<PAGE>
------------------------------------------------------------------------
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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: August 31, 1997
-----------------------------------
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.
------------------------------------------------------
(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
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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
-------- -------
The number of shares of each class of common stock outstanding as of
August 31, 1997 Common stock, no par value 7,081,889
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SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
----
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- August 31, 1997 and May 31, 1997. . . . . . . . . . . . . . 3
Consolidated Statements of Income:
- For the Three Months Ended
August 31, 1997 and August 31, 1996. . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
- For the Three Months Ended
August 31, 1997 and August 31, 1996. . . . . . . . . . . . . 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 of 11
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
August 31, 1997 May 31, 1997
Unaudited
---------------- --------------
Cash $ 970,886 $ 504,662
Marketable securities & commercial paper 717,400 168,000
Accounts receivable 1,734,920 2,725,512
Inventories 2,788,700 2,479,820
Prepaid expenses 24,064 30,668
Deferred tax asset 133,702 136,000
---------------- --------------
Total current assets 6,369,672 6,044,662
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 1,113,610 1,025,868
Furniture and equipment 790,224 760,596
Vehicles 128,725 146,299
---------------- --------------
2,331,559 2,231,763
Less accumulated depreciation 555.499 530,587
---------------- --------------
Total property & equipment 1,776,060 1,701,176
Other assets
Long-term deferred tax 679,000 679,000
Other assets -0- 90,415
---------------- --------------
Total other assets 679,000 769,415
Total assets $8,824,732 $8,515,253
---------------- --------------
---------------- --------------
Page 3 of 11
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
-----------
August 31, 1997 May 31, 1997
Unaudited
---------------- -------------
Current liabilities
Trade accounts payable $ 590,149 $ 530,667
Accrued liabilities 222,182 306,811
Income taxes payable 125,125 68,563
Current portion of long term debt 29,061 29,061
---------------- -------------
Total current liabilities 966,517 935,102
Long-term debt, net of current portion 150,922 150,922
---------------- -------------
Total liabilities $1,117,439 $1,086,024
STOCKHOLDERS' EQUITY
--------------------
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
August 31, 1997 4,952,411 4,952,411
and May 31, 1997 7,081,889 shares
Cumulative foreign exchange translation
adjustment (112,757) (36,270)
Retained earnings 2,867,639 2,513,088
Total stockholders' equity 7,707,293 7,429,229
Total liabilities and stockholders' equity $8,824,732 $8,515,253
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Page 4 of 11
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND AUGUST 31, 1996
(UNAUDITED)
Three Months Ended
8/31/97 8/31/96
-------------- -------------
Sales $2,666,941 $1,793,698
Cost of sales 1,162,352 724,140
-------------- -------------
Gross profit 1,504,589 1,069,558
General and administrative expenses 1,076,211 843,878
-------------- -------------
Income from operations 428,378 225,680
Other income and expense
Interest income 9,403 5,473
Interest expense (1,928) -0-
Misc. income 94,698 20,123
-------------- -------------
102,173 25,596
Income before income tax 530,551 251,276
Provision for income tax 176,000 111,000
Net income for period $ 354,551 $ 140,276
-------------- -------------
-------------- -------------
Net income per common share and common
share equivalent
Primary $.05 $.02
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Weighted average number of
shares 7,557,878 7,217,196
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Fully diluted $.05 $.02
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------- -------
Weighted average number of
shares 7,557,878 7,538,903
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Page 5 of 11
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND AUGUST 31, 1996
(UNAUDITED)
Cash flows from operating activities: August 31, 1997 August 31, 1996
--------------- ---------------
Net income from operations $ 354,551 $140,276
Items not affecting cash:
Amortization -0- 18,680
Depreciation 24,912 63,464
Deferred taxes 2,298 (7,965)
Unrealized gain on trading securities (99,400) -0-
--------------- ---------------
282,361 214,455
Cash flows from changes in assets & liabilities:
Increase (decrease) in accounts payable 59,482 107,018
Increase (decrease) in other liabilities (84,629) (97,249)
Decrease (increase) in accounts receivable 990,592 218,355
Decrease (increase) in marketable securities
& commercial paper (450,000) (264,562)
Decrease (increase) in inventory (308,880) (469,037)
Decrease (increase) in prepaid expenses 6,604 7,480
Decrease (increase) in other assets 90,415 -0-
Increase (decrease) in corp income tax 56,562 (183,749)
--------------- ---------------
360,146 (681,744)
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Net cash provided (used) by operating activities: 642,507 (467,289)
Cash flows used by investing activities:
Acquisition of capital assets: (99,796) (72,205)
--------------- ---------------
Net cash provided (used) by investing activities: (99,796) (72,205)
Cash flows from financing activities:
Exercise of stock options -0- 165,331
--------------- ---------------
Net cash provided (used) by financing activities: -0- 165,331
Effect of foreign exchange rate changes on cash: (76,487) -0-
Increase (decrease) in cash: 466,224 (374,163)
Cash beginning of period: 504,662 508,240
Cash end of period $970,886 $ 134,077
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Page 6 of 11
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August 31, 1997 August 31, 1996
--------------- ---------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options exercised $ -0- $330,000
--------
Supplemental Information
Income taxes paid $ -0- $ -0-
Interest paid $1,928 $ -0-
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, 1997 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 affect on previously
reported results, operations or stockholders' equity.
Page 7 of 11
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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
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 improved during the first quarter of fiscal 1998, ended
August 31, 1997, as evidenced by increases in sales and profit levels. Sales
have increased in the United Kingdom, Germany and other world markets during
the first quarter of this fiscal year. Management expects these increased
sales trends to continue.
During the first quarter ended August 31, 1997, 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 1998. Sales of the TMS series products have been made pursuant
to an exclusive marketing agreement with Veeco (NASDAQ: VECO).
RESULTS OF OPERATIONS:
Sales in the first quarter of fiscal 1998 increased to $2,666,941 versus
$1,793,698 in the same period last year. This 49% increase was caused by
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 $679,460 of the first quarter sales, as compared to
$460,754 in first quarter 1997 SMS sales.
First quarter cost-of-sales increased to 44% of sales versus 40% 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 47% for the first quarter 1998 versus 46%
in the same period last year. Management expects SMS cost-of-sales for
fiscal 1998 to be approximately 40%.
Three-month general and administrative expenses totaled $1,076,211 versus
$843,878 for the same period last year. This increase is attributable
primarily to the increased sales level this 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 Schmitt
Hofmann Systems GmbH ("SHS") and Schmitt Europe Ltd. ("SEL") added to ongoing
operating expenses.
Sales by the German subsidiary, SHS, totaled $478,873 for the quarter, with
SEL reporting $104,834 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 SEL of $48,361 and non-recurring losses
at SHS of $41,735.
Page 8 of 11
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
General and administrative expenses as a percentage of sales during the first
three months of fiscal 1998 were 40% compared to 47% for the same period last
year. Management estimates these costs will stabilize at approximately 36%
for fiscal 1998, down from 41% for fiscal 1997 and 44% in fiscal year 1996.
In the three-month period ended August 31, 1997 pretax earnings totaled
$530,551 versus $251,276 for the same period last year. Taxes were accrued
at approximately a 33% rate compared with 44% in the same period last year.
Management anticipates that the tax rate for fiscal 1998 will approximate 30%.
Three-month net earnings were $354,551 versus $140,276 for the same period
last year. Three-month earnings per share were $0.05 versus $0.02 last year.
Primary EPS and Common Stock Equivalent were $0.05 versus $0.02 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. Working capital totaled $5,403,155 at August 31, 1997 versus
$5,110,000 at May 31, 1997 fiscal year end. Corporate cash and marketable
securities levels stood at $1,688,286 at August 31, 1997.
During the three-month period ended August 31, 1997 net cash provided by
operating activities totaled $642,507, including net operating earnings of
$354,551. Included in cash flow from operations was a $308,880 increase in
inventory. During the period, accounts receivable decreased by $990,592 and
marketable securities and commercial paper increased by $450,000.
The decrease in accounts receivable occurred because of the lower sales
during the three-month period ended August 31, 1997 compared with the last
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
uncollectable accounts, returns or allowances has been established. Net cash
used by investing activities was $99,796, which was used for the acquisition
of capital assets, etc. Net cash used by financing activities was $0.00.
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 Companies future growth requirements.
Page 9 of 11
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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:
-- None --
Item 5. Other Information - None
Item 6.(a) Exhibit 11.1 - Schedule of Computation of Net Income Per
Share
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.
------------------------
(Registrant)
Date: 10/10/97
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Wayne A. Case, President/CEO/Director
Date: 10/10/97
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Annie Windsor, Chief Financial Officer
Page 10 of 11
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EXHIBIT 11.1
SCHMITT INDUSTRIES, INC.
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(UNAUDITED)
Three Months Ended
August 31, 1997 August 31, 1996
---------------- ----------------
I. Net income for period $ 354,551 $ 140,276
-------------- --------------
II. Determination of shares
Weighted average number of common
shares outstanding 7,081,889 6,973,654
Common equivalent shares 475,989 243,542
(determined using the "treasury
stock" method) representing shares
issuable upon exercise of employee
stock options
Weighted average number of shares
used in 7,557,878 7,217,196
calculation of primary income per share
Shares issuable on exercise of stock -0- 321,707
options, net of shares assumed to be
repurchased with proceeds at market price
Weighted average number of shares
used in fully diluted income per share 7,557,878 7,538,903
-------------- --------------
III. Net income per common share and common
share equivalent
Primary $.05 $.02
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Fully diluted $.05 $.02
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Page 11 of 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 970,886
<SECURITIES> 717,400
<RECEIVABLES> 1,734,920
<ALLOWANCES> 0
<INVENTORY> 2,788,700
<CURRENT-ASSETS> 6,369,672
<PP&E> 2,331,559
<DEPRECIATION> 555,499
<TOTAL-ASSETS> 8,824,732
<CURRENT-LIABILITIES> 966,517
<BONDS> 150,922
0
0
<COMMON> 4,952,411
<OTHER-SE> 2,754,882
<TOTAL-LIABILITY-AND-EQUITY> 8,824,732
<SALES> 2,666,941
<TOTAL-REVENUES> 2,666,941
<CGS> 1,162,352
<TOTAL-COSTS> 1,162,352
<OTHER-EXPENSES> 1,076,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,928
<INCOME-PRETAX> 530,551
<INCOME-TAX> 176,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 354,551
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
