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 28, 1996
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
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 28, 1996.
Common shares, without par value: 2,663,075 shares.
Page 1
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SHOPSMITH, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
December 28, 1996 and March 30, 1996 3-4
Statements of Consolidated Operations and
Retained Earnings (Deficit) - Three and nine months
Ended December 28, 1996 and December 30, 1995 5
Consolidated Statements of Cash Flows
Three and nine months Ended December 28, 1996 and
December 30, 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. Other Information 11
Page 2
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 28, March 30,
ASSETS 1996 1996
<S> <C> <C>
Current assets:
Cash............................. $ 541,002 $ 560,201
Restricted cash.................. 53,831 314,635
Short-term investments........... 514,140 740,871
Notes and accounts receivable:
Trade - less allowance for
doubtful accounts; $223,437
at December 28 and $235,007
at March 30.................. 376,068 292,694
Inventories...................... 1,822,187 1,510,959
Deferred income taxes (Note 2)... 167,000 253,000
Prepaid expenses................. 245,365 177,116
Total current assets...... 3,719,593 3,849,476
Property:
Machinery, equipment & tooling... 6,815,013 6,762,942
Leasehold improvements........... 190,835 190,835
Total..................... 7,005,848 6,953,777
Less accumulated depreciation
and amortization............... 6,453,098 6,345,197
Property - net............ 552,750 608,580
Deferred income taxes (Note 2)..... 659,000 563,000
Other assets....................... 2,158 3,158
Total..................... $ 4,933,501 $ 5,024,214
<FN>
See notes to financial statements.
</TABLE>
Page 3
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<TABLE>
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 28, March 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1996
<S> <C> <C>
Current liabilities:
Accounts payable.................... $ 789,276 $ 847,750
Capital lease obligations -
current........................... -- 4,881
Customer advances................... 52,503 53,921
Accrued liabilities:
Compensation and related
accounts........................ 386,414 812,299
Sales tax payable................. 110,564 152,632
Accrued recourse liability........ 93,778 352,872
Other............................. 605,648 990,379
Total current liabilities....... 2,038,183 3,214,734
Shareholders' equity:
Preferred shares - without par
value; authorized 500,000......... -- --
Common shares - without par value;
authorized 5,000,000; outstanding
2,663,075 at December 28 and
2,659,175 at March 30............. 2,992,146 2,984,925
Retained deficit.................... (96,828) (1,175,445)
Total shareholders' equity...... 2,895,318 1,809,480
Total........................... $ 4,933,501 $ 5,024,214
<FN>
See notes to financial statements.
</TABLE>
Page 4
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<TABLE>
SHOPSMITH, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS AND ACCUMULATED DEFICIT
<CAPTION>
Three Months Ended Nine Months Ended
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales............... $ 4,594,688 $ 4,774,214 $11,907,964 $11,610,629
Cost of products sold... 2,182,427 2,333,611 5,491,544 5,802,397
Gross profit............ 2,412,261 2,440,603 6,416,420 5,808,232
Selling expenses........ 1,343,760 1,410,813 3,631,122 2,985,958
Administrative expenses. 605,750 704,551 1,770,626 1,880,635
Total selling and
administrative
expenses........... 1,949,510 2,115,364 5,401,748 4,866,593
Income from operations.. 462,751 325,239 1,014,672 941,639
Interest income (expense) 19,047 3,551 44,028 (9,966)
Other income- net....... 4,459 10,984 19,917 19,508
Income before income
taxes and extra-
ordinary item......... 486,257 339,774 1,078,617 951,181
Income tax benefit...... -- -- -- 607,000
Income before
extraordinary item.... 486,257 339,774 1,078,617 1,558,181
Extraordinary item-
gain from extinguish-
ment of debt -- 158,211 -- 770,824
Net income.............. 486,257 497,985 1,078,617 2,329,005
Accumulated (deficit):
Beginning of period... (583,085) (2,372,139) (1,175,445) (4,203,159)
End of period......... $ (96,828) $(1,874,154) $ (96,828) $(1,874,154)
Weighted average number
of common shares
outstanding...........
(Note 6).............. 2,754,091 2,691,584 2,753,324 2,690,626
Income per common share:
Before extraordinary
item................ $ .18 $ .13 $ .39 $ .58
Extraordinary item... $ -- $ .06 $ -- $ .29
Net income............ $ .18 $ .19 $ .39 $ .87
<FN>
See notes to financial statements.
</TABLE>
Page 5
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<TABLE>
SHOPSMITH, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine months Ended
December 28, December 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income............................ $1,078,617 $2,329,005
Adjustments to reconcile net
income to cash provided by
(required for) operating activities:
Depreciation & amortization....... 157,521 159,959
Provision for doubtful accounts... 177,559 176,159
Gain on disposal of properties.... (6,700) --
Deferred income taxes............. (10,000) (607,000)
Gain on extinguishment of debt.... -- (770,824)
Cash provided by (required for)
changes in assets & liabilities:
Restricted cash............... 260,804 (6,402)
Accounts receivable........... (130,850) 105,013
Inventories................... (311,228) (142,453)
Other current assets.......... (68,249) (127,659)
Other assets.................. 1,000 --
Accounts payable & customer
advances.................... (59,892) (722,101)
Other current liabilities..... (1,241,861) (514,462)
Cash (used in)
operating activities.................. (153,279) (120,765)
Cash flows from investing activities:
Short-term investments................ 226,731 741,959
Proceeds from sale of properties...... 6,700 --
Property additions.................... (101,691) (155,312)
Cash provided by
investing activities............ 131,740 586,647
Cash flows from financing activities:
Common shares issued.................. 7,221 4,050
Decrease in term loan................. -- (323,310)
Decrease in accounts payable long-term -- (496,649)
Decrease in capital leases............ (4,881) (8,663)
Cash provided by (used in)
financing activities............ 2,340 (824,572)
Net decrease in cash.................... (19,199) (358,690)
Cash at beginning of period............. 560,201 360,915
Cash at end of period................... $ 541,002 $ 2,225
<FN>
See notes to financial statements.
</TABLE>
Page 6
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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 adjustments) have been made
as of December 28, 1996 and December 30, 1995 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 March 30, 1996.
2. The provision for income taxes is as follows:
Three Months Ended Nine Months Ended
Sep 28, 1996 Sep 30, 1995 Sep 28, 1996 Sep 30, 1995
Income before extra-
ordinary item $ 486,256 $ 339,774 $1,078,617 $ 951,181
Provision at stat-
utory rate of 34% 166,000 116,000 367,000 324,000
Change in valuation (166,000) (116,000) (367,000) (931,000)
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. 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.
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net sales were $4,595,000 in the quarter ended December 28,
1996, down 3.8% from $4,774,000 in the quarter ended December
30, 1995, mainly due to decreases in direct mail sales. In
the first nine months net sales increased by 2.6% from the
same period last year to $11,908,000. The Company's core
demonstration sales channel has shown strong performance which
has helped to offset the weakness in mail sales. A program
was begun in the early fall of 1995 to substantially increase
the quantity and effectiveness of advertising efforts
supporting the demonstration sales effort.
This program has proven effective and has permitted the
Company to improve margins on many of its products. The
improved gross margin rates more than offset the effect of the
current third-quarter sales reduction and, in that period,
produced gross margins of 52.5% of net sales compared to 51.1%
in last year's third quarter. In the year to date, margins
improved from 50.0% of net sales last year to 53.9% in the
current year.
When compared with the third quarter last year, during which
the more aggressive demonstration sales advertising commenced,
selling and administrative costs were down by $165,900 or
7.8%. This decrease was caused chiefly by the Company's
decision not to mail a fall catalog to its customer list and
to re-evaluation of the Company's exposure to litigation. Due
to the increase in demonstration sales advertising in the
first two quarters of the current year, selling and
administrative costs increased by $535,000 or 11% for the year
to date in the current year compared with the same period last
year. Selling and administrative costs decreased from 44.3%
of net sales in the third quarter last year to 42.4% in the
same period this year but increased from 41.9% of net sales
for the first nine months of last year to 45.4% of net sales
in the same period this year because of the aforementioned
increase in demonstration advertising efforts.
Investment of idle funds and minimal borrowing during the
current year caused interest income, net of interest expense,
to increase to $19,000 in the third quarter of the current
year compared to $4,000 of interest income for the same period
last year. Interest cost the Company about $10,000 in the
first nine months of last year compared to interest income of
$44,000 in the same period of the current year. $158,000 and
$770,000 of extraordinary gains were recorded during the first
three and nine months, respectively, of last year to reflect
non-recurring early payment discounts realized by the Company
on voluntary payment arrangements with various lessors and
other creditors that were affected by the Company's 1994
decision to close its retail store operation.
Page 8
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For the three and nine months ended December 28, 1996, the
Company reflected no provision for income taxes on its pre-tax
income. Except for the quarter ended September 30, 1995,
income tax expenses at statutory rates has been offset by
reductions in previously established valuation reserves
related to deferred income tax amounts, including tax loss
carryforwards, pursuant to SFAS 109. During the quarter ended
September 30, 1995, the Company reduced the valuation reserves
by $607,000 to reflect its optimism that operating loss and
tax credit carryforwards as well as other timing differences
would be realized.
As a result of the above, net profits of $486,000 or $.18 per
share and $1,079,000 or $.39 per share were realized in the
quarter and nine months ended December 28, 1996. These
amounts are best compared, in the prior year, to income before
taxes and extraordinary item which was $340,000 or $.13 per
share in the quarter ended December 30, 1995 and $951,000 or
$.35 per share in the first nine months of last year. Net
income was $498,000 or $.19 per share in the third quarter
last year and $2,329,000 or $.87 in the first nine months of
last year.
Liquidity and Capital Resources
$153,000 of cash was used in operations in the nine months
ended December 28, 1996. In that period, net income, adjusted
for non-cash items, provided cash of $1,397,000 while
$1,302,000 of cash was used to reduce accounts payable and
other current liabilities and $311,000 was used to increase
inventories. Operations used $121,000 of cash 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,
primarily in connection with the early payment discount
provision of a voluntary vendor payment plan which was
discussed earlier, and other liabilities.
Property additions were $102,000 for the first nine months of
the current year as compared to $155,000 in the first nine
months of the prior year. In the first nine months of the
current year, $227,000 was provided by the liquidation of
short-term investments as compared to $742,000 from the same
source in the first nine months of last year. $497,000 was
used to reduce long-term accounts payable in the first nine
months of last year.
The Company's ratio of total debt to equity was 0.70 at
December 28, 1996 compared to 1.78 at March 30, 1996 and 2.68
at December 30, 1995. The current ratio was 1.82 at December
28, 1996 compared to 1.20 at March 30, 1996 and 1.01 at
December 30, 1995. The improvement during the last 12 months
stemmed from profitability and the use of current assets to
liquidate current liabilities. Profitability caused working
capital to improve to $1,681,000 at December 28, 1996 from
$635,000 at March 30, 1996 and $26,000 at December 30, 1995.
Page 9
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No amounts were outstanding under the revolving bank line of
credit at December 28, 1996. Management believes financial
resources will be adequate to meet operating needs.
Page 10
<PAGE>
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
(Principal Financial
and Accounting Officer)
Date: February _, 1997
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-05-1997
<PERIOD-END> DEC-29-1996
<CASH> 598,833
<SECURITIES> 514,140
<RECEIVABLES> 599,505
<ALLOWANCES> 223,437
<INVENTORY> 1,822,187
<CURRENT-ASSETS> 3,719,593
<PP&E> 7,005,848
<DEPRECIATION> 6,453,098
<TOTAL-ASSETS> 4,933,501
<CURRENT-LIABILITIES> 2,038,183
<BONDS> 0
<COMMON> 2,992,146
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,933,501
<SALES> 11,907,964
<TOTAL-REVENUES> 11,907,964
<CGS> 5,491,544
<TOTAL-COSTS> 5,491,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 177,559
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,078,617
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,078,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,078,617
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
