UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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xx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 1996
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or
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to:
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Commission File Number: 0-23996
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SCHMITT INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Oregon 93-1151989
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(Place of Incorporation) (IRS Employer ID Number)
2765 NW Nicolai Street, Portland, Oregon 97210
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(Address of registrant's principal executive office)
(503) 227-7908
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(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 of 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 xx No
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The number of shares of each class of common stock outstanding as of August 31,
1996 Common stock, no par value 6,989,389
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
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Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- August 31, 1996 and May 31, 1996. . . . . . . . . . . . . 3-4
Consolidated Income Statements:
- For the Three Months Ended
August 31, 1996 and August 31, 1995 . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
- For the Three Months Ended
August 31, 1996 and August 31, 1995 . . . . . . . . . . . 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 8-9
Part II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 10
Signatures - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exhibits - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Page 2 of 11
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, 1996 May 31, 1996
Unaudited
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Cash $ 134,077 $ 508,240
Marketable securities & commercial paper 410,162 145,600
Accounts receivable 1,193,450 1,411,805
Inventories 2,250,368 1,781,331
Deferred tax asset 701,705 593,740
Prepaid expenses 8,426 15,906
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Total current assets 4,698,188 4,456,622
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 834,850 834,850
Furniture and equipment 732,576 660,371
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1,866,426 1,794,221
Less accumulated depreciation (375,652) (312,189)
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Total property & equipment 1,490,774 1,482,032
Other assets
Marketing rights 735,914 735,914
Less accumulated amortization (682,201) (663,521)
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53,713 72,393
Total other assets 53,713 72,393
Total assets $6,242,675 $6,011,047
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Page 3 of 11
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
August 31, 1996 May 31, 1996
Unaudited
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Current liabilities
Trade accounts payable $ 451,847 $ 344,828
Accrued liabilities 147,364 244,613
Income taxes payable 11,000 294,749
Current portion of long term debt 40,346 40,346
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Total current liabilities 650,557 924,536
Long term deferred tax liability 25,107 25,107
Long-term debt, net of current portion 174,532 174,532
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Total liabilities $ 850,196 $1,124,175
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
August 31, 1996 6,989,389 shares 4,463,843 4,098,512
May 31, 1996 6,918,139 shares
Retained earnings 928,636 788,360
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Total stockholders' equity 5,392,479 4,886,872
Total liabilities and stockholders' equity $6,242,675 $6,011,047
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Page 4 of 11
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
1996 1995
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Sales $1,793,698 $1,340,771
Cost of sales 724,140 502,307
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Gross profit 1,069,558 838,464
General and administrative expenses 761,734 596,946
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Income from operations 307,824 241,518
Other income and expense
Interest income 5,473 5,509
Interest expense -0- (5,386)
Depreciation (63,464) (44,957)
Amortization (18,680) (42,848)
Misc. income 20,123 4,556
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(56,548) (83,126)
Income before income tax 251,276 158,392
Provision for income tax 111,000 75,000
Net income for period $ 140,276 $ 83,392
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Net income per common share
and common share equivalent: $.02 $.01
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Page 5 of 11
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
(UNAUDITED)
Cash flows from operating activities: 1996 1995
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Net earnings from operations $ 140,276 $ 83,392
Items not affecting cash:
Amortization 18,680 42,848
Depreciation 63,464 44,957
Deferred taxes (7,965) -0-
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214,455 171,197
Cash flows from changes in assets & liabilities:
Increase (decrease) in accounts payable 107,018 (59,391)
Increase (decrease) in current-mortgage -0- 300
Increase (decrease) in other liabilities (97,249) -0-
Decrease (increase) in accounts receivable 218,355 291,589
Decrease (increase) in marketable securities
& commercial paper (264,562) 150,000
Decrease (increase) in inventory (469,037) (219,013)
Decrease (increase) in prepaid expenses 7,480 4,181
Decrease (increase) in other assets -0- (4,000)
Increase (decrease) in corp income tax (183,749) 25,000
Decrease (increase) in income tax receivables -0- 50,000
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(681,744) 238,666
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Net cash provided (used) by operating activities: (467,289) 409,863
Cash flows from financing activities:
Mortgage payable -0- (3,407)
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Net cash provided (used) by financing activities: -0- (3,407)
Cash flows from investing activities:
Exercise of stock options 165,331 -0-
Acquisition of capital assets (72,205) (207,100)
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Net cash provided (used) by investing activities: 93,126 (207,100)
Increase (decrease) in cash (374,163) 199,356
Cash beginning of period $508,240 $ 141,244
Cash end of period $134,077 $ 340,600
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Page 6 of 11
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options exercised
($300,000)
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Supplemental Information
Income taxes paid $ -0- $ -0-
Interest paid $ -0- $ 5,386
NOTES TO INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
and all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended August 31, 1996 are not necessarily indicative of the
results that may be experienced for the fiscal year ending May 31, 1997.
These financial statements are those of the Company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in the preparation of the consolidated financial statements.
Page 7 of 11
SCHMITT INDUSTRIES, INC.
FORM 10-Q
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including but not limited to the uncertainties of the Company's new product
introduction and the risks of increased competition and technological change in
the Company's industry. Accordingly, actual results may differ, possibly
materially, from the predictions contained herein.
Company operations improved during the first quarter of fiscal 1997, ended
August 31, 1996, as evidenced by modest increases in sales and profit levels.
The acquisition of Schmitt Measurement Systems ("SMS"), which occurred in the
fourth quarter of fiscal 1995, led to a significant increase in assets and new
products.
During the first quarter ended August 31, 1996, the Company continued to sell
TMS-2000 non-contact laser texture measurement systems (TMS 2000) to the
computer hard drive market. The Company has secured additional orders for these
new products and expects substantial delivery during the balance of fiscal year
1997.
RESULTS OF OPERATIONS:
Sales in the first quarter of fiscal 1997 increased to $1,793,698 versus
$1,340,771 in the same period last year. This 34% increase was caused by
across-the-board gains in orders from both domestic and international customers.
Management believes sales increases resulted from improved marketing coverage
and advertising and the weakening of domestic competitors. Additionally, SMS
sales accounted for $460,754 of the first quarter sales as the new TMS-2000 had
increased shipments, as compared to $140,864 in first quarter 1996 SMS sales.
First quarter cost-of-sales increased to 40% of sales versus 37% in the same
period last year. The continued sales of TMS-2000 products during the first
quarter had a positive impact on gross earnings and net earnings. Cost-of-sales
of SMS products was 54% for the first quarter 1996 versus 36% in the same period
last year. Management expects SMS cost-of-sales for fiscal 1997 to be
approximately 35%.
Three-month general and administrative expenses totaled $761,734 versus $596,946
for the same period last year. This increase is attributed to the increased
sales level this year and a lower level of expenses in the same period last
year. The expansion in advertising, sales training costs, computer purchases
and employee salaries continued. Also, an increasing percentage of the
Company's products are being sold through commissioned agents and salesmen, as
compared with last year, a trend management expects to continue. The
acquisition of SMS added to ongoing operating expenses.
General and administrative expenses as a percentage of sales during the first
three months of fiscal 1997 were 42% compared to 44% for the same period last
year, and management feels these costs will stabilize at approximately 42% for
fiscal 1997, down from 43% for fiscal 1996 and 47% in fiscal year 1995.
Page 8 of 11
SCHMITT INDUSTRIES, INC.
FORM 10-Q
In the three-month period ended August 31, 1996 pretax earnings totaled $251,276
versus $158,392 for the same period last year. Taxes were accrued at
approximately a 44% rate compared with 47% in the same period last year.
Management anticipates that the tax rate for fiscal 1997 will approximate 30%.
Three-month net earnings were $140,276 versus $83,392 for the same period last
year. Three-month earnings per share were $0.02 versus $0.01 last year.
Primary EPS and Common Stock Equivalent were $0.02 versus $0.01 last year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company increased its working capital position slightly during the first
quarter while still financing the growth of the new SMS products and inventory
growth. Working capital totaled $3,847,631 at August 31, 1996 versus $3,532,086
at May 31, 1996 fiscal year end. Corporate cash and marketable securities
levels stood at $544,239 at August 31, 1996.
During the three-month period ended August 31, 1996 net cash provided by
operating activities totaled $214,455, including net operating earnings of
$140,276. Included in cash flow from operations was a $469,037 increase in
inventory. During the period, accounts receivable decreased by $218,355 and
marketable securities and commercial paper increased by $264,562.
The decrease in accounts receivable occurred because of the lower sales during
the three-month period ended August 31, 1996 compared with the last three months
of fiscal year 1996. As a result of its high-quality customer base, the Company
has experienced near 100% collection and no reserve for uncollectables, returns
or allowances has been established. Net cash used by investing activities was
$72,205, used for the acquisition of capital assets, etc. Net cash used by
financing activities was $0.00. The Company had previously paid off the
mortgage on the Company's corporate headquarters.
Management believes that its cash flow from operations, available credit
resources and its improving cash position will provide adequate funds on a
short-term basis to cover currently foreseeable debt payments, lease commitments
and payments under existing and anticipated supplier agreements. Management
believes that such cash flow is sufficient to finance current short term
operations, projected capital expenditures, anticipated short-term sales
agreements and other contingencies during the next three months.
Management is currently reviewing long-range capital requirements as they relate
to expansion of products and markets. This analysis will be completed within
the next three months and may or may not result in future decisions to seek
additional funding for the Company via debt or equity to service the Companies
future growth requirements.
Page 9 of 11
SCHMITT INDUSTRIES, INC.
FORM 10-Q
Part II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders:
-- None --
Item 5. Other Information - None
Item 6.A Exhibit 11.1 - Schedule of Computation of Net Income Per Share
Item 6.B Exhibit of Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHMITT INDUSTRIES, INC.
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(Registrant)
Date: 10/10/96
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Wayne A. Case, President/CEO/Director
Date: 10/10/96
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Annie Windsor, Chief Financial Officer
Page 10 of 11