UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- ----
XX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: FEBRUARY 28, 1999
or
- ---- 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: 0-23996
SCHMITT INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Oregon 93-1151989
------------------------ -----------------------
(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
-------------------------------
(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
---- ----
The number of shares of each class of common stock outstanding as of February
28, 1999 Common stock, no par value 8,184,889
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- February 28, 1999 and May 31, 1998..................................... 3
Consolidated Statements of Income:
- For the Three and Nine Months Ended
February 28, 1999 and February 28, 1998................................ 5
Consolidated Statements of Cash Flows
- For the Nine Months Ended
February 28, 1999 and February 28, 1998................................ 6
Supplemental Schedule of Non-Cash Investing
and Financing Activities............................................... 7
Notes to Consolidated Financial Statements................................ 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9
Part II - OTHER INFORMATION......................................................... 11
Signatures -......................................................................... 11
Exhibits - ......................................................................... 12
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
February 28, 1999 May 31, 1998
Unaudited
-------------------------------------------
Cash $ 607,621 $ 1,127,076
Accounts receivable 1,161,935 1,197,951
Inventories 4,684,460 4,166,755
Prepaid expenses 89,339 120,466
Notes receivable 11,058 -0-
Deferred tax asset 268,706 34,623
Income tax receivable 67,363 190,806
----------- -----------
Total current assets 6,890,482 6,837,677
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 1,216,581 1,190,920
Furniture and equipment 1,067,460 1,045,319
----------- -----------
2,583,041 2,535,239
Less accumulated depreciation 860,949 691,258
----------- -----------
Total property & equipment 1,722,092 1,843,981
Other assets
Long-term investment 2,135,000 -0-
Long-term deferred tax asset 837,560 837,560
Other assets 91,667 100,000
----------- -----------
Total other assets 3,064,227 937,560
Total assets $11,676,801 $ 9,619,218
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----------- -----------
Page 3
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
February 28, 1999 May 31, 1998
Unaudited
---------------------------------------
Current liabilities
Line of credit $300,000 $ -0-
Trade accounts payable 349,138 681,524
Accrued liabilities 203,837 249,565
--------- --------
Total current liabilities 852,975 931,089
Total liabilities $852,975 $931,089
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
February 28, 1999 8,184,889 shares $7,394,459 $5,072,634
May 31, 1998 7,099,139 shares
Accumulated other comprehensive
income (183,605) (147,708)
Retained earnings 3,612,972 3,763,203
--------- ---------
Total stockholders' equity 10,823,826 8,688,129
Total liabilities and stockholders' equity $11,676,801 $9,619,218
----------- ----------
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Page 4
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1999,
AND FEBRUARY 28, 1998
(UNAUDITED)
Three Months Ended Nine Months Ended
02/28/99 02/28/98 02/28/99 2/28/98
------------------------------------ ------------------------------------
Sales $ 1,767,427 $ 2,372,320 $ 5,913,751 $ 8,259,736
Cost of sales 769,727 1,313,120 2,968,920 3,862,310
----------- ----------- ----------- -----------
Gross profit 997,700 1,059,200 2,944,831 4,397,426
General and administrative
expenses 918,760 821,997 2,830,163 2,826,670
Research and development 55,854 78,655 329,715 270,579
----------- ----------- ----------- -----------
974,614 900,652 3,159,878 3,097,249
Income (loss) from operations 23,086 158,548 (215,047) 1,300,177
Other income and expense (17,742) 43,246 64,815 185,617
Income (loss) before
income tax 5,344 201,794 (150,232) 1,485,794
Provision for (benefit from)
income tax (11,500) 100,000 -0- 334,000
----------- ----------- ----------- -----------
Net (loss) income for period $ 16,844 $ 101,794 $ (150,232) $ 1,151,794
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net (loss) income per share
Basic $ .00 $ .01 $ (.02) $ .16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ .00 $ .01 $ (.02) $ .15
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Page 5
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
(UNAUDITED)
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- ------------------
Cash flows from operating activities:
Net (loss) income from operations $ (150,232) $ 1,151,794
Items not affecting cash:
Amortization 8,333 -0-
Depreciation 169,691 111,487
Deferred taxes -0- (108,585)
Unrealized gain on trading securities -0- (45,400)
----------- -----------
27,792 1,109,296
Cash flows from changes in assets & liabilities:
Decrease (increase) in accounts receivable 36,016 1,289,813
Decrease (increase) in inventory (517,705) (1,407,931)
Decrease (increase) in prepaid expenses 31,127 (108,579)
Increase (decrease) in notes receivable (11,058) -0-
Decrease (increase) in income tax receivables 123,443 -0-
Decrease (increase) in other assets -0- 90,415
Increase (decrease) in accounts payable (332,385) 131,431
Increase (decrease) in other liabilities (45,728) (152,833)
Increase (decrease) in corp income tax -0- (68,563)
----------- -----------
(716,290) (226,247)
----------- -----------
Net cash provided (used) by operating activities: (688,498) 883,049
Cash flows used by investing activities:
Acquisition of capital assets: (47,802) (284,567)
----------- -----------
Cash flows from financing activities:
Advance on line of credit 300,000 -0-
Repurchase of company stock (47,258) -0-
Repayment of debt -0- (179,983)
Exercise of stock options -0- 105,995
----------- -----------
Net cash provided (used) by financing activities: 252,742 (73,988)
Effect of foreign exchange rate changes on cash: (35,897) (139,067)
Increase (decrease) in cash: (519,455) 385,427
Cash beginning of period: 1,127,076 504,662
Cash end of period $ 607,621 $ 890,089
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----------- -----------
Page 6
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- ------------------
Income tax benefit of stock options exercised $ 234,083 $ 19,370
---------- ----------
---------- ----------
Supplemental Information
Income taxes paid $ 6,800 $ 399,200
Interest paid $ 7,647 $ 22,252
Purchase of Air Packaging Technologies shares
for common stock $2,135,000 $ -0-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:
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 nine-month period ended February 28, 1999
are not necessarily indicative of the results that may be experienced for the
fiscal year ending May 31, 1999.
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
02/28/99 02/28/98 02/28/99 02/28/98
------------------------------- ------------------------------
Weighted average shares (basic) 7,987,978 7,095,711 7,395,434 7,088,728
Effect of dilutive stock options -0- 342,639 -0- 382,614
Weighted average shares (diluted) 7,987,978 7,438,350 7,395,434 7,471,342
Incremental common stock equivalent shares of 6,824 were not used in the
calculation of diluted earnings per common share in the nine months ended
February 28, 1999, due to the net loss for the period.
NOTE 3: Comprehensive Income
THREE MONTHS ENDED NINE MONTHS ENDED
02/28/99 02/28/98 02/28/99 02/28/98
------------ ----------- ----------- ------------
Net (loss) income $ 16,844 $ 101,794 $ (150,232) $ 1,151,794
Other comprehensive income (loss)
Foreign currency translation adjustment (207,521) (47,235) (35,897) (139,067)
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ (190,677) $ 54,559 $ (186,129) $ 1,012,727
The foreign currency translation adjustment represents the Company's only
significant other comprehensive income element. The cumulative translation
adjustment consists of unrealized gains/losses from translation adjustments and
intercompany foreign currency transactions that are of a long-term investment
nature. These items are reflected in the statement of shareholders' equity in
accordance with Statement of Financial Accounting Standards No. 52, FOREIGN
CURRENCY TRANSLATION.
Page 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Note 4: Non Cash Transactions
During the third quarter, officers/employees exercised stock options for 485,750
shares at an average exercise price of $1.79 per share. The officers/employees
issued notes to the Company for the exercise price. The notes mature on or
before December 2000 ($586,500) and January 2001 ($282,975), and carry interest
at the rate of 6% per annum. In accordance with SEC guidelines, the notes are
reported as a reduction of stockholders' equity.
Also during the quarter, the Company issued 610,000 shares of its common stock
to acquire 13,757,155 shares or approximately 19.5% of the outstanding shares of
Air Packaging Technologies, Inc. (APTI). That company is engaged in the design,
manufacture, marketing and sales of "Air Box" patented packaging systems used in
the semiconductor, electronic, medical and dental markets worldwide. The Company
made this investment as the philosophy of APTI is similar to its own - to
provide products that make its customers more profitable either through
increased productivity or reduced operating costs.
Page 8
SCHMITT INDUSTRIES, INC.
FORM 10-Q
THIRD QUARTER FISCAL YEAR 1999
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
FORWARD-LOOKING INFORMATION:
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, the risks of increased competition and technological change in
the Company's industry and other risks detailed in the Company's Securities and
Exchange Commission filings. Accordingly, actual results may differ, possibly
materially, from the predictions contained herein.
OVERVIEW:
Consolidated net earnings for the quarter were $16,844 or $.00 per share
compared to net earnings of $101,794 or $.01 per share in the same quarter last
year. Earnings declined primarily as a result of a drop in sales of Schmitt
Measurement Systems, Inc. (SMS) products. SMS sales were below prior year levels
due to the ongoing worldwide decline in the computer industry.
For the nine months ended February 28, 1999, the Company reported a net loss of
$150,232 or $.02 per share compared to net earnings of $1,151,794 or $.15 per
share (diluted) over the same period last year. As with the third quarter, the
decline resulted from the lower sales of SMS products. As the computer industry
improves in calendar 1999, the revenues of SMS are expected to grow.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998:
Sales decreased to $1,767,427 from $2,372,320 in the prior year. Revenues from
Schmitt Balancing Systems (SBS) products were almost equal to prior year
amounts. The introduction of the new SB-4500 controller in calendar 1999 is
expected to produce increases in sales over those experienced in the prior year.
The decrease in consolidated revenues was attributed to the decline in sales of
SMS measurement products. Those sales were $65,996 in the most recent quarter
compared to $675,051 in the third quarter of 1998. Sales are expected to recover
later in calendar 1999 for two reasons. Shipments of TMS-2000 and DTM-2000
Non-Contact Laser Texture Measurement Systems to the computer hard drive markets
are expected to resume. In addition, new products are expected to be introduced
in the first fiscal quarter of 2000 that should have a positive impact on
revenues.
The earnings impact of the lower sales was offset by lower cost of sales. Third
quarter cost of sales, as a percentage of revenues, was 44%, down from 55% in
the same period last year. The current year percentage was lower due to an
adjustment to estimated inter-company profits related to products sold during
the first two quarters of 1999. Had this adjustment not been made, the
percentage would have been 51%.
Operating expenses rose slightly during the third quarter to $974,614 from
$900,652 in the same period last year. This increase was in several categories
and not attributable to any one item.
The German subsidiary, Schmitt Hofmann Systems GmbH (SHS), had sales of $368,755
versus $410,734 in the same period last year. The British subsidiary, Schmitt
Europe Ltd. (SEL), reported $176,767 in sales compared to prior year same period
sales of $220,867. The Company does not expect these decreases to continue in
the long run as SEL has realized a sustained increase in sales over the past
twelve months while SHS revenues have been relatively stable.
NINE MONTHS ENDED FEBRUARY 28, 1999 AND 1998:
Sales decreased to $5,913,751 from $8,259,736 in the same period last year.
While the revenues of SBS products are essentially even with prior year amounts,
revenues of the SMS products declined significantly. Sales of SMS products for
the nine months ended February 29, 1999 and 1998 amounted to $435,140 and
$2,674,549, respectively.
Page 9
SCHMITT INDUSTRIES, INC.
FORM 10-Q
THIRD QUARTER FISCAL YEAR 1999
Cost of sales as a percentage of revenues was 50%, an increase from 47% in the
prior year. This increase is directly attributable to the decline in SMS sales.
Those products generally have lower costs as a percentage of revenues than SBS
products. Therefore, as SMS products' proportionate share of total revenues
declines, the cost of sales percentage will rise.
General and administrative expenses, including R&D, as a percentage of sales
were 53% compared to 37% for the same period last year. This is attributable to
lower sales levels in the current year. Management continues to critically
review significant expenses to assure they are essential. While large cost
reductions were considered, management did not feel large cuts were prudent.
Well over 60% of these costs are payroll or sales-related areas where the
Company has expended a great deal of effort to train staff. Once sales improve,
the costs to hire and train new people, particularly in the technical areas,
would be much greater than absorbing these costs over a short-term period.
Additionally, the technical staff could be used for R&D efforts rather than
hiring more expensive and less knowledgeable outside consultants.
LIQUIDITY AND CAPITAL RESOURCES:
The working capital position improved during the second quarter of fiscal 1999
despite the required financing for the development of new products and
inventory. Working capital at February 28, 1999 was $6,037,507 compared to
$5,906,588 at May 31, 1998. Corporate cash and marketable securities were
$607,621 at February 28, 1999 versus $1,127,076 at May 31, 1998.
For the nine months ended February 28, 1999, net cash used by operating
activities totaled $688,498 including a net loss of $150,232. Included were
increases in inventories of $517,705, and a decrease in accounts payable of
$332,385. Inventories increased due to a ramp up of parts required to
manufacture new products scheduled for introduction in calendar 1999. Management
is currently executing a plan to reduce inventory levels. During the third
quarter, these efforts produced a $187,492 drop in inventories. The drop in
accounts payable reflects a general reduction in purchasing activity in the area
of inventories.
Net cash used in investing activities amounted to $47,802 for the nine months
ended February 28, 1999, and consisted entirely of additions to fixed assets.
Cash flows from financing activities were $252,742 for the nine months ended
February 28, 1999. The most significant change was a draw of $300,000 on the
Company's $1.5 million credit line.
Management believes cash from operations, available credit resources and its
improving working capital position will provide adequate funds on a short-term
basis to cover currently foreseeable 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.
IMPACT OF THE YEAR 2000 ISSUE:
The Company has completed an assessment of the impact of the Year 2000 issue on
its internal systems and equipment, on its products and on the systems of its
significant vendors. Based on this assessment, the Company believes that its
internal systems have been updated to address the Year 2000 issue, its products
will properly recognize calendar dates beginning in the Year 2000, and its
significant vendors are appropriately addressing the Year 2000 issue.
Accordingly, the Company believes it is Year 2000 ready and does not expect that
the Year 2000 will have a material impact on the Company's business, results of
operations or financial condition. However, there can be no assurance that the
systems of other companies on which the Company relies will not have an adverse
effect on the Company's systems.
Page 10
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 27 - Financial Data Schedule
Item 6.(b) Reports on Form 8-K - Current Report
on Form 8-K dated December 24, 1998
Reporting sales of equity securities
pursuant to Regulation S.
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.
(Registrant)
Date: 04/14/99 /s/ Wayne A. Case
---------- ------------------------------------------
Wayne A. Case, President/CEO/Director
Date: 04/14/99 /s/ Robert C. Thompson
---------- ------------------------------------------
Robert C. Thompson, Chief Financial Officer
Page 11
SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
NUMBER DESCRIPTION LOCATION
- ------- ---------------------------- ---------
27 Financial Data Schedule Page 13
Page 12