FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15 (d)

SHOPSMITH, INC.

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 September 30, 2000.

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

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SHOPSMITH, INC. AND SUBSIDIARIES

INDEX

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SHOPSMITH INC. AND SUBSIDIARIES

Continued

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SHOPSMITH INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

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SHOPSMITH INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

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SHOPSMITH INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

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SHOPSMITH, INC. AND SUBSIDIARIES

1.	In the opinion of management, all adjustments (consisting of only normal and recurring adjustments) have been made as of September 30, 2000 and October 2, 1999 to present the financial statements fairly. However, the results of operations for the 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, 2000.
2.	The provision for income taxes is as follows:

The Company has deferred tax assets amounting to $1,326,000 at September 30, 2000 and April 1, 2000 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 the available evidence as prescribed in SFAS 109. For the six months ended September 30, 2000, the Company has reduced its provision for recoverable income taxes by a $128,000 valuation allowance because of the uncertainty of realizing its benefit.

3.	Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect 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:

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	There were no additional dilutive shares included in the computation at September 30, 2000 and October 2, 1999 because the stock options were anti-dilutive.

4.

A revolving credit agreement has been renewed and will now expire on July 31, 2001. The agreement provides for maximum short-term borrowing of $500,000 with interest charged at one percent over the Bank’s prime rate. The agreement requires compliance with certain minimum net worth, working capital and other miscellaneous covenants. Substantially all tangible assets except for land and building are pledged as collateral.

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

Results of Operations

Second quarter sales declined to $4,001,000 or 0.9% from $4,037,000 generated a year ago. On a year-to-date basis sales have declined by $93,000 or 1.2% to $7,671,000. Decreases in our demonstration sales channel have more than offset increases in other channels.

Gross margin rates declined by 2.0% compared to the same quarter last year and by 1.8% for the year-to-date.

Through tighter control on expenditures and the deferral of some longer term programs, total operating expenses were reduced by $288,000 to $2,009,000 in the current quarter and by $489,000 to $4,376,000 for the six month period.

Provisions for income taxes ($0 in FY 2001 and $40,000 in FY 2000) are based on estimated annual effective rates and changes in the valuation reserve in FY2001.

With the reduction in operating expenses, a net income of $71,000 or $.03 per diluted share was experienced in the quarter ended September 30, 2000 compared to a net loss of $115,000 or $.04 per diluted share for the same period of last year. Year to date a loss of $412,000 or $.16 per diluted share was incurred, compared to a loss of $499,000 or $.19 per diluted share for the year before.

Liquidity and Financial Position

Cash used in operations for the first six months of the current fiscal year totaled $931,000 compared with $1,537,000 last year. Net losses of $412,000, together with liquidation of current liabilities, were the main reasons for the cash usage in the six months ended September 30, 2000.

The Company’s assets include $1,326,000 of deferred income tax assets at September 30, 2000. 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. For the current year through September 30, 2000, the Company has reduced its provision for recoverable income taxes by a $128,000 valuation allowance because of the uncertainty of realizing its benefit. Management will continue to evaluate these assets and the need for additional valuation allowances based on near-term operating results and longer-term projections. If the Company is unable to generate sufficient operating income in the future, the valuation allowance will have to be increased by means of a charge against operating results.

The current ratio was 1.90 to 1 at September 30, 2000 compared to 1.73 to 1 at the beginning of the current fiscal year. The debt to equity ratio improved slightly to 1.48 to 1 from 1.57 to 1 at April 1, 2000.

The Company has now experienced operating losses in the last two fiscal years as well as for the year to date through the first two quarters of the current fiscal year. Continuation of operating losses will negatively affect the Company’s liquidity both (a) as a result of negative cash flow caused by the losses, and (b) by putting the Company in the position of failing to satisfy the conditions applicable to drawing under the Company’s line of credit.

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.

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Item 3. Quantitative and qualitative disclosures about market risk.

      Not applicable.

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PART II. OTHER INFORMATION

Item 4.

The company held its Annual Meeting of Shareholders on July 26, 2000. At the meeting, shareholders (a) elected messrs. John R. Folkerth, J. Michael Herr, and Edward A. Nicholson as directors of the Company and (b) approved the appointment of Crowe, Chizek and Company LLP as independent public accountants for the Company. Votes were tabulated as follows:

Directors continuing in office were Robert L. Folkerth and Brady L. Skinner.

Item 6.

(a)  Exhibits:

(27)  Financial Data Schedule for the period ended September 30, 2000

(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)

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