##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended
January 3, 2004
    
    Commission File Number 0-9318


SHOPSMITH, INC(Exact Name of Registrant as specified in its charter)


Ohio
    
    31-0811466(State of Incorporation)
    
    (IRS Employer Identification No.)


6530 Poe Avenue
Dayton, Ohio
    
    45414(Address of Principal
Executive Offices)
    
    (Zip Code)


Registrants Telephone Number 937-898-6070

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes
X             No ___

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes ___ No _X_

Indicate the number of shares outstanding of each of the registrants classes
of common stock as of January 23, 2004.

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

Page 1



---

TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|CONSOLIDATED BALANCE SHEETS                      
|CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
|CONSOLIDATED STATEMENTS OF CASH FLOWS            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|                                                  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 4. Controls and Procedures.                                                             
|PART II. OTHER INFORMATION                       
|                                                  | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                  | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                       
|EX-31.1                                          
|EX-31.2                                          
|EX-32.1                                          
|EX-32.2                                          



---



##### Table of Contents



SHOPSMITH, INC. AND SUBSIDIARIES

INDEX

Page No.


Part I. Financial Information:

Item 1.

    Financial StatementsConsolidated Balance Sheets  January 3, 2004 and April 5, 2003
    
    
    3-4Consolidated Statements of Operations and
Deficit  Three Months and Nine Months
Ended January 3, 2004 and December 28, 2002
    
    
    5Consolidated Statements of Cash Flows  Nine Months Ended January 3, 2004 and December 28, 2002
    
    
    6Notes to Consolidated Financial Statements
    
    
    7-8Item 2.
    
    Managements Discussion and Analysis
of Financial Condition and Results
of Operations
    
    
    9-10Item 4.
    
    Controls and Procedures
    
    
    11


Part II. Other Information

Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    12Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    12Signatures
    
    
    
    
    12Exhibits
    
    
    
    
    13-16


Page 2



---



##### Table of Contents






Part I  FINANCIAL INFORMATION

SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

January 3,
    
    April 5,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    800
    
    
    $
    250,316Accounts receivable:Trade, less allowance for doubtful accounts:$362,212 on January 3, 2004 and $915,489 on April 5, 2003
    
    
    999,159
    
    
    
    1,395,660Inventories:Finished products
    
    
    853,724
    
    
    
    856,629Raw materials and work in process
    
    
    1,327,442
    
    
    
    1,098,679Total inventories
    
    
    2,181,166
    
    
    
    1,955,308Prepaid expenses
    
    
    240,260
    
    
    
    209,072Total current assets
    
    
    3,421,385
    
    
    
    3,810,356Properties:Land, building and improvements
    
    
    3,150,298
    
    
    
    3,148,348Machinery, equipment and tooling
    
    
    6,777,449
    
    
    
    6,723,950Total cost
    
    
    9,927,747
    
    
    
    9,872,298Less, accumulated depreciation and amortization
    
    
    7,331,053
    
    
    
    7,213,852Net properties
    
    
    2,596,694
    
    
    
    2,658,446Long-term portion of accounts receivable trade, less allowance for doubtful
accounts:$250,111 on January 3, 2004 and $205,709 on April 5, 2003
    
    
    681,823
    
    
    
    577,080Other assets
    
    
    3,128
    
    
    
    3,128Total assets
    
    $
    6,703,030
    
    
    $
    7,049,010


Continued

Page 3



---



##### Table of Contents



SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

January 3,
    
    April 5,2004
    
    2003(Unaudited)LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,232,894
    
    
    $
    949,801Note payable
    
    
    
    
    
    
    400,000Current portion of long-term debt and capital lease obligation
    
    
    106,395
    
    
    
    105,458Customer advances
    
    
    78,197
    
    
    
    65,489Accrued liabilities:Compensation, employee benefits and payroll taxes
    
    
    251,425
    
    
    
    396,573Sales taxes payable
    
    
    60,866
    
    
    
    64,177Accrued recourse liability
    
    
    311,768
    
    
    
    351,055Accrued expenses
    
    
    300,856
    
    
    
    273,605Other
    
    
    52,500
    
    
    
    72,921Total current liabilities
    
    
    2,394,901
    
    
    
    2,679,079Long-term debt and capital lease obligation
    
    
    2,294,037
    
    
    
    2,374,220Total liabilities
    
    
    4,688,938
    
    
    
    5,053,299Shareholders equity:Preferred shares- without par value;
authorized 500,000; none issued
Common shares- without par value;
authorized 5,000,000; issued and outstanding 2,605,233
    
    
    2,806,482
    
    
    
    2,806,482Deficit
    
    
    (792,390
    )
    
    
    (810,771
    )Total shareholders equity
    
    
    2,014,092
    
    
    
    1,995,711Total liabilities and shareholders equity
    
    $
    6,703,030
    
    
    $
    7,049,010


See notes to consolidated financial statements.

Page 4



---



##### Table of Contents






SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

Three Months Ended
    
    Nine Months EndedJanuary 3,
    
    December 28,
    
    January 3,
    
    December 28,2004
    
    2002
    
    2004
    
    2002(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Net sales
    
    $
    3,645,732
    
    
    $
    3,986,866
    
    
    $
    9,932,570
    
    
    $
    10,608,638Cost of products sold
    
    
    1,795,158
    
    
    
    2,039,175
    
    
    
    4,890,152
    
    
    
    5,192,364Gross margin
    
    
    1,850,574
    
    
    
    1,947,691
    
    
    
    5,042,418
    
    
    
    5,416,274Selling expenses
    
    
    1,410,002
    
    
    
    1,446,248
    
    
    
    3,695,276
    
    
    
    3,919,028Administrative expenses
    
    
    418,114
    
    
    
    456,423
    
    
    
    1,282,344
    
    
    
    1,232,283Total operating expenses
    
    
    1,828,116
    
    
    
    1,902,671
    
    
    
    4,977,620
    
    
    
    5,151,311Income before other income
and expense
    
    
    22,458
    
    
    
    45,020
    
    
    
    64,798
    
    
    
    264,963Interest income
    
    
    53,081
    
    
    
    35,658
    
    
    
    140,242
    
    
    
    85,902Interest expense
    
    
    53,145
    
    
    
    82,664
    
    
    
    186,164
    
    
    
    255,481Other income, net
    
    
    1,557
    
    
    
    1,986
    
    
    
    4,386
    
    
    
    4,616Income before income taxes
    
    
    23,951
    
    
    
    
    
    
    
    23,262
    
    
    
    100,000Income tax expense
    
    
    
    
    
    
    
    
    
    
    4,881
    
    
    
    Net income
    
    
    23,951
    
    
    
    
    
    
    
    18,381
    
    
    
    100,000Deficit:Beginning
    
    
    (816,341
    )
    
    
    (810,771
    )
    
    
    (810,771
    )
    
    
    (910,771
    )Ending
    
    $
    (792,390
    )
    
    $
    (810,771
    )
    
    $
    (792,390
    )
    
    $
    (810,771
    )Net income per common share
(Note 3)Basic
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.04Diluted
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.04


See notes to consolidated financial statements.

Page 5



---



##### Table of Contents






SHOPSMITH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months EndedJanuary 3,
    
    December 28,2004
    
    2002(Unaudited)
    
    (Unaudited)Cash flows from operating activities:Net Income
    
    $
    18,381
    
    
    $
    100,000Adjustments to reconcile net Income to
cash from operating activities:Depreciation and amortization
    
    
    117,201
    
    
    
    145,286Provision for doubtful accounts
    
    
    212,815
    
    
    
    189,813Changes in operating assets and liabilities:Restricted cash
    
    
    
    
    
    
    126,645Accounts receivable
    
    
    78,943
    
    
    
    (542,542
    )Inventories
    
    
    (225,858
    )
    
    
    (36,529
    )Prepaid expenses
    
    
    (31,188
    )
    
    
    41,485Accounts payable and customer advances
    
    
    295,801
    
    
    
    (95,024
    )Other current liabilities
    
    
    (180,916
    )
    
    
    84,755Cash from operating activities
    
    
    285,179
    
    
    
    13,889Cash flows from investing activities:Property additions
    
    
    (55,449
    )
    
    
    (11,875
    )Cash (used in) investing activities
    
    
    (55,449
    )
    
    
    (11,875
    )Cash flows from financing activities:Payments on note payable
    
    
    (400,000
    )
    
    
    Payments on long-term debt and capital lease obligation
    
    
    (79,246
    )
    
    
    (77,513
    )Cash (used in) financing activities
    
    
    (479,246
    )
    
    
    (77,513
    )Net decrease in cash
    
    
    (249,516
    )
    
    
    (75,499
    )Cash and cash equivalents:At beginning of period
    
    
    250,316
    
    
    
    76,324At end of period
    
    $
    800
    
    
    $
    825


See notes to consolidated financial statements.

Page 6



---



##### Table of Contents






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 January 3, 2004 and
December 28, 2002 to present the financial statements fairly. However,
the results of operations for the nine months then ended are not
necessarily indicative of results for the full fiscal year. The financial
statements and notes are presented as permitted by Form 10-Q, and do not
contain certain information included in the annual financial statements.
The financial statements accompanying this report should be read in
conjunction with the financial statements and notes thereto included in
the Annual Report to Shareholders for the year ended April 5, 2003.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | Taxable income for the three and nine months ended January 3, 2004 and
for the nine months ended December 28, 2002 was offset by a net operating
loss carryforward. The tax expense shown for the nine months ended January
3, 2004 relates to a provision for alternative minimum tax.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
income 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
    
    Nine Months EndedJanuary 3,
    
    December 28,
    
    January 3,
    
    December 28,2004
    
    2002
    
    2004
    
    2002Net income
    
    $
    23,951
    
    
    $
    
    
    
    $
    18,381
    
    
    $
    100,000Weighted average shares
    
    
    2,605,233
    
    
    
    2,605,233
    
    
    
    2,605,233
    
    
    
    2,605,233Additional dilutive shares
    
    
    22,500
    
    
    
    
    
    
    
    3,762
    
    
    
    Total dilutive shares
    
    
    2,627,733
    
    
    
    2,605,233
    
    
    
    2,608,995
    
    
    
    2,605,233Basic income per share
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.04Diluted income per share
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.04




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

Page 7



---



##### Table of Contents





| | 4. |  | During fiscal 2002, Shopsmith entered into an arrangement with John R.
Folkerth, the Companys CEO, which allowed the Company to borrow up to
$500,000 with interest at twelve percent. The maximum authorized
borrowing was increased to $600,000 in July 2002. Substantially all
personal property except for certain receivables was pledged as
collateral. Interest was due monthly and the note was payable on demand.
At April 5, 2003, there was $400,000 outstanding under this arrangement.
Borrowings from Mr. Folkerth were subject to Mr. Folkerths approval and
were payable upon demand by Mr. Folkerth. The note payable was paid in
full on July 31, 2003.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | On December 31, 2002, Shopsmith entered into a loan agreement with
Provident Bank which allows the Company to borrow up to the lesser of
$750,000 or 80% of eligible receivables due from Lowes Companies, Inc.,
with interest charged at one and one-half percent over the banks prime
rate. On July 17, 2003, this agreement was amended to allow borrowings up
to $1,400,000. The agreement requires compliance with certain net income,
net worth, and miscellaneous covenants. Substantially all personal
property is pledged as collateral. At January 3, 2004, there were no
amounts outstanding under this agreement.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | A major retailer represented 40% and 37% of net sales for the quarters
ended January 3, 2004 and December 28, 2002, respectively. This retailer
also represented 38% and 42% of trade accounts receivable at January 3,
2004 and April 5, 2003, respectively.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7. |  | In May 2002, Shopsmith had implemented an employee salary reduction plan.
Reductions under this plan continued through December 2002. As part of
this plan, fiscal 2003 pre-tax income above $100,000 was used to return
the amount of the reduction to the employees and if income had permitted,
to pay an additional incentive equal to the amount of the reduction.
Fiscal 2003 income levels permitted approximately $70,000 or 76% of the
reduction to be returned. This amount was paid during the quarter ended
July 5, 2003, and no further liabilities exist under the plan.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8. |  | 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 income and earnings per
share if compensation expense was measured using the fair value recognition
provisions of SFAS No. 123.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three Months Ended
    
    Nine Months EndedJanuary 3,
    
    December 28,
    
    January 3,
    
    December 28,2004
    
    2002
    
    2004
    
    2002Net income  as reported
    
    $
    23,951
    
    
    $
    
    
    
    $
    18,381
    
    
    $
    100,000Net income  pro forma
    
    $
    23,951
    
    
    $
    
    
    
    $
    18,381
    
    
    $
    80,000Diluted earnings per share  as reported
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.04Diluted earnings per share  pro forma
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.03




| | 9. |  | New Accounting Pronouncements  In May 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement did not have an impact on
the Companys consolidated financial statements.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. This standard clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, and addresses
consolidation by business enterprises of variable interest entities. FIN 46
requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among the parties involved. FIN 46 also enhances
the disclosure requirements related to variable interest entities. This
statement was effective for the Company on October 4, 2003 for variable
interest entities created or in which an enterprise obtains an interest after
January 31, 2003. FIN 46 is effective for the Company beginning January 4,
2004 for all interest in variable interest entities acquired before February
1, 2003. The adoption of this statement did not have an impact on the
Companys consolidated financial statements.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 8



---



##### Table of Contents






Item 2. Managements 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 Lowes where Shopsmith
also conducts sales demonstrations), along with smaller amounts through other
efforts. Mark V sales demonstrations are performed in shopping malls, at home
shows, and at state fairs. Other woodworking products and accessories are sold
through mail and Internet channels. Shopsmith recognizes revenue for these
orders at the time of product shipment.

Critical Accounting Policies And Estimates

The financial condition and results of operations for Shopsmith presented in
the Consolidated Financial Statements, accompanying notes , selected financial
data appearing elsewhere within this report, and managements discussion and
analysis are dependent upon the Companys accounting policies. The selection
and application of these accounting policies involve judgements, estimates, and
uncertainties that are susceptible to change. In managements opinion, the
Companys critical accounting policies include the allowance for doubtful
accounts and accrued recourse liability.

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. An allowance also exists for estimated
future losses on accounts not yet repurchased as discussed below in Accrued
Recourse Liability. Since these accounts are not classified as trade accounts
receivable until the repurchase occurs, the allowance percentage of doubtful
accounts to total receivables is unusually high compared to other receivable
arrangements.

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 his obligation to the financial institution. The
Companys 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.

Results of Operations

Fiscal 2004 third quarter sales decreased to $3,646,000, or 8.6% from
$3,987,000 generated during the same period a year ago. Fiscal 2004
year-to-date sales decreased to $9,933,000, or 6.4% from $10,609,000 last year.
The decreases in the third quarter occurred primarily in our demonstration
event Mark V sales.

Gross margin rates for the fiscal 2004 third quarter increased by 1.9
percentage points compared to the same period last year due to the decreased
proportion of sales through distributors. On a year-to-date basis, gross margin
rates decreased by 0.3 percentage points. Operating expenses were reduced by
$75,000 to $1,828,000 in the fiscal 2004 third quarter from $1,903,000 in last
years third quarter. This reduction was due to continued improvement in
expense controls on Mark V sales events. On a year to date basis,
administrative costs were higher than the same period for last year because of
a $60,000 favorable agreement on finance participation rebates that occurred in
last years second quarter. For fiscal 2004 year-to-date, operating costs
decreased by $173,000 to $4,978,000 from $5,151,000 in the prior year.

Provisions for recoverable federal income taxes are based on estimated annual
effective rates, less a valuation reserve. Taxable income for the periods ended
January 3, 2004 and December 28, 2002 was offset by the utilization of net
operating loss carryforwards. The expense recorded for the nine months ended
January 3, 2004 reflected alternative minimum tax payments.

With the reduction in operating expenses, the Company recorded net income of
$24,000 or $.01 per diluted share in the quarter ended January 3, 2004 compared
to net income of $0 or $.00 per diluted share for the same period of last year.
For fiscal 2004

Page 9



---



##### Table of Contents





| |  | year-to-date, net income of $18,000 or $.01 per diluted share was earned,
compared to net income of $100,000 or $.04 per diluted share for the same
period last year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Liquidity and Financial Position
| |  | --------------------------------



| |  | Cash provided from operations totaled $285,000 for the nine months ended
January 3, 2004, compared with $14,000 for the same period of the preceding
year. Payment of $400,000 on a note payable, decreases in accounts receivable
and an increase in inventories were the primary factors affecting cash for the
period.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The current ratio was 1.42 to 1 at both January 3, 2004 and April 5, 2003
respectively. The debt to equity ratio decreased to 2.33 to 1 from 2.53 to 1 at
April 5, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During fiscal 2002, Shopsmith entered into an arrangement with John R.
Folkerth, the Companys CEO, which allowed the Company to borrow up to $500,000
with interest at twelve percent. The maximum authorized borrowing was
increased to $600,000 in July 2002. Substantially all personal property except
for certain receivables was pledged as collateral. Interest was due monthly
and the note was payable on demand. At July 5, 2003, there was $300,000
outstanding under this arrangement all of which was paid in full on July 31,
2003. Borrowings from Mr. Folkerth were subject to Mr. Folkerths approval and
were payable upon demand by Mr. Folkerth.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On December 31, 2002, Shopsmith entered into a loan agreement with Provident
Bank which allows the Company to borrow up to the lesser of $750,000 or 80% of
eligible receivables due from Lowes Companies, Inc., with interest charged at
one and one-half percent over the Banks prime rate. On July 17, 2003, this
agreement was amended to allow borrowings up to $1,400,000. The agreement
requires compliance with certain net income, net worth, and miscellaneous
covenants. Substantially all personal property is pledged as collateral. At
January 3, 2004, there were no amounts outstanding under this agreement.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | With the increased borrowing allowed under the amended agreement with Provident
Bank, the Company believes that adequate liquidity is available for the
remainder of the current fiscal year. The Company believes that continued
profitability is critical to ensuring adequate liquidity in future fiscal
years.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Forward Looking Statements
| |  | --------------------------



| |  | The foregoing discussion and the Companys consolidated financial statements
contain certain forward-looking statements that involve risks and
uncertainties, including but not limited to the following: (i) the operating
cash flows together with currently available working capital may be inadequate
to finance the operating needs of the Company; (ii) cancellation by Lowes of
the in-store sales program; (iii) the Company may fail to comply with the
financial covenants contained in its Loan Agreement dated December 31, 2002
with Provident Bank, in which event the Bank may declare all amounts owed by
the Company to the Bank to be immediately due and payable; and (iv) actual
losses related to doubtful accounts and recourse liabilities (discussed under
Critical Accounting Policies and Estimates) may exceed current estimates.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 10



---



##### Table of Contents






Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

Page 11



---



##### Table of Contents






PART II. OTHER INFORMATION




Item 2. Changes in Securities and Use of Proceeds

The Loan Agreement between the Company and Provident Bank prohibits
the payment of dividends.




Item 6. Exhibits and Reports on Form 8-K

(a) 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.


(b) Reports on Form 8-K:

During the quarter ended January 3, 2004 the Company filed the
following report on Form 8-K:

A Form 8-K filed on November 19, 2003 included the text of the
Companys press release reporting the results of its operations
for the quarter ended October 4, 2003.




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, INCBy
    
    /s/ Mark A MayMark A. MayVice President of Finance (Principal
Financial and Accounting Officer)Date: January 27, 2004


Page 12