<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- ----
xx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 1997
-----------------------------------------
or
- ----
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: ___________________ to: __________________
Commission File Number: 0-23996
-------------------------------------------------
SCHMITT INDUSTRIES, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-1151989
----------------------- ----------------------------------
(Place of Incorporation) (IRS Employer ID Number)
2765 NW Nicolai Street, Portland, Oregon 97210
- --------------------------------------------------------------------------------
(Address of registrant's principal executive office)
(503) 227-7908
- --------------------------------------------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes xx No
---- ----
The number of shares of each class of common stock outstanding as of November
30, 1997 Common stock, no par value 7,094,889
<PAGE>
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page
----
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- November 30, 1997 and May 31, 1997........................ 3
Consolidated Statements of Income:
- For the Three and Six Months Ended
November 30, 1997 and November 30, 1996................... 5
Consolidated Statements of Cash Flows
- For the Six Months Ended
November 30, 1997 and November 30, 1996................... 6
Supplemental Schedule of Non-Cash Investing
and Financing Activities.................................. 7
Notes to Interim Financial Statements........................ 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Part II - OTHER INFORMATION............................................ 10
Signatures - ............................................................. 11
Exhibits - ............................................................. 12
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, 1997 May 31, 1997
Unaudited
-----------------------------------
Cash $ 811,903 $ 504,662
Marketable securities & commercial
paper 266,000 168,000
Accounts receivable 2,650,690 2,725,512
Inventories 3,386,032 2,479,820
Prepaid expenses 86,842 30,668
Deferred tax asset 233,806 136,000
----------- -----------
Total current assets 7,435,273 6,044,662
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 1,168,218 1,025,868
Furniture and equipment 917,472 760,596
Vehicles 160,045 146,299
----------- -----------
2,544,735 2,231,763
Less accumulated depreciation 623,011 530,587
----------- -----------
Total property & equipment 1,921,724 1,701,176
Other assets
Long-term deferred tax 679,000 679,000
Other assets -0- 90,415
----------- -----------
Total other assets 679,000 769,415
Total assets $10,035,997 $8,515,253
----------- -----------
----------- -----------
Page 3
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
November 30, 1997 May 31, 1997
Unaudited
---------------------------------
Current liabilities
Trade accounts payable $1,116,319 $ 530,667
Accrued liabilities 275,257 306,811
Income taxes payable -0- 68,563
Current portion of long term debt 10,848 29,061
----------- -----------
Total current liabilities 1,402,424 935,102
Long-term debt, net of current portion 150,922 150,922
----------- -----------
Total liabilities $1,553,346 $1,086,024
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
November 30, 1997 5,047,665 4,952,411
and May 31, 1997 7,094,889 shares
and 7,081,889 respectively
Cumulative foreign translation
adjustment (128,102) (36,270)
Retained earnings 3,563,088 2,513,088
----------- -----------
Total stockholders' equity 8,482,651 7,429,229
Total liabilities and stockholders' equity $10,035,997 $8,515,253
----------- -----------
----------- -----------
Page 4
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1997
AND NOVEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
11/30/97 11/30/96 11/30/97 11/30/96
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Sales $3,220,475 $2,738,314 $5,887,416 $4,532,012
Cost of sales 1,386,838 1,012,638 2,549,190 1,736,778
----------- ----------- ----------- -----------
Gross profit 1,833,637 1,725,676 3,338,226 2,795,234
General and administrative
expenses 1,120,386 1,085,750 2,196,597 1,929,628
----------- ----------- ----------- -----------
Income from operations 713,251 639,926 1,141,629 865,606
Other income and expense
Interest income 14,616 6,878 24,019 12,351
Interest expense (220) (16) (2,148) (16)
Misc. income 25,802 10,556 120,500 30,679
----------- ----------- ----------- -----------
40,198 17,418 142,371 43,014
Income before income tax 753,449 657,344 1,284,000 908,620
Provision for income tax 58,000 50,000 234,000 161,000
----------- ----------- ----------- -----------
Net income for period $695,449 $607,344 $1,050,000 $747,620
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common share
and common share equivalent
Primary .09 .08 .14 .10
--- --- --- ---
--- --- --- ---
Fully diluted .09 .08 .14 .10
--- --- --- ---
--- --- --- ---
</TABLE>
Page 5
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997 AND NOVEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
November 30, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income from operations $1,050,000 $747,620
Items not affecting cash:
Amortization -0- 23,065
Depreciation 92,424 122,154
Deferred taxes (97,806) 8,045
Unrealized gain on trading securities (98,000) -0-
----------- -----------
946,618 900,884
Cash flows from changes in assets & liabilities:
Increase (decrease) in accounts payable 585,652 (18,039)
Increase (decrease) in other liabilities (31,554) 118,383
Decrease (increase) in accounts receivable 74,822 (219,358)
Decrease (increase) in marketable securities
& commercial paper -0- (81,342)
Decrease (increase) in inventory (906,212) (561,589)
Decrease (increase) in prepaid expenses (56,174) 11,513
Decrease (increase) in other assets 90,415 -0-
Increase (decrease) in corp income tax (68,563) (343,849)
----------- -----------
(311,614) (1,094,281)
----------- -----------
Net cash provided (used) by operating activities: 635,004 (193,397)
Cash flows used by investing activities:
Acquisition of capital assets: (312,972) (86,482)
----------- -----------
Net cash provided (used) by investing activities: (312,972) (86,482)
Cash flows from financing activities:
Repayment of debt (18,213) -0-
Exercise of stock options 95,254 251,169
----------- -----------
Net cash provided (used) by financing activities: 77,041 251,169
Effect of foreign exchange rate changes on cash: (91,832) -0-
Increase (decrease) in cash: 307,241 (28,710)
Cash beginning of period: 504,662 508,240
Cash end of period $ 811,903 $ 479,530
----------- -----------
----------- -----------
</TABLE>
Page 6
<PAGE>
November 30, 1997 November 30, 1996
----------------- -----------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options
exercised $ 17,379 $330,000
--------- --------
--------- --------
Supplemental Information
Income taxes paid $186,600 $110,100
Interest paid $ 2,148 $ 16
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
and all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month and six-month periods ended November 30, 1997 are not necessarily
indicative of the results that may be experienced for the fiscal year ending May
31, 1998.
These financial statements are those of the Company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in the preparation of the consolidated financial statements. Certain
prior year amounts have been reclassified to conform with current year
presentation. Such reclassifications had no affect on previously reported
results of operations or stockholders' equity.
Note 2: Net Earnings Per Share
Net earnings per share are based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods,
computed using the treasury stock method for stock options. The Company will
adopt Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
for periods ending after December 15, 1997. The effect of the adoption of such
pronouncement is expected to be immaterial to the financial statements taken as
whole.
Page 7
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including but not limited to the uncertainties of the Company's new product
introductions and the risks of increased competition and technological change in
the Company's industry. Accordingly, actual results may differ, possibly
materially, from the predictions contained herein.
Company operations improved during the second quarter of fiscal 1998, ended
November 30, 1997, as evidenced by increases in sales and profit levels. Sales
have increased in the United Kingdom, Germany and other world markets during the
second quarter of this fiscal year. Management expects these increased sales
trends to continue.
During the second quarter ended November 30, 1997, the Company continued to sell
TMS-2000 non-contact laser texture measurement systems (TMS 2000) to the
computer hard drive market. The Company has secured additional orders for these
products and expects continued delivery during the balance of fiscal year 1998.
Sales of the TMS series products have been made pursuant to an exclusive
marketing agreement with Veeco (NASDAQ: VECO).
RESULTS OF OPERATIONS:
Sales in the second quarter of fiscal 1998 increased to $3,220,475 versus
$2,738,314 in the same period last year. This 18% increase was caused by gains
in orders from both domestic and international customers. Management believes
sales increases resulted from improved marketing coverage and advertising and
the weakening of domestic competitors as well as market growth. Additionally,
SMS sales accounted for $1,322,608 of the second quarter sales, as compared to
$679,460 in second quarter 1997 SMS sales.
Second quarter cost-of-sales increased to 43% of sales versus 37% in the same
period last year. The continued sales of TMS-2000 products during the second
quarter had a positive impact on gross earnings and net earnings. Cost-of-sales
of SMS products was 38% of related revenues for the second quarter 1998 versus
47% in the same period last year. Management expects SMS cost-of-sales for
fiscal 1998 to be approximately 40% of related revenues.
Six-month general and administrative expenses totaled $2,196,597 versus
$1,929,628 for the same period last year. This increase is attributable
primarily to the increased sales level this year. The expansion in advertising,
sales training costs, computer purchases and employee salaries continued. Also,
an increasing percentage of the Company's products are being sold through
commissioned agents and salesmen, as compared with last year, a trend management
expects to continue. The acquisition of Schmitt Hofmann Systems GmbH ("SHS")
and Schmitt Europe Ltd. ("SEL") added to ongoing operating expenses.
Sales by the German subsidiary, SHS, totaled $404,169 for the quarter, with SEL
reporting $134,398 in sales for the period. These sales levels met management's
expectations and resulted from intensive efforts expended during this quarter in
Germany and the United Kingdom to expand sales levels. The quarter included
operating losses for SHS of $127,097 (due to inventory adjustments) and
operating losses at SEL of $69,496.
Page 8
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
General and administrative expenses as a percentage of sales during the first
six months of fiscal 1998 were 37% compared to 43% for the same period last
year. Management estimates these costs will stabilize at approximately 39% for
fiscal 1998, down from 41% for fiscal 1997 and 43% in fiscal year 1996.
In the three-month period ended November 30, 1997 after tax earnings totaled
$695,449 versus $607,344 for the same period last year. For the six-month
period, taxes were accrued at approximately a 18% rate compared with 18% in the
same period last year. Management now anticipates that the tax rate for fiscal
1998 will approximate 34%, due to the timing of tax benefit realization from net
operating loss carry forwards.
Six-month net earnings were $1,050,000 versus $747,620 for the same period last
year. Six-month earnings per share were $0.14 versus $0.10 last year on a
primary and fully diluted basis respectively.
LIQUIDITY AND CAPITAL RESOURCES:
The Company increased its working capital position slightly during the first
quarter while still financing the growth of the new SMS products and inventory
at SHS and SEL. Working capital totaled $6,032,849 at November 30, 1997 versus
$5,109,560 at May 31, 1997 fiscal year end. Corporate cash and marketable
securities levels stood at $1,077,903 at November 30, 1997.
During the six-month period ended November 30, 1997 net cash provided by
operating activities totaled $635,004, including net income of $1,050,000.
Included in cash flow from operations was a $906,212 increase in inventory.
During the period, accounts receivable decreased by $74,822 and marketable
securities and commercial paper appreciated $98,000. The increase in inventory
was caused by planned changes of balancer inventory for the U.S.A. and Europe
ramp up of the new DTM-2000 measurement product line.
The decrease in accounts receivable occurred because of improved collections
during the six-month period ended November 30, 1997 compared with the same six
months of fiscal year 1997. As a result of its high-quality customer base, the
Company has experienced near 100% collection and no reserve for uncollectable
accounts, returns or allowances has been established. Net cash used by
investing activities was $312,972, which was used for the acquisition of capital
assets. Net cash provided by financing activities was $77,041, primarily from
the exercise of stock options offset by repayment of debt.
Management believes that cash from operations, available credit resources and
its improving cash position will provide adequate funds on a short-term basis to
cover currently foreseeable debt payments, lease commitments and payments under
existing and anticipated supplier agreements. Management believes that such
cash flow is also sufficient to finance current short-term operations, projected
capital expenditures, anticipated short-term sales agreements and other
contingencies during at least the next six months.
Management is currently reviewing long-range capital requirements as they relate
to expansion of products and markets. This analysis may or may not result in
future decisions to seek additional funding for the Company via debt or equity
to service the Companies future growth requirements.
Page 9
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders:
The Company conducted an Annual Shareholders Meeting on September 26, 1997.
The matters voted upon, together with the results of voting, were as
follows:
1.) The Restated Articles of Incorporation of the Company be amended to
provide for (a) staggered terms for directors, (b) removal of directors
only for cause, (c) the creation of a class of Preferred Stock, (d) special
voting requirements for amending the Company's Bylaws and Articles, and (e)
special voting requirements for approving certain business combinations,
all as set forth in the Company's Proxy Statement dated August 28, 1997:
<TABLE>
<CAPTION>
Shares Shares
Voted in Voted Shares
Resolution Favor Against Abstained
---------- -------- ------- ---------
<S> <C> <C> <C>
(a) Staggered terms for directors 5,886,586 212,961 8,829
(b) Removal of directors only for
cause 5,888,494 211,111 8,771
(c) The creation of a class of
Preferred Stock 5,679,061 217,772 211,543
(d) Special voting requirements
for amending the Company's
Bylaws and Articles 5,885,472 212,269 10,635
(e) Special voting requirements
for approving certain business
combinations 5,889,335 211,606 7,435
</TABLE>
2.) Upon approval of the foregoing resolutions by the shareholders and
filing of Articles of Amendment to effect such amendments, the directors of
the Company shall be divided into three classes and the following persons
are elected to the Board of Directors of the Company, to serve until their
respective terms have expired and until their successors shall be duly
elected:
Shares Voted Shares
Director Class Term In Favor Withheld
----------------- ----- --------- ------------- --------
David L. Dotlich 1 1997-1998 6,089,606 18,770
David M. Hudson 1 1997-1998 6,089,606 18,770
Dennis T. Pixton 1 1997-1998 6,089,606 18,770
Page 10
<PAGE>
Shares Voted Shares
Director Class Term In Favor Withheld
----------------- ----- ----------- -------------- --------
Trevor Nelson 2 1997-1999 6,101,176 7,200
John A. Rupp 2 1997-1999 6,101,176 7,200
Shares Voted Shares
Director Class Term In Favor Withheld
----------------- ----- ----------- -------------- --------
Maynard E. Brown 3 1997-2000 6,102,406 5,970
Wayne A. Case 3 1997-2000 6,102,406 5,970
3.) The appointment of Price Waterhouse LLP, effective July 25, 1997, as
independent auditors to examine the financial statements of the Company and
its subsidiaries for the fiscal year ending May 31, 1998, is ratified,
approved and confirmed.
Shares Voted in Favor Shares Voted Against Shares Abstained
--------------------- -------------------- ----------------
6,096,711 5,000 6,665
Item 5. Other Information - None
Item 6(a). Exhibit 11.1 - Schedule of Computation of Net Income Per
Share
Exhibit 27 - Financial Data Schedule
Item 6(b). Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHMITT INDUSTRIES, INC.
------------------------
(Registrant)
Date: 01/13/98 /s/ Wayne A. Case
------------------------------------------------------------------
Wayne A. Case, President/CEO/Director
Date: 01/13/98 /s/ Annie Windsor
------------------------------------------------------------------
Annie Windsor, Chief Financial Officer
Page 11
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
Number Description Location
- ------ -------------------------------------- --------
11.1 Schedule of Computation of Net Income Page 13
27 Financial Data Schedule Page 14
Page 12
<PAGE>
EXHIBIT 11.1
SCHMITT INDUSTRIES, INC.
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
11/30/97 11/30/96 11/30/97 11/30/96
-------------------- -------------------
<S> <C> <C> <C> <C>
I. Net income for period $ 695,449 $ 607,344 $1,050,000 $ 747,620
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
II. Determination of shares
Weighted average number of
common shares outstanding 7,088,768 7,020,593 7,085,595 6,998,225
Common equivalent shares 419,942 516,032 403,223 423,724
(determined using the "treasury stock"
method) representing shares issuable
upon exercise of employee stock options
Weighted average number of shares used 7,508,710 7,536,625 7,488,818 7,421,949
in calculation of primary income per share
Shares issuable on exercise of stock options, 594 331 6,075 94,110
determined using the "treasury stock"
method
Weighted average number of shares used in
fully diluted income per share 7,509,304 7,536,956 7,494,893 7,516,059
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
III. Net income per common share and common
share equivalent
Primary .09 .08 .14 .10
--- --- --- ---
--- --- --- ---
Fully diluted .09 .08 .14 .10
--- --- --- ---
--- --- --- ---
</TABLE>
Page 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10 Q OF
NOVEMBER, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 811,903
<SECURITIES> 266,000
<RECEIVABLES> 2,650,690
<ALLOWANCES> 0
<INVENTORY> 3,386,032
<CURRENT-ASSETS> 7,435,273
<PP&E> 2,544,735
<DEPRECIATION> 623,011
<TOTAL-ASSETS> 10,035,997
<CURRENT-LIABILITIES> 1,402,424
<BONDS> 0
0
0
<COMMON> 5,047,665
<OTHER-SE> 3,434,986
<TOTAL-LIABILITY-AND-EQUITY> 10,035,997
<SALES> 5,887,416
<TOTAL-REVENUES> 5,887,416
<CGS> 2,549,190
<TOTAL-COSTS> 2,549,190
<OTHER-EXPENSES> 2,196,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,148
<INCOME-PRETAX> 1,284,000
<INCOME-TAX> 234,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,050,000
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
