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, 2000 |
|
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
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, 2000.
Common shares, without par value: 2,605,233 shares.
Page 1
SHOPSMITH, INC. AND SUBSIDIARIES
INDEX
| Page No. | ||||||
| Part 1. Financial information: | ||||||
| Item 1. Financial Statements | ||||||
| Consolidated Balance Sheets- | ||||||
| December 30, 2000 and April 1, 2000 | 3-4 | |||||
| Statements of Consolidated Operations and | ||||||
| Retained Earnings — Three and Nine Months | ||||||
| Ended December 30, 2000 and January 1, 2000 | 5 | |||||
| Consolidated Statements of Cash Flows- | ||||||
| Nine Months Ended December 30, 2000 and | ||||||
| January 1, 2000 | 6 | |||||
| Notes to Consolidated Financial Statements | 7-8 | |||||
| Item 2. Management’s Discussion and Analysis | ||||||
| of Financial Condition and Results | ||||||
| of Operations | 9 | |||||
| Item 3. Quantitative and qualitative disclosures | ||||||
| about market risk | 10 | |||||
| Part II. Other Information | 11 | |||||
Page 2
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 30, | April 1, | |||||||||||
| 2000 | 2000 | |||||||||||
| (Unaudited) | ||||||||||||
| ASSETS | ||||||||||||
| Current Assets: | ||||||||||||
| Cash and equivalents | $ | 217,603 | $ | 1,301,387 | ||||||||
| Restricted cash | 173,171 | 104,970 | ||||||||||
| Accounts receivable: | ||||||||||||
| Trade, less allowance for doubtful accounts: | ||||||||||||
| $743,177 on December 30 and $646,756 on April 1 | 704,793 | 622,887 | ||||||||||
| Inventories | 2,636,357 | 2,523,185 | ||||||||||
| Deferred income taxes (Note 2) | 563,000 | 569,000 | ||||||||||
| Prepaid expenses | 355,471 | 426,214 | ||||||||||
| Total current assets | 4,650,395 | 5,547,643 | ||||||||||
| Properties: | ||||||||||||
| Land, building and improvements | 3,161,199 | 3,161,199 | ||||||||||
| Machinery, equipment and tooling | 6,617,144 | 6,568,403 | ||||||||||
| Total cost | 9,778,343 | 9,729,602 | ||||||||||
| Less accumulated depreciation and amortization | 6,716,544 | 6,501,718 | ||||||||||
| Net properties | 3,061,799 | 3,227,884 | ||||||||||
| Deferred income taxes (Note 2) | 763,000 | 757,000 | ||||||||||
| Other assets | 2,303 | 20,833 | ||||||||||
| Total assets | $ | 8,477,497 | $ | 9,553,360 | ||||||||
Continued
Page 3
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 30, | April 1, | ||||||||||
| 2000 | 2000 | ||||||||||
| (Unaudited) | |||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 1,294,140 | $ | 1,469,298 | |||||||
| Current portion of long-term debt and capital lease obligation | 78,121 | 189,038 | |||||||||
| Customer advances | 17,882 | 26,863 | |||||||||
| Accrued liabilities: | |||||||||||
| Compensation, employee benefits and payroll taxes | 224,253 | 372,235 | |||||||||
| Sales taxes payable | 98,080 | 193,162 | |||||||||
| Accrued recourse liability | 439,984 | 390,369 | |||||||||
| Accrued expenses | 250,640 | 298,717 | |||||||||
| Other | 173,668 | 260,157 | |||||||||
| Total current liabilities | 2,576,768 | 3,199,839 | |||||||||
| Long-term debt and capital lease obligation | 2,596,065 | 2,640,445 | |||||||||
| Total liabilities | 5,172,833 | 5,840,284 | |||||||||
| 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 30 and on April 1 |
2,806,482 | 2,806,482 | |||||||||
| Retained earnings | 498,182 | 906,594 | |||||||||
| Total shareholders’ equity | 3,304,664 | 3,713,076 | |||||||||
| Total Liabilities and Shareholders’ Equity | $ | 8,477,497 | $ | 9,553,360 | |||||||
See notes to consolidated financial statements.
Page 4
SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| Dec 30 | Jan 1 | Dec 30 | Jan 1 | ||||||||||||||
| 2000 | 2000 | 2000 | 2000 | ||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||
| Net sales | $ | 4,148,057 | $ | 4,954,240 | $ | 11,818,721 | $ | 12,718,239 | |||||||||
| Cost of products sold | 1,935,195 | 2,225,453 | 5,569,639 | 5,757,820 | |||||||||||||
| Gross margin | 2,212,862 | 2,728,787 | 6,249,082 | 6,960,419 | |||||||||||||
| Selling expenses | 1,816,925 | 2,212,452 | 5,330,193 | 6,077,436 | |||||||||||||
| Administrative expenses | 344,421 | 429,632 | 1,207,607 | 1,429,880 | |||||||||||||
| Total operating expenses | 2,161,346 | 2,642,084 | 6,537,800 | 7,507,316 | |||||||||||||
| Income (Loss) from operations | 51,516 | 86,703 | (288,718 | ) | (546,897 | ) | |||||||||||
| Interest income | 11,943 | 8,600 | 30,625 | 34,725 | |||||||||||||
| Interest expense | (62,125 | ) | (67,553 | ) | (157,364 | ) | (202,303 | ) | |||||||||
| Other income, net | 2,244 | 3,492 | 7,045 | 10,514 | |||||||||||||
| Income (Loss) before income taxes | 3,578 | 31,242 | (408,412 | ) | (703,961 | ) | |||||||||||
| Income tax benefit (Expense) | — | (18,000 | ) | — | 218,000 | ||||||||||||
| Net Income (Loss) | 3,578 | 13,242 | (408,412 | ) | (485,961 | ) | |||||||||||
| Retained earnings: | |||||||||||||||||
| Beginning | 494,604 | 1,087,080 | 906,594 | 1,586,283 | |||||||||||||
| Ending | $ | 498,182 | $ | 1,100,322 | $ | 498,182 | $ | 1,100,322 | |||||||||
| Net Income (Loss) per common share
(Note 3) Basic |
$ | 0.00 | $ | 0.01 | $ | (0.16 | ) | $ | (0.19 | ) | |||||||
| Diluted | $ | 0.00 | $ | 0.01 | $ | (0.16 | ) | $ | (0.19 | ) | |||||||
See notes to consolidated financial statements.
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SHOPSMITH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
| Nine Months Ended | |||||||||||
| December 30 | January 1 | ||||||||||
| 2000 | 2000 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net Loss | $ | (408,412 | ) | $ | (485,961 | ) | |||||
| Adjustments to reconcile net loss to cash provided from operating activities: | |||||||||||
| Depreciation and amortization | 214,826 | 208,968 | |||||||||
| Provision for doubtful accounts | 225,885 | 128,572 | |||||||||
| Deferred income taxes | — | (218,000 | ) | ||||||||
| Cash provided from (required for) changes in assets and liabilities: | |||||||||||
| Restricted cash | (68,201 | ) | (10,415 | ) | |||||||
| Accounts receivable | (258,176 | ) | 126,849 | ||||||||
| Inventories | (113,172 | ) | (418,607 | ) | |||||||
| Other assets | 89,273 | (219,698 | ) | ||||||||
| Accounts payable and customer advances | (184,139 | ) | (336,028 | ) | |||||||
| Other current liabilities | (377,630 | ) | (104,631 | ) | |||||||
| Cash provided from (used in) operating activities | (879,746 | ) | (1,328,951 | ) | |||||||
| Cash flows from investing activities: | |||||||||||
| Maturity of short-term investments | — | 989,122 | |||||||||
| Property additions | (48,741 | ) | (99,871 | ) | |||||||
| Cash provided from (used in) investing activities | (48,741 | ) | 889,251 | ||||||||
| Cash flows from financing activities: | |||||||||||
| Common shares repurchased | — | — | |||||||||
| Payments on long-term debt and capital lease obligation | (155,297 | ) | (52,442 | ) | |||||||
| Cash provided from (used in) financing activities | (155,297 | ) | (52,442 | ) | |||||||
| Net decrease in cash | (1,083,784 | ) | (492,142 | ) | |||||||
| Cash: | |||||||||||
| At beginning of period | 1,301,387 | 1,005,371 | |||||||||
| At end of period | $ | 217,603 | $ | 513,229 | |||||||
See notes to consolidated financial statements.
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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 30, 2000 and January 1, 2000 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 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: |
| Three months ended | Nine months ended | |||||||||||||||||
| December 30 | January 1 | December 30 | January 1 | |||||||||||||||
| 2000 | 2000 | 2000 | 2000 | |||||||||||||||
| Income (Loss) before income taxes | $ | 3,578 | $ | 31,242 | $ | (408,412 | ) | $ | (703,961 | ) | ||||||||
| Provision for (recoverable) income taxes: | ||||||||||||||||||
| Current | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Deferred | 6,000 | 18,000 | (122,000 | ) | (218,000 | ) | ||||||||||||
| Change in valuation allowance | (6,000 | ) | — | 122,000 | — | |||||||||||||
| Net provision for (recoverable) income taxes | $ | — | $ | 18,000 | $ | — | $ | (218,000 | ) | |||||||||
| The Company has deferred tax assets amounting to $1,326,000 at December 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 current year through December 30, 2000, the Company has established a $122,000 valuation allowance against its provision for recoverable income taxes 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: |
| Three months ended | Nine months ended | |||||||||||||||
| December 30, | January 1, | December 30, | January 1, | |||||||||||||
| 2000 | 2000 | 2000 | 2000 | |||||||||||||
| Net income (loss) | $ | 3,578 | $ | 13,242 | $ | (408,412 | ) | $ | (485,961 | ) | ||||||
| Weighted average shares | 2,605,233 | 2,605,233 | 2,605,233 | 2,605,233 | ||||||||||||
| Additional dilutive shares | — | — | — | — | ||||||||||||
| Total dilutive shares | 2,605,233 | 2,605,233 | 2,605,233 | 2,605,233 | ||||||||||||
| Basic earnings (loss) per share | $ | 0.00 | $ | 0.01 | $ | (0.16 | ) | $ | (0.19 | ) | ||||||
| Diluted earnings (loss) per share | $ | 0.00 | $ | 0.01 | $ | (0.16 | ) | $ | (0.19 | ) | ||||||
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| There were no additional dilutive shares included in the computation at December 30, 2000 and January 1, 2000 because the stock options were anti-dilutive. |
| 4. | A revolving credit agreement expires 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. |
Page 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Third quarter sales declined to $4,148,000 or 16.3% from $4,954,000 generated a year ago. On a year-to-date basis sales have declined by $900,000 or 7.1% to $11,819,000. Decreases in our demonstration sales channel have more than offset increases in other channels.
Gross margin rates declined to 53.3% from 55.1% for the same quarter last year. Gross margin rates for the year-to-date declined to 52.9% from 54.7% for the same period last year.
Through tighter control on expenditures and the deferral of some longer term programs, total operating expenses were reduced by $481,000 to $2,161,000 in the current quarter and by $970,000 to $6,538,000 for the nine month period.
Provisions for income taxes for the quarter ($0 in FY 2001 and $18,000 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 $4,000 or $.00 per diluted share was experienced in the quarter ended December 30, 2000 compared to a net income of $13,000 or $.01 per diluted share for the same period of last year. Year to date a loss of $408,000 or $.16 per diluted share was incurred, compared to a loss of $486,000 or $.19 per diluted share for the year before.
Liquidity and Financial Position
Cash used in operations for the first nine months of the current fiscal year totaled $1,084,000 compared with $492,000 last year. Net losses of $408,000, together with liquidation of current liabilities, were the main reasons for the cash usage in the nine months ended December 30, 2000.
The Company’s assets include $1,326,000 of deferred income tax assets at December 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 December 30, 2000, the Company has established a $122,000 valuation allowance against its provision for recoverable income taxes 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 1.80 to 1 at December 30, 2000 compared to 1.73 to 1 at the beginning of the current fiscal year. The debt to equity ratio is unchanged from April 1, 2000 at 1.57 to 1.
The Company has recently switched providers for its consumer finance from Household Retail Services to CitiFinance. CitiFinance does not currently offer a recourse program. A recourse program allows the company, at its option, to assume recourse liability with respect to consumers that the provider would not otherwise finance. Shopsmith is currently financing some of these customers internally, which has a negative effect on liquidity.
The Company has now experienced operating losses in the last two fiscal years as well as for the year to date through the first three 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.
Page 9
Item 3. Quantitative and qualitative disclosures about market risk.
Not applicable.
Page 10
PART II. OTHER INFORMATION
Item 6.
(a) Exhibits:
(10) Material Contracts
(10.14) Consumer Finance agreement with CitiFinancial dated November 15, 2000.
(c) 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 7, 2001 |
Page 11