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Previous: SHARED MEDICAL SYSTEMS CORP, SC 13G/A, 2000-02-11 |
Next: SIGMA ALDRICH CORP, SC 13G, 2000-02-11 |
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
January 1, 2000
SHOPSMITH, INC.
—————————————————————————————————
(Name of Registrant)
| Ohio | 31-0811466 | |
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| (State of Incorporation) | (IRS Employer Identification Number) | |
| 6530 Poe Avenue Dayton, Ohio |
45414 | |
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| (Address of Principal Executive Offices) |
(Zip Code) |
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 January 20, 2000.
Common shares, without par value: 2,605,233 shares.
Page 1
SHOPSMITH, INC. AND SUBSIDIARIES
INDEX
| Page No. | ||||||||
| Part I. Financial information: | ||||||||
| Item 1. Financial Statements | ||||||||
| Consolidated Balance Sheets- | ||||||||
| January 1, 2000 and April 3, 1999 | 3-4 | |||||||
| Statements of Consolidated Operations and Retained Earnings | ||||||||
| Three and Nine Months Ended January 1, 2000 and January 2, 1999 | 5 | |||||||
| Consolidated Statements of Cash Flows- | ||||||||
| Three and Nine Months Ended January 1, 2000 and January 2, 1999 | 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 | 10 | |||||||
| Part II. Other Information | 11 | |||||||
Page 2
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| January 1, | April 3, | |||||||||||
| 2000 | 1999 | |||||||||||
| (Unaudited) | ||||||||||||
| ASSETS | ||||||||||||
| Current Assets: | ||||||||||||
| Cash | $ | 513,229 | $ | 1,005,371 | ||||||||
| Restricted cash | 111,664 | 101,249 | ||||||||||
| Short-term investments | — | 989,122 | ||||||||||
| Accounts receivable: | ||||||||||||
| Trade, less allowance for doubtful accounts: | ||||||||||||
| $333,783 on January 1 and $450,677 on April 3 | 619,696 | 758,548 | ||||||||||
| Inventories | 2,829,515 | 2,410,908 | ||||||||||
| Deferred income taxes (Note 2) | 450,000 | 475,000 | ||||||||||
| Prepaid expenses | 444,852 | 225,157 | ||||||||||
| Total current assets | 4,968,956 | 5,965,355 | ||||||||||
| Properties: | ||||||||||||
| Land, building and improvements | 3,161,199 | 3,151,407 | ||||||||||
| Machinery, equipment and tooling | 6,595,337 | 6,505,258 | ||||||||||
| Total cost | 9,756,536 | 9,656,665 | ||||||||||
| Less accumulated depreciation and amortization | 6,409,664 | 6,200,696 | ||||||||||
| Net properties | 3,346,872 | 3,455,969 | ||||||||||
| Deferred income taxes (Note 2) | 827,000 | 584,000 | ||||||||||
| Other assets | 19,311 | 19,308 | ||||||||||
| Total assets | $ | 9,162,139 | $ | 10,024,632 | ||||||||
Continued
Page 3
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| January 1, | April 3, | |||||||||||
| 2000 | 1999 | |||||||||||
| (Unaudited) | ||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities: | ||||||||||||
| Accounts payable | $ | 1,019,421 | $ | 1,342,957 | ||||||||
| Current portion of long-term debt and capital lease obligation | 92,452 | 81,219 | ||||||||||
| Customer advances | 13,296 | 25,788 | ||||||||||
| Accrued liabilities: | ||||||||||||
| Compensation, employee benefits and payroll taxes | 325,468 | 377,453 | ||||||||||
| Sales taxes payable | 126,532 | 187,020 | ||||||||||
| Accrued recourse liability | 449,837 | 333,265 | ||||||||||
| Accrued expenses | 311,107 | 309,000 | ||||||||||
| Other | 164,088 | 158,356 | ||||||||||
| Total current liabilities | 2,502,201 | 2,815,058 | ||||||||||
| Long-term debt and capital lease obligation | 2,753,134 | 2,816,809 | ||||||||||
| Total liabilities | 5,255,335 | 5,631,867 | ||||||||||
| 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 January 1 and April 3 | 2,806,482 | 2,806,482 | ||||||||||
| Retained earnings | 1,100,322 | 1,586,283 | ||||||||||
| Total shareholders’ equity | 3,906,804 | 4,392,765 | ||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 9,162,139 | $ | 10,024,632 | ||||||||
See notes to consolidated financial statements.
Page 4
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| January 1, | January 2, | January 1, | January 2, | |||||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||
| Net sales | $ | 4,954,240 | $ | 4,025,426 | $ | 12,718,239 | $ | 10,974,469 | ||||||||||||
| Cost of products sold | 2,225,453 | 2,052,951 | 5,757,820 | 5,290,052 | ||||||||||||||||
| Gross margin | 2,728,787 | 1,972,475 | 6,960,419 | 5,684,417 | ||||||||||||||||
| Selling expenses | 2,212,452 | 1,980,885 | 6,077,436 | 4,952,026 | ||||||||||||||||
| Administrative expenses | 429,632 | 475,860 | 1,429,880 | 1,413,689 | ||||||||||||||||
| Total operating expenses | 2,642,084 | 2,456,745 | 7,507,316 | 6,365,715 | ||||||||||||||||
| Income (loss) from operations | 86,703 | (484,270 | ) | (546,897 | ) | (681,298 | ) | |||||||||||||
| Interest income | 8,600 | 22,669 | 34,725 | 82,036 | ||||||||||||||||
| Interest expense | (67,553 | ) | — | (202,303 | ) | — | ||||||||||||||
| Other income, net | 3,492 | 1,060 | 10,514 | 10,819 | ||||||||||||||||
| Income (loss) before income taxes | 31,242 | (460,541 | ) | (703,961 | ) | (588,443 | ) | |||||||||||||
| Income tax expense ( benefit) | 18,000 | (142,708 | ) | (218,000 | ) | (187,090 | ) | |||||||||||||
| Net income (loss) | 13,242 | (317,833 | ) | (485,961 | ) | (401,353 | ) | |||||||||||||
| Retained earnings: | ||||||||||||||||||||
| Beginning | 1,087,080 | 2,215,832 | 1,586,283 | 2,299,352 | ||||||||||||||||
| Ending | $ | 1,100,322 | $ | 1,897,999 | $ | 1,100,322 | $ | 1,897,999 | ||||||||||||
| Net income (loss) per common share (Note 3) | ||||||||||||||||||||
| Basic | $ | 0.01 | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.15 | ) | |||||||||
| Diluted | $ | 0.01 | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.15 | ) | |||||||||
See notes to consolidated financial statements.
Page 5
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
| Nine Months Ended | |||||||||||
| January 1, | January 2, | ||||||||||
| 2000 | 1999 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | (485,961 | ) | $ | (401,353 | ) | |||||
| Adjustments to reconcile net income (loss) to cash provided from operating activities: | |||||||||||
| Depreciation and amortization | 208,968 | 147,800 | |||||||||
| Provision for doubtful accounts | 128,572 | 119,802 | |||||||||
| Deferred income taxes | (218,000 | ) | (182,971 | ) | |||||||
| Cash provided from (required for) changes in assets and liabilities: | |||||||||||
| Restricted cash | (10,415 | ) | 164,580 | ||||||||
| Accounts receivable | 126,849 | (50,078 | ) | ||||||||
| Inventories | (418,607 | ) | (512,156 | ) | |||||||
| Other assets | (219,698 | ) | (43,626 | ) | |||||||
| Accounts payable and customer advances | (336,028 | ) | (136,918 | ) | |||||||
| Other current liabilities | (104,631 | ) | (516,025 | ) | |||||||
| Cash provided from (used in) operating activities | (1,328,951 | ) | (1,410,945 | ) | |||||||
| Cash flows from investing activities: | |||||||||||
| Maturity of short-term investments | 989,122 | 1,828,911 | |||||||||
| Property additions | (99,871 | ) | (3,134,050 | ) | |||||||
| Cash provided from (used in) investing activities | 889,251 | (1,305,139 | ) | ||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | — | 2,862,125 | |||||||||
| Common shares repurchased | — | 4,594 | |||||||||
| Payments on long-term debt and capital lease obligation | (52,442 | ) | (67,787 | ) | |||||||
| Cash provided from (used in) financing activities | (52,442 | ) | 2,798,932 | ||||||||
| Net increase (decrease) in cash | (492,142 | ) | 82,848 | ||||||||
| Cash: | |||||||||||
| Beginning | 1,005,371 | 316,669 | |||||||||
| Ending | $ | 513,229 | $ | 399,517 | |||||||
See notes to consolidated financial statements.
Page 6
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 January 1, 2000 and January 2, 1999 to present the financial statements fairly. However, the results of operations for the three months and nine months then ended are not necessarily indicative of results for the fiscal years. 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 3, 1999. | |
| 2. | The provision for income taxes is as follows: |
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| 1/1/00 | 1/2/99 | 1/1/00 | 1/2/99 | ||||||||||||||
| Income tax expense (benefit): | |||||||||||||||||
| Current | $ | — | $ | — | $ | — | $ | — | |||||||||
| Deferred | 18,000 | (159,708 | ) | (218,000 | ) | (204,090 | ) | ||||||||||
| Change in valuation allowance | — | 17,000 | — | 17,000 | |||||||||||||
| Total | $ | 18,000 | $ | (142,708 | ) | $ | (218,000 | ) | $ | (187,090 | ) | ||||||
| Provisions for recoverable income taxes have been computed at statutory rates. In the periods ending January 2, 1999 the recoverable tax provision was reduced by a valuation allowance $17,000 for tax credits expiring in 1999. Resulting deferred tax assets amounting to $1,277,000 at January 1, 2000 and $1,059,000 at April 3, 1999 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. If the Company is unable to generate sufficient income in the future through operating results, an increase in the valuation allowance will be required through a charge to expense. | ||
| 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: |
| Three months ended | Nine months ended | |||||||||||||||
| 1/1/00 | 1/2/99 | 1/1/00 | 1/2/99 | |||||||||||||
| Net income (loss) | $ | 13,242 | $ | (317,833 | ) | $ | (485,961 | ) | $ | (401,353 | ) | |||||
| Weighted average shares | 2,605,233 | 2,602,970 | 2,605,233 | 2,600,661 | ||||||||||||
| Additional dilutive shares | 2,826 | — | — | — | ||||||||||||
| Total dilutive shares | 2,608,059 | 2,602,970 | 2,605,233 | 2,600,661 | ||||||||||||
| Basic earnings (loss) per share | $ | 0.01 | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.15 | ) | |||||
| Diluted earnings (loss) per share | $ | 0.01 | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.15 | ) | |||||
Page 7
| 4. | The Company is utilizing SFAS No. 130, “Reporting Comprehensive Income.” This Statement establishes standards for reporting and displaying comprehensive income and its components. Components of comprehensive income, as it applies to the Company, would include the write-up or write-down of securities held for sale to market value. The effects of such adjustments to comprehensive income for fiscal 2000 and 1999 are not material and do not affect the Company’s reported results of operations or financial position. | |
| 5. | A revolving credit agreement expires on July 31, 2000. The agreement provides for maximum short-term borrowing of $500,000 with interest charged at one-half of 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. |
Page 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The Company earned $13,000 or $ .01 per diluted share in the most recent quarter compared to a $318,000 loss ($.12 per diluted share) for the three months ended January 2, 1999. Over the nine months ending on January 1, 2000 and January 2, 1999, the Company experienced net losses of $486,000 and $401,000 or $.19 and $.15 per diluted share respectively.
Third quarter sales increased by 23% to $4,954,000 from $4,025,000 reported for the same quarter in 1999. Sales moved upward on a nine-month basis to $12,718,000 — up by $1,744,000 or 16% from $10,974,000 of sales last year. These increases relate to the Company’s promotions and were achieved through expanded demonstration sales efforts. Gross margins improved by $756,000 or 38% to $2,729,000 for the most recent three months and to $6,960,000 from $5,684,000 experienced for the first nine months of last year. Such margin improvements were the result of increased sales and improved profitable mix of products sold in fiscal 2000 and also because of inventory loss provisions in 1999.
The Company continued to expand its promotional efforts in the third quarter as total operating expenses increased by 8% to $2,642,000. Such expenses increased by 18% for the year to date to $7,507,000 from $6,366,000 in the same nine months of 1999. Net interest cost rose for the quarter and year to date due to financing costs associated with the December 31, 1998 purchase of the Company’s 6530 Poe Avenue facility. In addition, fewer idle funds were available for investment during the third quarter and year to date.
Provisions for income taxes are based on anticipated annual effective tax rates. A provision for Federal tax expense of $18,000 was recorded in the third quarter of the current fiscal year compared to $143,000 of recoverable taxes in the preceding year. For the years to date, a recoverable tax of $218,000 was provided in the current fiscal year compared to $187,000 in fiscal 1999.
Liquidity and Financial Position
Cash used in operations for the nine months ended January 1, 2000 totaled $1,329,000 compared to $1,411,000 a year ago. Net losses of $486,000 and $402,000 together with increases in inventory levels to meet additional product demand and liquidation of current liabilities were the main reasons for cash usage in both years. Maturing short-term investments of $989,000 and $1,829,000 were utilized in the current and past year respectively to fund the operating cash requirements.
The Company’s assets include $1,277,000 of deferred income tax assets at January 1, 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. 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 1.99 to 1 at January 1, 2000 compared to 2.12 to 1 at the beginning of the fiscal year. The debt to equity ratio increased slightly to 1.35 to 1 from 1.28 to 1 during that same period.
The Company returned to profitability in the third quarter of fiscal 2000 after experiencing operating losses for the previous six quarters. Low profitability or further losses will negatively affect the Company’s liquidity both (a) as a result of negative cash flow, and (b) by putting the Company in the position of failing to satisfy the conditions applicable to drawing under the line of credit.
Year 2000 Impact
The year 2000 issue was related to computer software utilizing two digits rather than four to define the year. As a result, any of the Company’s computer programs or any of the Company’s suppliers having date sensitive software could have caused system failures or generation of incorrect data. No significant year 2000 issues have occurred through the current date.
Page 9
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.
Item 3. Quantitative and qualitative disclosures about market risk.
Not applicable.
Page 10
PART II. OTHER INFORMATION
Item 6.
| (a) | Exhibits: | |
| (27) | Financial Data Schedule for the period ended January 1, 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/ John R. Folkerth ——————————— John R. Folkerth Chairman of the Board President and Chief Executive Officer |
| By /s/ Mark A. May ——————————— Mark A. May Principal Financial and Accounting Officer |
Date: February 11, 2000
Page 11
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