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
December 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 December 30, 1995.
Common shares, without par value: 2,657,775 shares.
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SHOPSMITH, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
December 30, 1995 and April 1, 1995 3-4
Statements of Consolidated Operations and
Accumulated Deficit- Three and Nine months
Ended December 30, 1995 and December 31, 1994 5
Consolidated Statements of Cash Flows
Nine months Ended December 30, 1995 and
December 31, 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>
December 30, April 1,
ASSETS 1995 1995
<S> <C> <C>
Current assets:
Cash............................. $ 2,225 $ 360,915
Restricted cash.................. 356,652 350,249
Short-term investments........... -- 741,959
Notes and accounts receivable:
Trade - less allowance for
doubtful accounts; $121,971
at December 30 and $94,728 at
April 1...................... 331,646 451,662
Inventories...................... 1,876,620 1,734,167
Deferred taxes................... 136,000 --
Prepaid expenses................. 287,892 160,233
Total current assets...... 2,991,035 3,799,185
Property:
Machinery, equipment & tooling... 6,831,468 6,676,156
Leasehold improvements........... 189,265 189,265
Total..................... 7,020,733 6,865,421
Less accumulated depreciation
and amortization............... 6,412,379 6,252,420
Property - net............ 608,354 613,001
Deferred income taxes............... 471,000 --
Other assets....................... 3,158 3,158
Total..................... $ 4,073,547 $ 4,415,344
<FN>
See notes to financial statements.
</TABLE>
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<TABLE>
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 30, April 1,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1995
<S> <C> <C>
Current liabilities:
Accounts payable.................... $ 1,097,844 $ 2,423,643
Term note, current (Note 3)......... -- 60,027
Capital lease obligations -
current........................... 9,661 13,443
Customer advances................... 79,534 88,448
Accrued liabilities:
Compensation and related
accounts........................ 391,669 775,355
Sales tax payable................. 103,920 138,975
Reserve for restructuring......... 251,397 294,229
Other............................. 1,031,166 922,899
Total current liabilities....... 2,965,191 4,717,019
Accounts payable, less current portion -- 496,649
Term note, less current portion
(Note 3)............................ -- 421,494
Capital lease obligations less
current portion..................... -- 4,881
Total liabilities............... 2,965,191 5,640,043
Shareholders' equity:
Preferred shares - without par
value; authorized 500,000......... -- --
Common shares - without par value;
authorized 5,000,000; outstanding
2,657,775 at December 30 and
2,654,566 at April 1.............. 2,982,510 2,978,460
Accumulated deficit................. (1,874,154) (4,203,159)
Total shareholders' equity
(deficit)..................... 1,108,356 (1,224,699)
Total........................... $ 4,073,547 $ 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 Nine Months Ended
December 30, December 31, December 30, December 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales............... $ 4,774,214 $ 5,028,163 $11,610,629 $11,802,209
Cost of products sold... 2,333,611 2,696,326 5,802,397 6,437,713
Gross profit............ 2,440,603 2,331,837 5,808,232 5,364,496
Selling expenses........ 1,410,813 990,787 2,985,958 2,742,738
Administrative expenses. 704,551 669,743 1,880,635 1,590,631
Total selling and
administrative
expenses........... 2,115,364 1,660,530 4,866,593 4,333,369
Income from operations.. 325,239 671,307 941,639 1,031,127
Interest income
(expense)............ 3,551 (23,974) (9,966) (102,770)
Other income (exp)- net. 10,984 31,270 19,508 54,855
Income before income
taxes and extra-
ordinary item......... 339,774 678,603 951,181 983,212
Income tax benefit...... -- -- 607,000 --
Income before
extraordinary item.... 339,774 678,603 1,558,181 983,212
Extraordinary item-
gain from extinguish-
ment of debt (Note 3). 158,211 -- 770,824 --
Net income.............. 497,985 678,603 2,329,005 983,212
Accumulated deficit:
Beginning of period... (2,372,139) (5,319,297) (4,203,159) (5,623,906)
End of period......... $(1,874,154) $(4,640,694) $(1,874,154) $(4,640,694)
Weighted average number
of common shares
outstanding
(Note 6).............. 2,691,584 2,649,733 2,690,626 2,515,490
Income per common share:
Before extraordinary
item................ $ .13 $ .26 $ .58 $ .39
Extraordinary item... $ .06 $ -- $ .29 $ --
Net income............ $ .19 $ .26 $ .87 $ .39
<FN>
See notes to financial statements.
</TABLE>
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<TABLE>
SHOPSMITH, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
December 30, December 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income............................ $2,329,005 $ 983,212
Adjustments to reconcile net
income to cash provided by
(required for) operating activities:
Provision for doubtful accounts... 176,159 88,099
Loss on disposal of properties.... -- 2,985
Depreciation & amortization....... 159,959 253,207
Deferred income taxes............. (607,000) --
Gain on extinguishment of debt.... (770,824) --
Cash provided by (required for)
changes in assets & liabilities:
Restricted cash............... (6,402) (93,157)
Accounts receivable........... 105,013 (157,757)
Inventories................... (142,453) 2,160,869
Other current assets.......... (127,659) 219,210
Other assets.................. -- 38,410
Accounts payable & customer
advances.................... (722,101) (628,867)
Other current liabilities..... (514,462) (2,161,115)
Cash provided by (used in)
operating activities.................. (120,765) 705,096
Cash flows from investing activities:
Short-term investments................ 741,959 --
Proceeds from sale of property........ 3,500
Property additions.................... (155,312) (232,085)
Cash provided by (used in)
investing activities............ 586,647 (228,585)
Cash flows from financing activities:
Common shares issued.................. 4,050 154,494
Decrease in term loan................. (323,310) (325,925)
Decrease in accounts payable long-term (496,649) (733,528)
Decrease in capital leases............ (8,663) (333,819)
Cash used in financing
activities...................... (824,572) (1,238,778)
Net decrease in cash.................... (358,690) (762,267)
Cash at beginning of period............. 360,915 560,570
Cash at end of period................... $ 2,225 $ (201,697)
<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
December 30, 1995 and December 31, 1994 to present the
financial statements fairly. However, the results of
operations for the three and 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
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 Nine months Ended
Dec 30, 1995 Dec 31, 1994 Dec 30, 1995 Dec 31, 1994
Income before extra-
ordinary item $ 339,774 $ 678,603 $ 951,181 $ 983,212
Provision at stat-
utory rate of 34% 116,000 231,000 324,000 335,000
Change in valuation (116,000) (231,000) (931,000) (335,000)
allowance
Net -- -- (607,000) --
Extraordinary item 158,211 770,824
Provision at stat-
utory rate of 34% 54,000 262,000
Change in valuation
allowance (54,000) (262,000)
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 nine months
ended December 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 seven
quarters and has 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
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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. In December 1994, an early lease cancellation agreement was
reached with the lessor of the equipment and software for the
central computer system used to control the Company's
discontinued retail operations. The equipment was returned
to the lessor and the fair value of that equipment was
deducted from the Company's remaining obligation to the
lessor. A $100,000 initial payment was made on the $610,000
obligation resulting from this settlement with the remainder
payable in monthly installments through December 1996 with
the remaining balance due to be paid at that time.
The agreement also provided for a discount from the face
amount of the obligation, by making a payment to the lessor
in advance of the agreed schedule. Thus, in October 1995,
the Company paid about $294,000 in satisfaction of about
$452,000 in debt. The resultant $158,000 gain was recorded
as an extraordinary item.
A $613,000 extraordinary item relating to the early payment
of certain trade creditors was discussed in the Company's
Form 10-Q for the quarter ended July 1, 1995.
4. 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 of $4,774,000 were recorded in the quarter ended
December 30, 1995. Sales in that quarter were 5.1% less than the
$5,028,000 recorded in the same period a year ago, due primarily
to reductions in mail and dealer sales partly offset by increases
in demonstration sales. Additionally, the Company, due to
production limitations, was unable to fulfill orders generated in
its second quarter last year on a timely basis. This order
backlog was eliminated in the third quarter last year thus
increasing that period's sales. The Company was able to fulfill
orders on a timely basis throughout the current year and thus no
additional sales were booked during the third quarter of the
current year due to elimination of backlogs. For the nine months
to date, net sales, at $11,611,000, were down 1.6% from that same
period a year prior.
Increases in the proportion of sales from higher-margin selling
channels and sales price increases caused gross margins to
increase from 46.4% and 45.5% of net sales in the third quarter
and first nine months of last year to 51.1% and 50.0% in the same
periods this year.
Selling and administrative costs rose by 27.4% and 12.3% from the
third quarter and first nine months, respectively, of last year
to $2,115,000 and $4,867,000 in the same respective periods in
the current year. As a percent of net sales, these costs
increased from 33.0% in the first three months and 36.7% in the
first nine months of last year to 44.3% and 41.9% in the same
respective periods in the current year. The additional costs
resulted from increased advertising in the demonstration sales
channel, the production and mailing of a fall product catalog,
the recruiting and training of new sales representatives.
Reduced current-year borrowing and investment of idle funds
caused net interest costs to change from the same period last
year by 115% to $4,000 in interest income in the current third
quarter from $24,000 in interest expense in the same period last
year and decrease by 90% to $10,000, in the first nine months 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 a prior quarter of the current fiscal year. 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 seven
quarters 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 more
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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 utilize a greater
portion of the deferred tax asset, the valuation allowance will
be reduced through a credit to income.
As discussed in Note 3 to the Consolidated Financial Statements
included herein, the Company availed itself of an early-payment
discount feature of an early lease cancellation agreement that
was reached in December 1994. The discount amounted to $158,000
or $.06 per share in the quarter ended December 30, 1995. Also,
as was discussed in the Company's 10-Q for the quarter ended July
1, 1995, 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. In combination, the discounts for the early
lease cancellation agreement and the voluntary creditor payment
plan amounted to $771,000 or $.29 per share in the nine months
ended December 30, 1995.
The above resulted in net income of $498,000 or $.19 per share in
the quarter and $2,329,000 or $.87 per share in the nine months
ended December 30, 1995. The above results compare to net income
of $679,000 or $.26 per share in the quarter ended December 31,
1994 and $983,000 or $.39 per share in the nine months ended on
that date.
Liquidity and Capital Resources
$121,000 of cash was used in operations in the nine months ended
December 30, 1995. In that period, net income, adjusted for non-
cash items, provided cash of $1,287,000 while $1,237,000 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 nine months ended December 31, 1994, operations provided cash
of $705,000, principally through inventory reduction and net
income. $2,790,000 was used, during that period, to reduce
accounts payable and other current liabilities. Property
additions were $155,000 for the first nine months of the current
year as compared to $232,000 in the first nine months of the
prior year. In the first nine months of the current year,
$742,000 was provided by the liquidation of short-term
investments.
$734,000 was used to reduce long-term payables in the first nine
months last year. Long-term payables were reduced by $497,000
during the first nine 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. Additionally, $323,000 was used to pay the
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balance of a term loan that was established in connection with an
early computer lease cancellation agreement which is discussed
above and in Note 3 to the Consolidated Financial Statements
included herein.
Net income during the first nine months increased the Company's
net worth to a positive $1,108,000 resulting in a debt to net
worth ratio of 2.68 to 1. Because of the Company's negative net
worth at the end of the first nine months 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 positive
$26,000 at December 30, 1995 from a negative $918,000 at April 1,
1995 and a negative $944,000 at December 31, 1994. The resulting
current ratio improved to 1.01 at December 30, 1995 from 0.81
April 1, 1995 and 0.77 at December 31, 1994.
No amount was outstanding under the revolving bank line of credit
at December 30, 1995. Management believes financial resources
will be adequate to meet operating needs.
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PART II. OTHER INFORMATION
-NONE-
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: February 8, 1995
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-END> DEC-30-1995
<CASH> 358,877
<SECURITIES> 0
<RECEIVABLES> 453,617
<ALLOWANCES> 121,971
<INVENTORY> 1,876,620
<CURRENT-ASSETS> 2,991,035
<PP&E> 7,020,773
<DEPRECIATION> 6,412,379
<TOTAL-ASSETS> 4,073,547
<CURRENT-LIABILITIES> 2,965,191
<BONDS> 0
<COMMON> 2,982,510
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,073,547
<SALES> 11,610,629
<TOTAL-REVENUES> 11,610,629
<CGS> 5,802,397
<TOTAL-COSTS> 5,802,397
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 176,160
<INTEREST-EXPENSE> 9,966
<INCOME-PRETAX> 951,181
<INCOME-TAX> (607,000)
<INCOME-CONTINUING> 1,558,181
<DISCONTINUED> 0
<EXTRAORDINARY> 770,824
<CHANGES> 0
<NET-INCOME> 2,329,005
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
</TABLE>
