<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: May 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File Number: 0-23996
SCHMITT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon 91-1151989
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2765 N.W. Nicolai Street
Portland, Oregon 97210
(Address of principal executive offices) (Zip Code)
(503) 227-7908
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- ---------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - no par value
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 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 X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of August 8, 1997, the aggregate market value of the registrant's Common
Stock held by nonaffiliates of the registrant was $21,337,313 based on the
closing sales price of the registrant's Common Stock on the Nasdaq National
Market. On that date, there were 7,081,889 shares of Common Stock outstanding.
Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Parts II and IV hereof, and portions of the
registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company designs, assembles and markets computer-controlled balancing
equipment for use primarily by the machine tool industry. Through its wholly
owned subsidiary, Schmitt Measurement Systems, Inc. ("SMS"), a Montana
corporation, the Company also designs, manufactures and markets precision laser
measurement systems.
The Company was incorporated under the laws of British Columbia, Canada in
1984. The name of the Company was changed to Schmitt Industries Inc. in 1987.
In February 1996, the Company was "continued" from British Columbia to the state
of Wyoming and then merged into its wholly owned subsidiary, Schmitt Industries,
Inc., an Oregon corporation; Schmitt Industries, Inc. was the surviving entity.
The Company acquired its original balancing equipment technology pursuant
to a series of agreements from 1987 through 1991. The patented technology has
been substantially enhanced and advanced by the Company in the past decade.
In May 1995, the Company acquired TMA Technologies Inc. ("TMA"), a
designer, assembler and marketer of innovative industrial measurement systems
based on laser light scatter technologies. For all of the outstanding shares of
TMA, the Company paid $15,000, assumed approximately $515,000 of TMA debt and
agreed to make royalty payments to TMA's shareholders of 5% on sales of TMA
products and future Company products that utilize TMA's technologies, hardware,
software and existing patents, subject to a maximum royalty of $6 million. In
June 1995, TMA began operations in Portland and subsequently changed its name to
Schmitt Measurement Systems, Inc. (SMS)
In June 1996, the Company formed Schmitt Europe, Ltd. under the laws of
Great Britain to market and sell the Company's products in Great Britain.
In December 1996, the Company completed the acquisition of the assets of
the grinding wheel balancer division of Hofmann Machinenbau GmbH of Germany.
The Company operates this business as Schmitt Hofmann Systems GmbH, a wholly
owned subsidiary of the Company ("SHS"). SHS purchased the assets from Hofmann
Machinenbau GmbH with a $496,000 loan from the Company.
The Company's executive offices are located at 2765 N.W. Nicolai Street,
Portland, Oregon 97210, and its telephone number is (503) 227-7908.
BALANCING PRODUCTS
The Company's principal product is the Schmitt Dynamic Balance System (the
"SBS System"). It consists of a computer control unit, sensor, spindle mounting
adapter, and balance head. It was designed to be an inexpensive, yet highly
accurate, permanent installation on grinding machines. Today, the SBS System is
beginning to be evaluated by manufacturers for additional applications including
large electric motors, industrial fans, industrial brushing devices, turbines
and similar devices.
2
<PAGE>
The SBS System is fully automated and consequently the user does not have
to pre-balance such devices as grinding wheels. This reduces the setup time of
such operations and ensures a smoother and more efficient operation.
The SBS System operates on a principle of mass compensation for wheel
imbalance. The balance head contains two movable eccentric weights, each of
which is driven by electric motors through a precision gear train. These
weights can be repositioned to offset any imbalance in a grinding wheel or other
application. Imbalance or vibration is picked up by the sensor. The signal is
fed to a controller that filters the signal by revolutions per minute. The
controller then drives the two balance head weights in the direction that
reduces the amplitude of the vibration signal. When the weights are positioned
so the lowest vibration level is reached, the balance cycle is complete.
Notable features of the SBS System include its ability to fit almost all
machines, ease of installation, compact and modular construction, ability to
balance a wheel while on a machine, elimination of wheel vibration, automatic
monitor of balance, display in both English and metric systems, instrument grade
calibration, short balance process, measurement of both displacement and/or
velocity, and minimal user maintenance.
Benefits to the system user include improved quality of finished parts,
ease of product adaptation, minimal downtime, complete and ready installation,
elimination of need for static balancing, longer life for wheels, dressings,
diamonds and spindle bearings, the ability to balance within 0.2 microns and its
adaptability to all types of machines.
The precision grinding industry has a worldwide presence and is established
in all industrialized countries. In each major industrialized country there are
three major market segments: the machine tool builders, the rebuilders and
grinding machine users.
The first major market segment consists of machine tool builders who
actually design and manufacture a variety of cylindrical, surface, and specialty
application grinding machines that are sold at home and also exported to foreign
markets. SBS System products are distributed to a variety of world markets
through OEM (original equipment manufacturer) accounts, where a special pricing
(20%) discount is offered to the machine builder if the designer incorporates
the SBS System into its machine.
Examples of some of well-known worldwide machine tool builders who have
offered and/or installed the SBS System include ANCA (Australia), Bryant
Grinders Corporation (U.S.), Blohm Incorporated (U.S.), Blohm GmbH (Germany),
Capco Machinery (U.S.), Cincinnati Milacron (U.S.), Ecotech/SMTW (China/U.S.),
Gold Crown Machinery (U.S.), Gleason Works (U.S.), Litton IAS/Landis Grinding
(U.S.), Mattison Machine (U.S.), Micron Machinery Limited (Japan/U.S.), Normac
Incorporated (U.S.), NTC Toyama America (U.S./Japan), Okomoto (Japan), Okuma
Machine (Japan), Royal Master Grinders (U.S.), Shigiya Machine (Japan), Sumitomo
Heavy Industry (Japan), TOS Hostivar (Czech Republic), TOS Holice (Czech
Republic), Toyoda Machine (Japan) and Weldon Machine Tool (U.S.).
One successful marketing channel to tool builders is the sale of the SBS
System to users who purchase new machines and thereby experience the benefits of
the SBS System and then purchase additional units for application to their older
machines.
The second major market segment consists of machine tool rebuilders who are
found in all industrial nations and who develop their business with users by
offering to completely update and refurbish older machine tools. These
rebuilders typically tear the old machine apart and install new bearings, new
electronics, and new advanced features, such as an SBS Automatic Wheel Balancer.
The Company
3
<PAGE>
currently sells its product directly to all major machine rebuilders in the U.S.
and to some countries in Western Europe.
Grinding machine users in industrialized countries are the third major
market segment. Users become aware of the SBS System through trade shows, trade
magazine advertising, distributors, field representatives, referrals and new
machine suppliers.
Precision grinding is increasing as a worldwide method of material removal
and material processing. Therefore, the Company believes that there may be an
increase in market growth and an increase in the need for automatic balancers.
Precision grinding is necessary in all major manufacturing areas such as the
automotive industry (camshafts, crankshafts, valves), bearings (roller and
tapered types), ceramics (precision shaping), electric motors (shafts), pumps
(shafts and turbines), aircraft (engine parts), and general manufacturing.
The Company's business is conducted with many customers located throughout
the world. Examples of some of the more well known of these include Black &
Decker, Briggs and Stratton, Caterpillar Inc., Daewoo International Corp., Eaton
Corporation, Ford Motor Company, General Electric Corp., General Motors,
Ingersoll Rand, Sumitomo Heavy Industries, Texas Instruments, The Timken
Company, Torrington, TRW Automotive Components and Westinghouse Electric Corp.
The acquisition of SHS has added additional balancer designs to the
Company's worldwide product line. The SHS internal spindle balancers and ring
balancers add to the total balancer package available from the Company. These
proven designs, along with the original water balancer, allow Schmitt to broaden
its machine applications. The Company is now developing additional electronic
controllers that will operate all Schmitt, including SHS, balancers from a
single electronic controller.
In Fiscal 1995, 1996 and 1997, net sales of the Company's balancing
products totaled $4,414,832, $4,801,151 and $6,488,348, respectively. Net sales
of balancing products accounted for 100% of the Company's revenue in
Fiscal 1995, 68% in Fiscal 1996 and 61% in Fiscal 1997. See Note 9 to
Consolidated Financial Statements.
COMPETITION. Management believes that the SBS System is the only fully
automatic balancing system marketed in the world. All other competitive
balancing products require special setup and training or calibration to the
specific machine. The Company believes that the SBS System is currently the only
balancing product on the market that fits all machines with wheel sizes from 6
to 48 inches in diameter and spindle rpm of 500 through 7,500.
Competitive products include European manufacturers building water
balancers and electromechanical balancers similar to the SBS System. Water
balancers are currently priced at about 1.5 times the level of the SBS System
because of expensive plumbing and water chambers machined into the wheel hub.
The machines are disassembled and parts remachined or replaced within the
spindle assembly, a process that takes from one to two days. The system is
"tuned" or "calibrated" to the machine by a factory service technician.
Although water systems are unable to balance at low rpm, they work at mid- and
high-speeds when properly monitored by regularly cleaning filters and checking
clearance of water jets. This technology is the oldest in the market and is
employed in the SHS-installed systems. After the acquisition of SHS in December
1996, the Company considers European electromechanical balancers to be the its
major competition due to their established base in Europe.
Electromechanical balancers similar to the SBS System are produced by
several European companies, located primarily in Switzerland, Germany, Spain and
Italy. These European balancers have
4
<PAGE>
deficiencies in electronics which render them less effective in solving
essential balancing requirements. They cannot achieve the consistent low
balance levels obtained by the SBS System and cannot operate effectively at 500
rpm (low speed) or at 7,500 rpm (high speed). In addition, these balancers have
inferior brush and cable assemblies which cause down time and high maintenance.
None of these companies can compete effectively with the Company in providing
mounting adapters for all grinding machines.
The SBS System list price is $7,800 worldwide. Water balancers produced by
German companies other than SHS are priced at $11,000 to $15,000, and the
electromechanical systems are priced at $8,000 to $10,000 worldwide. Market
surveys by management indicate that customers perceive values of an automatic
balancer to approximately $8,000; therefore, Company pricing is geared to
obtaining a dominant market position and meeting competitive supplier prices.
The market strategy is to establish the SBS System as the dominant product with
the best quality, reliability and performance and superior economic value.
SCHMITT MEASUREMENT SYSTEMS, INC.
HISTORICAL BACKGROUND. SMS manufactures and markets a line of laser-based,
precision measurement systems. In addition, SMS operates a precision light
scatter measurement laboratory which is utilized by third-party equipment
manufacturers and others.
Light scatter technology involves using lasers, optics and detectors to
throw a beam of light on a material sample and recording its
reflection/transmission. Analysis of light scatter information can determine
material characteristics such as surface roughness and defects, without
introducing contaminants and causing changes to the tested material.
In May 1995, the Company relocated TMA (now SMS) assets and equipment to
its Portland, Oregon facility. Three employees were relocated and three
part-time former TMA employees remained in Montana to assist with sales and
marketing activities.
SMS PRODUCTS. The principal products of SMS are laser-based measurement
products and technology that can be applied to both military and industrial
markets. Historically, TMA (now SMS) did not pursue industrial markets but
instead concentrated on military markets. The Company believes that this
strategy was a significant contributing factor in the failure of TMA to achieve
profitable operations.
The Company believes that the patents, patent applications, trademarks and
other proprietary technology acquired with TMA can be successfully refocused
into industrial markets, including electronics, computer disk manufacturers and
flat-panel display manufacturers.
The Company is developing a product review and marketing plan. Over the
long term, the Company expects SMS products to add to sales and profitability of
the Company. During Fiscal 1996, net sales of SMS products totaled $2,278,977
or 32% of the Company's total revenue. During Fiscal 1997, net sales of SMS
products totaled $4,390,499 or 49% of the Company's total revenue. See Note 9
to Consolidated Financial Statements.
SMS operates three businesses: a light-scatter measurement laboratory,
laser-based light-scatter measurement products and other laser alignment
products. SMS provides a highly advanced, extremely precise measurement
services laboratory to a wide variety of industrial and commercial businesses,
using advanced laser, light scatter technology.
5
<PAGE>
The laboratory uses three SMS CASI Scatterometers for measuring surface
roughness. The true value of the laboratory is not only its extremely precise
measurement capability but also that the item being tested is not altered,
touched or destroyed. Thus, the laboratory is widely used by the semiconductor
and computer hard disk industries, as well as manufacturers of critical optical
components in aerospace and defense systems. Customers of the laboratory have
included Aerojet, AT&T Bell Labs, Eastman Kodak, General Electric, IBM, NASA and
dozens of other industrial companies, universities and government agencies.
The three SMS CASI Scatterometers in the laboratory are angle-resolved BRDF
measurement instruments providing customers with precise roughness measurements
of optical surfaces, diffuse materials, semiconductor wafers, magnetic storage
media, precision-machined surfaces, as well as surfaces affecting the cosmetic
appearance of consumer products. A Scatterometer uses ultraviolet or infrared
laser light as a nondestructive probe to measure surface quality, optical
performance, smoothness, appearance, defects and contamination on a wide variety
of materials.
The sample is mounted on stages capable of moving bidirectionally and/or in
rotation. The incident angle can be set anywhere up to an 85DEG. angle from
surface normal. The detector sweeps around the sample in the incident plane
measuring scattered and specular light. During the scan, the computer controls
gain, filter and aperture changes through user-defined parameters. The
instrument background is measured separately and can be compared with the sample
data.
The CASI Analysis Software simplifies analysis of scatter data. BRDF
values are used to calculate total integrated scatter, PSD and RMS roughness.
Annotated results print on the HP PaintJet printer as viewgraphs or
publication-ready figures.
The laboratory generated approximately 10% of SMS's total revenue during
Fiscal 1996 and 9% during Fiscal 1997. Total revenue for this business is
expected to rise modestly in the future while representing a smaller percentage
of SMS's business. Use of the laboratory, leading to orders for SMS's
laser-based light scatter measurement products by its customers, represents the
best marketing channel for SMS's current and future products. Existing products
(such as the uScan and the Model 2002 alignment laser system) and products
being developed in conjunction with the measurement services laboratory are
being marketed to a variety of industrial customers.
The uScan System consists of a hand-held control unit, an interchangeable
measurement head and a separate charging unit. To perform a measurement, the
operator places the measurement head on the objective area and presses the
button. Each measurement takes less than five seconds. The results are
displayed and stored in system memory. The uScan can store 700 measurements in
255 files and provides the capability to program pass/fail criteria. Software
is available for control, analysis and file conversion. From a single
measurement, a user can determine RMS surface roughness, reflectance and scatter
light levels (BRDF) on flat or curved surfaces under any lighting conditions.
The Auto-Collimating Alignment Laser System - Model 2002 is an extremely
accurate laser alignment system. The incorporation of a solid-state laser diode
provides increased beam stability and eliminates warm-up time. A new unique TMA
See-Thru target design completely eliminates beam displacement and power loss.
The addition of an operator selectable auto-collimating feature provides one arc
second accuracy over a large angular range. A microprocessor automates system
configuration. A new bus interconnect reduces setup time and allows up to seven
operator selectable targets, reducing time required to perform measurements. A
complete Model 2002 system consists of an auto-collimating laser, power supply,
digital display, See-Thru and end targets, carrying case and cable assemblies.
6
<PAGE>
The Company intends to introduce a new product, a Dual Texture Measurement
machine called the DTM-2000, in the first half of Fiscal 1998. Using the
Company's patented non-contact light scatter process of surface measurement, the
automated DTM-2000 provides for measurements on both sides of computer hard
disks at 1,200 disks per hour at a measurement range of 2 angstroms to
200 angstroms.
BUSINESS AND MARKETING STRATEGY
MARKETING. The Company designs, assembles and markets all of its products.
Its operations are divided into a number of different areas. The production
organization, which is responsible for all assembly, purchasing and production
engineering, is directed by the Vice President of Operations. The Product
Marketing Division is responsible for the sale of SBS System products. This
division is managed by the President/CEO and five Marketing Managers. Four of
the Marketing Managers are responsible for domestic sales. The fifth Marketing
Manager is responsible for sales in mainland China, Japan and Korea. The
President/CEO is responsible for sales in both eastern and western Europe and
also oversees the efforts of the five Marketing Managers. The technical
services division is responsible for providing technical support to customers
and is managed by the Vice President of Operations. In addition, there is a
research and development group which is supervised directly by the President/CEO
and the Vice President of Operations.
The Company markets and sells the SBS System in a variety of ways. First,
the Company uses the conventional channels provided by independent
manufacturer's representatives and distributors. There are currently 25
individuals and/or organizations in the United States acting in one of these
capacities. Compensation comes from commissions which are paid only upon
completion of a sale and payment by the customer. The amount paid to the
selling person or entity varies between 10% (for independent sales agents) and
15% (for distributors) of the sales amount.
Second, trade shows represent a significant amount of marketing/sales
effort. These events are held throughout the world and have proven to be
excellent sources of business for the Company. A representative from the
Company, usually one of the marketing managers and/or Wayne A. Case, attends
these events along with local Company representatives. These individuals attend
a display booth that features professional products, an SBS System demonstration
stand, product literature, and technical literature. Representatives from all
facets of the market to which the Company directs its sales efforts attend these
trade shows.
Third, original equipment manufacturers often include the SBS System on the
machine tools which they produce. Users thus purchase the SBS System
concurrently with the machine tools. The SBS Systems are also often installed
by machine builders prior to displaying their own machine tools at various trade
shows. These samples often become endorsements that prove to be beneficial to
the Company's sales efforts.
In the United States, most products are shipped directly to customers from
the Company's distribution center in Portland, Oregon. Where the Company has
distributors, the product is shipped to the distributor, who in turn pays the
Company directly and then delivers and installs the product for the end user.
Western European distribution to customers is handled by shipping the product
directly from the Company's Portland headquarters to the end users.
The acquisition of SMS (formerly TMA) has resulted in revision of marketing
strategy of both the balancer business and the new measurement products. The
Company is evaluating all products acquired through the acquisition of TMA and
evaluating existing measurement product and balancing product distributors and
agents to determine the most efficient mix.
7
<PAGE>
MANUFACTURING. The Company does not use any unique sources of supply or
raw materials in its products for either SBS System balancing products or SMS
measurement products. Essential electronic components used are available in
large quantities from various suppliers. These electronic components are
assembled into the SBS System and SMS electronic control units to meet the
Company's quality and assembly standards. Company-owned software and firmware
are coupled with the electronic components to provide the basis of the Company's
various electronic control units. The Company believes several sources of
supplies exist for all electronic components and assembly work that is used in
its electronic control system. The Company's primary outside supplier of
electronic assembly is Bell Industries of Portland, Oregon, a custom supplier of
assembled electronic products for several Pacific Northwest companies. In the
event of supply problems, the Company feels two or three alternatives could be
developed within 30 days to supplement or replace Bell Industries.
Mechanical parts for the Company's SBS System and SMS products are produced
to the customers' drawings and specifications by local high quality CNC machine
shops. Several such CNC machine shops exist in the local area, and the Company
is not dependent on any one supplier of mechanical components. Principal
suppliers of components for the Company's products include MacKay Manufacturing
of Spokane, Washington; OEM Manufacturing of Corvallis, Oregon; Eagle Industries
of Newberg, Oregon; and Forest City Gear of Roscoe, Illinois.
The Company uses in-house skilled assemblers to construct and test vendor-
supplied components. Component inventory of finished vendor-supplied parts is
held on the Company property to assure adequate flow of parts to meet customer
order requirements. Inventory is monitored by a computer control system
designed to assure timely re-ordering of components.
In-house personnel assemble various products and test all finished
components before placing them in the finished goods inventory. Finished goods
inventory is maintained via computer to assure timely shipment and service to
customers. All customer shipments are from the finished goods inventory.
In November 1996, the Company's Quality Control Program received full
ISO-9001 certification.
The Company has established an SBS System customer base consisting of over
250 companies. TMA (now SMS) had over 200 customers, many of whom are also
purchasers of the Company's SBS System balancing products. The major customers
of TMA have been retained by the Company.
In Fiscal 1997, approximately 22% of the Company's total revenue was
attributable to a single customer of SMS. In Fiscal 1997, SMS entered into a
strategic partnership with this entity to distribute systems manufactured by SMS
for an initial term of one year. No other customer accounted for more than 10%
of the Company's total revenue in Fiscal 1997.
PATENTS AND TRADEMARKS
SBS SYSTEM PRODUCTS. The Company manufactures its products under copyright
protection in the U.S. for all electronic board designs which are also further
protected with encapsulation of the finished product to protect the Company's
technologies and software. U.S. Patent No. 4951526 was issued to the Company in
1990 and covers both the new ring balancer and the existing SBS Balance Heads
that the Company markets to the grinding industries.
The trademark "SBS" is a registered trademark of the Company and is affixed
to all products and literature created in the Company's balance product line.
8
<PAGE>
The Company pays no licenses or royalties on its balancing technologies and
has offered no concessions, labor agreements or royalty agreements on its
balancing product lines.
SMS PRODUCTS. The trademark "SMS" is a registered trademark of the Company
and is affixed to all products and literature created in the Company's
measurement product line.
The following tables include information about patents and trademarks
issued and patents pending with respect to SMS products.
SMS PATENTS ISSUED
- --------------------------------------------------------------------------------
5196906 1993 uScan: surface measurement
5416590 1995 GapMaster: gap and mismatch
5596403 1997 Pitch, yaw of a single laser beam system and method
of measuring angular position
5625451 1997 Methods and apparatus for characterizing a surface
SMS TRADEMARKS
- --------------------------------------------------------------------------------
uScan 1992 Surface measurement system
CASI 1993 Surface inspection system
Accunet 1994 Distance measurement NET
FMS 1994 Finished measurement systems
Surf-Map 1995 Surface inspection process
SMS 1995 Schmitt Measurement System
PRODUCT DEVELOPMENT
Prior to Fiscal 1996, research and development activities of the Company
were focused on the enhancement of the existing product lines for balancers and
on development work toward the new ring balance product. Since its May 1995
acquisition of TMA, the Company has expended significant efforts evaluating
existing and potential new products for the light-scatter precision measurement
market.
During Fiscal 1994 and 1995, the Company developed the Ring Balancer, a
dynamic balancer shaped as a "ring" that allows the device to be fitted "around"
a rotating shaft rather than on the end of a shaft where the current Company
products are mounted. This mounting and configuration will allow the Company to
apply its ring balancers to virtually any rotating device such as fans,
turbines, large motors, centrifuges and other industrial machine tools.
During the last several years, the Company has developed several new major
offshoot products of its balancing technologies to widen market opportunities.
All costs associated with these developments have been borne directly by the
Company's customers, with minimal development costs to the Company. Research
and development costs for existing product line enhancements are treated as
product improvements and expenses, including costs toward the new Ring Balancer.
During Fiscal 1997, the Company continued to develop new balancing products
and expended considerable time and effort in evaluating and developing new
laser-based measurement products. During Fiscal 1997, the Company developed and
began marketing the TMS-2000W and TMS-3000W.
During Fiscal 1995, 1996 and 1997, the Company's research and development
expense totaled $15,843, $0 and $55,800, respectively.
9
<PAGE>
INTERNATIONAL SALES
The Company's sales in the last three fiscal years have been generated from
the following geographic areas:
NORTH AMERICA EUROPE ASIA
----------------- -------------- ------------
Fiscal 1997 $ 8,664,819 $ 1,601,359 $ 275,794
Fiscal 1996 6,298,170 442,470 339,488
Fiscal 1995 4,018,498 220,741 175,593
BACKLOG
The Company does not generally track backlog. Normally, orders are shipped
within several weeks after receipt unless the customer requests otherwise.
EMPLOYEES
As of July 15, 1997, the Company employed 47 individuals worldwide on a
full-time basis. There were no regular part-time employees. None of the
Company's employees is covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's design and assembly facilities and executive offices are
located in a 7,500-square foot building in Portland, Oregon owned by the
Company; a 33,000-square foot facility, located across the street from the
executive offices and also owned by the Company, houses SMS's operations.
Schmitt Europe Ltd. occupies a 1,893-square foot facility in Coventry, England
pursuant to a five-year lease beginning February 1, 1997 with a basic monthly
rent of L1,708 (approximately $2,785 as of August 1, 1997). SHS occupies a
5,194-square foot facility in Alsbach, Germany pursuant to a five-year lease
beginning February 1, 1997 with a basic monthly rent of DM 5,442 (approximately
$2,916 as of August 1, 1997). The Company believes its facilities are adequate
to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
In May 1995, the Company acquired TMA Technologies Inc. ("TMA") which
became a wholly owned subsidiary of the Company and was renamed Schmitt
Measurement Systems, Inc. ("SMS"). During the third quarter of Fiscal 1996, the
Company and SMS filed an action against Robert C. Mathis and Marvin H. Ball,
former officers and directors of TMA, in the U.S. District Court for the
District of Montana. The lawsuit claims that these individuals violated their
fiduciary duties to TMA, the Company and participants in a TMA royalty pool.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter ended May 31, 1997.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since May 5, 1997, the Company's Common Stock has been traded on the Nasdaq
National Market; prior to that it was traded on the Nasdaq--Small Cap Market.
The Common Stock is traded under the symbol "SMIT."
The following tables set forth the high and low sales prices of the
Company's Common Stock as reported on the Nasdaq--Small Cap Market and on the
Nasdaq National Market (since May 5, 1997) for the periods indicated.
YEAR ENDED MAY 31, 1996 HIGH LOW
------------------------- ------------ -----------
First Quarter $ 2.88 $ 2.13
Second Quarter $ 5.13 $ 2.63
Third Quarter $ 5.63 $ 3.88
Fourth Quarter $ 14.75 $ 5.25
YEAR ENDED MAY 31, 1997 HIGH LOW
------------------------- ------------ -----------
First Quarter $ 13.75 $ 8.88
Second Quarter $ 11.00 $ 7.88
Third Quarter $ 11.00 $ 7.88
Fourth Quarter $ 10.25 $ 7.00
As of July 15, 1997, there were 7,081,889 shares of Common Stock
outstanding held by approximately 130 holders of record. The number of holders
does not include individual participants in security position listings; the
Company believes that there are more than 2,500 individual holders of shares of
Common Stock.
The Company has not paid any dividends on its Common Stock since June 1994.
The Company's current policy is to retain earnings to finance the Company's
business. Future dividends will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
acquisition plans and plans for expansion and any other factors that the
Company's Board of Directors deems relevant. The Company has no present
intention of paying dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is included in the Company's Annual
Report to Shareholders for the fiscal year ended May 31, 1997 under the heading
"Selected Financial Data" and is incorporated herein by reference.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is included in the Company's Annual
Report to Shareholders for the fiscal year ended May 31, 1997 under the heading
"Management's Discussion and Analysis" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent auditors, financial statements and other
information required by this Item are included in the Company's Annual Report to
the Shareholders for the fiscal year ended May 31, 1997 and are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
In July 1997, the Company replaced its independent accountant, Moss Adams
LLP, with Price Waterhouse LLP. This decision was made by the Audit Committee
of the Company's Board of Directors.
Moss Adams LLP's reports for the fiscal years ended May 31, 1996 and
May 31, 1997 did not contain an adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles. During Fiscal 1996 and 1997 and until Moss Adams LLP's dismissal,
there were no disagreements with Moss Adams LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope of
procedure, which disagreements, if not resolved to the satisfaction of Moss
Adams LLP, would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under
the heading "Proposals 2(a)-(b): Election of Directors" and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
heading "Executive Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
heading "Principal Shareholders" and is incorporated herein by reference.
12
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
heading "Certain Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. FINANCIAL STATEMENTS:
Annual Report
Page Number
-----------------
A. Consolidated Balance Sheets as of May 31,
1997 and May 31, 1996. . . . . . . . . . . 10
B. Consolidated Statements of Income for each of
the years ended May 31, 1997, May 31, 1996
and May 31, 1995 . . . . . . . . . . . . . 11
C. Consolidated Statements of Cash Flows for
each of the years ended May 31, 1997,
May 31, 1996 and May 31, 1995. . . . . . . 12
D. Consolidated Statements of Changes in
Stockholders' Equity for each of the years
ended May 31, 1997, May 31, 1996 and
May 31, 1995 . . . . . . . . . . . . . . . 14
E. Notes to Financial Statements. . . . . . . 15
F. Independent Auditors' Report . . . . . . . 23
2. FINANCIAL STATEMENT SCHEDULES:. . . . . . . . .
All financial statement schedules are omitted
either because they are not applicable, not
required, or the required information is
included in the financial statements or notes
thereto.
3. EXHIBITS: See Index to Exhibits on page 15.
(b) Reports on Form 8-K: None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Wayne A. Case
-----------------------------------
Wayne A. Case
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Date: August 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on August 27, 1997.
SIGNATURE TITLE
- --------- -----
/s/ Wayne A. Case Chairman of the Board, President and Chief
- ------------------------------ Executive Officer
Wayne A. Case (Principal Executive Officer)
/s/ Annie Windsor
- ------------------------------ Chief Financial Officer
Annie Windsor (Principal Financial and Accounting Officer)
/s/ Maynard E. Brown
- ------------------------------ Director
Maynard E. Brown
/s/ David M. Hudson
- ------------------------------ Director
David M. Hudson
/s/ Trevor Nelson
- ------------------------------ Director
Trevor Nelson
/s/ Dennis T. Pixton
- ------------------------------ Director
Dennis T. Pixton
/s/ John A. Rupp
- ------------------------------ Director
John A. Rupp
14
<PAGE>
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
- ---------- --------------------------------------------------------------------
3(i) Restated Articles of Incorporation of Schmitt Industries, Inc. (the
"Company"). Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-4, File No. 33-98226,
as amended.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3(ii) Restated Bylaws of the Company. Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-4,
File No. 33-98226, as amended. . . . . . . . . . . . . . . . . . . .
10.1 Schmitt Industries, Inc. Stock Option Plan. Incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1996.. . . . . . . . . .
10.2 Agreement dated April 21, 1995 between TMA Technologies, Inc. and
the Company. Incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996.. . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3 Distribution Agreement dated September 18, 1996 between Sloan
Technology Inc. and the Company. Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended November 30, 1996.. . . . . . . . . . . .
10.4 Sales Contract dated November 19, 1996 between Herr Dirk Pfeil,
receiver of Hofmann Maschinenbau GmbH, and Schmitt Hofmann Systems
GmbH. Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
February 28, 1997. . . . . . . . . . . . . . . . . . . . . . . . . .
*11.1 Schedule of computation of net income per share. . . . . . . . . . .
*13.1 Annual Report to Shareholders of Schmitt Industries, Inc. for
fiscal year ended May 31, 1997.. . . . . . . . . . . . . . . . . . .
*21.1 Subsidiaries of Schmitt Industries, Inc. . . . . . . . . . . . . . .
*27.1 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . . .
- ------------------------------
* Filed herewith
15
<PAGE>
EXHIBIT 11.1
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
SCHMITT INDUSTRIES, INC.
YEARS ENDED MAY 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
PRIMARY
Net income for primary income per
common share $1,724,728 $1,217,253 $248,805
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares
outstanding during the year 7,031,449 6,887,975 6,886,889
Add: common equivalent shares
(determined using the "treasury stock
method") representing shares issuable
upon exercise of employee stock
options 530,295 528,738 228,905
---------- ---------- ----------
Weighted average number of shares
used in calculation of primary
income per share 7,561,744 7,416,713 7,115,794
---------- ---------- ----------
---------- ---------- ----------
Primary income per common share $.23 $.16 $.04
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED
Net income for fully diluted net
income per share $1,724,728 $1,217,253 $248,805
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares
used in calculating primary income
per common share 7,561,744 7,416,713 7,115,794
Add (deduct) incremental
shares representing:
Shares issuable upon exercise of
stock options included in primary
calculation above (530,295) (528,738) (228,905)
Shares issuable upon exercise of
stock options based on year-end
market price 529,463 557,374 228,905
---------- ---------- ----------
Weighted average number of shares
used in calculation of fully
diluted income per share 7,560,912 7,445,349 7,115,794
---------- ---------- ----------
---------- ---------- ----------
Fully diluted income per common
share $.23 $.16 $.04
---------- ---------- ----------
---------- ---------- ----------
16
<PAGE>
ABOUT SCHMITT INDUSTRIES
Schmitt Industries designs, manufactures and markets two distinct types of
precision measurement systems. Schmitt's automatic balancing systems for
rotating machinery are used by many of the world's leading automotive, aerospace
and bearing manufacturers. The second of Schmitt products, non-contact
measurement laser systems, are targeted to high-tech manufacturers worldwide and
ensure that silicon wafers and computer hard disks meet exacting standards for
surface microroughness.
The company's mission is to provide the best possible products and quality
for its customers, to provide challenging and rewarding employee opportunities
and to provide the greatest possible return to shareholders.
Schmitt recorded fiscal 1997 revenues of $10,541,972. The company currently
employs 47 people in three international locations: Alsbach, Germany; Coventry,
England; and at its corporate headquarters in Portland, Oregon.
Company shares are traded on the NASDAQ National Market under the
symbol, SMIT.
FINANCIAL HIGHLIGHTS
IN THOUSANDS OF DOLLARS EXCEPT PER SHARE INFORMATION
1997 1996 1995 1994 1993
REVENUES . . . . . . . . . . . $ 10,542 $ 7,080 $ 4,415 $ 2,575 $ 1,674
OPERATING INCOME . . . . . . . 2,296 1,509 697 313 262
NET INCOME AFTER TAXES . . . . 1,725 1,217 249 182 262
NET INCOME PER SHARE . . . . . $ .23 $ .16 $ .04 $ .03 $ .03
SHAREHOLDER'S EQUITY . . . . . 7,429 4,887 3,464 3,215 1,877
[GRAPH]
<PAGE>
SCHMIT INDUSTRIES, INC.
----------------------------
PAGE 1
TO OUR SHAREHOLDERS
[PICTURE]
"WE'RE GUIDED BY THE REALIZATION THAT WE CANNOT SELL ANYTHING TO ANYONE UNLESS
WE OFFER ECONOMIC VALUE. WE'RE COMMITTED TO PROVIDING THE BEST METHODS OF
MEASUREMENT AND BALANCING SOLUTIONS AT THE LOWEST COST TO OUR CUSTOMERS."
ON THIS, OUR TENTH ANNIVERSARY, I am especially pleased to address the
shareholders of Schmitt Industries, and report on the many positive events that
transpired during fiscal 1997. Once again, our sales and net profits made strong
gains. Since we introduced the first Schmitt product in 1987, sales have grown
steadily each year.
However, impressive numbers on the balance sheet are merely a part of the
overall success story during the past year. I'd like to share with you two
noteworthy developments that point to continued success into the 21st century.
The first is the acquisition of a former competitor-Hofmann Maschinenbau, a
balancer company in Germany. This new division-Schmitt Hofmann Systems (SHS)-
adds breadth and depth to our product line and provides a springboard from which
to build a sales and support staff in Europe. We are building inventory at SHS,
and as in the U.S., this is vital to market penetration. Also during this past
fiscal year, we formed Schmitt Europe, Ltd. (SEL) as a sales and service outlet
in the United Kingdom. The market potential in Europe is enormous.
The second development of note is the continued accelerated growth of
Schmitt Measurement Systems (SMS), which produces non-contact laser measurement
tools for the high technology industry. We acquired this laser technology in May
1995, and the scope of the metrology market continues to expand, exceeding even
our most optimistic expectations.
Of course, the traditional mainstay of Schmitt Industries is our balancer
systems for grinding machines, which has earned a dominant position in the U.S.
market, and we further solidified that position during fiscal 1997.
Our company is asset-rich and virtually debt-free, which enables us to
aggressively research new products, study additional acquisition opportunities
and seek strategic partnerships both in the U.S. and abroad. We are also happy
to report that we achieved ISO-9001 quality certification in November 1996,
reinforcing our reputation for superior product quality in the marketplace.
In closing, let me take this opportunity to thank our many employees for
their loyalty and dedicated efforts. We look forward to the challenges and
opportunities ahead, and we appreciate the continued support of our worldwide
investors.
Today, more than ever, we are poised for the future.
/s/ Wayne A. Case
Wayne A. Case
President and Chairman of the Board
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 2
PRECISELY ALIGNED WITH THE NEEDS OF THE MARKETPLACE.
"SCHMITT'S BALANCING EQUIPMENT KEEPS PRECISION MACHINE TOOLS OPERATING AT PEAK
EFFICIENCY, WHILE ITS INNOVATIVE LASER MEASUREMENT SYSTEMS ENSURE THAT SILICON
WAFERS AND COMPUTER HARD DISKS MEET EXACTING STANDARDS."
Schmitt's common sense approach to business is building precision products
driven by market needs. This philosophy has resulted in steady, consistent
growth year after year.
From the very beginning, we identified customer requirements. We conducted
in-depth surveys and analyses, got our hands dirty, and probed for answers. As a
result of this exacting research, we uncovered an emerging market for in-process
balancing of grinding machines in industrial manufacturing.
Ten years ago, there was no simple, reliable solution for balancing
grinding machines. In addition, customer service was sorely lacking. Long waits
for balancing equipment was the rule, not the exception.
We decided to design automatic balancers as an inexpensive add-on.
Furthermore, we planned to make these balancers reliable, durable, and simple to
operate. This ease of operation was a unique differentiator and immediately set
us apart from other balancing products. We also made our entire system modular,
making it easy to replace parts, minimizing downtime.
During each of the past two years, Schmitt has made a key acquisition that
promises positive long-term benefits. In 1995 we acquired TMA Technologies for
its leading-edge laser technology. This acquisition has resulted in an entirely
new company division, Schmitt Measurement Systems (SMS). The flagship product of
the SMS division is the TMS 2000, which uses reflected laser light to measure
the surface smoothness of substrates, the basic material for silicon computer
wafers, as well as blanks for hard disks. In its first two years of operation,
sales within SMS have been dramatic and analysts project continued strong
growth.
Our second acquisition occurred during this last fiscal year. Hofmann
Maschinenbau, a German balancing company and a former competitor, is now
1987
- --------------------------------------------------------------------------------
1987
- ----
SB-2000 SBS Controller introduced as Schmitt initial balancer product
Sales of $364,196
1988
- -----
The Torrington Company and Bryant Grinder Company established as major
customers
Two employees
1989
- ----
Schmitt introduced advanced trouble free power transmission technology
Sales of $348,374
1990
- ----
SB-2500 SBS advanced Controller introduced into balancer market
Four employees
1991
- ----
Caterpillar Incorporated, Allied Signal Aerospace Co., and Federal Mogul
Corporation established as major customers
Seven employees
1992
- -----
Mercedes Benz and Dana Corporation established as major customers
Introduced the SB-3500 SBS multi-channel controller and the
SB-2400 SBS advanced remote panel electronic controller
Sales of $1,066,015
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 3
ACQUIRING NEW TECHNOLOGY TO LEVERAGE NEW OPPORTUNITIES.
PROVIDING ECONOMIC VALUE DRIVES OUR EVERY EFFORT.
a wholly-owned subsidiary named Schmitt Hofmann Systems (SHS). We will continue
to manufacture and sell SHS hydrokompensers, internal spindle balancers and ring
balancers to complement the Schmitt Balancing System (SBS) product line.
We intend to address the European market with the same care and precision
we bring to other worldwide markets. A major goal in Europe is building a
sizable inventory of SHS balancer parts and systems, so we can provide rapid
delivery of them. The European community has communicated a need for top-flight
customer service and we intend to meet this challenge via Schmitt Europe, Ltd.
(SEL) and SHS. SEL has also been awarded the exclusive sales and service
contract for the large installed base of CEMB parts-balancing machines in the
United Kingdom.
We're guided by the realization that we cannot sell anything to anyone
unless we offer economic value. With that uppermost in mind, we're committed to
providing the best methods of measurement and process control at the lowest cost
to our customers. We plan to continually provide our customers with the best
possible products on an economic value basis.
In fact, economic value drives every one of our product development
programs. We develop products for one overriding reason: because the
marketplace demands them.
Equally important, we've assembled a work force with the same care that we
design our products. Consequently, we have an incredibly low turnover rate, due
to our selective employment practices, combined with attractive compensation
packages. We nurture employee involvement by encouraging them to participate in
company decisions, and we reward productivity and dedication accordingly.
1997
- --------------------------------------------------------------------------------
1993
- ----
GENERAL MOTORS CORPORATION AND FORD MOTOR COMPANY ESTABLISHED AS MAJOR
CUSTOMERS
PURCHASED AND MOVED INTO PRESENT CORPORATE OFFICE
ELEVEN EMPLOYEES
1994
- ----
BOEING COMPANY AND BRIGGS AND STRATTON ESTABLISHED AS MAJOR CUSTOMERS
PURCHASED AND REMODELED THE SMS BUILDING
TWELVE EMPLOYEES
1995
- ----
BEGAN TRADING ON NASDAQ SMALL CAP UNDER TRADE SYMBOL SMIT
ACQUIRED TMA, RENAMED IT SMS AND MOVED THE BUSINESS TO PORTLAND
TMS 2000 INTRODUCED AS SMS MAJOR NEW PRODUCT
SALES OF $4,414,832
1996
- ----
SCHMITT INDUSTRIES CONSOLIDATED FROM CANADA TO OREGON
OPENED SCHMITT EUROPE LTD.
ACQUIRED SCHMITT HOFMANN SYSTEMS GMBH IN GERMANY
TWENTY-ONE EMPLOYEES
1997
- ----
SCHMITT STOCK UPGRADED FROM SMALL CAP TO NASDAQ NATIONAL MARKET
FORTY-SEVEN EMPLOYEES WORLDWIDE
RECORD SALES OF $10,541,972
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 4
SCHMITT BALANCING SYSTEMS
ACCURATELY BALANCING GRINDING WHEELS IS CRITICAL TO THE MANUFACTURING PROCESS. A
BALANCED WHEEL PRODUCES SUPERIOR ROUNDNESS OR, IN THE CASE OF SURFACE GRINDERS,
SUPERIOR FLATNESS. JUST A SMALL AMOUNT (A FEW MICRONS*) OF WHEEL IMBALANCE
DAMAGES THE FORM AND SURFACE OF A GROUND WORKPIECE. IN PRODUCTION GRINDING,
CLOSE AND REPEATABLE TOLERANCE OF FINISHED PARTS, PRODUCTION EFFICIENCY, PART
FINISH, AND OVERALL CONSISTENT QUALITY ARE CRITICAL TO SUCCESS.
SCHMITT MANUFACTURES THE SBS AND SHS DYNAMIC BALANCING SYSTEMS FOR GRINDING
MACHINES. OUR BALANCERS PROVIDE FAR MORE ACCURACY AND RELIABILITY THAN COMPETING
PRODUCTS AND SELL FOR LESS THAN COMPETING PRODUCTS, FACTORS WHICH HAVE ENABLED
THE SBS AND SHS BALANCERS TO BECOME THE STANDARD OF THE INDUSTRY.
* A MEASUREMENT UNIT EQUAL TO FORTY MILLIONTHS OF AN INCH.
HOW SMALL IS A MICRON?
- -----------------------
/ / A HUMAN HAIR IS ABOUT 50 MICRONS IN DIAMETER.
/ / GRASS GROWS AT ABOUT 5 MICRONS A MINUTE.
/ / ONE MICRON IS TO A DROP OF WATER, AS A TEASPOON OF WATER IS TO AN OLYMPIC
SWIMMING POOL.
SCHMITT OFFERS A PRODUCT FOR EVERY BALANCER NEED
WE HAVE GROWN OUR BUSINESS LARGELY ON CUSTOMER SERVICE AND OUR ABILITY TO
PROVIDE OVERNIGHT DELIVERY OF BALANCER SYSTEMS AND REPLACEMENT PARTS. BUT IT ALL
BEGINS WITH A SOUND PRODUCT.
SCHMITT'S SBS AND SHS SYSTEMS ARE PRODUCTION-PROVEN IN MORE THAN 15,000
MAJOR MANUFACTURING INSTALLATIONS WORLDWIDE, INCLUDING MANY OF THE LARGEST
MANUFACTURING FIRMS. THESE INCLUDE THE BOEING COMPANY, GENERAL MOTORS, FORD
MOTOR COMPANY, TIMKEN BEARINGS, TORRINGTON BEARINGS, MERCEDES BENZ, VOLKSWAGEN
AG, VOLVO, TRW DEUTSCHLAND GMBH, AUDI AG, AND BMW BAYERISCHE MOTOREN WERKE AG.
IN ADDITION, MANY MANUFACTURERS INCORPORATE THE SBS AND SHS DYNAMIC BALANCING
EQUIPMENT AS OEM EQUIPMENT ON GRINDING MACHINES.
THE SBS SYSTEM OFFERS A 10-YEAR SUCCESSFUL TRACK RECORD AND REQUIRES
LITTLE OR NO MODIFICATIONS TO THE GRINDING MACHINE. THIS IS ESPECIALLY
IMPORTANT, SINCE MANY OTHER SYSTEMS REQUIRE EXTENSIVE MACHINING OF THE
SPINDLE, HUB OR GUARDING. WE PROVIDE PRE-ENGINEERED BALANCING SOLUTIONS FOR
MORE THAN 600 DIFFERENT GRINDING MACHINES, AND THE LIST CONTINUES TO GROW.
(INCIDENTALLY, THE SHS SYSTEM HAS 30 YEARS OF PROVEN SUCCESS, PRIMARILY IN
THE EUROPEAN MARKET.)
THE SBS AND SHS MECHANICAL SYSTEMS ARE FULLY AUTOMATED AND OPERATE ON A
PRINCIPLE OF MASS COMPENSATION FOR WHEEL IMBALANCE. A SENSOR MONITORS SPINDLE
MOVEMENT OR VIBRATION, THEN SENDS A SIGNAL TO THE COMPUTER CONTROL UNIT. THE
CONTROL UNIT FILTERS THE SIGNAL FROM THE VIBRATION SENSOR BY RPM. THE
MECHANICAL BALANCE HEADS CONTAIN TWO MOVEABLE WEIGHTS, EACH DRIVEN BY
ELECTRIC MOTORS WITHIN THE BALANCER. THE CONTROL UNIT MOVES THE ECCENTRIC
WEIGHTS IN THE DIRECTION THAT REDUCES THE SIGNAL AMPLITUDE. WHEN THE
VIBRATION IS LOWEST, THE BALANCE CYCLE IS COMPLETE.
THE SHS HYDROKOMPENSER ALSO WORKS ON MASS COMPENSATION TO CORRECT WHEEL
IMBALANCE. WATER IS INJECTED INTO CHAMBERS WHILE THE BALANCE DEVICE IS
ATTACHED TO THE GRINDER. ANY IMBALANCE IN THE GRINDING WHEEL IS OFFSET BY
WATER DISTRIBUTED VIA THE COMPUTER CONTROLLER.
THESE SYSTEMS PROVIDE MONITORING AND CONTROL OF A VERY CRUCIAL
MANUFACTURING PROCESS VARIABLE, WHICH DIRECTLY AFFECTS QUALITY AND EFFICIENCY.
IN THIS AGE OF EVER-INCREASING MANUFACTURING REQUIREMENTS AND STATISTICAL
CONTROL REQUIREMENTS, THESE TYPES OF BALANCING TOOLS ARE INVALUABLE.
SCHMITT SBS BALANCER PRODUCTS ARE MANUFACTURED IN THE U.S. AND CONFORM TO
STRINGENT ISO-9001 QUALITY AND MEASUREMENT STANDARDS.
CONTROLS AND SENSORS
SCHMITT'S COMPUTER CONTROL FEATURES A RELIABLE CIRCUIT BOARD DESIGN IN A RUGGED
SEALED ENCLOSURE. THE SENSOR MONITORS VIBRATION LEVELS WITH PRECISE ACCURACY.
THE CONTROLS AND SENSORS ARE THE BACKBONE OF THE SCHMITT BALANCER PRODUCT LINE.
MANY OPTIONS ARE AVAILABLE.
EXTERNAL BALANCERS AND ADAPTERS
THE SCHMITT EXTERNAL BALANCER/ADAPTER IS EASY TO INSTALL AND FITS A WIDE RANGE
OF STANDARD U.S. APPLICATIONS.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 5
[PICTURE]
INTERNAL BALANCERS
THE IDEAL CHOICE FOR MANY GRINDING MACHINE OEMS. PRODUCED IN EUROPE
BY SHS.
[PICTURE]
RING BALANCERS
THE SCHMITT RING BALANCER FEATURES A HIGHLY FLEXIBLE DESIGN. IT'S A HIGHLY
LOGICAL WAY TO ADDRESS ADDITIONAL MARKET OPPORTUNITIES.
[PICTURE]
HYDROKOMPENSER
THE HYDROKOMPENSER IS THE ORIGINAL AUTOMATIC BALANCE SYSTEM, DESIGNED FOR
HIGH-SPEED APPLICATIONS. THE SYSTEM IS MANUFACTURED IN EUROPE BY SCHMITT HOFMANN
SYSTEMS.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 6
SCHMITT MEASUREMENT SYSTEMS
Over the last 25 years, the computing power of microprocessor chips has
increased almost 50 percent each year. Within 10 years, experts predict that
these chips will contain between 300 million and 500 million transistors,
compared with 3.5 million transistors found in today's chips.
To address these precision needs of the high technology industry, the
Schmitt SMS division manufactures a series of non-contact laser measurement
devices which measure surface roughness (commonly referred to as microroughness)
in angstroms.* Manufacturers of hard disks, hard disk drives, and silicon wafers
are major customers of Schmitt laser products.
* A MEASUREMENT UNIT EQUAL TO FOUR BILLIONTHS OF AN INCH.
SCHMITT OFFERS A WIDE RANGE OF NON-CONTACT SURFACE DEVICES.
All smooth surfaces possess some degree of microroughness, even if only at the
atomic level. In high-technology products, roughness arises from the
manufacturing process, which may involve chemical deposition, grinding,
polishing, etching or several other commonly used production techniques.
Non-contact surface measurement devices can quantify surface micro-
roughness with rapid, accurate, repeatable and non-destructive measurements.
Schmitt's TMS 2000W and TMS 3000W laser devices measure in tenths of
angstroms and can provide precise microroughness measurements of the surface of
silicon wafers. Silicon wafers are carefully cut and polished in order to
provide the substrate or base upon which a computer or memory chip is produced.
Silicon wafer manufacturing processes must be performed in a very precise
and controlled manner, and the precision of these processes is greatly dependent
on the beginning surface roughness of the silicon wafer. The industry continues
to demand more precision from its manufacturing process, in order to continually
increase the performance and capacity of the chips being produced.
Computer hard disks require exact manufacturing control and they have a
narrow tolerance band for acceptable roughness. This is because the
HOW SMALL IS AN ANGSTROM?
- -------------------------
/ / The point of a needle is about 1 million angstroms in diameter.
/ / Fingernails grow at about 50 angstroms per second.
/ / One angstrom is to a grain of sand, as a child's wading pool is to the
Atlantic Ocean.
[GRAPHIC]
TMS 2000
The SMS TMS 2000 provides fast, accurate, repeatable microroughness measurements
for computer hard disk manufacturers. The system quadruples production
throughput, compared to other testing devices.
[GRAPHIC]
TMS 2000W/3000W
The SMS TMS 2000W/3000W provides fast, accurate, repeatable measurements for
manufacturers of silicon wafers, computer chips and memory devices. The system
provides measurements to a few hundredths of an angstrom, a level unachievable
by other testing devices.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 7
read/write head of the operating disk drive is designed to "fly" over the
surface of the rotating disk. A cushion of air is all that prevents contact
between the head and the disk surface. This air cushion is generated when the
rough surface of the rotating disk pulls air under the read/write head.
If the surface of the disk is too smooth, the read/write head may stick, or
bind to the surface of the disk, causing damage. If the disk is too rough, the
head will fly too far from the disk surface, causing a reduction in data density
or storage capacity on the drive. So, as you can see, control of surface
microroughness on the disk is critical for manufacturers. The TMS 2000 from
Schmitt more than meets this challenge and several versions of this device are
available. Customers include Komag, Akashic, Western Digital, and Seagate.
Each version measures microroughness via scattered light technology, and the
products are marketed worldwide through a strategic partnership with Veeco
Surface Metrology. The TMS 2000W and the TMS 3000W are specifically designed for
the silicon wafer market. Customers include Mitsubishi Siltec, SEH America, and
Material Silicon.
The SMS hand-held scatterometer also measures surface roughness and spatial
frequency data from scattered light distribution. The device is portable, making
it ideal for in-process testing of optical surfaces, in-situ testing of
precision ground surfaces, and quality control of finished parts.
Our customers can also count on Schmitt for comprehensive and responsive
measurement services. We maintain the world's most powerful light scatter
laboratory, featuring eight lasers that operate at 20 different wavelengths, and
we offer complete light scatter analysis for industrial, military and space
optics applications. We routinely do measurements for such industry giants as
NASA, Lockheed Martin and Raytheon.
All Schmitt non-contact surface measurement products are manufactured in
the U.S. and conform to stringent ISO-9001 quality and measurement standards.
[GRAPHIC]
ALMS LASER
The Model 2002 is the world's most accurate laser alignment system. A
solid-state laser diode increases beam stability and its unique See-Thru target
design eliminates beam displacement and power loss. An excellent tool for
precision tasks such as aircraft assembly.
[GRAPHIC]
MICRO-SCAN
The Schmitt (micro)Scan is a portable, hand held device that provides
microroughness measurements at the sample in seconds. From a single measurment,
a user can determine surface roughness, reflectance and scattered light levels.
[GRAPHIC]
COMPREHENSIVE MEASUREMENT SERVICES
Schmitt's powerful light scatter lab uses 8 lasers operating at 20 different
wavelengths.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 8
FOCUSED IN THE PRESENT, WHILE ENVISIONING THE FUTURE.
"DRIVEN BY STRONG GROWTH IN MANUFACTURING, ESPECIALLY IN THE COMPUTER INDUSTRY,
SCHMITT'S SALES AND EARNINGS ARE EXPECTED TO GROW BETWEEN 25 PERCENT AND 50
PERCENT PER YEAR THROUGH THE END OF THIS DECADE."
STRATEGIES FOR LONG-TERM SUCCESS.
"OUR TMS 2000 IS THE FASTEST AND MOST ACCURATE NON-CONTACT MEASUREMENT SYSTEM IN
THE WORLD."
Schmitt prides itself on staying well-positioned to respond to the marketplace.
We understand our markets and we provide precise and exact solutions to industry
demands.
One major strength is our high levels of inventory within our balancer
product line. Because of the stable design of our balancers, we are able to
stock in excess of $1 million of inventory, which enables overnight delivery of
spare parts and entire systems. We also offer the finest balancer products in
terms of cost, performance and reliability.
Today we control 60 percent of the existing U.S. balancer market for
grinding machines. Yet, as U.S. industry continues to expand and as
manufacturing requirements become stricter, the need for grinders and balancer
products increases. Therefore, we are far from reaching the market saturation
point.
Applying balancers to grinding machines is merely the beginning. We have
our eyes firmly set on future markets, specifically, applying balancers to other
rotating industrial machinery, including turbines, fans, generators. Tremendous
opportunity exists to capitalize on these additional related markets. This
clearly defined direction remains an important aspect of our original company
charter.
We have created a climate within the market the precludes many would-be
competitors from trying to challenge us. We are very formidable, by virtue of
our solid market share, as well as our $8.5 million in assets and our ongoing
decision to not incur debt.
We temper careful planning with timely strategic moves. The acquisitions of
Schmitt Measurement Systems (SMS) (formerly TMA Technologies) in May 1995 and
Schmitt Hofmann Systems (SHS) (formerly Hofmann Maschinenbau) in December 1996
are prime examples of our ability to be bold.
We anticipate that the demand for SMS laser products like the TMS 2000 will
increase dramatically over the next several years. Originally, we intended to
complement our balancer line with laser devices that measured surfaces on ground
parts. During our market research, we discovered the need for surface
measurement tools in the high technology industry. Silicon wafers and computer
hard disks are two major product categories that require precise surface
measurements and we are targeting both of those categories.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 9
TAPPING THE POTENTIAL OF INTERNATIONAL MARKETS.
"WE ARE POSITIONED TO CONTINUE THE GROWTH WE HAVE EXPERIENCED OVER THE LAST TEN
YEARS."
Market demands are ever increasing for non-contact laser measurement
products, and this will spur even more research and development. Several
additional SMS products are already underway. The potential is very exciting,
and we project that our overall company growth will be greatly accentuated by
SMS sales.
In our SMS division, we are outsourcing our marketing and customer service
capabilities. We've accomplished this through a strategic partnership with Veeco
Surface Metrology (NASDAQ:VECO), which acts as our sales and customer service
agents for our TMS laser measurement products.
Veeco provides worldwide sales, service and technical support and gives us
instant viability in all major worldwide markets, including inroads to many new
prospects. As we develop additional metrology products, we will benefit from
Veeco's expertise to gain footholds in other new markets.
With the addition of SHS and Schmitt Europe, Ltd. (SEL), we can utilize
time-proven strategies to increase our market share in Europe. Building
inventory at SHS is our first step, in conjunction with developing our European
marketing and customer support staff. Providing responsive service will be a
major priority. We will also benefit from the well-established customer base and
market presence that Hofmann brings to Schmitt Industries.
Over the years in the U.S., we've developed a sales and marketing support
staff for the balancer market. The dynamics of the industry have enabled us to
add staff in an evolutionary process over time. We plan to increase our staff in
a similar manner in Europe.
We will also continue to seek highly qualified personnel and bring them
into the company where appropriate. At the end of fiscal 1997, we employed 47
people worldwide, including 19 in Europe and 28 in the U.S.
A final note: The average U.S. manufacturing firm strives to achieve 40
percent gross profit. At Schmitt Industries, we try to average 60 percent gross
profit on every manufactured product. More often than not, we meet that goal as
a result of out efficient designs, precise manufacturing, extraordinary service
and superior product quality.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 10
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED MAY 31, 1997 AND 1996
1997 1996
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 504,662 $ 508,240
Trading securities . . . . . . . . . . . . . . . . . 168,000 145,600
Accounts receivable. . . . . . . . . . . . . . . . . 2,725,512 1,411,805
Inventories. . . . . . . . . . . . . . . . . . . . . 2,479,820 1,781,331
Prepaid expenses . . . . . . . . . . . . . . . . . . 30,668 15,906
Deferred tax asset . . . . . . . . . . . . . . . . . 136,000 169,729
- --------------------------------------------------------------------------------
Total current assets . . . . . . . . . . . . . . 6,044,662 4,032,611
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . . . . 299,000 299,000
Building and leasehold improvements. . . . . . . . . 1,025,868 834,850
Furniture, fixtures, and equipment . . . . . . . . . 760,596 556,245
Vehicles . . . . . . . . . . . . . . . . . . . . . . 146,299 104,126
- --------------------------------------------------------------------------------
2,231,763 1,794,221
Less accumulated depreciation and amortization . . . 530,587 312,189
- --------------------------------------------------------------------------------
1,701,176 1,482,032
- --------------------------------------------------------------------------------
OTHER ASSETS
Long-term deferred tax asset . . . . . . . . . . . . 679,000 398,904
Marketing rights, net of accumulated amortization
of $735,914 and $663,521 at May 31, 1997
and 1996, respectively . . . . . . . . . . . . . . -- 72,393
Other assets . . . . . . . . . . . . . . . . . . . . 90,415 --
- --------------------------------------------------------------------------------
769,415 471,297
- --------------------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $8,515,253 $5,985,940
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . $ 530,667 $ 344,828
Accrued royalties. . . . . . . . . . . . . . . . . . 131,983 84,157
Accrued commissions. . . . . . . . . . . . . . . . . 111,996 133,382
Other accrued liabilities. . . . . . . . . . . . . . 62,832 27,074
Income taxes payable . . . . . . . . . . . . . . . . 68,563 294,749
Current portion of long-term debt. . . . . . . . . . 29,061 40,346
- --------------------------------------------------------------------------------
Total current liabilities. . . . . . . . . . . . 935,102 924,536
- --------------------------------------------------------------------------------
LONG-TERM DEBT, net of current portion . . . . . . . 150,922 174,532
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized 7,081,889 and 6,918,139 shares
issued and outstanding at May 31, 1997 and
1996, respectively . . . . . . . . . . . . . . . . 4,952,411 4,098,512
Cumulative foreign exchange translation adjustment . (36,270) --
Retained earnings. . . . . . . . . . . . . . . . . . 2,513,088 788,360
- --------------------------------------------------------------------------------
Total stockholders' equity . . . . . . . . . . . 7,429,229 4,886,872
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . $8,515,253 $5,985,940
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 11
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . . . . . $10,541,972 $7,080,128 $4,414,832
COST OF SALES. . . . . . . . . . . . . . . . . . . . 3,875,790 2,547,054 1,656,462
Gross profit . . . . . . . . . . . . . . . . . . 6,666,182 4,533,074 2,758,370
GENERAL, ADMINISTRATIVE, AND
SALES EXPENSE. . . . . . . . . . . . . . . . . . . 4,314,271 3,023,916 2,045,117
RESEARCH AND DEVELOPMENT EXPENSE . . . . . . . . . . 55,800 -- 15,843
- -----------------------------------------------------------------------------------------------
Operating expenses . . . . . . . . . . . . . . . 4,370,071 3,023,916 2,060,960
- -----------------------------------------------------------------------------------------------
Operating income . . . . . . . . . . . . . . . . . . 2,296,111 1,509,158 697,410
- -----------------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE
Interest expense . . . . . . . . . . . . . . . . . (16,273) (45,130) (26,756)
Interest income. . . . . . . . . . . . . . . . . . 25,007 27,853 56,978
Gain on sale of assets . . . . . . . . . . . . . . -- -- 2,512
Loss on write down of assets . . . . . . . . . . . -- -- (333,382)
Unrealized gain (loss) on trading securities . . . 22,400 (61,222) --
Miscellaneous income . . . . . . . . . . . . . . . 25,430 16,132 18,813
- -----------------------------------------------------------------------------------------------
Other income and expense . . . . . . . . . . . 56,564 (62,367) (281,835)
- -----------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES . . . . . . . . . . . . . . . . . . . 2,352,675 1,446,791 415,575
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . 627,947 229,538 166,770
- -----------------------------------------------------------------------------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 1,724,728 $1,217,253 $ 248,805
- -----------------------------------------------------------------------------------------------
Net income per common share and common
share equivalent . . . . . . . . . . . . . . . . . $ 0.23 $ 0.16 $ 0.04
- -----------------------------------------------------------------------------------------------
Weighted average number of common shares
and common share equivalents outstanding . . . . . 7,420,921 7,416,713 7,115,794
- -----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS RELATING TO
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . $1,724,728 $1,217,253 $ 248,805
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . 264,440 196,021 77,211
Amortization . . . . . . . . . . . . . . . . . . . . . 72,393 189,103 148,325
Unrealized (gain) loss on trading securities . . . . . (22,400) 61,222 --
Deferred taxes . . . . . . . . . . . . . . . . . . . . 198,426 (30,822) 51,000
Write-down of marketing rights . . . . . . . . . . . . -- -- 333,382
Gain on sale of assets . . . . . . . . . . . . . . . . -- -- (2,512)
(Increase) decrease in:
Trading securities . . . . . . . . . . . . . . . . . . -- 150,000 (356,822)
Accounts receivable. . . . . . . . . . . . . . . . . . (1,313,707) (444,024) (210,472)
Inventories. . . . . . . . . . . . . . . . . . . . . . (235,556) (613,626) (482,485)
Prepaid expenses . . . . . . . . . . . . . . . . . . . (14,762) (4,004) 2,213
Notes receivable . . . . . . . . . . . . . . . . . . . -- 10,000 (10,000)
Income taxes receivable. . . . . . . . . . . . . . . . -- 50,000 (50,000)
Other assets . . . . . . . . . . . . . . . . . . . . . (90,415) (121,907) 372
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . 185,839 (96,215) 59,492
Accrued liabilities, royalties, and commissions. . . . 62,198 126,784 52,048
Income taxes payable . . . . . . . . . . . . . . . . . (226,186) 294,749 (168,228)
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . . . 604,998 984,534 (307,671)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Purchase of property and equipment . . . . . . . . . . . (461,168) (406,675) (561,799)
Proceeds from disposal of equipment. . . . . . . . . . . 10,651 -- 5,000
Acquisition of assets of Hofmann
Maschinenbau GmbH. . . . . . . . . . . . . . . . . . . (496,000)
Acquisition of TMA Technologies, Inc.. . . . . . . . . . -- -- (530,240)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities. . . . . . . (946,517) (406,675) (1,087,039)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Net decrease in short-term debt. . . . . . . . . . . . . -- -- (200,000)
Repayment of long-term debt. . . . . . . . . . . . . . . (34,895) (69,131) --
Long-term repayments -- mortgage . . . . . . . . . . . . -- (233,920) (38,202)
Net change in lease payable. . . . . . . . . . . . . . . -- -- (4,431)
Dividends paid . . . . . . . . . . . . . . . . . . . . . -- -- (99,630)
Exercise of stock options. . . . . . . . . . . . . . . . 409,106 92,188 --
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities. . . . . . . . . . . . . . . 374,211 (210,863) (342,263)
- ----------------------------------------------------------------------------------------------------
Effect of foreign exchange translation on cash . . . . . (36,270) -- --
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 13
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MAY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . $ (3,578) $ 366,996 $(1,736,973)
CASH, beginning of year. . . . . . . . . . . . . . . . . 508,240 141,244 1,878,217
- ----------------------------------------------------------------------------------------------------
CASH, end of year. . . . . . . . . . . . . . . . . . . . $ 504,662 $ 508,240 $ 141,244
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for interest . . . . . . . . $ 15,272 $ 45,130 $ 26,756
Cash paid during the period for income taxes . . . . . . $ 450,871 $ 11,600 $ 321,997
SUPPLEMENTAL SCHEDULE
OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Discount associated with long-term debt. . . . . . . . . $ -- $ (78,085)
Reduction of goodwill. . . . . . . . . . . . . . . . . . $(215,973) $(424,011)
Income tax benefit of stock options exercised. . . . . . $(444,793) $(113,800)
On December 2, 1996, Schmitt Hofmann Systems
GmbH acquired certain assets of
Hofmann Maschinenbau GmbH
The purchase price consisted of the following:
Inventories. . . . . . . . . . . . . . . . . . . . . $ 462,933
Equipment. . . . . . . . . . . . . . . . . . . . . . 33,067
- ----------------------------------------------------------------------------------------------------
Net cash paid to acquire certain assets
of Hofmann MaschinenbauGmbH . . . . . . . . . . . $ 496,000
- ----------------------------------------------------------------------------------------------------
On May 23, 1995, Schmitt Industries, Inc.,
acquired TMA Technologies, Inc.
The purchase price consisted of the following:
Accounts receivable. . . . . . . . . . . . . . . . . $ 208,574
Inventories. . . . . . . . . . . . . . . . . . . . . 72,342
Property, plant, and equipment . . . . . . . . . . . 306,714
Intellectual property. . . . . . . . . . . . . . . . 45,527
Goodwill . . . . . . . . . . . . . . . . . . . . . . 433,839
Accounts payable . . . . . . . . . . . . . . . . . . (174,662)
Long-term debt . . . . . . . . . . . . . . . . . . . (362,094)
- ----------------------------------------------------------------------------------------------------
Net cash paid to acquire TMA
Technologies, Inc.. . . . . . . . . . . . . . . . $ 530,240
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 14
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1997, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Cumulative
Foreign Retained
Exchange Earnings
Translation (Accumulated
Shares Amount Adjustment Deficit) Total
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
May 31, 1994. . . . . . . . . . . . . 6,886,889 $3,892,524 $ -- $ (677,698) $3,214,826
Net income for the year. . . . . . . . . -- -- -- 248,805 248,805
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
May 31, 1995. . . . . . . . . . . . . 6,886,889 3,892,524 -- (428,893) 3,463,631
Stock options exercised. . . . . . . . . 31,250 92,188 -- -- 92,188
Income tax benefit from exercise of
stock options. . . . . . . . . . . . . -- 113,800 -- -- 113,800
Net income . . . . . . . . . . . . . . . -- -- -- 1,217,253 1,217,253
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
May 31, 1996. . . . . . . . . . . . . 6,918,139 4,098,512 -- 788,360 4,886,872
Cumulative foreign exchange translation
adjustment . . . . . . . . . . . . . . -- -- (36,270) -- (36,270)
Stock options exercised. . . . . . . . . 163,750 409,106 -- -- 409,106
Income tax benefit from exercise of
stock options. . . . . . . . . . . . . -- 444,793 -- -- 444,793
Net income . . . . . . . . . . . . . . . -- -- -- 1,724,728 1,724,728
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
May 31, 1997. . . . . . . . . . . . . 7,081,889 $4,952,411 $(36,270) $2,513,088 $7,429,229
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 15
NOTE 1
- --------------------
ORGANIZATION AND NATURE OF OPERATIONS
Schmitt Industries, Inc. (the Company) is engaged in the design, assembly,
marketing, and distribution of electronic and mechanical components for
industrial products and laser measurement systems throughout the United States,
the Far East, and Europe.
On May 23, 1995, the Company acquired TMA Technologies, Inc. As of June
1, 1995, the name of this company was changed to Schmitt Measurement Systems,
Inc. On June 13, 1996, the Company established Schmitt Europe, Ltd. In
addition, on December 2, 1996, the Company established Schmitt Hofmann
Systems GmbH which acquired certain assets of the grinding wheel balance
division of Hofmann Maschinenbau GmbH.
The consolidated financial statements as of May 31, 1997 and 1996, and
for the years ended May 31, 1997, 1996, and 1995, include those of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the preparation of the
consolidated financial statements.
NOTE 2
- --------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined on the
average cost basis. As of May 31, 1997 and 1996, inventories consisted of raw
materials ($1,165,554 and $931,095, respectively), work-in-process ($258,912 and
$122,403, respectively), and finished goods ($1,055,354 and $727,833,
respectively).
DEPRECIATION
Depreciation is computed by the straight-line method over estimated useful lives
of three to seven years for furniture, fixtures, and equipment; three years for
vehicles; and twenty-five years for building and leasehold improvements.
MARKETING RIGHTS
The capitalized costs of marketing rights are recorded at cost
and are amortized on a straight-line basis over five to ten years.
CAPITAL STOCK
The Company follows the practice of recording amounts received upon the exercise
of options by crediting common stock. No charges are reflected in the
consolidated statements of income as a result of the grant or exercise of stock
options. The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. This benefit also results in an increase
in common stock.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentration of
credit risk are trade accounts receivable. Credit terms generally include a
discount of 1-1/2% if the invoice is paid within ten days, with the net amount
payable in 30 days. No allowance for doubtful accounts is considered necessary.
For the year ended May 31, 1997, approximately 22% of consolidated sales
were made to one entity. During the year ended May 31, 1997, the Company entered
into a strategic partnership with this entity to distribute systems manufactured
by Schmitt Measurement Systems, Inc., for an initial term of one year. For the
year ended May 31, 1996, approximately 15.4% of consolidated sales were made to
one customer. For the year ended May 31, 1995, sales to a single customer did
not exceed 10% of consolidated sales.
INCOME TAXES
The Company follows the asset and liability method of accounting for income
taxes whereby deferred tax assets and liabilities are recognized for the future
tax consequences of differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense
when incurred.
TRADING SECURITIES
Trading securities consist of common stock and are stated at fair value, which
is estimated based on quoted market prices. Unrealized gains or losses are
included in other income and expense.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 16
NOTE 2 (CONTINUED)
- --------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
FOREIGN CURRENCY TRANSLATION
Financial statements for the Company's subsidiaries outside
the United States are translated into U.S. dollars at year-end exchange rates
for assets and liabilities and weighted average exchange rates for income and
expenses. The resulting translation adjustments are recorded as a separate
component of stockholders' equity titled "Cumulative Foreign Exchange
Translation Adjustment."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments approximate their fair values at
May 31, 1997 and 1996. The fair market value of long-term debt approximates
carrying amounts based on discounted cash flow analyses.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform with current year presentations.
NOTE 3
- --------------------
COMPANY ACQUISITIONS
On May 23, 1995, in a business combination accounted for as a purchase, the
Company acquired TMA Technologies, Inc., which designs, manufactures, and
markets optical quality assurance instruments. Subsequent to this
acquisition, the Company changed the name of TMA Technologies, Inc., to
Schmitt Measurement Systems, Inc., and moved the operations to Portland,
Oregon.
In transactions related to the acquisition, the Company established a
royalty pool and has vested each shareholder and debt holder an interest in the
royalty pool equal to the amount actually invested by shareholders or loaned by
debt holders including interest payable through March 31, 1995. The royalty pool
is funded at 5% of net sales (defined as gross sales less returns, allowances,
and sales commissions) of Schmitt Measurement Systems, Inc.'s, products and
future derivative products developed by Schmitt Industries, Inc., which utilize
these technologies. As part of the royalty pool agreement, each of the former
shareholders and debt holders released TMA Technologies, Inc., and Schmitt
Industries, Inc., for any claims with regard to the acquisition except their
rights to future royalties. However, as a result of an action filed in U.S.
Bankruptcy Court, the Company is required to purchase the interests of three
debt holders as follows: April 29, 1996 - $91,068; March 29, 1997 - $54,640;
March 29, 1998 - $43,713; March 29, 1999 - $34,970; March 20, 2000 - $139,880.
The outstanding balance at May 31, 1997 and 1996, based on the present value of
the debt, discounted at 8% per annum, was $179,983 and $214,878, respectively,
of which $29,061 and $40,346, respectively, was classified as current.
On June 13, 1996, the Company established Schmitt Europe, Ltd. The cost of
establishing this subsidiary is immaterial to these consolidated financial
statements. On December 2, 1996, the Company established Schmitt Hofmann Systems
GmbH in Germany with an initial capitalization of $67,000. Schmitt Hofmann
Systems GmbH purchased certain assets of the grinding wheel balancer division of
Hofmann Maschinenbau GmbH with a loan from the Company for $496,000.
Both companies established during the year ended May 31, 1997, operate in
the mechanical components segment of the business. The results of both companies
are included in the accompanying consolidated financial statements since their
respective dates of acquisition.
NOTE 4
- --------------------
LINE OF CREDIT
The Company has an unsecured short-term line of credit agreement with Wells
Fargo Bank, to a maximum of $1,500,000. The line is guaranteed by the
Company's wholly-owned subsidiary, Schmitt Measurement Systems, Inc. Interest
is payable at the bank's prime rate, fully floating. No balance was
outstanding as of May 31, 1997. The existing credit arrangement succeeds a
line of credit of $250,000 for which there was no outstanding balance at May
31, 1996.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 17
NOTE 5
- --------------------
INCOME TAXES
Deferred income taxes are recognized for all significant temporary differences
between the tax and financial accounting bases of assets and liabilities. The
classification of the resulting deferred tax assets and liabilities is based
upon the classification of the related balance sheet asset or liability. The
deferred tax asset results principally from net operating loss carryforwards,
exercise of stock options, and temporary differences in the expense recognition
of certain accounts. The deferred tax liability results from using accelerated
depreciation methods
for tax purposes.
The principal components of the deferred tax assets and liabilities are as
follows:
MAY 31, 1997 1996
- ----------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward. . . . . $1,314,979 $1,591,229
Exercise of stock options. . . . . . . . 95,337 113,800
Inventory capitalization . . . . . . . . 16,760 39,066
Other asset capitalization . . . . . . . 28,936 --
Other deferred assets. . . . . . . . . . 81,988 16,863
- ----------------------------------------------------------------------------
1,538,000 1,760,958
Valuation allowance. . . . . . . . . . . (675,000) (1,167,218)
- ----------------------------------------------------------------------------
$ 863,000 $ 593,740
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . $ 48,000 $ 25,107
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Net deferred tax assets. . . . . . . . . $ 815,000 $ 568,633
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Net deferred tax assets are as follows:
MAY 31, 1997 1996
- ----------------------------------------------------------------------------
Current. . . . . . . . . . . . . . . . . $ 136,000 $ 169,729
Long-term. . . . . . . . . . . . . . . . 679,000 398,904
- ----------------------------------------------------------------------------
$ 815,000 $ 568,633
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Through the acquisition of Schmitt Measurement Systems, Inc., the Company
acquired net operating loss carryforwards in the amount of $5,507,768. These
carryforwards expire in the years 2002 through 2010 and as of May 31, 1997,
$3,867,084 of the net operating loss carryforwards remain. A valuation allowance
is provided when it is more likely than not that some portion or all of the
operating loss will not be realized. Since all of the net operating losses
associated with the acquisition might not be realized, a valuation allowance was
established for the entire balance at May 31, 1995. As of May 31, 1997 and 1996,
the valuation allowance has been reduced since it is more likely than not that
some portion of the operating loss will be realized.
The income tax provision is as follows:
YEARS ENDED MAY 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Current. . . . . . . . . . . . . . $ 826,373 $ 198,716 $ 217,770
Deferred . . . . . . . . . . . . . (198,426) 30,822 (51,000)
Provision for
income taxes . . . . . . . . . . $ 627,947 $ 229,538 $ 166,770
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
FOR THE YEARS ENDED MAY 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Federal income taxes
at statutory rate . . . . . . . $799,909 $491,909 $141,296
State income taxes,
net of federal
income tax benefit . . . . . . . 102,482 31,511 18,103
Change in deferred tax
valuation allowance . . . . . . (492,218) (705,424) --
Reduction of goodwill
associated with the
acquisition of
Schmitt Measurement
Systems, Inc.. . . . . . . . . . 215,973 424,011 --
Other. . . . . . . . . . . . . . . 1,801 (12,469) 7,371
- -------------------------------------------------------------------------------
Provision for
income taxes . . . . . . . . . . $627,947 $229,538 $166,770
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Effective tax rate . . . . . . . . 27% 16% 40%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE 6
- --------------------
EMPLOYEE BENEFIT PLANS
The Company adopted the Schmitt Industries, Inc. 401(k) Profit Sharing Plan &
Trust effective June 1, 1996. Employees must meet certain age and service
requirements to be eligible. Participants may contribute up to 15% of their
eligible compensation which is matched by the Company. The Company may
further make either a profit sharing contribution or a discretionary
contribution. Contributions made to this Plan during the year ended May 31,
1997, were $116,248.
The Company adopted a Simplified Employee Pension Plan (SEP) during the
year ended May 31, 1993. All permanent employees were eligible to participate
once they met the age and length of employment requirements. Contributions
were $41,840, and $40,500, during the years ended May 31, 1996 and 1995,
respectively. The Plan was terminated effective May 31, 1996.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 18
NOTE 7
- --------------------
STOCK OPTIONS
Prior to 1995, the Company granted stock options to officers of the Company.
Stock options for up to 10% of the outstanding shares were eligible for grant
provided that the stock options for any one individual did not exceed 5% of the
issued and outstanding shares of common stock. The purchase price of the
optioned shares was equal to not less than the average closing price of the
Company's common stock for the ten trading days immediately preceding the grant
date of the stock options. The maximum term of each stock option did not exceed
five years and all options were vested and exercisable upon grant. The options
expire in the year 1999.
A 1995 Stock Option Plan was adopted by the Board of Directors on December
19, 1995. An option granted under the Plan may be either an incentive stock
option ("ISO"), or a nonstatutory stock option ("NSO"). ISOs may be granted
only to employees of the Company and are subject to certain limitations, in
addition to restrictions applicable to all stock options under the Plan. Options
not meeting these limitations will be treated as NSOs. Options granted under the
Plan are not exercisable until vested. Vesting is generally on a cumulative
basis over four years at 25% per year. This plan, which originally provided for
300,000 shares available for option, was amended during the year ended May 31,
1997, with the maximum number of available shares increased to 500,000. The
options expire in years 2006 and 2007.
The following summarizes the options outstanding as of May 31, 1997:
<TABLE>
<CAPTION>
COMBINED
OFFICERS' PLAN EMPLOYEES' PLAN PLANS
- -------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise Combined
Shares Price Shares Price Shares
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options under grant, May 31, 1995. . . . . . 614,500 $ 1.72 -- $ -- 614,500
Options granted in 1996. . . . . . . . . . . -- -- 295,000 5.83 295,000
Options exercised in 1996. . . . . . . . . . (18,750) $ 1.96 (12,500) $ 4.38 (31,250)
- -------------------------------------------------------------------------------------------------------------------------
Options under grant, May 31, 1996. . . . . . 595,750 $ 1.72 282,500 $ 5.83 878,250
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Options vested at May 31, 1996 . . . . . . . 595,750 70,625 666,375
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Options granted in 1997. . . . . . . . . . . -- -- 67,500 $ 5.83 67,500
Options exercised in 1997. . . . . . . . . . (110,000) $ 1.72 (53,750) $ 4.38 (163,750)
Options forfeited in 1997. . . . . . . . . . -- -- (14,000) -- (14,000)
- -------------------------------------------------------------------------------------------------------------------------
Options under grant, May 31, 1997. . . . . . 485,750 $ 1.72 282,250 $ 5.83 768,000
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Options vested at May 31, 1997 . . . . . . . 485,750 89,500 575,250
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1997 and
1996 consistent with the provisions of SFAS No. 123, the Company's pro forma
net income and earnings per share for the years ended May 31, 1997 and 1996,
would be $1,436,760 and $602,835, and $.19 and $.08, respectively.
The fair value of each option granted is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 0%; expected volatility of
51%; risk-free interest rate of 7.5%; and expected lives of 10 years.
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 19
NOTE 8
- --------------------
CONTINGENCY
The Company is party to a legal action initiated by a competitor alleging
wrongful misrepresentation of the competitor's product. The claim is considered,
by management and the Company's legal counsel, to be without merit. The extent
of potential liability, if any, cannot be estimated at this time.
NOTE 9
- --------------------
SEGMENTS OF BUSINESS
The Company operates principally in two segments of business; the manufacturing
of mechanical components for the machine tool industry, and the manufacturing of
laser measurement systems for the computer disk industry. The segment which
manufactures mechanical components for the machine tool industry reported net
sales of $6,488,348 for the year ended May 31, 1997, which includes export sales
of $1,153,033 and intersegment sales of $336,875. The segment which manufactures
laser measurement systems for the computer disk industry reported net sales of
$4,390,499 for the year ended May 31, 1997, which includes $25,658 of export
sales. The mechanical components segment and laser measurement segment had sales
of $4,801,151 and $2,278,977, respectively, for the year ended May 31, 1996,
which included no intersegment sales. The operations of the laser measurement
segment were immaterial for the year ended May 31, 1995.
Income from operations for the years ended May 31, 1997 and 1996, of the
mechanical components segment was $176,927 and $648,777, respectively. Income
from operations for the years ended May 31, 1997 and 1996, of the laser
measurement segment was $2,089,184 and $830,381, respectively. Consolidated
income from operations includes an adjustment of $30,000 for the elimination of
intercompany rent for the years ended May 31, 1997 and 1996. Identifiable assets
at May 31, 1997 and 1996, were $5,246,517 and $4,162,209, for the mechanical
components segment and $3,268,736 and $1,823,731 for the laser measurement
segment. Depreciation expense incurred during the years ending May 31, 1997 and
1996, by the mechanical components segment was $156,374 and $115,778,
respectively. The laser measurement segment incurred depreciation expense of
$108,066 and $80,243, for the years ended May 31, 1997 and 1996, respectively.
Amortization expense incurred during the years ending May 31, 1997 and 1996, by
the mechanical components segment was $72,393 and $91,756, respectively. The
laser measurement segment incurred amortization expense of $97,347 for the year
ended May 31, 1996. Capital expenditures for the years ended May 31, 1997 and
1996, were $297,998 and $317,861 by the mechanical components segment and
$163,170 and $88,814 by the laser measurement segment, respectively.
Income from operations represents sales less costs and operating expenses.
In computing income from operations, all overhead expenses have been allocated
to both industry segments as they are an integral part of profit recognition for
each segment. Identifiable assets by segment of business are those assets used
in the Company's operations in each segment. There are no unallocated Company
assets.
NOTE 10
- --------------------
EARNINGS PER SHARE
Earnings per share (EPS) were computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding for
the years ended May 31, 1997, 1996, and 1995. Common share equivalents
include the number of shares issuable on exercise of the outstanding options
less the number of shares that would have been purchased with the proceeds
from the exercise of the options based on the average price of common stock
during the year for primary net income per common share and the closing
market price of common stock for fully diluted net income per common share.
There is no difference between primary and fully diluted net income per share
calculations for the years ended May 31, 1997, 1996, and 1995.
In 1997, the Financial Accounting Standards board issued Statement No. 128,
"Earnings per Share," which modifies the way in which EPS is calculated and
disclosed for the years ending after December 15, 1997. Upon adoption of this
standard for the year ending May 31, 1998, the Company will disclose basic and
diluted EPS and will restate all prior period EPS data presented. The Company
does not anticipate this change will have a material impact on the calculation
of EPS.
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 industry and the
risk factors listed from time to time in the Company's SEC reports, including
but not limited to the Current Report in Form 8-K dated June 5, 1996.
Accordingly, actual results may differ, possibly materially, from the
predictions contained herein.
During fiscal 1997 the markets the Company serves continued to grow. The
Company has responded to this increased demand for its products by adding staff,
expanding facilities, increasing inventories and launching new products for both
the laser measurement markets and the mechanical balancer markets. As a result
of these changes by management, the Company's sales in fiscal 1997 grew 49% and
gross profit grew 47% from fiscal 1996. The Company expects product sales and
profitability to continue to grow in the immediate future. However, there can be
no assurance that the Company will continue to be profitable with increased
sales levels in future time periods.
Sales outside the United States accounted for approximately 20% of the
Company's revenues in each of the fiscal 1995,
1996 and 1997. Some foreign customers will purchase in their
own country's currencies, thereby imposing on the Company a currency risk. All
U.S. sales (80% of total sales) are in U.S. dollars and less than 10% of total
sales are in currencies other than U.S. dollars; as a result, currency
fluctuations have historically had little impact on revenue realization.
However, significant variations in the value of the U.S. dollar, relative to
currencies of countries in which the Company has significant competitors, can
impact future sales. The Company does not engage in currency hedging. In
addition, longer payment cycles of international sales can have a negative
impact on liquidity. The Company believes that international sales will
continue to grow in future periods.
[BAR CHART]
A substantial portion of the Company's revenues is derived from sales to
end users through selling agents and directly to builders of machine tools. For
fiscal 1996 and 1997, sales to a single customer did not exceed 10% of total
balancer revenues. In fiscal 1997 the Company entered into a strategic
partnership which appoints Veeco Instruments Inc. (NASDAQ: VECO) as its
exclusive sales and marketing agent for the TMS series products. As a result of
this agreement, 22% of consolidated fiscal 1997 sales were through Veeco. The
Company is dependent on the sales activities of its selling agents, and there
can be no assurance that these agents will continue to be successful in their
efforts to market the Company's products. The Company enjoys substantial repeat
business from a broad base of customers, but there can be no assurance that
these customers will continue to buy the Company's products in the future.
[BAR CHART]
Increased revenues during fiscal 1995, 1996 and 1997 principally have been
the result of increased volume of product shipments. Product improvements and
available features have resulted in modestly increased average product prices.
The Company operates in a highly competitive industry characterized by
increasingly rapid technological changes. The Company's competitive advantage
and future success are therefore dependent on its ability to develop new
products, to qualify these new products with its customers, to successfully
introduce these products to the marketplace on a timely basis, to commence
production to meet customer demands and to develop new markets in the industries
for its products and services. The successful introduction of new technology and
products is increasingly complex. If the Company is unable, for whatever reason,
to develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, its results of operations could be
adversely impacted.
RESULTS OF OPERATIONS
Sales in fiscal 1997 increased to $10,541,972 from $7,080,128 in fiscal 1996 and
$4,414,832 in fiscal 1995. The 49% increase in fiscal 1997 was driven by
across-the-board gains in orders from both domestic and international customers.
Management believes that the increase in sales resulted from new products,
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 21
improved marketing coverage, advertising and the weakening of competitors.
Additionally, SMS sales accounted for $4,364,841 of fiscal 1997 sales
compared with fiscal 1996 sales of $2,278,977.
The Company has enjoyed a high gross profit margin in excess of 60% on its
SBS Dynamic Balancing products and its SMS measurement products. Cost of sales
as a percentage of sales for fiscal 1995, 1996 and 1997 was 37.5%, 35.9% and
36.7%, respectively. The introduction of the TMS 2000 during the third quarter
of fiscal 1996 had a positive impact on sales and net earnings for fiscal 1996
and 1997. Management anticipates that cost of sales as a percentage of sales
will be similar in future time periods. Management expects that increasing costs
associated with expanding operations will continue to be more than offset by
increased revenue, although no assurances can be made that the Company will be
profitable or will generate increased sales.
General selling and administrative expenses as a percentage of net sales
were 41% in fiscal 1997, 43% in fiscal 1996, and 46% in fiscal 1995. During each
of these fiscal years, the Company increased spending in marketing and selling
programs to support the development of international markets, particularly in
the European and Asia-Pacific regions, and to increase the awareness of new
products. Administrative expenses have increased during each of the last three
fiscal years to support the Company's growth, improve information technology
capability and protect the Company's intellectual property rights.
The Company has had minor variable cost increases in periods of
increased sales; therefore, fixed costs have been in past years amortized
over an increasing sales revenue as unit sales of SBS and SMS products
increased. Even with two operating segments, management believes the
Company's cost of sales will not increase at the same rate that sales are
anticipated to increase in fiscal 1998, although there can be no such
assurance.
[BAR CHART]
Net income for fiscal 1997 rose to $1,724,728, a 42% increase over fiscal
1996 and 593% increase over fiscal 1995. Net income per share increased to $0.23
in fiscal 1997 from $0.16 in fiscal 1996 and $0.04 in fiscal 1995.
The Company's future operating results depend, to a considerable extent, on
its ability to maintain a competitive advantage in both the products and
services it provides. For this reason, the Company believes it is critical to
continue to make future investments in research and development to ensure the
flow of innovative, productive, high-quality products and support services.
Accordingly, the Company expects research and development expenses to continue
to increase in the immediate future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained very strong, with a ratio of current
assets to current liabilities of 6.5:1 at May 31, 1997, compared with 4.36:1 at
May 31, 1996. As of May 31, 1997, the Company had $672,662 in cash, and trading
securities, compared with $653,840 at May 31, 1996.
Accounts receivable have increased as revenue has increased. At May 31,
1997, accounts receivable totaled $2,725,512 compared with $1,411,805 at May 31,
1996 and $967,781 at May 31, 1995. At May 31, 1997, none of the Company's
accounts receivable were considered a doubtful collection. The Company generally
experiences a payment cycle of 30-80 days on invoices. Management believes its
credit policies and collection policies are effective and appropriate for the
marketplace that it serves and the Company has had no bad debt write-offs since
its inception in 1986. There can be no assurance that the Company's collection
procedures will continue to be successful.
Working capital increased from $2,148,919 at May 31, 1995 to $3,108,075 at
May 31, 1996, and to $5,109,560 at May 31, 1997. The Company spent $530,240
during fiscal 1995 on the acquisition of SMS. Fiscal 1996 capital expenditures
totaled $88,814 for SMS. During fiscal 1997 the Company spent $496,000 to
acquire certain assets of a former European competitor, Hofmann Maschinenbau
GmbH (SHS). Additionally the Company spent $461,168 on the purchase of worldwide
corporate assets of property and
[BAR CHART]
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 22
equipment in fiscal 1997 compared with $406,675 in fiscal 1996. Although the
Company has no current material commitments for capital expenditures, product
development to extend SBS products to new markets and to bring SMS products to
advanced commercial status is expected to result in increased capital
expenditures for equipment in fiscal 1998.
The Company maintains levels of inventory sufficient to satisfy normal
customer demands, plus an increasing short term delivery requirement for a
majority of its products. Additionally, inventories are periodically adjusted
according to management's forecast for future business activity. Management
believes its ability to provide prompt deliveries gives it a competitive
advantage for certain sales. It is expected that current inventory levels will
be maintained or increased as new products are introduced. The average finished
goods inventory turnover ratio for fiscal 1995, 1996 and 1997 was 4.9x, 4.9x and
4.7x respectively.
The acquisition of SMS resulted in a tax loss carryforward of about $5
million, which is available to offset earnings from SMS through the year 2010,
at the rate of approximately $325,000 of tax savings per year.
The Company has completed an evaluation of Year 2000 computer information
processing problems and has determined that there will be minimal costs or
impact on the Company operations to assure compliance.
Management believes that its cash flows from operations, available credit
resources and its improving cash position will provide adequate funds on both a
short-term and long-term basis to cover currently foreseeable debt payments,
lease commitments and payments under existing and anticipated supplier
agreements. Management believes that such cash flow (without the raising of
external funds) is sufficient to finance current operations, projected capital
expenditures, anticipated long-term sales agreements and other expansion-related
contingencies during fiscal 1998.
SUMMARIZED QUARTERLY FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1997 QUARTER ENDED AUGUST 31* NOVEMBER 30* FEBRUARY 28* MAY 31*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales. . . . . . . . . . . . . . . . . . $1,793,698 $2,739,314 $2,918,912 $3,091,048
Gross Profit . . . . . . . . . . . . . . 1,069,558 1,725,676 1,827,858 2,043,090
Net Income . . . . . . . . . . . . . . . 140,276 607,344 458,655 518,453
Net Income Per Share . . . . . . . . . . 0.02 0.08 0.06 0.07
Market Price of Common Stock
Low. . . . . . . . . . . . . . . . . . $ 8.25 $ 7.50 $ 7.75 $ 7.00
High . . . . . . . . . . . . . . . . . $13,75 $11.00 $11.88 $10.75
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1996 QUARTER ENDED AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
- ----------------------------------------------------------------------------------------------------
Sales. . . . . . . . . . . . . . . . . . $1,340,771 $1,520,028 $1,855,938 $2,363,391
Gross Profit . . . . . . . . . . . . . . 838,464 927,754 1,274,354 1,452,502
Net Income . . . . . . . . . . . . . . . 83,392 208,099 484,288 441,474
Net Income Per Share . . . . . . . . . . 0.01 0.03 0.06 0.06
Market Price of Common Stock
Low. . . . . . . . . . . . . . . . . . $ 2.13 $ 2.63 $ 3.88 $ 5.25
High . . . . . . . . . . . . . . . . . $ 2.88 $ 5.13 $ 5.63 $14.75
</TABLE>
* Quarterly data has been restated to account for inter-company transactions.
COMMON STOCK INFORMATION AND DIVIDEND POLICY
As of July 15, 1997, there were 7,081,889 shares of Common Stock outstanding
held by approximately 130 holders of record. The number of holders does not
include individual participants in security position listings. Management
estimates that there are over 2,500 shareholders who own the Company's stock.
In June 1994, the Company paid its only cash dividend, which equaled U.S.
$0.015 per share. The Company's present policy is to retain earnings to
finance the Company's business. Any future dividends will be dependent upon
the Company's financial condition, results of operations, current and
anticipated cash requirements, acquisition plans and plans for expansion, and
any other factors that the Company's Board of Directors deems relevant. The
Company has no present intention of paying dividends on its common stock in
the foreseeable future.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 23
SELECTED
FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED 5/31/97 5/31/96 5/31/95 5/31/94 5/31/93
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales. . . . . . . . . . $10,542 $ 7,080 $ 4,415 $ 2,575 $ 1,674
Net Income . . . . . . . 1,725 1,217 249 182 262
Net Income Per Share . . 0.23 0.16 0.04 0.03 0.03
Weighted Avg.
No. Shares (000) . . . . 7,421 7,417 7,116 6,203 5,997
Stockholders' Equity . . $ 7,429 $ 4,887 $ 3,464 $ 3,215 $ 1,877
Total Assets . . . . . . $ 8,515 $ 5,986 $ 4,619 $ 4,232 $ 2,067
- --------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Schmitt Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Schmitt
Industries, Inc. and Subsidiaries as of May 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended May 31, 1997, 1996, and 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Schmitt Industries,
Inc. and Subsidiaries as of May 31, 1997 and 1996, and the results of their
operations and cash flows for each of the three years ended May 31, 1997, 1996,
and 1995, in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Portland, Oregon
July 10, 1997
<PAGE>
SCHMITT INDUSTRIES, INC.
- ----------------------------
PAGE 24
<TABLE>
<CAPTION>
SCHMITT WORLDWIDE CUSTOMERS
<S> <C> <C>
Adam Opel AG FAG Bearing Ltd. Parker Hannifin Corporation
Akashic Memories Corporation Federal Mogul Corporation Pratt & Whitney
Allied Signal Aerospace Company Fiat Rayetheon
Allison Engine Company Ford France S.A. Reliance Electric Company
American Axel Ford Motor Company Rexnord Corporation
American Koyo Bearing Mfg. Corp. Fuji Electric Reynolds Metals
American NTN Bearing Company General Electric Corporation Robert Bosch Corporation
Asahi Komag General Motors Corporation Robert Bosch GmbH
Atlas Copco Airpower N.V. Goldcrown Machinery Saturn Corporation
Audi AG Greenfield Industries Seagate Substrates
Barden Corporation Giihring Automation SEH America, Inc.
Black & Decker Corporation Harley-Davidson Motor Company Siemens Automotive Systems
Blohm Maschinenbau Gmbh HMT Technology Corporation SKF Bearing Industries
BMW Motoren GmbH Honda Motor Company, Honda SKF GmbH
Boeing Company Of America Sumitomo Heavy Industries
Briggs & Stratton IBM Deutschland Texas Instruments
Bryant Grinder Corporation INA Bearing Corporation The Timken Company
Caterpillar Belgium S.A. Jones & Shipman, Inc. The Torrington Company
Caterpillar Incorporated Komag, Inc. Timken France
Chrysler Corporation Koube Steel Toyoda Machinery USA, Toyoda
Cincinnati Milacron Koyo Machinery USA Machinery, Ltd.
Cummins Engine Company Landis, Landis Lund TRW Automotive Components
Daewoo International Corporation Lockheed Martin United Grinding Technologies
Daimler Benz Mercedes Benz AG University Of Connecticut Grinding
Dana Corporation Milwaukee Electric Tool Research Center
Deere & Company Mitsubishi Chemical Volkswagen AG
Diesel Technology Corporation Mitsubishi Material Silicon Volvo
Dresser-Rand Mitsubishi Motor Company Ltd. Weldon Machine Tool
Eaton Corporation NASA Western Digital
Emerson Power Transmission Navistar International Transportation Weyburn-Bartel
Erwin Junker New Venture Gear
Nissan Motors Ltd.
Normac, Inc.
Norton Company
Okamoto Corporation
Okunia Machinery, Inc.
Opel Austria GmbH
</TABLE>
<PAGE>
SCHMITT INDUSTRIES, INC.
----------------------------
PAGE 25
CORPORATE OFFICES OFFICERS
Schmitt Industries, Inc. Wayne A. Case
2765 NW Nicolai St. President & Chief Executive Officer
Portland, OR 97210 David W. Case
Phone: (503) 227-7908 Vice President of Operations
Fax: (503) 223-1258 Annie N. Windsor
Web: www.schmitt-ind.com Chief Financial Officer
Linda M. Case
Schmitt Europe Ltd. Corporate Secretary
University of Warwick Science Park
Sir William Lyons Road DIRECTORS
Coventry, England CV4 7EZ Wayne A. Case
Phone: 44-1203-697192 President & Chief Executive Officer
Fax: 44-1203-412697 Schmitt Industrties
Maynard Brown
Schmitt Hofmann Systems GmbH Partner, Brown McCue, Attorneys
Schwingungsmesstechnik David L. Dotlich, Ph.D.
Birkenweg 8 (Gewerbegebiet) Executive Director, Michigan Human
D - 64665 Alsbach, Germany Resource Partnership,
Phone: 49-6257-9351-21 University of Michigan
Fax: 49-6257-9351-23 David M. Hudson
President, Coldstream Holdings, Inc.
TRANSFER AGENT & REGISTRAR Trevor Nelson
Montreal Trust Company Financial Consultant
Vancouver, British Columbia The Stewart Thomas Group
Dennis T. Pixton
BANKING REFERENCE President, Chief Operating Officer
Wells Fargo Bank Michaels of Oregon Co.
Portland, Oregon U.S.A. John A. Rupp
Business Executive - Self Employed
CERTIFIED PUBLIC ACCOUNTANTS
Moss Adams LLP FORM 10-K AVAILABLE
Portland, Oregon U.S.A. A copy of the Company's Form 10-K
as filed with the Securities and
STOCK LISTING Exchange Commission is available to
NASDAQ National Market shareholders free of charge upon
Symbol: SMIT request addressed to the Secretary at
the Company's Corporate Offices.
ANNUAL MEETING
The annual meeting of shareholders
will be held Friday, September 26,
1997 at 3:00 p.m. at the Corporate
Offices.
FORWARD-LOOKING STATEMENTS
This summary annual report, other
than the historical financial
information, contains statements
regarding future sales and earnings
growth and projects or processes
currently under development which
are forward-looking statements that
involve risks and uncertainties that
could cause actual results to differ
materially from those set forth in
the forward-looking statements,
including delays in technology or
product developments, shipment or
cancellation of orders, timing of
future orders, customer
reorganizations, fluctuations in
demand and the other risks detailed
from time-to-time in the Company's
reports which are filed with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF SCHMITT INDUSTRIES, INC.
AS OF MAY 31, 1997
STATE OF INCORPORATION OR
SUBSIDIARY COUNTRY IN WHICH ORGANIZED
- ------------------------------------- --------------------------
Schmitt Measurement Systems, Inc. Montana
Schmitt Hofmann Systems GmbH Germany
Schmitt Europe, Ltd. United Kingdom
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTRAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCHMIDTT
INDUSTRIES, INC INDEPENDENT AUDITORS, REPORT AND CONSOLIDATED FINANCIAL
STATEMENTS MAY 31, 1997, 1996, AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 504,662
<SECURITIES> 168,000
<RECEIVABLES> 2,725,512
<ALLOWANCES> 0
<INVENTORY> 2,479,820
<CURRENT-ASSETS> 6,044,662
<PP&E> 2,231,763
<DEPRECIATION> 530,587
<TOTAL-ASSETS> 8,575,253
<CURRENT-LIABILITIES> 935,102
<BONDS> 150,922
0
0
<COMMON> 4,952,411
<OTHER-SE> 2,976,818
<TOTAL-LIABILITY-AND-EQUITY> 8,515,253
<SALES> 10,541,972
<TOTAL-REVENUES> 10,541,972
<CGS> 3,875,790
<TOTAL-COSTS> 4,370,071
<OTHER-EXPENSES> (56,564)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,273
<INCOME-PRETAX> 2,352,675
<INCOME-TAX> 627,947
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,724,728
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
