Shopsmith, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2005
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-9318
SHOPSMITH, INC.
(Exact name of registrant as specified in its charter)
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Ohio |
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31-0811466 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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6530 Poe Avenue, Dayton, Ohio |
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45414 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (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. þ Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date.
Common shares, without par value: 2,605,233 shares as of November 1, 2005.
SHOPSMITH, INC. AND SUBSIDIARIES
INDEX
Page 2
Part
I FINANCIAL INFORMATION
Item 1. Financial Statements
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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October 1, |
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April 2, |
|
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|
2005 |
|
|
2005 |
|
|
|
(Unaudited) |
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|
|
ASSETS |
|
|
|
|
|
|
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Current assets: |
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|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
42,974 |
|
|
$ |
1,099 |
|
Accounts receivable: |
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
$306,745 on October 1, 2005 and $608,060 on April 2, 2005 |
|
|
627,636 |
|
|
|
1,206,143 |
|
Inventories: |
|
|
|
|
|
|
|
|
Finished products |
|
|
680,643 |
|
|
|
811,215 |
|
Raw materials and work in process |
|
|
1,173,796 |
|
|
|
1,223,402 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
1,854,439 |
|
|
|
2,034,617 |
|
Prepaid expenses |
|
|
229,771 |
|
|
|
112,754 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,754,820 |
|
|
|
3,354,613 |
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|
|
|
|
|
|
|
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Properties: |
|
|
|
|
|
|
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Land, building and improvements |
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|
3,157,054 |
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|
|
3,157,054 |
|
Machinery, equipment and tooling |
|
|
6,899,046 |
|
|
|
6,885,915 |
|
|
|
|
|
|
|
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Total cost |
|
|
10,056,100 |
|
|
|
10,042,969 |
|
Less, accumulated depreciation and amortization |
|
|
7,605,511 |
|
|
|
7,526,435 |
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|
|
|
|
|
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Net properties |
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|
2,450,589 |
|
|
|
2,516,534 |
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|
|
|
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Long-term portion of accounts receivable
trade, less allowance for doubtful accounts: |
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|
|
|
|
|
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$15,378 on October 1, 2005 and $265,688 on April 2, 2005 |
|
|
53,777 |
|
|
|
1,068,050 |
|
|
|
|
|
|
|
|
|
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Other assets |
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|
2,253 |
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|
|
2,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,261,439 |
|
|
$ |
6,941,450 |
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|
|
|
|
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|
Continued
Page 3
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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|
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|
|
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October 1, |
|
|
April 2, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
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|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
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Current liabilities: |
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|
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Accounts payable |
|
$ |
1,467,687 |
|
|
$ |
2,052,134 |
|
Revolving line of credit |
|
|
233,592 |
|
|
|
577,727 |
|
Current portion of long-term debt |
|
|
1,877,145 |
|
|
|
1,926,915 |
|
Customer advances |
|
|
75,814 |
|
|
|
79,547 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
Compensation, employee benefits and payroll taxes |
|
|
197,797 |
|
|
|
318,075 |
|
Sales taxes payable |
|
|
61,600 |
|
|
|
59,685 |
|
Accrued recourse liability |
|
|
223,212 |
|
|
|
266,768 |
|
Accrued expenses |
|
|
215,192 |
|
|
|
232,758 |
|
Other |
|
|
73,038 |
|
|
|
73,349 |
|
|
|
|
|
|
|
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Total current liabilities |
|
|
4,425,077 |
|
|
|
5,586,958 |
|
|
|
|
|
|
|
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Long-term debt, less current portion |
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|
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|
|
|
|
|
|
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|
|
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Total liabilities |
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|
4,425,077 |
|
|
|
5,586,958 |
|
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|
|
|
|
|
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|
|
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Shareholders equity: |
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Preferred shares- without par value;
authorized 500,000; none issued
|
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|
|
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|
|
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Common shares- without par value;
authorized 5,000,000; issued and outstanding 2,605,233 |
|
|
2,806,482 |
|
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|
2,806,482 |
|
Deficit |
|
|
(1,970,120 |
) |
|
|
(1,451,990 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
836,362 |
|
|
|
1,354,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total liabilities and shareholders equity |
|
$ |
5,261,439 |
|
|
$ |
6,941,450 |
|
|
|
|
|
|
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|
See notes to consolidated financial statements.
Page 4
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
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Three Months Ended |
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Six Months Ended |
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October 1, |
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October 2, |
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October 1, |
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October 2, |
|
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|
2005 |
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|
2004 |
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|
2005 |
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|
2004 |
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|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Net sales |
|
$ |
2,438,106 |
|
|
$ |
3,025,730 |
|
|
$ |
5,041,118 |
|
|
$ |
5,813,166 |
|
Cost of products sold |
|
|
1,243,556 |
|
|
|
1,392,670 |
|
|
|
2,511,138 |
|
|
|
2,788,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
1,194,550 |
|
|
|
1,633,060 |
|
|
|
2,529,980 |
|
|
|
3,025,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
|
983,493 |
|
|
|
1,283,912 |
|
|
|
2,156,189 |
|
|
|
2,668,180 |
|
Administrative expenses |
|
|
307,803 |
|
|
|
374,763 |
|
|
|
715,059 |
|
|
|
830,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,291,296 |
|
|
|
1,658,675 |
|
|
|
2,871,248 |
|
|
|
3,498,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other income
and expense |
|
|
(96,746 |
) |
|
|
(25,615 |
) |
|
|
(341,268 |
) |
|
|
(473,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring expenses from going
private transaction |
|
|
103,334 |
|
|
|
|
|
|
|
103,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
667 |
|
|
|
43,523 |
|
|
|
820 |
|
|
|
88,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(36,601 |
) |
|
|
(33,657 |
) |
|
|
(74,979 |
) |
|
|
(87,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
225 |
|
|
|
887 |
|
|
|
631 |
|
|
|
1,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(235,789 |
) |
|
|
(14,862 |
) |
|
|
(518,130 |
) |
|
|
(471,377 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(235,789 |
) |
|
|
(14,862 |
) |
|
|
(518,130 |
) |
|
|
(471,377 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
(1,734,331 |
) |
|
|
(1,137,686 |
) |
|
|
(1,451,990 |
) |
|
|
(681,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
$ |
(1,970,120 |
) |
|
$ |
(1,152,548 |
) |
|
$ |
(1,970,120 |
) |
|
$ |
(1,152,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share (Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
Page 5
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(518,130 |
) |
|
$ |
(471,377 |
) |
Adjustments to reconcile net loss to
cash provided from (used in) operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
79,076 |
|
|
|
76,493 |
|
Provision for doubtful accounts |
|
|
48,368 |
|
|
|
102,311 |
|
Proceeds from sale of consumer revolving credit receivables |
|
|
1,138,721 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
405,691 |
|
|
|
307,147 |
|
Inventories |
|
|
180,178 |
|
|
|
(128,950 |
) |
Prepaid expenses and other |
|
|
(117,017 |
) |
|
|
(37,054 |
) |
Accounts payable and customer advances |
|
|
(588,180 |
) |
|
|
121,440 |
|
Other current liabilities |
|
|
(179,796 |
) |
|
|
(139,111 |
) |
|
|
|
|
|
|
|
Cash provided from (used in) operating activities |
|
|
448,911 |
|
|
|
(169,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(13,131 |
) |
|
|
(41,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings (repayments) on revolving line of credit |
|
|
(344,135 |
) |
|
|
609,055 |
|
Payments on long-term debt |
|
|
(49,770 |
) |
|
|
(398,591 |
) |
|
|
|
|
|
|
|
Cash provided from (used in) financing activities |
|
|
(393,905 |
) |
|
|
210,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
41,875 |
|
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
At beginning of period |
|
|
1,099 |
|
|
|
800 |
|
|
|
|
|
|
|
|
At end of period |
|
$ |
42,974 |
|
|
$ |
700 |
|
|
|
|
|
|
|
|
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 October 1, 2005 and October 2, 2004 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 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 April 2, 2005. |
2. |
|
There was no tax benefit during the three and six-month periods ended October 1, 2005 and
October 2, 2004, as the tax benefits were offset by changes in a valuation allowance. |
3. |
|
Basic loss per share is computed by dividing net loss by the weighted average number of
common shares outstanding during the period. Diluted loss per share reflects per share amounts
that would have resulted if dilutive stock options had been converted into common stock. The
following reconciles amounts reported in the financial statements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
October 1, |
|
|
October 2, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss |
|
$ |
(235,789 |
) |
|
$ |
(14,862 |
) |
|
$ |
(518,130 |
) |
|
$ |
(471,377 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loss per share |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no additional dilutive shares included in the computation for the three and six-month
periods ended October 1, 2005 and October 2, 2004 because the effect of stock options were
anti-dilutive.
4. |
|
The Company had the ability to borrow under a Loan Agreement (the Revolving Credit
Agreement) with National City Bank at the lesser of (i) $600,000 or (ii) the sum of 80% of
accounts receivable due from Lowes Companies. Interest on the Revolving Credit Agreement is
charged at one and one-half percent over the banks prime rate. The maturity date on the
agreement was August 15, 2005. All loans under the Revolving Credit Agreement are at the
discretion of National City Bank. At October 1, 2005, $233,592 was outstanding under the
expired Revolving Credit Agreement. |
The
Company is in the process of negotiating an agreement with Greystone Metro Factors regarding
a factoring arrangement covering the Companys receivables from Lowes. The funding from this
agreement is planned to replace the funding from the Revolving Credit Agreement with National
City Bank which expired August 15, 2005.
In connection with the Revolving Credit Agreement, Mr. John R. Folkerth, Chairman and Chief
Executive Officer of the Company, delivered to Provident Bank (National City Bank is successor
to Provident Bank) a Continuing Unconditional Guaranty pursuant to which Mr. Folkerth guaranteed
repayment of $200,000 of the indebtedness then or thereafter owing by the Company to the Bank.
In consideration of that Guaranty, the Company has agreed to pay to Mr. Folkerth an annual fee
of $3,000 (being 1.5% of the guaranteed amount).
On June 29, 2004, the Company refinanced a mortgage note on its building with a mortgage note
from Provident Bank in the amount of $2,000,000 with interest at one-quarter percent over the
banks prime rate. The note requires monthly payments of interest and from $8,000 to $10,000 of
the principal. In August 2009, the remaining balance on the note of approximately $1,477,000
will become due. At October 1, 2005, there was $1,877,145 outstanding under the building mortgage
agreement.
Page 7
Under the terms of the mortgage loan, default by the Company under the Revolving Credit
Agreement triggers default under the mortgage loan. In the event of default, Provident Bank
may declare the mortgage loan immediately due and payable. The outstanding balance of the
mortgage note has been classified as a current liability in the accompanying consolidated
balance sheets due to the Companys default of its Revolving Credit Agreement.
The mortgage loan and the revolving credit loans are collateralized by a mortgage on, or
security interest in, substantially all assets of the Company.
The Company is dependent upon the Revolving Credit Agreement to fund operations during periods
of negative cash flow. Termination of the Revolving Credit Agreement, without the establishment
of a substitute credit facility, would create significant liquidity issues for the Company.
5. |
|
A major retailer (Lowes) represented 24% and 32% of net sales for the quarters ended October
1, 2005 and October 2, 2004, respectively. This retailer also represented 21% and 31% of trade
accounts receivable at October 1, 2005 and April 2, 2005, respectively. |
6. |
|
The Company has adopted the disclosure only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation Transition and Disclosure, and, accordingly,
accounts for its stock option plans using the intrinsic value method of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. |
The following table illustrates the effect on net loss and net loss per share if compensation
expense was measured using the fair value recognition provisions of SFAS No. 123.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
October 1, |
|
|
October 2, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss as reported |
|
$ |
(235,789 |
) |
|
$ |
(14,862 |
) |
|
$ |
(518,130 |
) |
|
$ |
(471,377 |
) |
Net loss pro forma |
|
$ |
(235,789 |
) |
|
$ |
(28,406 |
) |
|
$ |
(518,130 |
) |
|
$ |
(484,921 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share as reported |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.18 |
) |
Diluted loss per share pro forma |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.19 |
) |
7. |
|
Uncertainties. The accompanying consolidated financial statements have been prepared assuming
that the Company will continue to operate as a going concern. As discussed below, the Company
has incurred recurring losses and is in default of its debt obligations, which taken as a
whole, raise substantial doubt about its ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. At October 1, 2005, the Company had a deficiency
of working capital of $1,670,257, a net loss of $235,789 for the quarter ended October 1,
2005, and was in default of its lending agreements with National City Bank. The future of the
Company as an operating entity will depend on managements plans and ability to (a) maintain
or replace existing financing arrangements, (b) obtain financing to meet its cash requirements
and (c) operate profitably in the future. |
To improve profitability, the Company needs to reduce costs and increase per event sales. One
effort to reduce costs in fiscal 2006 is a reduction in the number of Mark V sales demonstration
events. Demonstration sales are focused on the most promising locations for the events. The
Company is also continuing its prospect generation advertising efforts to increase the number of
prospects invited to each sales event.
In April 2005, the Company has implemented an employee salary reduction plan. As part of this
plan, fiscal 2006 pre-tax income above $100,000 will be used to return the amount of the
reduction. The effect of this plan on the second quarter was to reduce expenses by $40,000.
To improve liquidity, the Company completed a sale of substantially all of its consumer
receivables to Citizens Finance Company in April 2005. During fiscal 2006, the Company also
plans efforts to increase liquidity through better inventory management.
Page 8
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 Lowes where Shopsmith also conducts sales demonstrations) along with
smaller amounts through other efforts. Mark V sales demonstrations are performed at state fairs, at
home shows, and in shopping malls. Other woodworking products and accessories are sold through mail
and internet channels. Shopsmith recognizes revenue for these orders at the time of product
shipment.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The financial condition and results of operations for Shopsmith presented in the Consolidated
Financial Statements, accompanying notes , and managements discussion and analysis are dependent
upon the Companys accounting policies. The selection and application of these accounting policies
involve judgments, estimates, and uncertainties that are susceptible to change. The Companys
significant accounting policies are discussed in Note 2 of the notes to the Consolidated Financial
Statements included in the Companys annual report to shareholders for the year ended April 2,
2005. In managements opinion, the Companys critical accounting policies include the allowance for
doubtful accounts, accrued recourse liability and deferred tax valuation allowance.
Allowance For Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. Customer accounts are stratified by type of
account, original credit rating, and recent payment history. Estimated loss rates are then applied
to these groups. Deterioration of our customers ability to make payments could require additions
to the allowance.
Accounts repurchased under the recourse provision, discussed below, are carried in trade accounts
receivable, net of an allowance for doubtful accounts, while the Company attempts to collect them.
Accrued Recourse Liability
Certain retail installment contracts sold to financial institutions through the fiscal year ended
March 31, 2001 included a recourse provision. Under this recourse provision, Shopsmith is obligated
to purchase the installment contract if the customer defaults on their obligation to the financial
institution. The Companys liability for future recourse obligations has been estimated using
factors based on the value and rate of change of the value of the outstanding accounts, the rate
and changes in the rate of repurchases required under the recourse provision, as well as estimates
of amounts collectable after the accounts are repurchased. If these factors would deteriorate,
additional accruals would be necessary and would affect future operating results. The Company
adopted Statement of Position 03-03 in April 2005. Purchases of loans under a recourse provision
are now recorded at fair value at repurchase date, instead of gross less an allowance for doubtful
accounts.
Deferred Tax Valuation Allowance
The Company has recorded a valuation allowance against its net deferred tax assets based on its
evaluation of the realizability of the future tax benefits of deferred tax assets. The effect of
the allowance is to reduce to zero the carrying value of the potential tax benefit arising from the
possibility of offsetting the Companys cumulative operating losses against future taxable income.
Page 9
Results of Operations
Fiscal 2006 second quarter sales decreased to $2,438,000, or 19.4%, from $3,026,000 during the same
period a year ago. The primary reason for the decline was decreased sales through demonstrations
within Lowes stores. Fiscal 2006 year-to-date sales decreased to $5,041,000, or 13.3%, from
$5,813,000 last year.
Gross margin rates for the fiscal 2006 second quarter decreased by 5.0 percentage points compared
to the same period last year. On a year-to-date basis, gross margin rates decreased by 1.9
percentage points. Operating expenses decreased by $367,000 to $1,291,000 in the fiscal 2006 second
quarter from $1,659,000 in last years second quarter. For fiscal 2006 year-to-date, operating
costs decreased by $628,000 to $2,871,000 from $3,499,000 in the prior year. The most significant
factors in the decrease in operating expenses were a decrease in the number of Mark V sales
demonstration events and lower sales representative training costs.
Provisions for recoverable federal income taxes are based on estimated annual effective rates, less
a valuation allowance. No tax benefit or expense is reported for the periods ended October 1, 2005
and October 2, 2004, as they were offset by changes in the valuation allowance.
The lower level of sales, along with the expenses incurred from going private transaction efforts,
resulted in a net loss of $236,000, or $.09 per diluted share, in the quarter ended October 1,
2005, compared to a net loss of $15,000, or $.01 per diluted share, for the same period of last
year. For fiscal 2006 year-to-date, a net loss of $518,000, or $.20 per diluted share, was
incurred, compared to a net loss of $471,000, or $.18 per diluted share, for the same period last
year.
Liquidity and Financial Position
Cash provided from operations totaled $449,000 for the six months ended October 1, 2005, compared
with $169,000 used in operations for the same period of the preceding year.
To improve liquidity, the Company sold substantially all of its consumer revolving credit
receivables to Citizens Finance Company in April 2005 for $1,139,000. The Company plans to finance
ongoing customer purchases through Citizens Finance Company.
As described in Note 4 to the Companys Consolidated Financial Statements, the Company had the
ability to borrow under a Loan Agreement (the Revolving Credit Agreement) with National City
Bank. Under the loan documents, the Company was allowed to borrow the lesser of (i) $600,000 or
(ii) the sum of 80% of accounts receivable due from Lowes Companies. Interest on the Revolving
Credit Agreement is charged at one and one-half percent over the Banks prime rate. The maturity
date on the agreement was August 15, 2005. All loans under the Revolving Credit Agreement are at
the discretion of National City Bank. At October 1, 2005, $233,592 , was outstanding under the
Revolving Credit Agreement.
In connection with the Revolving Credit Agreement, Mr. John R. Folkerth, Chairman and Chief
Executive Officer of the Company, delivered to Provident Bank (National City Bank is successor to
Provident Bank) a Continuing Unconditional Guaranty pursuant to which Mr. Folkerth guaranteed
repayment of $200,000 of the indebtedness then or thereafter owing by the Company to the Bank. In
consideration of that Guaranty, the Company has agreed to pay to Mr. Folkerth an annual fee of
$3,000 (being 1.5% of the guaranteed amount).
On June 29, 2004, the Company refinanced a mortgage on its office and manufacturing facility, with
a mortgage loan from Provident Bank in the amount of $2,000,000 (the New Mortgage Loan). Interest
on the New Mortgage Loan is at one-quarter percent over the Banks prime rate. The loan documents
require monthly payment of interest and monthly payments of principal from $8,000 to $10,000. In
August 2009, the remaining balance on the note of approximately $1,477,000 will become due.
Under the
terms of the New Mortgage Loan, default under the Revolving Credit Agreement triggers
default under the New Mortgage Loan. In the event of default, the Bank may declare the New
Mortgage Loan immediately due and payable. As of October 1, 2005, the Company was in default of
its Revolving Credit Agreement. As a result, the mortgage debt has been classified as a current
liability as of October 1, 2005. The Company has requested a forbearance agreement from National
City Bank (successor to Provident Bank) concerning the mortgage loan, but no such agreement is yet
in place.
The New Mortgage Loan and the revolving credit loans are collateralized by a mortgage on, or
security interest in, substantially all assets of the Company.
Page 10
The
Company is in the process of negotiating an agreement with Greystone Metro Factors regarding a
factoring arrangement covering the Companys receivables from Lowes. The funding from this
agreement is planned to replace the funding from the Revolving Credit Agreement with National City
Bank which expired August 15, 2005.
The Company has been dependent upon the Revolving Credit Agreement to fund operations during
periods of negative cash flow. Termination of the Revolving Credit Agreement, without
establishment of a substitute credit facility, would create significant liquidity issues for the
Company.
The Companys current ratio was 0.62 to 1 at October 1, 2005 and 0.60 to 1 at April 2, 2005. The
debt to equity ratio increased to 5.29 to 1 at October 1, 2005 from 4.12 to 1 at April 2, 2005.
Losses during the six months ended October 1, 2005 have contributed to a tightening of liquidity
which in turn has caused the Company to defer payments to vendors beyond the Companys customary
payment practice.
The Company believes that profitability is critical to ensuring adequate liquidity in both the
current and future fiscal years.
Contractual Obligations
As noted in managements discussion of liquidity and financial position, the mortgage debt, shown
here as long-term debt, has been classified as a current obligation on the consolidated balance
sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Revolving Line of Credit |
|
$ |
233,592 |
|
|
$ |
233,592 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-Term Debt |
|
|
1,877,145 |
|
|
|
102,753 |
|
|
|
219,057 |
|
|
|
1,555,335 |
|
|
|
|
|
Operating Leases |
|
|
206,662 |
|
|
|
73,385 |
|
|
|
116,596 |
|
|
|
16,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,317,399 |
|
|
$ |
409,730 |
|
|
$ |
335,653 |
|
|
$ |
1,572,016 |
|
|
$ |
|
|
Forward Looking Statements
The foregoing discussion and the Companys 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) cancellation by Lowes of the
in-store sales program; (iii) the Bank may declare all amounts owed by the Company to the Bank
under the revolving credit and mortgage loan facilities to be immediately due and payable; (iv) the
Company may be unable to refinance the revolving credit facility which matured on August 15, 2005;
and (v) actual losses related to doubtful accounts and recourse liabilities (discussed under
Critical Accounting Policies and Estimates) may exceed current estimates.
Page 11
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
The Companys Chairman and Chief Executive Officer, John R. Folkerth, and the Companys Chief
Financial Officer, Mark A. May, have evaluated the Companys disclosure controls and
procedures as of the end of the period covered by this Report. Based on that evaluation,
Messrs. Folkerth and May have concluded that the Companys disclosure controls and procedures
are effective.
(b) Changes in Internal Controls Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that
occurred during the second quarter of the Companys fiscal year that have materially affected,
or are reasonably likely to materially affect, the Companys internal control over financial
reporting.
Page 12
PART II. OTHER INFORMATION
Item 3. Default Upon Senior Securities
As discussed in the Liquidity and Financial Position section of Managements Discussion and
Analysis of Financial Condition and Results of Operations set forth
in Item 2 of Part I of this report, the Companys
revolving credit arrangement with National City Bank expired
August 15, 2005, and outstanding borrowings became due on that
date. The borrowings (aggregating $239,127 as of November 14,
2005) have not been repaid.
Item 6. Exhibits
|
31.1 |
|
Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
32.2 |
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
Page 13
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: November 15, 2005
Page 14