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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
XX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 1998
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or
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to:
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Commission File Number: 0-23996
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SCHMITT INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Oregon 93-1151989
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(Place of Incorporation) (IRS Employer ID Number)
2765 Nw Nicolai Street, Portland, Oregon 97210
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(Address of registrant's principal executive office)
(503) 227-7908
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(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
----- -----
The number of shares of each class of common stock outstanding as of August 31,
1998
Common stock, no par value 7,089,139
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SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- August 31, 1998 and May 31, 1998............................. 3
Consolidated Statements of Income:
- For the Three Months Ended
August 31, 1998 and August 31, 1997.......................... 5
Consolidated Statements of Cash Flows
- For the Three Months Ended
August 31, 1998 and August 31, 1997.......................... 6
Supplemental Schedule of Non-Cash Investing
and Financing Activities..................................... 7
Notes to Consolidated Financial Statements...................... 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
Part II - OTHER INFORMATION............................................... 10
Signatures - ................................................................ 10
Exhibits - ................................................................ 11
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1998
Unaudited
--------------- -------------
<S> <C> <C>
Cash $ 573,547 $1,127,076
Accounts receivable 1,265,186 1,197,951
Inventories 4,672,603 4,166,755
Deferred tax asset 34,623 34,623
Prepaid expenses 88,968 120,466
Income tax receivable 201,315 190,806
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Total current assets 6,836,242 6,837,677
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 1,215,446 1,190,920
Furniture and equipment 1,026,029 1,045,319
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2,540,475 2,535,239
Less accumulated depreciation 712,803 691,258
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Total property & equipment 1,827,672 1,843,981
Other assets
Long-term deferred tax asset 837,560 837,560
Other assets 100,000 100,000
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Total other assets 937,560 937,560
Total assets $9,601,474 $9,619,218
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</TABLE>
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1998
Unaudited
--------------- -------------
<S> <C> <C>
Current liabilities
Trade accounts payable $ 582,498 $ 681,524
Accrued liabilities 283,372 249,565
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Total current liabilities 865,870 931,089
Total liabilities $ 865,870 $ 931,089
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
August 31, 1998 7,089,139 shares 5,025,376 5,072,634
May 31, 1998 7,099,139 shares
Cumulative foreign exchange translation
adjustment (1,518) (147,708)
Retained earnings 3,711,746 3,763,203
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Total stockholders' equity 8,735,604 8,688,129
Total liabilities and stockholders' equity $9,601,474 $9,619,218
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</TABLE>
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
8/31/98 8/31/97
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<S> <C> <C>
Sales $1,984,671 $2,666,941
Cost of sales 1,023,168 1,162,352
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Gross profit 961,503 1,504,589
General and administrative expenses 853,456 939,493
Research and development 176,829 136,718
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1,030,285 1,076,211
(Loss) income from operations (68,782) 428,378
Other income and expense
Interest income 9,357 9,403
Interest expense -0- (1,928)
Misc. income 19,468 94,698
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28,825 102,173
(Loss) income before income tax (39,957) 530,551
Provision for income tax 11,500 176,000
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Net (loss) income for period $ (51,457) $ 354,551
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Net (loss) income per common share
Basic ($.01) $.05
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Diluted ($.01) $.05
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</TABLE>
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
August 31, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income from operations $ (51,457) $354,551
Items not affecting cash:
Depreciation 21,545 24,912
Deferred taxes -0- 2,298
Unrealized gain on trading securities -0- (99,400)
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(29,912) 282,361
Cash flows from changes in assets & liabilities:
Increase (decrease) in accounts payable (99,026) 59,482
Increase (decrease) in other liabilities 33,807 (84,629)
Decrease (increase) in accounts receivable (67,235) 990,592
Decrease (increase) in marketable securities
& commercial paper -0- (450,000)
Decrease (increase) in inventory (505,848) (308,880)
Decrease (increase) in prepaid expenses 31,498 6,604
Decrease (increase) in other assets -0- 90,415
Increase (decrease) in corp income tax -0- 56,562
Decrease (increase) in income tax receivables (10,509) -0-
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(617,303) 360,146
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Net cash provided (used) by operating activities: (647,225) 642,507
Cash flows from investing activities:
Acquisition of capital assets: (5,236) (99,796)
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Net cash provided (used) by investing activities: (5,236) (99,796)
Cash flows from financing activities:
Repurchase of company stock (47,258) -0-
Exercise of stock options -0- -0-
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Net cash provided (used) by financing activities: (47,258) -0-
Effect of foreign exchange rate changes on cash: 146,190 (76,487)
Increase (decrease) in cash: (553,529) 466,224
Cash beginning of period: 1,127,076 504,662
Cash end of period $ 573,547 $ 970,886
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</TABLE>
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<TABLE>
<CAPTION>
August 31, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options exercised $ -0- $ -0-
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Supplemental Information
Income taxes paid $ -0- $ -0-
Interest paid $ -0- $ 1,928
</TABLE>
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
and all adjustments considered necessary for a fair presentation have been
included. Operating results for the three-month period ended August 31, 1998
are not necessarily indicative of the results that may be experienced for the
fiscal year ending May 31, 1999.
These financial statements are those of the Company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in the preparation of the consolidated financial statements. Certain
prior year amounts have been reclassified to conform with current year
presentation. Such reclassifications had no affect on previously reported
results of operations or stockholders' equity.
NOTE 2: EPS Reconciliation
<TABLE>
<CAPTION>
Three Months Ended
8/31/98 8/31/97
--------- ---------
<S> <C> <C>
Weighted average shares (basic) 7,098,378 7,081,889
Effect of dilutive stock options -- 466,495
Weighted average shares (diluted) 7,098,378 7,548,384
</TABLE>
NOTE 3: Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
8/31/98 8/31/97
--------- ---------
<S> <C> <C>
Net (loss) income $ (51,457) $ 354,551
Other comprehensive income (loss)
Foreign currency translation adjustment 146,190 (76,487)
--------- ---------
Total comprehensive income $ 94,733 278,064
</TABLE>
The foreign currency translation adjustment represents the Company's only
significant other comprehensive income element. The cumulative translation
adjustment consists of unrealized gains/losses from translation adjustments and
intercompany foreign currency transactions that are of a long-term investment
nature. These items are reflected in the statement of shareholders' equity in
accordance with Statement of Financial Accounting Standards No. 52, FOREIGN
CURRENCY TRANSLATION.
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
FIRST QUARTER FISCAL YEAR 1999
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 declined during the first quarter of fiscal 1999, ended
August 31, 1998, as evidenced by decreases in sales and profit levels. Balancer
product sales have remained steady in the United States, the United Kingdom,
Germany and other world markets during the first quarter of this fiscal year,
while sales of Schmitt Measurement Systems, Inc. ("SMS") measurement products
were below expected levels for the quarter due to the world-wide decline in the
computer industry. The overall result was a net operating loss for the first
quarter of fiscal 1999.
RESULTS OF OPERATIONS:
Sales in the first quarter of fiscal 1999 decreased to $1,984,671 versus
$2,666,941 in the same period last year. This 26% decrease was caused by
declines in orders from both domestic and international measurement customers.
SMS sales totaled only $167,667 in the first quarter of fiscal 1999 as compared
to $679,460 in the first quarter of fiscal 1998. The Company expects
measurement sales to be depressed throughout the calendar year 1998 with
improved sales of the TMS-2000 and the DTM-2000 Non-Contact Laser Texture
Measurement Systems to the computer hard drive markets in early 1999.
First quarter cost-of-sales increased to 52% of sales versus 44% in the same
period last year. Cost-of-sales of SMS products was 62% for the first
quarter 1999 versus 47% in the same period last year. Management expects SMS
cost-of-sales for fiscal 1999 to be approximately 50%.
First quarter general and administrative and R&D expenses totaled $1,030,285
versus $1,076,211 for the same period last year. This decrease is attributable
primarily to the cost savings programs and decreased sales level this year.
These general and administrative numbers include $176,829 of research and
development expenses for the period ended August 31, 1998 and $136,718 research
and development costs for the previous year in the same period. The Company has
embarked on a major cost reduction program that reduces consultants, outside
purchases and future inventory levels. Management is pleased with cost
reduction progress during the first quarter, but will continue to seek
opportunities to limit spending but add to sales levels.
Sales by the German subsidiary, SHS, totaled $443,425 for the quarter versus
$478,387 for the same quarter last year, while the British subsidiary, SEL,
reported $289,477 in sales for the quarter versus $104,834 for the same period
last year. 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 profits for SEL of
$64,878 and for SHS of $30,186.
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
FIRST QUARTER FISCAL YEAR 1999
General and administrative expenses, including R&D, as a percentage of sales
during the first three months of fiscal 1999 were 52% compared to 40% for the
same period last year. This increase was attributable primarily to the lower
level of sales in the first quarter of fiscal 1999. Management estimates these
costs will stabilize at approximately 45% for fiscal 1999, up from 44% for
fiscal 1998 and 41% in fiscal 1997.
In the three-month period ended August 31, 1998, pretax loss totaled ($39,957)
versus earnings of $530,551 for the same period last year. Taxes were accrued
at approximately a 23% rate, as a percentage of SBS pretax income, compared with
33% in the same period last year. Management anticipates that the tax rate for
fiscal 1999 will approximate 25%.
Three-month net (loss) earnings were ($51,457) versus $354,551 for the same
period last year. Three-month (loss) earnings per share, basic and diluted,
were ($0.01) versus $0.05 last year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company increased its working capital position slightly during the first
quarter while still financing the development of new SMS products and inventory.
Working capital totaled $5,970,372 at August 31, 1998 versus $5,906,588 at May
31, 1998 and $5,109,560 at May 31, 1997 fiscal year end. Corporate cash and
marketable securities levels stood at $573,547 at August 31, 1998 versus
$1,127,076 as of May 31, 1998.
During the three-month period ended August 31, 1998, net cash used by operating
activities totaled ($647,225), including net operating loss of ($51,457).
Included in cash flow from operations was a $505,848 increase in inventory. The
increase in the Company's inventories was a planned ramp up of parts required
for products that will be marketed in future quarters.
During the period, accounts receivable increased by $67,235, and accounts
payable decreased by $99,026. The increase in accounts receivable occurred
because of the sales mix during the three-month period ended August 31, 1998
compared with the immediately preceding quarter. 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 $5,236. Net cash used
by financing activities was $47,258.
Management believes that cash from operations, available credit resources and
its improving working capital position will provide adequate funds on a
short-term basis to cover currently foreseeable payments, lease commitments
and payments under existing and anticipated supplier agreements. Management
believes that such cash flow is also sufficient to finance current short-term
operations, projected capital expenditures, anticipated short-term sales
agreements and other contingencies during at least the next six months.
Management is currently reviewing long-range capital requirements as they relate
to expansion of products and markets. This analysis may or may not result in
future decisions to seek additional funding for the Company via debt or equity
to service the Company's future growth requirements.
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders:
-- None --
Item 5. Other Information - None
Item 6.(a) Exhibit 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: 10/14/98 /s/ Wayne A. Case
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Wayne A. Case, President/CEO/Director
Date: 10/14/98 /s/ Annie Windsor
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Annie Windsor, Chief Financial Officer
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
NUMBER DESCRIPTION LOCATION
- ------ ------------------------------------ --------
27 FINANCIAL DATA SCHEDULE PAGE 11
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<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q OF
AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 573547
<SECURITIES> 0
<RECEIVABLES> 1265186
<ALLOWANCES> 0
<INVENTORY> 4672603
<CURRENT-ASSETS> 6836242
<PP&E> 2540475
<DEPRECIATION> 712803
<TOTAL-ASSETS> 9601474
<CURRENT-LIABILITIES> 865870
<BONDS> 0
0
0
<COMMON> 5025376
<OTHER-SE> 3710228
<TOTAL-LIABILITY-AND-EQUITY> 9601474
<SALES> 1984671
<TOTAL-REVENUES> 1984671
<CGS> 1023168
<TOTAL-COSTS> 1023168
<OTHER-EXPENSES> 1030285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (39957)
<INCOME-TAX> 11500
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51457)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
