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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    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
 o
    
    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)
 Ohio
    
    31-0811466(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 6530 Poe Avenue, Dayton, Ohio
    
    45414(Address of principal executive offices)
    
    (Zip Code)
  þ o
  o þ
 o þ




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Page No.Part I. Financial Information:Item 1. Financial StatementsConsolidated Balance Sheets  October 1, 2005 and April 2, 2005
    
    
    3-4Consolidated Statements of Operations and Deficit  Three Months and Six Months Ended October 1, 2005 and October 2, 2004
    
    
    5Consolidated Statements of Cash Flows  Six Months Ended October 1, 2005 and October 2, 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9-11Item 4. Controls and Procedures
    
    
    12Part II. Other InformationItem 3. Default Upon Senior Securities
    
    
    13Item 6. Exhibits
    
    
    13Signatures
    
    
    14Exhibits
    
    
    15-18Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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Part
I  FINANCIAL INFORMATION
 
   
  October 1,
    
    
    April 2,2005
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    42,974
    
    
    $
    1,099Accounts receivable:Trade, less allowance for doubtful accounts:$306,745 on October 1, 2005 and $608,060 on April 2, 2005
    
    
    627,636
    
    
    
    1,206,143Inventories:Finished products
    
    
    680,643
    
    
    
    811,215Raw materials and work in process
    
    
    1,173,796
    
    
    
    1,223,402Total inventories
    
    
    1,854,439
    
    
    
    2,034,617Prepaid expenses
    
    
    229,771
    
    
    
    112,754Total current assets
    
    
    2,754,820
    
    
    
    3,354,613Properties:Land, building and improvements
    
    
    3,157,054
    
    
    
    3,157,054Machinery, equipment and tooling
    
    
    6,899,046
    
    
    
    6,885,915Total cost
    
    
    10,056,100
    
    
    
    10,042,969Less, accumulated depreciation and amortization
    
    
    7,605,511
    
    
    
    7,526,435Net properties
    
    
    2,450,589
    
    
    
    2,516,534Long-term portion of accounts receivable
trade, less allowance for doubtful accounts:$15,378 on October 1, 2005 and $265,688 on April 2, 2005
    
    
    53,777
    
    
    
    1,068,050Other assets
    
    
    2,253
    
    
    
    2,253Total assets
    
    $
    5,261,439
    
    
    $
    6,941,450
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October 1,
    
    
    April 2,2005
    
    
    2005(Unaudited)LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,467,687
    
    
    $
    2,052,134Revolving line of credit
    
    
    233,592
    
    
    
    577,727Current portion of long-term debt
    
    
    1,877,145
    
    
    
    1,926,915Customer advances
    
    
    75,814
    
    
    
    79,547Accrued liabilities:Compensation, employee benefits and payroll taxes
    
    
    197,797
    
    
    
    318,075Sales taxes payable
    
    
    61,600
    
    
    
    59,685Accrued recourse liability
    
    
    223,212
    
    
    
    266,768Accrued expenses
    
    
    215,192
    
    
    
    232,758Other
    
    
    73,038
    
    
    
    73,349Total current liabilities
    
    
    4,425,077
    
    
    
    5,586,958Long-term debt, less current portion
    
    
    
    
    
    
    Total liabilities
    
    
    4,425,077
    
    
    
    5,586,958Shareholders equity:Preferred shares- without par value;
authorized 500,000; none issuedCommon shares- without par value;
authorized 5,000,000; issued and outstanding 2,605,233
    
    
    2,806,482
    
    
    
    2,806,482Deficit
    
    
    (1,970,120
    )
    
    
    (1,451,990
    )Total shareholders equity
    
    
    836,362
    
    
    
    1,354,492Total liabilities and shareholders equity
    
    $
    5,261,439
    
    
    $
    6,941,450
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Three Months Ended
    
    
    Six Months EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Net sales
    
    $
    2,438,106
    
    
    $
    3,025,730
    
    
    $
    5,041,118
    
    
    $
    5,813,166Cost of products sold
    
    
    1,243,556
    
    
    
    1,392,670
    
    
    
    2,511,138
    
    
    
    2,788,110Gross margin
    
    
    1,194,550
    
    
    
    1,633,060
    
    
    
    2,529,980
    
    
    
    3,025,056Selling expenses
    
    
    983,493
    
    
    
    1,283,912
    
    
    
    2,156,189
    
    
    
    2,668,180Administrative expenses
    
    
    307,803
    
    
    
    374,763
    
    
    
    715,059
    
    
    
    830,741Total operating expenses
    
    
    1,291,296
    
    
    
    1,658,675
    
    
    
    2,871,248
    
    
    
    3,498,921Loss 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
    
    
    
    88,061Interest expense
    
    
    (36,601
    )
    
    
    (33,657
    )
    
    
    (74,979
    )
    
    
    (87,355
    )Other income, net
    
    
    225
    
    
    
    887
    
    
    
    631
    
    
    
    1,782Loss 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
    )
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Six Months EndedOctober 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 activitiesDepreciation and amortization
    
    
    79,076
    
    
    
    76,493Provision for doubtful accounts
    
    
    48,368
    
    
    
    102,311Proceeds from sale of consumer revolving credit receivables
    
    
    1,138,721
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    405,691
    
    
    
    307,147Inventories
    
    
    180,178
    
    
    
    (128,950
    )Prepaid expenses and other
    
    
    (117,017
    )
    
    
    (37,054
    )Accounts payable and customer advances
    
    
    (588,180
    )
    
    
    121,440Other 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
    )
    
    
    609,055Payments on long-term debt
    
    
    (49,770
    )
    
    
    (398,591
    )Cash provided from (used in) financing activities
    
    
    (393,905
    )
    
    
    210,464Net increase (decrease) in cash
    
    
    41,875
    
    
    
    (100
    )Cash and cash equivalents:At beginning of period
    
    
    1,099
    
    
    
    800At end of period
    
    $
    42,974
    
    
    $
    700
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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 EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (235,789
    )
    
    $
    (14,862
    )
    
    $
    (518,130
    )
    
    $
    (471,377
    )Weighted average shares
    
    
    2,605,233
    
    
    
    2,605,233
    
    
    
    2,605,233
    
    
    
    2,605,233Additional dilutive shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total dilutive shares
    
    
    2,605,233
    
    
    
    2,605,233
    
    
    
    2,605,233
    
    
    
    2,605,233Basic loss per share
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.20
    )
    
    $
    (0.18
    )Diluted loss per share
    
    $
    (0.09
    )
    
    $
    (0.01
    )
    
    $
    (0.20
    )
    
    $
    (0.18
    )
  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 Lowes Companies. Interest on the Revolving Credit Agreement is
charged at one and one-half percent over the banks 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.
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5.
    
    A major retailer (Lowes) 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.
  Three Months Ended
    
    
    Six Months EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2005
    
    
    2004
    
    
    2005
    
    
    2004Net 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 managements 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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MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 GENERAL
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Allowance For Doubtful Accounts
   Accrued Recourse Liability
  Deferred Tax Valuation Allowance
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Results of Operations
     Liquidity and Financial Position
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Contractual Obligations
  Scheduled payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsRevolving 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
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PART II. OTHER INFORMATION
 
   
  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.
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SIGNATURES
  SHOPSMITH, INC.-s- Mark A MayBy
    
    /s/ Mark A MayMark A. MayVice President of Finance
(Principal Financial andAccounting Officer)
  Page 14