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 July 2, 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 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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6530 Poe Avenue, Dayton, Ohio
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45414 |
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(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 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 July 26, 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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July 2, |
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April 2, |
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2005 |
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2005 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,099 |
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$ |
1,099 |
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Accounts receivable: |
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Trade, less allowance for doubtful accounts: |
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$585,887 on July 2, 2005 and $608,060 on April 2, 2005 |
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541,948 |
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1,206,143 |
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Inventories: |
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Finished products |
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930,236 |
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811,215 |
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Raw materials and work in process |
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1,158,909 |
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1,223,402 |
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Total inventories |
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2,089,145 |
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2,034,617 |
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Prepaid expenses |
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297,754 |
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112,754 |
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Total current assets |
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2,929,946 |
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3,354,613 |
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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 |
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Machinery, equipment and tooling |
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6,894,871 |
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6,885,915 |
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Total cost |
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10,051,925 |
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10,042,969 |
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Less, accumulated depreciation and amortization |
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7,566,796 |
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7,526,435 |
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Net properties |
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2,485,129 |
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2,516,534 |
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Long-term portion of accounts receivable
trade, less allowance for doubtful accounts: |
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$14,234 on July 2, 2005 and $265,688 on April 2, 2005 |
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59,409 |
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1,068,050 |
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Other assets |
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2,253 |
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2,253 |
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Total assets |
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$ |
5,476,737 |
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$ |
6,941,450 |
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Continued
Page 3
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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July 2, |
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April 2, |
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2005 |
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2005 |
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(Unaudited) |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,358,819 |
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$ |
2,052,134 |
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Revolving line of credit |
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250,592 |
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577,727 |
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Current portion of long-term debt |
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1,902,558 |
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1,926,915 |
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Customer advances |
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77,252 |
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79,547 |
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Accrued liabilities: |
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Compensation, employee benefits and payroll taxes |
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213,798 |
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318,075 |
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Sales taxes payable |
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49,883 |
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59,685 |
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Accrued recourse liability |
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241,481 |
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266,768 |
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Accrued expenses |
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256,085 |
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232,758 |
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Other |
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54,118 |
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73,349 |
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Total current liabilities |
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4,404,586 |
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5,586,958 |
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Long-term debt, less current portion |
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Total liabilities |
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4,404,586 |
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5,586,958 |
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Shareholders equity: |
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Preferred shares- without par value;
authorized 500,000; none issued |
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Common shares- without par value;
authorized 5,000,000; issued and outstanding 2,605,233 |
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2,806,482 |
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2,806,482 |
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Deficit |
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(1,734,331 |
) |
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(1,451,990 |
) |
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Total shareholders equity |
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1,072,151 |
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1,354,492 |
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Total liabilities and shareholders equity |
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$ |
5,476,737 |
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$ |
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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July 2, |
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July 3, |
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2005 |
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2004 |
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(Unaudited) |
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(Unaudited) |
Net sales |
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$ |
2,603,012 |
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$ |
2,787,436 |
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Cost of products sold |
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1,267,582 |
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1,395,440 |
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Gross margin |
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1,335,430 |
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1,391,996 |
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Selling expenses |
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1,172,696 |
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1,384,268 |
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Administrative expenses |
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407,256 |
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455,978 |
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Total operating expenses |
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1,579,952 |
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1,840,246 |
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Loss before other income
and expense |
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(244,522 |
) |
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(448,250 |
) |
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Interest income |
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153 |
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44,538 |
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Interest expense |
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(38,378 |
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(53,698 |
) |
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Other income, net |
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406 |
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895 |
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Loss before income taxes |
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(282,341 |
) |
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(456,515 |
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Income tax expense |
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Net loss |
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(282,341 |
) |
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(456,515 |
) |
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Deficit: |
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Beginning |
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(1,451,990 |
) |
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(681,171 |
) |
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Ending |
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$ |
(1,734,331 |
) |
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$ |
(1,137,686 |
) |
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Net loss per common share (Note 3) |
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Basic |
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$ |
(0.11 |
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$ |
(0.18 |
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Diluted |
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$ |
(0.11 |
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$ |
(0.18 |
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See notes to consolidated financial statements.
Page 5
SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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July 2, |
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July 3, |
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2005 |
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2004 |
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(Unaudited) |
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(Unaudited) |
Cash flows from operating activities: |
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Net loss |
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$ |
(282,341 |
) |
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$ |
(456,515 |
) |
Adjustments to reconcile net loss to
cash (used in) operating activities |
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Depreciation and amortization |
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40,361 |
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38,433 |
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Provision for doubtful accounts |
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26,102 |
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47,887 |
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Proceeds from sale of consumer revolving credit receivables |
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1,138,721 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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508,013 |
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344,757 |
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Inventories |
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(54,528 |
) |
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(16,818 |
) |
Prepaid expenses and other |
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(185,000 |
) |
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(102,696 |
) |
Accounts payable and customer advances |
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(695,610 |
) |
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49,461 |
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Other current liabilities |
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(135,270 |
) |
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(122,747 |
) |
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Cash (used in) operating activities |
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360,448 |
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(218,238 |
) |
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Cash flows from investing activities: |
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Property additions |
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(8,956 |
) |
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(22,692 |
) |
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Cash (used in) investing activities |
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(8,956 |
) |
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(22,692 |
) |
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Cash flows from financing activities: |
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Net borrowings (repayments) on revolving line of credit |
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(327,135 |
) |
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614,754 |
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Payments on long-term debt |
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(24,357 |
) |
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(373,824 |
) |
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Cash provided from financing activities |
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(351,492 |
) |
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240,930 |
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Net decrease in cash |
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Cash and cash equivalents: |
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At beginning of period |
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1,099 |
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|
800 |
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At end of period |
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$ |
1,099 |
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$ |
800 |
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See notes to consolidated financial statements.
Page 6
SHOPSMITH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
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In the opinion of management, all adjustments (consisting of only normal and recurring
adjustments) have been made as of July 2, 2005 and July 3, 2004 to present the financial
statements fairly. However, the results of operations for the three 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. |
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2. |
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There was no tax benefit during the three-month periods ended July 2, 2005 and July 3, 2004,
as the tax benefits were offset by changes in a valuation allowance. |
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3. |
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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: |
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Three Months Ended |
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July 2, |
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July 3, |
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2005 |
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2004 |
Net loss |
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$ |
(282,341 |
) |
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$ |
(456,515 |
) |
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Weighted average shares |
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2,605,233 |
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2,605,233 |
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Additional dilutive shares |
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Total dilutive shares |
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2,605,233 |
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2,605,233 |
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Basic loss per share |
|
$ |
(0.11 |
) |
|
$ |
(0.18 |
) |
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Diluted loss per share |
|
$ |
(0.11 |
) |
|
$ |
(0.18 |
) |
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There were no additional dilutive shares included in the computation for the three-month periods
ended July 2, 2005 and July 3, 2004 because the effect of stock options were anti-dilutive. |
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4. |
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On June 3, 2005, the Company executed a Loan Agreement (the Revolving Credit Agreement)
with National City Bank. Under the loan documents, the Company may 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 is August 15, 2005. All loans under the Revolving
Credit Agreement are at the discretion of National City Bank. At July 2, 2005, $250,592 was
outstanding under the Revolving Credit Agreement. |
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The Revolving Credit Agreement contains the following financial covenants: |
2.1 Tangible Net Worth. The Companys Tangible Net Worth shall not at any time be less than
the required amount of One Million One Hundred Thirty-five Thousand and 00/100 dollars
($1,135,000.00), tested quarterly.
2.2 Net Income. The Companys Net Income shall not at any time be less than negative Two
Hundred Thirty-five Thousand and 00/100 (-$235,000.00), tested quarterly
|
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As of July 2, 2005, the Company was not in compliance with the above two financial covenants,
having a tangible net worth of $1,072,151 and a year-to-date net loss of $282,341. The Company
has notified the lender of such noncompliance, but no waiver has been obtained. Failure to
obtain a waiver could materially affect the Companys financial position, liquidity, and
operations. |
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|
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 |
Page 7
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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). |
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|
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 July 2, 2005, there was $1,902,558 outstanding under the building mortgage
agreement. |
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|
Under the terms of the mortgage loan, default by the Company under the Revolving Credit
Agreement can trigger 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 noncompliance with the financial covenants of its Revolving
Credit Agreement. 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. |
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|
The mortgage loan and the revolving credit loans are collateralized by a mortgage on, or
security interest in, substantially all assets of the Company. |
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|
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 35% and 44% of net sales for the quarters ended July 2,
2005 and July 3, 2004, respectively. This retailer also represented 44% and 31% of trade
accounts receivable at July 2, 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. |
|
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|
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. |
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|
Three Months Ended |
|
|
July 2, |
|
July 3, |
|
|
2005 |
|
2004 |
Net loss as reported |
|
$ |
(282,341 |
) |
|
$ |
(456,515 |
) |
Net loss pro forma |
|
$ |
(282,341 |
) |
|
$ |
(456,515 |
) |
|
Diluted loss per share as reported |
|
$ |
(0.11 |
) |
|
$ |
(0.18 |
) |
Diluted loss per share pro forma |
|
$ |
(0.11 |
) |
|
$ |
(0.18 |
) |
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 July 2, 2005, the Company had a deficiency of
working capital of $1,474,640, a net loss of $282,341 for the quarter ended July 2, 2005, and
was not in compliance with various debt covenants (see Note 4).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. |
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|
|
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. |
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In April 2005, the Company has implemented a 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 first quarter was to reduce expenses by $40,000. |
Page 8
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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 9
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 10
Results of Operations
Fiscal 2006 first quarter sales decreased to $2,603,000, or 6.6%, from $2,787,000 during the same
period a year ago. The primary reason for the decline was decreased sales through demonstrations
within Lowes stores.
Gross margin rates for the fiscal 2006 first quarter increased by 1.4 percentage points compared to
the same period last year. Operating expenses decreased by $260,294 to $1,580,000 in the fiscal
2006 first quarter from $1,840,000 in last years first quarter. 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 period ended July 2, 2005, as
they were offset by changes in the valuation allowance.
The lower level of sales was more than offset by the reduction in selling expenses. This reduced
the Companys net loss to $282,000, or $.11 per diluted share, in the quarter ended July 2, 2005,
compared to a net loss of $457,000, or $.18 per diluted share, for the same period of last year.
Liquidity and Financial Position
Cash used in operations totaled $778,000 for the three months ended July 2, 2005, compared with
$218,000 used in operations for the same period of the preceding year. During the period, cash was
used to decrease accounts payable balances, as well as to fund the periods net loss.
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, On June 3, 2005, the
Company executed a Loan Agreement (the Revolving Credit Agreement) with National City Bank. Under
the loan documents, the Company may 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
is August 15, 2005. All loans under the Revolving Credit Agreement are at the discretion of
National City Bank. At July 2, 2005, $250,592 , was outstanding under the Revolving Credit
Agreement. This amount also represents the maximum available under the Revolving Credit Agreement
at July 2, 2005.
The Revolving Credit Agreement contains the following financial covenants:
2.1 Tangible Net Worth. The Companys Tangible Net Worth shall not at any time be less than
the required amount of One Million One Hundred Thirty-five Thousand and 00/100 dollars
($1,135,000.00), tested quarterly.
2.2 Net Income. The Companys Net Income shall not at any time be less than negative Two
Hundred Thirty-five Thousand and 00/100 (-$235,000.00), tested quarterly
As of July 2, 2005, the Company was not in compliance with the above two financial covenants,
having a tangible net worth of $1,072,151 and a year-to-date net loss of $282,341. The Company has
notified the lender of such noncompliance, but now waiver has been obtained. Failure to obtain a
waiver could materially affect the Companys financial position, liquidity, and operations.
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.
Page 11
Under the terms of the New Mortgage Loan, default under the Revolving Credit Agreement can trigger
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 July 2, 2005, the Company was not in compliance
with the financial covenants of the Revolving Credit Agreement. As a result of this covenant
violation, the mortgage debt has been classified as a current liability as of July 2, 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.
On August 11, 2005, the Company reached verbal 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 expires 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 0.67 to 1 at July 2, 2005 and 0.60 to 1 at April 2, 2005. The debt
to equity ratio decreased to 4.11 to 1 at July 2, 2005 from 4.12 to 1 at April 2, 2005. Losses
during the three months ended July 2, 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.
|
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|
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|
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|
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|
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Scheduled payments due by period |
|
|
|
|
|
|
Less than |
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|
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|
|
|
|
|
|
More than |
Contractual Obligations |
|
Total |
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
Revolving Line of Credit |
|
$ |
250,592 |
|
|
$ |
250,592 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-Term Debt |
|
|
1,902,558 |
|
|
|
101,652 |
|
|
|
216,708 |
|
|
|
1,584,198 |
|
|
|
|
|
Operating Leases |
|
|
223,378 |
|
|
|
73,385 |
|
|
|
120,770 |
|
|
|
29,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,376,528 |
|
|
$ |
425,629 |
|
|
$ |
337,478 |
|
|
$ |
1,613,421 |
|
|
$ |
|
|
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 Company may fail to obtain a waiver for its failure to meet the
financial covenants contained its Loan Agreement with National City Bank, in which event 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 Companys future results may fail to
meet the financial covenants contained in its Loan Agreement with National City Bank; (v) the Bank
may decline to make further advances under the revolving credit facility; (vi) the Company may be
unable to extend or refinance the revolving credit facility when the revolving credit loans mature
on August 15, 2005; and (vii) actual losses related to doubtful accounts and recourse liabilities
(discussed under Critical Accounting Policies and Estimates) may exceed current estimates.
Page 12
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 first 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 13
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 this report, at
July 2, 2005, the Company was not in compliance with its financial covenants (relating to net
worth and net income) contained in its Revolving Credit Agreement with National City Bank.
Item 6. Exhibits
|
31.1 |
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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. |
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31.2 |
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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. |
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32.1 |
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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. |
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32.2 |
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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 14
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.
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SHOPSMITH, INC.
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By: |
/s/ Mark A. May
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Mark A. May
Vice President of Finance (Principal Financial
and Accounting Officer) |
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Date: August 15, 2005
Page 15