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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: November 30, 1996
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or
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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:
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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 November
30, 1996 Common stock, no par value 7,038,889
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SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
PAGE
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Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- November 30, 1996 and May 31,1996 . . . . . . . . . . . . 3
Consolidated Statements of Income:
- For the Three Months and Six Months Ended
November 30, 1996 and November 30, 1995. . . . . . . . . . . 5
Consolidated Statements of Cash Flows
- For the Six Months Ended
November 30, 1996 and November 30, 1995. . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 8
Part II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 10
Signatures - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Exhibits - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Page 2
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Part I - Financial Information
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
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November 30, 1996 May 31, 1996
Unaudited
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Cash $ 479,530 $ 508,240
Marketable securities & commercial paper 226,942 145,600
Accounts receivable 1,681,163 1,411,805
Inventories 2,367,920 1,781,331
Deferred tax asset 915,695 593,740
Prepaid expenses 4,393 15,906
Income tax receivable 49,100 -0-
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Total current assets 5,724,743 4,456,622
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 837,333 834,850
Furniture and equipment 742,466 660,371
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1,878,799 1,794,221
Less accumulated depreciation (435,588) (312,189)
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Total property & equipment 1,443,211 1,482,032
Other assets
Marketing rights 735,914 735,914
Less accumulated amortization (683,437) (663,521)
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Total other assets 52,477 72,393
Total assets $7,220,431 $6,011,047
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Page 3
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
November 30, 1996 May 31, 1996
Unaudited
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Current liabilities
Trade accounts payable $ 326,789 $ 344,828
Accrued liabilities 337,997 244,613
Income taxes payable -0- 294,749
Current portion of long term debt 40,346 40,346
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Total current liabilities 705,132 924,536
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 $ 904,771 $1,124,175
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
November 30, 1996 7,038,889 shares 4,679,680 4,098,512
May 31, 1996 6,918,139 shares
Retained earnings 1,635,980 788,360
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Total stockholders' equity 6,315,660 4,886,872
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Total liabilities and stockholders' equity $7,220,431 $6,011,047
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Page 4
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED)
Three Months Ended Six Months Ended
11/30/96 11/30/95 11/30/96 11/30/95
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Sales $2,738,314 $1,520,028 $4,532,012 $2,866,897
Cost of sales 1,012,638 592,274 1,736,778 1,100,679
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Gross profit 1,725,676 927,754 2,795,234 1,766,218
General and administrative
expenses 922,675 640,236 1,684,409 1,231,861
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Income from operations 803,001 287,518 1,110,825 534,357
Other income and expense
Interest income 6,878 2,902 12,351 8,411
Interest expense (16) (5,313) (16) (10,699)
Depreciation (58,690) (47,907) (122,154) (92,864)
Amortization (4,385) (49,362) (23,065) (85,936)
Misc. income 10,556 17,790 30,679 10,752
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(45,657) (81,890) (102,205) (170,336)
Income before income tax 757,344 205,628 1,008,620 364,021
Provision for income tax 50,000 (2,471) 161,000 72,529
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Net income for period $ 707,344 $ 208,099 $ 847,620 $ 291,492
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Net income per common
share and common
share equivalent
Primary .09 .03 .11 .04
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Diluted .09 .03 .11 .04
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Page 5
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED)
Cash flows from operating activities: Nov. 30, 1996 Nov. 30, 1995
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Net earnings from operations $ 847,620 $291,492
Items not affecting cash:
Amortization 23,065 85,936
Depreciation 122,154 92,866
Deferred taxes 8,045 -0-
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1,000,884 470,294
Cash flows from changes in assets &
liabilities:
Increase (decrease) in accounts payable (18,039) (57,873)
Increase (decrease) in current-mortgage -0- 607
Increase (decrease) in other liabilities 93,383 27,756
Decrease (increase) in accounts receivable (269,358) 61,453
Decrease (increase) in marketable
securities & commercial paper (81,342) (3,360)
Decrease (increase) in inventory (586,589) (339,312)
Decrease (increase) in prepaid expenses 11,513 6,966
Decrease (increase) in other assets -0- (35,661)
Increase (decrease) in corp income tax (343,849) 19,529
Decrease (increase) in income tax
receivables -0- 50,000
Decrease (increase) in note receivable -0- 10,000
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(1,194,281) (259,895)
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Net cash provided (used) by operating
activities: (193,397) 210,399
Cash flows from investing activities:
Acquisition of capital assets (86,482) (265,608)
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Net cash provided (used) by
financing activities: (86,482) (265,608)
Cash flows from financing activities:
Mortgage payable -0- (6,894)
Exercise of stock options 251,169 -0-
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Net cash provided (used) by financing
activities: 251,169 (6,894)
Increase (decrease) in cash (28,710) (62,103)
Cash beginning of period 508,240 141,244
Cash end of period $479,530 $ 79,141
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SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options exercised ($330,000)
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Supplemental Information
Income taxes paid $ 110,100 $ 3,297
Interest paid $ 16 $ 10,699
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 and six-month period ended November 30, 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
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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 dramatically during the second quarter of fiscal
1997, ended November 30, 1996, as evidenced by major increases in sales and
profit levels. During the second quarter, the Company entered into an agreement
to acquire "Schmitt Hofmann Systems GmbH" in Germany. The Company purchased the
assets of Hofmann Maschinenbau GmbH and then formed a new wholly owned
subsidiary as of 12/1/96 for a total cost of $500,000.
During the second quarter ended November 30, 1996, the Company, through its
wholly owned subsidiary Schmitt Measurement Systems, Inc. ("SMS"), 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
products and expects substantial delivery during the balance of fiscal year
1997.
RESULTS OF OPERATIONS:
Sales in the second quarter of fiscal 1997 increased to $2,738,314 versus
$1,520,028 in the same period last year. This 80% 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 $1,283,742 of the second quarter sales as the TMS-2000 had
increased shipments, as compared to $394,292 in second quarter 1996 SMS sales.
Second quarter cost-of-sales decreased to 37% of sales versus 42% in the same
period last year. The continued sales of TMS-2000 products during the second
quarter had a positive impact on gross earnings and net earnings. Cost-of-sales
of SMS products was 28% for the first half of 1997 versus 37% in the same period
last year. Management expects SMS cost-of-sales for fiscal 1997 to be
approximately 34%.
The second quarter general and administrative expenses totaled $922,675 versus
$640,236 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.
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
General and administrative expenses as a percentage of sales during the second
quarter of fiscal 1997 were 34% compared to 45% for the same period last year,
and management feels these costs will stabilize at approximately 40% for fiscal
1997, down from 43% for fiscal 1996 and 47% in fiscal 1995.
In the six-month period ended November 30, 1996 net income totaled $847,620
versus $291,492 for the same period last year. For the second quarter period
ending November 30, 1996, net income totaled $707,344 vs. $208,099 for the same
period last year. Taxes were accrued at a modest rate for the second quarter
given a total of 16% rate compared with 40% in the same period last year for the
first six months of Fiscal Year 1997. Management anticipates that the tax rate
for fiscal 1997 will approximate 30% due to prior year tax credits and refunds.
Second quarter net income per common share and common share equivalent on both a
primary and a fully diluted basis totaled $.09 versus $0.03 last year for the
same period. Fiscal year 1997 six month primary and fully diluted EPS and
Common Stock Equivalent were $0.11 versus $0.04 last year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company increased its working capital position during the second quarter
while still financing the growth of the new SMS products and inventory growth.
Working capital totaled $5,059,958 at November 30, 1996 versus $3,532,086 at May
31, 1996 fiscal year end. Corporate cash and marketable securities levels stood
at $706,472 at November 30, 1996.
During the six-month period ended November 30, 1996 net cash provided by
operating activities totaled $847,620. Included in cash flow from operations
was a $586,589 increase in inventory. During the period, accounts receivable
increased by $269,358 to a total of $1,681,163 and marketable securities and
commercial paper increased by $81,342 to $226,942.
The increase in accounts receivable occurred because of the increased sales
during the second quarter ended November 30, 1996 compared with the first three
months of fiscal year 1997. 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.
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 six months.
Management is currently reviewing long-range capital requirements as they relate
to expansion of products and markets. This analysis is expected to 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
Company's future growth requirements.
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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:
The Company conducted an Annual Shareholders Meeting on October 25, 1996.
The matters voted upon, together with the results of voting, were as
follows:
1.) The following persons were elected to the Board of Directors of the
Company, to serve until the next annual meeting of the shareholders
and until their successors shall be duly elected:
SHARES VOTED SHARES SHARES
DIRECTOR IN FAVOR WITHHELD ABSTAINED
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Maynard E. Brown 5,566,770 700 3,250
Wayne A. Case 5,567,270 200 3,250
David L. Dotlich 5,558,310 9,160 3,250
David M. Hudson 5,558,310 9,160 3,250
Trevor Nelson 5,557,810 9,660 3,250
John A. Rupp 5,566,220 1,250 3,250
2.) The Schmitt Industries, Inc. Stock Option Plan, as amended and
restated, was approved.
SHARES VOTED SHARES VOTED SHARES SHARES
IN FAVOR AGAINST ABSTAINED NOT VOTED
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3,508,700 92,104 56,414 1,913,502
3.) Moss Adams was appointed as independent auditors to examine the
financial statements of the Company and its subsidiaries for the
fiscal year ending May 31, 1997.
SHARES VOTED SHARES VOTED SHARES
IN FAVOR AGAINST ABSTAINED
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5,523,634 37,536 9,550
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Part II - OTHER INFORMATION CONTINUED
Item 5. Other Information - None
Item 6(a) Exhibit 10.1 - Contract/Distribution Agreement
Exhibit 11.1 - Schedule of Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
Item 6(b) 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: 1/10/97
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Wayne A. Case, President/CEO/Director
Date: 1/10/97
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Annie Windsor, Chief Financial Officer
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
Number Description Location
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10.1 Contract/Distribution Agreement Page 13
11.1 Schedule of Computation of Net Income Page 25
27 Financial Data Schedule Page 26
Page 12