2,985
Depreciation & amortization....... 105,197 185,188
Deferred income taxes............. (607,000) --
Gain on extinguishment of debt.... (612,612) --
Cash provided by (required for)
changes in assets & liabilities:
Restricted cash............... 43,459 (48,714)
Accounts receivable........... (108,226) (164,185)
Inventories................... 95,562 1,912,789
Other current assets.......... (84,371) 217,340
Other assets.................. -- 25,899
Accounts payable & customer
advances.................... (673,774) (256,929)
Other current liabilities..... (568,893) (1,262,841)
Cash provided by (used in)
operating activities.................. (485,859) 976,253
Cash flows from investing activities:
Short-term investments................ 741,959 --
Proceeds from sale of property........ 3,500
Property additions.................... (32,715) (213,697)
Cash provided by (used in)
investing activities............ 709,244 (210,197)
Cash flows from financing activities:
Common shares issued.................. 2,476 152,741
Decrease in term loan................. (29,489) (111,524)
Decrease in accounts payable long-term (496,649) (484,892)
Decrease in capital leases............ (4,029) (708,267)
Cash used in financing
activities...................... (527,691) (1,151,942)
Net decrease in cash.................... (304,306) (385,886)
Cash at beginning of period............. 360,915 560,570
Cash at end of period................... $ 56,609 $ 174,684
<FN>
See notes to financial statements.
</TABLE>
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SHOPSMITH, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments (consisting of
only normal and recurring items) have been made as of
September 30, 1995 and October 1, 1994 to present the
financial statements fairly. However, the results of
operations for the three and six 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 April 1,
1995.
2. The provision for income taxes is as follows:
Three Months Ended Six Months Ended
Sept 30, 1995 Oct 1, 1994 Sept 30, 1995 Oct 1, 1994
Income before extra-
ordinary item $ 429,171 $ 265,260 $ 611,408 $ 304,609
Provision at stat-
utory rate of 34% 146,000 90,000 208,000 104,000
Change in valuation (753,000) (90,000) (815,000) (104,000)
allowance
Net $ (607,000) -- (607,000) --
Extraordinary item 612,612
Provision at stat-
utory rate of 34% 208,000
Change in valuation
allowance (208,000)
Net $ --
The change to the valuation allowance for all the periods
presented represents the realization of tax benefits of
temporary differences which reversed during the respective
periods except for $607,000 of the change in the three and
six months ended September 30, 1995. This decrease in the
valuation allowance resulted from the Company's reevaluation
of the realizability of future income tax benefits because of
its continued profitability. Specifically the Company has
been profitable from continuing operations for the past 18
months and has considerably exceeded budget estimates during
this period. It estimates that this profit trend will
continue through the near future. Therefore it believes that
it is now more likely than not that it will realize
approximately the $607,000 of the tax benefits previously
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part of the valuation allowance. If the Company is unable to
generate sufficient taxable income in the future through
operating results, increases in the valuation allowance will
be required through a charge to expense. However if it
achieves sufficient profitability to utilize a greater
portion of the deferred tax asset, the valuation allowance
will be reduced through a credit to income.
3. Certain amounts in the 1994 financial statements were
reclassified to conform to the 1995 presentation.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net sales in the quarter ended September 30, 1995 were
$3,687,000, up 6.4% from $3,463,000 in the same period a year
ago. For the six months to date, net sales, at $6,836,000, were
up 0.9% from that same period a year prior. These increases were
due primarily to increases in sales from the Company's
demonstration sales efforts coupled with better coordination
between the sales and production function. This latter
development enabled the Company to quickly fulfill a much larger
percentage of orders resulting in fewer shipments being deferred
until later periods. When compared with the first six months of
last year, mail order sales declined during the same period of
the current year.
Increased sales from higher-margin selling channels and sales
price increases caused gross margins to increase from 44.2% and
44.8% of net sales in the second quarter and first six months of
last year to 50.5% and 49.3% in the same periods this year.
Selling and administrative costs were up 16.0% and 2.9% from the
second quarter and first half, respectively, of last year to
$1,422,000 and $2,751,000 in the same respective periods in the
current year. As a percent of net sales, these costs increased
from 35.4% in the first three months and 39.5% in the first half
of last year to 38.6% and 40.2% in the same respective periods in
the current year. Increases were caused by higher advertising
costs plus increased incentive pay accruals resulting from
improved Corporate earnings.
Reduced current-year borrowing and investment of idle funds
caused net interest costs to fall from the same period last year
by 64.9% to $14,000 in the current second quarter and by 82.8%,
also to $14,000, in the first half of the current year.
The changes (see Note 2) to the deferred income tax valuation
allowance for all the periods presented represents the
realization of tax benefits of temporary differences which
reversed during the respective periods except for $607,000 of the
change in the three months ended September 30, 1995. This
decrease in the valuation allowance resulted from the Company's
reevaluation of the realizability of future income tax benefits
because of its continued profitability. Specifically the Company
has been profitable from continuing operations for the past 18
months and has considerably exceeded budget estimates during this
period. It estimates that this profit trend will continue
through the near future. Therefore it believes that it is now
more likely than not that it will realize approximately the
$607,000 of the tax benefits previously part of the valuation
allowance. If the Company is unable to generate sufficient
taxable income in the future through operating results, increases
in the valuation allowance will be required through a charge to
expense. However if it achieves sufficient profitability to
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utilize a greater portion of the deferred tax asset, the
valuation allowance will be reduced through a credit to income.
As was discussed in the quarterly report for the first quarter of
the current year, the Company availed itself in that period of an
early payment discount feature of a voluntary payment plan that
was approved by affected creditors in June 1994. The discount
amounted to $613,000 or $.23 per share and was recorded as an
extraordinary item.
Because of the above, net income of $1,036,000 or $.39 per share
was earned in the quarter and net income of $1,831,000 or $.68
per share was earned for the first half of the current year. The
above results compare to net income of $265,000 or $.11 per share
in the quarter ended October 1, 1994 and $305,000 or $.12 per
share in the six months ended on that date.
Liquidity and Capital Resources
Operations used $486,000 of cash in the six months ended
September 30, 1995. In that period, net income, adjusted for
non-cash items, provided cash of $810,000 while $1,243,000 of
cash was used to reduce accounts payable, both in connection with
the early payment discount provision of a voluntary vendor
payment plan which was discussed earlier and due to normal
seasonal fluctuations, as well as to reduce other current
liabilities. In the six months ended October 1, 1994, operations
provided cash of $976,000, principally through inventory
reduction. Property additions were $32,700 for the first half of
the current year as compared to $214,000 in the first half of the
prior year. In the first half of the current year, $742,000 was
provided by the liquidation of short-term investments.
$485,000 was used to reduce long-term payables in the first half
last year. Long-term payables were reduced by $497,000 during
the first six months of the current fiscal year because of the
satisfaction, during that period, of amounts due to creditors
involved in the voluntary payment plan which is discussed above.
During fiscal 1994, the Company negotiated an early termination
agreement for computer systems which had serviced its
discontinued retail operations. This agreement provided for the
return of the equipment to the lessor and a $610,000 obligation
by the Company to the lessor. A $100,000 initial payment was
made on this obligation with the remainder payable in equal
monthly installments of $7,654, beginning in December 1994, with
interest at 7% per annum. The principal balance remaining at
December 1, 1996 is due at that date.
The agreement also contains an early payment discount feature
whereby if the Company is able to make an unscheduled lump-sum
payment of approximately $294,000 in November 1995, the then
remaining $158,000 balance of the obligation will be forgiven.
Management intends to make this unscheduled payment.
Net income during the first half increased the Company's net
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worth to a positive $609,000 resulting in a debt to net worth
ratio of 5.48 to 1. Because of the Company's negative net worth
at the end of the first half of the prior fiscal year as well as
at the end of fiscal 1995, measurement of the debt to equity
ratio at those dates is not relevant. Profitability caused
working capital to improve to a negative $16,000 at September 30,
1995 from a negative $918,000 at April 1, 1995 and a negative
$1,743,000 at October 1, 1994. The resulting current ratio
improved to 0.99 at September 30, 1995 from 0.81 April 1, 1995
and 0.68 at October 1, 1994.
No amount was outstanding under the revolving bank line of credit
at September 30, 1995. Management believes financial resources
will be adequate to meet operating needs.
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PART II. OTHER INFORMATION
ITEMS 1-3 Not applicable during this reporting period.
ITEM 4 The Company held its Annual Meeting of Shareholders
on July 26, 1995. At the meeting, shareholders (i)
elected Messrs. Robert L. Folkerth, John L.
Schaefer, Brady L. Skinner and Richard L. Snell as
directors of the Company; (ii) approved the
appointment of Crowe, Chizek and Company as
independent public accountants for the Company; and
(iii) adopted the 1995 Stock Option Plan. Vote
tabulations were as follows:
Broker
Issue For Against Abstain Non-votes
Election of Directors:
Robert L. Folkerth 1,810,587 -- 42,549 N/A
John L. Schaefer 1,815,214 -- 37,923 N/A
Brady L. Skinner 1,814,464 -- 38,673 N/A
Richard L. Snell 1,814,814 -- 38,323 N/A
Appointment of Crowe,
Chizek and Company 1,835,286 4,390 9,402 N/A
1995 Stock Option Plan 1,329,030 88,003 18,170 417,643
Directors continuing in office were John R. Folkerth; J. Michael Herr
and Edward A Nicholson.
ITEM 5 Not applicable during this reporting period.
ITEM 6 Not applicable.
SIGNATURES
Pursuant to the requirements 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/William C. Becker
William C. Becker
Vice President of Finance and
Treasurer (Principal Financial
and Accounting Officer)
Date: November 9, 1995
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 363,399
<SECURITIES> 0
<RECEIVABLES> 670,873
<ALLOWANCES> 120,987
<INVENTORY> 1,638,605
<CURRENT-ASSETS> 2,932,494
<PP&E> 6,898,136
<DEPRECIATION> 6,357,617
<TOTAL-ASSETS> 3,947,171
<CURRENT-LIABILITIES> 2,948,500
<BONDS> 0
<COMMON> 2,980,936
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,947,171
<SALES> 6,836,415
<TOTAL-REVENUES> 6,836,415
<CGS> 3,468,786
<TOTAL-COSTS> 3,468,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 93,779
<INTEREST-EXPENSE> (13,517)
<INCOME-PRETAX> 611,408
<INCOME-TAX> (607,000)
<INCOME-CONTINUING> 1,218,408
<DISCONTINUED> 0
<EXTRAORDINARY> 612,612
<CHANGES> 0
<NET-INCOME> 1,831,020
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
