Shopsmith, Inc. Form 10-Q
Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Quarterly Report Pursuant To Section 13 or 15 (d)
Of the Securities Exchange Act of 1934

     
For the quarterly period ended— December 28, 2002   Commission File Number 0-9318

SHOPSMITH, INC.

(Exact Name of Registrant as specified in its charter)
     
Ohio   31-0811466
 
(State of Incorporation)   (IRS Employer Identification No.)
     
6530 Poe Avenue    
Dayton, Ohio   45414
(Address of Principal   (Zip Code)
Executive Offices)    

Registrant’s Telephone Number 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 17, 2003.

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

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CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
SHOPSMITH INC. AND SUBSIDIARIES                      CONSOLIDATED STATEMENTS OF CASH FLOWS
SHOPSMITH, INC. AND SUBSIDIARIES                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Liquidity and Financial Position
Forward Looking Statements
Item 3. Quantitative and qualitative disclosures about market risk.
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit 4.14 Promissory Note
Exhibit 99.2 Certification
Exhibit 99.3 Certification

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SHOPSMITH, INC. AND SUBSIDIARIES

INDEX
             
 
   Page No.
 
  
Part I. Financial Information:
        
 
        
 
Item 1. Financial Statements
        
 
        
   
Consolidated Balance Sheets- December 28, 2002 and March 30, 2002
     3-4  
 
        
   
Consolidated Statements of Operations and Retained Earnings (Deficit) – Three Months and Nine Months Ended December 28, 2002 and December 29, 2001
     5  
 
        
   
Consolidated Statements of Cash Flows- Nine Months Ended December 28, 2002 and December 29, 2001
     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
     11  
 
        
 
Item 4. Controls and procedures
     11  
 
        
Part II. Other Information
        
 
        
 
Item 6. Exhibits and Reports on Form 8-K
     12  
 
        
Signatures
     12  
 
        
Certifications
     13-14  

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

                         
            December 28,   March 30,
            2002   2002
           
 
            (Unaudited)        
ASSETS                
Current Assets:
                
 
Cash and equivalents
   $ 825     $ 76,324  
 
Restricted cash
     24,940       151,585  
 
Accounts receivable:
                
   
Trade, less allowance for doubtful accounts:
                
   
$909,539 on December 28, and $774,708 on March 30,
     1,680,879       1,642,366  
 
Inventories
                
   
Finished products
     986,856       875,888  
   
Raw materials and work in process
     1,352,930       1,427,369  
 
    
     
 
       
Total inventories
     2,339,786       2,303,257  
 
Prepaid expenses
     177,175       218,660  
 
    
     
 
       
Total current assets
     4,223,605       4,392,192  
Properties:
                
 
Land, building and improvements
     3,148,348       3,143,908  
 
Machinery, equipment and tooling
     6,722,321       6,714,886  
 
    
     
 
       
Total cost
     9,870,669       9,858,794  
 
Less accumulated depreciation and amortization
     7,174,414       7,029,128  
 
    
     
 
       
Net properties
     2,696,255       2,829,666  
Long-term portion of accounts receivable trade, less allowance for doubtful accounts:
                
 
$186,248 on December 28, and $116,432 on March 30,
     529,692       215,476  
Other assets
     2,303       2,303  
 
    
     
 
Total assets
   $ 7,451,855     $ 7,439,637  
 
    
     
 

Continued

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

                         
            December 28,   March 30,
            2002   2002
           
 
            (Unaudited)        
       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                
 
Accounts payable
   $ 1,529,211     $ 1,582,636  
 
Note payable
     400,000       400,000  
 
Current portion of long-term debt and capital lease obligation
     106,235       104,836  
 
Customer advances
     84,582       126,181  
 
Accrued liabilities:
                
   
Compensation, employee benefits and payroll taxes
     399,737       289,559  
   
Sales taxes payable
     56,136       80,570  
   
Accrued recourse liability
     131,444       147,786  
   
Accrued expenses
     277,427       257,544  
   
Other
     70,940       75,470  
 
    
     
 
     
Total current liabilities
     3,055,712       3,064,582  
Long-term debt and capital lease obligation
     2,400,432       2,479,344  
 
    
     
 
     
Total liabilities
     5,456,144       5,543,926  
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 December 28, and March 30,
     2,806,482       2,806,482  
 
Deficit
     (810,771 )     (910,771 )
 
    
     
 
     
Total shareholders’ equity
     1,995,711       1,895,711  
 
    
     
 
Total liabilities and shareholders’ equity
   $ 7,451,855     $ 7,439,637  
 
    
     
 

See notes to consolidated financial statements.

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)

                                   
      Three Months Ended   Nine Months Ended
     
 
      December 28,   December 29,   December 28,   December 29,
      2002   2001   2002   2001
     
 
 
 
      (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
Net sales
   $ 3,986,866     $ 4,617,061     $ 10,608,638     $ 10,943,202  
Cost of products sold
     2,039,175       2,387,571       5,192,364       5,362,391  
 
    
     
     
     
 
Gross margin
     1,947,691       2,229,490       5,416,274       5,580,811  
Selling expenses
     1,446,248       1,901,997       3,919,028       4,969,104  
Administrative expenses
     456,423       404,047       1,327,745       1,324,924  
 
    
     
     
     
 
 
Total operating expenses
     1,902,671       2,306,044       5,246,773       6,294,028  
Income (loss) from operations
     45,020       (76,554 )     169,501       (713,217 )
Non-recurring gain from demutualization of insurance company
     —       153,381       95,462       153,381  
Interest income
     35,658       20,218       85,902       53,996  
Interest expense
     82,664       65,645       255,481       189,911  
Other income, net
     1,986       2,029       4,616       8,784  
 
    
     
     
     
 
Income (loss) before taxes
     —       33,429       100,000       (686,967 )
Income tax expense
     —       —       —       —  
 
    
     
     
     
 
Net income (loss)
     —       33,429       100,000       (686,967 )
Retained earnings:
                                
 
Beginning
     (810,771 )     159,106       (910,771 )     879,502  
 
    
     
     
     
 
 
Ending
   $ (810,771 )   $ 192,535     $ (810,771 )   $ 192,535  
 
    
     
     
     
 
Net income (loss) per common share (Note 3)
                               
 
Basic
   $ —     $ 0.01     $ 0.04     $ (0.26 )
 
    
     
     
     
 
 
Diluted
   $ —     $ 0.01     $ 0.04     $ (0.26 )
 
    
     
     
     
 

See notes to consolidated financial statements.

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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

                     
        Nine Months Ended
       
        December 28,   December 29,
        2002   2001
       
 
        (Unaudited)   (Unaudited)
       
 
Cash flows from operating activities:
                
Net income (loss)
   $ 100,000     $ (686,967 )
 
Adjustments to reconcile net income (loss) to cash provided from operating activities:
                
 
Depreciation and amortization
     145,286       187,678  
 
Stock proceeds from Insurance Demutualization
     —       (153,381 )
 
Provision for doubtful accounts
     189,813       195,027  
 
Cash provided from (required for) changes in assets and liabilities:
                
   
Restricted cash
     126,645       174,718  
   
Accounts receivable
     (542,542 )     (824,655 )
   
Inventories
     (36,529 )     (501,064 )
   
Other assets
     41,485       170,020  
   
Accounts payable and customer advances
     (95,024 )     860,805  
   
Other current liabilities
     84,755       (43,884 )
 
    
     
 
Cash provided from (used in) operating activities
     13,889       (621,703 )
Cash flows from investing activities:
                
 
Property additions
     (11,875 )     (69,069 )
 
    
     
 
Cash used in investing activities
     (11,875 )     (69,069 )
Cash flows from financing activities:
                
 
Increase in revolving loan
     —       400,000  
 
Payments on long-term debt and capital lease obligation
     (77,513 )     (44,265 )
 
    
     
 
Cash provided from (used in) financing activities
     (77,513 )     355,735  
 
    
     
 
Net decrease in cash
     (75,499 )     (335,037 )
Cash:
                
 
At beginning of period
     76,324       651,530  
 
    
     
 
 
At end of period
   $ 825     $ 316,493  
 
    
     
 

See notes to consolidated financial statements.

 

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    Three Months Ended   Nine Months Ended
         
    December 28,   December 29,   December 28,   December 29,
    2002   2001   2002   2001
   
 
 
 
Income (loss) before income taxes
   $ —     $ 33,429     $ 100,000     $ (686,967 )
 
    
     
     
     
 
Provision for (recoverable) income taxes:
                                
Income tax benefit (expense)
   $ —     $ —     $ —     $ —  
 
    
     
     
     
 

 

Table of Contents

                                 
    Three Months Ended   Nine Months Ended
    December 28,   December 29,   December 28,   December 29,
    2002   2001   2002   2001
   
 
 
 
Net income (loss)
   $ —     $ 33,429     $ 100,000     $ (686,967 )
 
    
     
     
     
 
Weighted average shares
     2,605,233       2,605,233       2,605,233       2,605,233  
Additional dilutive shares
     —       8,400       —       —  
 
    
     
     
     
 
Total dilutive shares
     2,605,233       2,613,633       2,605,233       2,605,233  
 
    
     
     
     
 
Basic income (loss) per share
   $ —     $ 0.01     $ 0.04     $ (0.26 )
 
    
     
     
     
 
Diluted income (loss) per share
   $ —     $ 0.01     $ 0.04     $ (0.26 )
 
    
     
     
     
 

 

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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 December 28, 2002 and December 29, 2001 to present the financial statements fairly. However, the results of operations for the nine months then ended are not necessarily indicative of results for the full 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, 2002.
 
2.   The provision for income taxes is as follows:

<Insert TaxProv tab here>

    Taxable income for the nine months ended December 28, 2002 was offset by a net operating loss carry forward (The remaining net operating loss carry forward asset of $1,376,000 was not shown as an asset because of a valuation allowance against the Company’s ability to realize the tax benefit).
 
3.   Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects 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:

<Insert EPS tab here>

    There were no additional dilutive shares included in the computation for the periods ended December 28, 2002 and for the quarter ended December 29, 2001 because the stock options were anti-dilutive.

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4.   During fiscal 2002, entered into an arrangement with John R. Folkerth, the Company’s CEO, which allows the Company to borrow up to $500,000 with interest at twelve percent. The maximum authorized borrowing was increased to $600,000 in July 2002. Substantially all personal property except for certain receivables are pledged as collateral. Interest is due monthly and the note is payable on demand. At December 28, 2002 and March 30, 2002, there was $400,000 outstanding under this arrangement. Borrowings from Mr. Folkerth are subject to Mr. Folkerth’s approval and are payable upon demand by Mr. Folkerth.
 
5.   On December 31, 2002, Shopsmith entered into a loan agreement with Provident Bank which allows the Company to borrow up to the lesser of $750,000 or 80% of eligible receivables due from Lowes Companies, Inc., with interest charged at one and one-half percent over the bank’s prime rate. The agreement requires compliance with certain net income, net worth, and miscellaneous covenants. Substantially all personal property is pledged as collateral.
 
6.   One customer exceeded the 10% level of consolidated net sales. A major retailer represented 37% of net sales for the quarter ended December 28, 2002 and 33% of net sales for the nine months ended December 28, 2002.

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

Results of Operations

Shopsmith manufactures and sells woodworking products. Our core product, the Mark V is sold directly to consumers through demonstration sales events and indirectly to consumers through distributors, primarily Lowe’s where Shopsmith also conducts sales demonstrations, along with smaller amounts through other efforts. Mark V sales demonstrations are done in shopping malls, at home shows, and at state fairs. Other woodworking products and accessories are sold through mail and Internet channels. Shopsmith recognizes revenue for these orders at the time of product shipment.

Third quarter sales decreased to $3,987,000 or 13.6% from $4,617,000 generated a year ago. This decrease occurred primarily in our demonstration sales of the Mark V, other than demonstrations done at Lowe’s stores. Year to date sales decreased to $10,609,000 or 3.1% from $10,943,000 last year.

Gross margin rates increased by one half of a percentage point compared to the same quarter last year, and by 0.1% on a year to date basis. Operating expenses were reduced by $403,000 to $1,903,000 in the third quarter from $2,306,000 in last year’s third quarter. On a year to date basis, operating expenses dropped by $1,143,000 to $5,151,000 from $6,294,000 the prior year. Operating expenses were reduced by improved expense control on Mark V sales events, as well as through reductions in compensation costs. Employee benefit costs were reduced by $95,000 year to date, due to proceeds from the Anthem insurance demutualization.

During the fiscal year ending March 2003, Shopsmith has implemented a employee salary reduction plan. The plan took effect May 19, 2002 and continued until December 28, 2002. Salary reductions of participants (officers, managers and certain key employees) aggregated $38,000 and $91,000 during the three and nine months ended December 28, 2002, respectively. As part of this plan, fiscal 2003 pre-tax income above $100,000 will be used to return the amount of the reduction and to pay an additional incentive equal to the amount of the reduction, as income permits. The salary reductions were restored at the end of the Company’s third quarter. An expense of $147,000 has been accrued based on year to date results before the offsetting accrual for exceeding $100,000. The next $35,000 of additional earnings in the fourth quarter of fiscal 2003 will be offset by increases to the accrual for payment returning the salary reduction and paying the incentive amounts. If the plan had not been in effect for the three and nine months ended December 28, 2002, results would have been $73,000 and $156,000, respectively.

Provisions for recoverable Federal income taxes ($0 in both FY2003 and FY 2002) are based on estimated annual effective rates, less a valuation reserve. The zero Federal income tax amount in FY2003 was due to the utilization of the net loss carryforwards.

Because of the factors above, a net income of $0 or $.00 per diluted share was earned in the quarter ended December 28, 2002 compared to a net income of $33,000 or $.01 per diluted share for the same period of last year. For the year to date, net income was $100,000 or $.04 per diluted share compared to a net loss of $687,000 or $.26 per diluted share for the same period last year.

Liquidity and Financial Position

Cash provided from operations totaled $14,000 in the current year compared with a usage of $622,000 for the same period of the preceding year. The year to date income of $100,000 along with the adjustments for non-cash items, such as depreciation and the provision for doubtful accounts, offset by an increase in receivables explain the change in cash for the period.

The current ratio was 1.38 to 1 at December 28, 2002 compared to 1.43 to 1 at the beginning of the current fiscal year. The debt to equity ratio decreased to 2.73 to 1 from 2.92 to 1 at March 30, 2002.

During fiscal 2002, Shopsmith entered into an arrangement with John R. Folkerth, the Company’s CEO, which allows the Company to borrow up to $500,000 with interest at twelve percent. The maximum authorized borrowing was increased to $600,000 in July 2002. Substantially all personal property except for certain receivables are pledged as collateral. Interest is due monthly and the note is payable on demand. At December 28, 2002, there was $400,000 outstanding under this arrangement. Borrowings from Mr. Folkerth are subject to Mr. Folkerth’s approval and are payable upon demand by Mr. Folkerth.

On December 31, 2002, Shopsmith entered into a loan agreement with Provident Bank which allows the company to borrow up to the lesser of $750,000 or 80% of eligible receivables due from Lowes Companies, Inc., with interest charged at one and one-half percent over the Bank’s prime rate. The agreement requires compliance with certain net income, net worth, and miscellaneous covenants. Substantially all personal property is pledged as collateral.

In 1999, the Company purchased the building it had been leasing. The seller financed the building purchase. The financing agreement provided for a $100,000 down payment and a secured mortgage note for $2,800,000 at an 8.75% interest rate. The note was payable in monthly

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installments of $25,785 with the balance being due and payable in full on January 1, 2003. In March 2002, the agreement was amended to continue the $25,785 monthly payments of principal and interest until January 1, 2006 at which time the scheduled balance of approximately $2,180,000 will become due and payable.

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: (i) the operating cash flows together with currently available working capital may be inadequate to finance the operating needs of the Company; (ii) the demand loan extended to the Company by Mr. John R. Folkerth (as described above) could be called prior to the Company being in a position to repay or refinance the loan; and (iii) cancellation by Lowe’s of the in-store sales program.

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Item 3. Quantitative and qualitative disclosures about market risk.

    Not applicable.

Item 4. Controls and Procedures.

    The Company’s Chairman and Chief Executive Officer, John R. Folkerth, and the Company’s Chief Financial Officer, Mark A. May, have evaluated the Company’s internal controls and disclosure controls systems within 90 days of the filing of this report. Messrs. Folkerth and May have concluded that the Company’s disclosure controls systems are functioning effectively to provide reasonable assurance that the Company can meet its disclosure obligations. The reporting process is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Since Messrs. Folkerth’s and May’s most recent review of the Company’s internal controls systems, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

       4. Instruments Defining the Rights of Security Holders, Including Indentures

       4.14     Promissory Note and Loan Agreement with Provident Bank dated December 31, 2002

       99. Additional Exhibits

       99.2     Certification of the form 10-Q by John R. Folkerth, the Company’s CEO.
 
       99.3     Certification of the form 10-Q by Mark A. May, the Company’s CFO.

(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)

Date: February 10, 2003

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I, John R. Folkerth, certify that:

    1. I have reviewed this quarterly report on Form 10-Q of Shopsmith, Inc.;
 
    2. Based on my knowledge, this quarterly report does not contain any untrue statements of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
    3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in the quarterly report;
 
    4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
      b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
      c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

    5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

      a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
      b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

    6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
         
  Date: February 10, 2003
         
  By: /s/ John R. Folkerth

John R. Folkerth

Chairman and Chief Executive Officer

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    I, Mark A. May, certify that:
 
    1. I have reviewed this quarterly report on Form 10-Q of Shopsmith, Inc.;
 
    2. Based on my knowledge, this quarterly report does not contain any untrue statements of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
    3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in the quarterly report;
 
    4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
      b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
      c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

    5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

      a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
      b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

    6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
         
  Date:   February 10, 2003
         
  By:   /s/ Mark A. May
Mark A. May

Vice President of Finance and Treasurer

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