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: February 28, 1998
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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
February 28, 1998 Common stock, no par value 7,096,889
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
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Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- February 28, 1998 and May 31, 1997 . . . . . . . . . 3
Consolidated Statements of Income:
- For the Three and Nine Months Ended
February 28, 1998 and February 28, 1997. . . . . . . 5
Consolidated Statements of Cash Flows
- For the Nine Months Ended
February 28, 1998 and February 28, 1997. . . . . . . 6
Supplemental Schedule of Non-Cash Investing
and Financing Activities . . . . . . . . . . . . . . 7
Notes to Interim Financial Statements . . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 8
Part II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 10
Signatures - . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exhibits - . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
February 28, 1998 May 31, 1997
Unaudited
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Cash $ 890,089 $ 504,662
Marketable securities & commercial paper 213,440 168,000
Accounts receivable 1,435,699 2,725,512
Inventories 3,887,751 2,479,820
Prepaid expenses 139,247 30,668
Deferred tax asset 244,585 136,000
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Total current assets 6,810,811 6,044,662
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 1,195,093 1,025,868
Furniture and equipment 863,351 760,596
Vehicles 158,886 146,299
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2,516,330 2,231,763
Less accumulated depreciation 642,114 530,587
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Total property & equipment 1,874,216 1,701,176
Other assets
Long-term deferred tax 679,000 679,000
Other assets -0- 90,415
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Total other assets 679,000 769,415
Total assets $ 9,364,027 $ 8,515,253
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
February 28, 1998 May 31, 1997
Unaudited
--------------------------------
Current liabilities
Trade accounts payable $ 662,098 $ 530,667
Accrued liabilities 153,978 306,811
Income taxes payable -0- 68,563
Current portion of long term debt -0- 29,061
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Total current liabilities 816,076 935,102
Long-term debt, net of current portion -0- 150,922
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Total liabilities $ 816,076 $ 1,086,024
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
February 28, 1998 5,058,406 4,952,411
and May 31, 1997 7,096,889 and
7,081,889 shares respectively
Cumulative foreign translation
adjustment (175,337) (36,270)
Retained earnings 3,664,882 2,513,088
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Total stockholders' equity 8,547,951 7,429,229
Total liabilities and stockholders' equity $ 9,364,027 $ 8,515,253
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1998
AND FEBRUARY 28, 1997
(UNAUDITED)
Three Months Ended Nine Months Ended
02/28/98 02/28/97 02/28/98 02/28/97
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Sales $2,372,320 $2,918,912 $8,259,736 $7,450,924
Cost of sales 1,313,120 1,059,330 3,862,310 2,776,712
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Gross profit 1,059,200 1,859,582 4,397,426 4,674,212
General and administrative
expenses 821,997 1,122,128 2,826,670 3,011,641
Research and development 78,655 56,650 270,579 116,161
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Total operating expense 900,652 1,178,778 3,097,249 3,127,802
Income from operations 158,548 680,804 1,300,177 1,546,410
Other income and expense
Interest income 7,784 14,805 31,803 27,156
Interest expense (20,104) (5,593) (22,252) (5,609)
Misc. income 55,566 38,448 176,066 69,127
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43,246 47,660 185,617 90,674
Income before income tax 201,794 728,464 1,485,794 1,637,084
Provision for income tax 100,000 269,809 334,000 430,809
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Net income for period $ 101,794 $ 458,655 $1,151,794 1,206,275
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Net income per share
Basic .01 .07 .16 .17
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Diluted .01 .06 .15 .17
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Page 5
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1997
(UNAUDITED)
February 28, 1998 February 28, 1997
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Cash flows from operating activities:
Net income from operations $ 1,151,794 $ 1,206,275
Items not affecting cash:
Amortization -0- 23,815
Depreciation 111,487 199,768
Deferred taxes (108,585) (5,659)
Unrealized gain on trading securities (45,400) -0-
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1,109,296 1,424,199
Changes in certain assets & liabilities:
Decrease (increase) in accounts receivable 1,289,813 (759,740)
Decrease (increase) in marketable securities
& commercial paper -0- (176,782)
Decrease (increase) in inventory (1,407,931) (890,459)
Decrease (increase) in prepaid expenses (108,579) (13,943)
Decrease (increase) in other assets 90,415 -0-
Increase (decrease) in accounts payable 131,431 278,756
Increase (decrease) in other liabilities (152,833) 26,419
Increase (decrease) in income tax payable (68,563) (88,140)
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(226,247) (1,623,889)
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Net cash provided (used) by operating activities: 883,049 (199,690)
Cash flows used by investing activities:
Acquisition of capital assets: (284,567) (313,884)
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Net cash provided (used) by investing activities: (284,567) (313,884)
Cash flows from financing activities:
Line of credit -0- 400,000
Repayment of debt (179,983) -0-
Exercise of stock options 105,995 278,512
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Net cash provided (used) by financing activities: (73,988) 678,512
Effect of foreign exchange rate changes on cash: (139,067) -0-
Increase (decrease) in cash: 385,427 164,938
Cash beginning of period: 504,662 508,240
Cash end of period $ 890,089 $ 673,178
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Page 6
February 28, 1998 February 28, 1997
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SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options exercised $ 19,370 $ 330,000
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Supplemental Information
Income taxes paid $ 399,200 $ 124,100
Interest paid $ 22,252 $ 5,609
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
and all adjustments considered necessary for a fair presentation have been
included. Operating results for the three-month and nine-month periods ended
February 28, 1998 are not necessarily indicative of the results that may be
experienced for the fiscal year ending May 31, 1998.
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. Certain
prior year amounts have been reclassified to conform with current year
presentation. Such reclassifications had no effect on previously reported
results of operations or stockholders' equity.
Note 2: EPS Reconciliation Three Months Ended Nine Months Ended
2/28/98 2/28/97 2/28/98 2/28/97
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Weighted average shares (basic) 7,095,711 7,042,886 7,088,728 7,012,557
Effect of dilutive stock options 342,639 159,226 382,614 154,973
Weighted average shares (diluted) 7,438,350 7,202,112 7,471,342 7,167,530
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Page 7
SCHMITT INDUSTRIES, INC.
FORM 10-Q
THIRD QUARTER FISCAL YEAR 1998
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
introductions 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 slowed during the third quarter of fiscal 1998, ended
February 28, 1998, as evidenced by decreases in sales and profit levels. Sales
of balancer products increased in the United States, the United Kingdom, Germany
and other world markets during the third quarter of this fiscal year, but sales
of measurement products slowed during this period due primarily to the impact of
delayed orders for the Asian markets. Management expects these reduced sales
trends of measurement products to continue throughout fiscal year 1998.
During the third quarter ended February 28, 1998, the Company experienced
declining sales of the TMS-2000 non-contact laser texture measurement systems
(TMS 2000) to the computer hard drive market. Sales of the TMS series products
have been made pursuant to an exclusive marketing agreement with Veeco (NASDAQ:
VECO). Veeco has projected reduced delivery of these products during the
balance of fiscal year 1998.
RESULTS OF OPERATIONS:
Sales in the third quarter of fiscal 1998 declined to $2,372,320 versus
$2,918,912 in the same period last year. This 19% decline was caused by delays
in orders from both domestic and international measurement customers. SMS sales
accounted for $675,051 of the third quarter sales, as compared with $916,226 in
third quarter 1997 SMS sales.
Third quarter cost-of-sales increased to 55% of sales versus 36% in the same
period last year. The declining sales of TMS-2000 products during the third
quarter had a negative impact on gross earnings and net earnings. Cost-of-sales
of SMS products was 59% of related revenues for the third quarter 1998 versus
42% in the same period last year. Management expects SMS cost-of-sales for
fiscal 1998 to be approximately 40% of related revenues.
Nine-month general operating expenses totaled $3,097,249 versus $3,127,802 for
the same period last year. The acquisition of Schmitt Hofmann Systems GmbH
("SHS") and Schmitt Europe Ltd. ("SEL") added to ongoing operating expenses.
General and administrative expenses for U.S.A. operations have declined slightly
in fiscal year 1998 as compared with the comparable nine-month period in fiscal
year 1997.
Sales by the German subsidiary, SHS, totaled $410,734 for the third quarter,
with SEL reporting $220,867 in sales for the period. These sales levels met
management's expectations and resulted from intensive efforts expended during
this quarter in Germany and the United Kingdom to expand sales levels. The
quarter included operating losses for SHS of $56,357 and operating profit at SEL
of $23,846.
Page 8
SCHMITT INDUSTRIES, INC.
FORM 10-Q
THIRD QUARTER FISCAL YEAR 1998
General operating expenses as a percentage of sales during the first nine months
of fiscal 1998 were 37% compared with 42% for the same period last year.
Management estimates these costs will stabilize at approximately 39% for fiscal
1998, down from 41% for fiscal 1997 and 43% in fiscal year 1996.
In the three-month period ended February 28, 1998, net income totaled $101,794
versus $458,655 for the same period last year. For the nine-month period, taxes
were accrued at approximately a 22% rate compared with 26% in the same period
last year. Management now anticipates that the tax rate for fiscal 1998 will
approximate 34%, due to the timing of tax benefit realization from net operating
loss carry forwards.
Nine-month net income was $1,151,794 versus $1,206,275 for the same period last
year. Nine-month income per share was $0.16 for fiscal year 1998 versus $0.17
last year on a basic basis and $.15 for fiscal year 1998 versus $.17 last year
on a diluted basis, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
The Company maintained its working capital position during the third quarter
while still financing the growth of the new measurement products and inventory
at SHS and SEL. Working capital totaled $5,994,735 at February 28, 1998 versus
$5,109,560 at May 31, 1997 fiscal year end. Corporate cash and marketable
securities levels stood at $1,103,529 at February 28, 1998.
During the nine-month period ended February 28, 1998, net cash provided by
operating activities totaled $883,049, including net income of $1,151,794.
Included in cash flow was a $1,407,931 increase in inventory. During the
period, accounts receivable decreased by $1,289,813 and marketable securities
and commercial paper appreciated $45,400. The increase in inventory was caused
by planned changes of balancer inventory for the U.S.A. and Europe and the ramp
up of the new DTM-2000 measurement product line.
The decrease in accounts receivable occurred because of reduced invoicing and
improved collections during the nine-month period ended February 28, 1998
compared with the same nine 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 uncollectable accounts, returns or allowances has been
established. Net cash used for repayment of debt was $179,983, which was used
for the retirement of long-term debt obligations. Net cash used by financing
activities was $73,988.
Management believes that cash 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 also sufficient to finance current short-term operations, projected
capital expenditures, anticipated short-term sales agreements and other
contingencies during at least the next six months.
Management is currently reviewing long-range capital requirements as they relate
to expansion of products and markets. This analysis 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.
Page 9
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 10.1 - Exclusive Distribution Agreement
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: 04/10/98 /s/ Wayne A. Case
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Wayne A. Case, President/CEO/Director
Date: 04/10/98 /s/ Annie Windsor
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Annie Windsor, Chief Financial Officer
Page 10
SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
Number Description Location
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10.1 Exclusive Distribution Agreement Page 12
27 Financial Data Schedule Page 24
Page 11