<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, 1998
-------------------
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
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SCHMITT INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-1151989
------------------------ ------------------------
(Place of Incorporation) (IRS Employer ID Number)
2765 NW Nicolai Street, Portland, Oregon 97210
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(Address of registrant's principal executive office)
(503) 227-7908
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(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes xx No
------- ---------
The number of shares of each class of common stock outstanding as of
November 30, 1998
Common stock, no par value 7,089,139
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- --------------------------------------------------------------------------------
<PAGE>
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- November 30, 1998 and May 31, 1998........................ 3
Consolidated Statements of Income:
- For the Three and Six Months Ended
November 30, 1998 and November 30, 1997................... 5
Consolidated Statements of Cash Flows
- For the Six Months Ended
November 30, 1998 and November 30, 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 - ............................................................. 11
Exhibits - ............................................................. 12
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
November 30, 1998 May 31, 1998
Unaudited
-------------------------------
<S> <C> <C>
Cash $ 590,494 $1,127,076
Accounts receivable 1,545,241 1,197,951
Inventories 4,871,952 4,166,755
Deferred tax asset 34,623 34,623
Prepaid expenses 60,383 120,466
Income tax receivable 64,653 190,806
---------- ----------
Total current assets 7,167,346 6,837,677
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 1,215,899 1,190,920
Furniture and equipment 1,030,671 1,045,319
---------- ----------
2,545,570 2,535,239
Less accumulated depreciation 790,280 691,258
---------- ----------
Total property & equipment 1,755,290 1,843,981
Other assets
Long-term deferred tax asset 837,560 837,560
Other assets 96,667 100,000
---------- ----------
Total other assets 934,227 937,560
Total assets $9,856,863 $9,619,218
---------- ----------
---------- ----------
</TABLE>
Page 3
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
<TABLE>
<CAPTION>
November 30, 1998 May 31, 1998
Unaudited
--------------------------------
<S> <C> <C>
Current liabilities
Line of credit $ 300,000 $ -0-
Trade accounts payable 619,647 681,524
Accrued liabilities 291,797 249,565
----------- -----------
Total current liabilities 1,211,444 931,089
Total liabilities $ 1,211,444 $ 931,089
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
November 30, 1998 7,089,139 shares $ 5,025,376 $ 5,072,634
May 31, 1998 7,099,139 shares
Cumulative foreign currency translation
adjustment 23,916 (147,708)
Retained earnings 3,596,127 3,763,203
----------- -----------
Total stockholders' equity 8,645,419 8,688,129
Total liabilities and stockholders' equity $ 9,856,863 $ 9,619,218
----------- -----------
----------- -----------
</TABLE>
Page 4
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1998
AND NOVEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
11/30/98 11/30/97 11/30/98 11/30/97
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 2,161,653 $ 3,220,475 $ 4,146,324 $ 5,887,416
Cost of sales 1,176,025 1,386,838 2,199,193 2,549,190
----------- ----------- ----------- -----------
Gross profit 985,628 1,833,637 1,947,131 3,338,226
General and administrative
expenses 1,057,947 1,065,181 1,911,403 2,004,674
Research and development 97,032 55,205 273,861 191,923
----------- ----------- ----------- -----------
1,154,979 1,120,386 2,185,264 2,196,597
(Loss) income from operations (169,351) 713,251 (238,133) 1,141,629
Other income and expense
Interest income 5,187 14,616 14,543 24,019
Interest expense (3,543) (220) (3,543) (2,148)
Misc. income 52,089 25,802 71,557 120,500
----------- ----------- ----------- -----------
53,733 40,198 82,557 142,371
(Loss) income before
income tax (115,618) 753,449 (155,576) 1,284,000
Provision for income tax -0- 58,000 11,500 234,000
----------- ----------- ----------- -----------
Net (loss) income for period $ (115,618) $ 695,449 $ (167,076) $ 1,050,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net (loss) income per common share
and common share equivalent
Basic $(.02) $.10 $(.02) $.15
----- ---- ----- ----
----- ---- ----- ----
Diluted $(.02) $.09 $(.02) $.14
----- ---- ----- ----
----- ---- ----- ----
</TABLE>
Page 5
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 AND NOVEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
November 30, 1998 November 30, 1997
-------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income from operations $ (167,076) $ 1,050,000
Items not affecting cash:
Amortization 3,333 -0-
Depreciation 99,022 92,424
Deferred taxes -0- (97,806)
Unrealized gain on trading securities -0- (98,000)
----------- -----------
(64,721) 946,618
Cash flows from changes in assets & liabilities:
Increase (decrease) in accounts payable (61,877) 585,652
Increase (decrease) in other liabilities 42,232 (31,554)
Decrease (increase) in accounts receivable (347,290) 74,822
Decrease (increase) in inventory (705,197) (906,212)
Decrease (increase) in prepaid expenses 60,083 (56,174)
Decrease (increase) in other assets -0- 90,415
Increase (decrease) in corp income tax -0- (68,563)
Decrease (increase) in income tax receivables 126,153 -0-
----------- -----------
(885,896) (311,614)
----------- -----------
Net cash provided (used) by operating activities: (950,617) 635,004
Cash flows used by investing activities:
Acquisition of capital assets: (10,331) (312,972)
----------- -----------
Net cash provided (used) by investing activities: (10,331) (312,972)
Cash flows from financing activities:
Advance on line of credit 300,000 -0-
Repurchase of company stock (47,258) -0-
Repayment of debt -0- (18,213)
Exercise of stock options -0- 95,254
----------- -----------
Net cash provided (used) by financing activities: 252,742 77,041
Effect of foreign exchange rate changes on cash: 171,624 (91,832)
Increase (decrease) in cash: (536,582) 307,241
Cash beginning of period: 1,127,076 504,662
Cash end of period $ 590,494 $ 811,903
----------- -----------
----------- -----------
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
November 30, 1998 November 30, 1997
------------------------------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options exercised $ -0- $ 17,379
-------- --------
-------- --------
Supplemental Information
Income taxes paid $ 6,300 $186,600
Interest paid $ 3,543 $ 2,148
</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 six-month period ended November 30, 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.
<TABLE>
<CAPTION>
NOTE 2: EPS Reconciliation Three Months Ended Six Months Ended
11/30/98 11/30/97 11/30/98 11/30/97
-------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares (basic) 7,089,139 7,088,768 7,093,784 7,085,595
Effect of dilutive stock options -0- 386,774 -0- 378,663
Weighted average shares (diluted) 7,089,139 7,475,542 7,093,784 7,464,258
</TABLE>
Incremental common stock equivalent shares of 225,881 and 261,076 were not used
in the calculation of diluted earnings per common share in the three and six
months ended November 30, 1998, respectively, due to the net loss for the
periods.
<TABLE>
<CAPTION>
NOTE 3: Comprehensive Income Three Months Ended Six Months Ended
11/30/98 11/30/97 11/30/98 11/30/97
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income $ (115,618) $ 695,449 $ (167,076) $ 1,050,000
Other comprehensive income (loss)
Foreign currency translation adjustment 25,434 (15,345) 171,624 (91,832)
----------- ----------- ----------- -----------
Total comprehensive income $ (90,184) $ 680,104 $ 4,548 $ 958,168
</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.
Page 7
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
SECOND QUARTER FISCAL YEAR 1999
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
FORWARD-LOOKING INFORMATION:
The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including but not limited to the uncertainties of the Company's new product
introductions, the risks of increased competition and technological change in
the Company's industry and other risks detailed in the Company's Securities and
Exchange Commission filings. Accordingly, actual results may differ, possibly
materially, from the predictions contained herein.
OVERVIEW:
Results of operations declined modestly during the second quarter of fiscal
1999, ended November 30, 1998, as evidenced by a decrease in profit levels.
Schmitt Balancer Systems ("SBS") product sales increased in the United States,
the United Kingdom, Germany and other world markets during the second quarter of
this fiscal year. Sales of Schmitt Measurement Systems, Inc. ("SMS") measurement
products were below expected levels for the quarter due to the worldwide decline
in the computer industry. The overall result was a net operating loss for the
second quarter of fiscal 1999.
RESULTS OF OPERATIONS:
Sales in the second quarter of fiscal 1999 decreased to $2,161,653 versus
$3,220,475 in the same period last year. This 33% decrease was caused by
declines in orders from domestic and international measurement customers. SMS
sales totaled $201,477 in the second quarter of fiscal 1999 as compared to
$1,320,038 in the second quarter of fiscal 1998. The Company expects measurement
sales to recover throughout calendar year 1999 with improved sales of the
TMS-2000 and the DTM-2000 Non-Contact Laser Texture Measurement Systems to the
computer hard drive markets to start in early calendar 1999. Sales of SBS
products in the second quarter of fiscal 1999 were 97% of the total for the same
period of the last fiscal year. Management expects SBS sales to improve in
calendar 1999 with the introduction of the SB-4500 product.
Second quarter cost-of-sales increased to 54% of sales versus 43% in the same
period last year. Cost of sales for the second quarter of SBS products were
stable while those of SMS declined when compared to the same period last year.
The drop at SMS served to decrease the Company's overall percentage.
Second quarter general and administrative and research and development expenses
totaled $1,154,979 versus $1,120,386 for the same period last year. The increase
occurred in research and development costs which totaled $97,032 for the period
ended November 30, 1998 and $55,205 the same period of the last fiscal year.
Research and development costs were key to the development of new products
expected to be introduced during calendar 1999. Management has begun a critical
review of non-R&D items with the goal to reduce fixed costs.
Sales by the German subsidiary, Schmitt Hofmann Systems GmbH ("SHS"), totaled
$452,087 for the quarter versus $459,420 for the same quarter last year, while
the British subsidiary, Schmitt Europe Ltd. ("SEL"), reported $288,028 in sales
for the quarter versus $185,689 for the same period last year. These sales
levels met management's expectations and resulted from intensive efforts
expended during this quarter in the United Kingdom to expand sales levels. The
quarter included operating profits for SEL of $22,705 and a loss for SHS of
$71,800.
Page 8
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
SECOND QUARTER FISCAL YEAR 1999
General and administrative expenses, including R&D, as a percentage of sales
during the first six months of fiscal 1999 were 53% compared to 37% for the same
period last year. This increase was attributable primarily to the lower level of
sales in the first six months of fiscal 1999. Management expects that it's
critical review of general and administrative expenses, coupled with an
anticipated increase in sales, will stabilize these costs at approximately 45%
for the remainder of fiscal 1999, up from 44% for fiscal 1998 and 41% in fiscal
1997.
In the six-month period ended November 30, 1998, the pretax loss totaled
($155,576) versus earnings of $1,284,000 for the same period last year. Taxes
were accrued in the first quarter with no change in the provision during the
second fiscal quarter. Management anticipates that the tax rate for fiscal 1999
will approximate 25% of pre-tax earnings.
Six-month net (loss) earnings were ($167,076) versus $1,050,000 for the same
period last year. Six-month (loss) earnings per share, diluted, were ($0.02)
versus $0.14 last year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's working capital position improved slightly during the second
quarter despite the required financing for the development of new products and
inventory. Working capital totaled $5,955,902 at November 30, 1998 versus
$5,906,588 at May 31, 1998. Corporate cash and marketable securities levels
stood at $590,494 at November 30, 1998 versus $1,127,076 as of May 31, 1998.
During the six-month period ended November 30, 1998, net cash used by operating
activities totaled ($950,617), including a net operating loss of ($167,076).
Included in cash flow from operations was a $705,197 increase in inventories.
The increase occurred due to a ramp up of parts required to manufacture new
products scheduled to be introduced in the third fiscal quarter of 1999.
Management is in the process of implementing plans to reduce the inventory
balance over the next few months.
During the six-month period ended November 30, 1998, accounts receivable
increased by $347,290, and accounts payable decreased by $61,877. The increase
in accounts receivable occurred because of the sales mix during the six-month
period ended November 30, 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 $10,331. Net
cash used by financing activities was $252,742. During the six months ended
November 30, 1998, the Company drew $300,000 on its $1.5 million credit line.
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.
IMPACT OF THE YEAR 2000 ISSUE:
The Company has completed an assessment of the impact of the Year 2000 issue on
its internal systems and equipment, on its products and on the systems of its
significant vendors. Based on this assessment, the Company believes that its
internal systems have been updated to address the Year 2000 issue, its products
will properly recognize calendar dates beginning in the Year 2000, and its
significant vendors are appropriately addressing the Year 2000 issue.
Accordingly, the Company believes it is Year 2000 ready and does not expect that
the Year 2000 will have a material impact on the Company's business, results of
operations or financial condition. However, there can be no assurance that the
systems of other companies on which the Company relies will not have an adverse
effect on the Company's systems.
Page 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 October 9,
1998. The matters voted upon, together with the results of voting,
were as follows:
1) The following persons were elected to fill the vacancies on the
Board of Directors created by the expiration of the Class 1 directors'
terms, to serve until the year 2001 annual meeting of the shareholders
and until their successors shall be duly elected:
<TABLE>
<CAPTION>
Director Shares Voted in Favor Shares Voted Against Shares Withheld
-------- --------------------- -------------------- ---------------
<S> <C> <C> <C>
David L. Dotlich 5,562,756 3,400 89,825
David M. Hudson 5,562,356 3,800 89,825
Dennis T. Pixton 5,559,356 6,800 89,825
</TABLE>
2) The Schmitt Industries, Inc. Stock Option Plan was amended to
increase the number of shares of Common Stock of the Company
issuable under the Option Plan from 500,000 to 800,000 shares:
<TABLE>
<CAPTION>
Shares Voted In Favor Shares Voted Against Shares Abstained
--------------------- -------------------- ----------------
<S> <C> <C> <C>
5,070,714 536,767 48,500
</TABLE>
3) The Schmitt Industries, Inc. Stock Option Plan was amended to
clarify that the group of people eligible to participate in the
Option Plan includes directors (including directors who are not
employees), officers, and other key employees of any subsidiaries
of the Company ("Subsidiaries") and selected non-employee agents,
consultants, advisors, persons involved in the sale or
distribution of any Subsidiary's products and independent
contractors of Subsidiaries:
<TABLE>
<CAPTION>
Shares Voted In Favor Shares Voted Against Shares Abstained
--------------------- -------------------- ----------------
<S> <C> <C> <C>
5,167,574 445,917 42,490
</TABLE>
4) PricewaterhouseCoopers LLP was appointed as independent auditors
to examine the financial statements of the Company and its
subsidiaries for the fiscal year ending May 31, 1999:
Page 10
<PAGE>
<TABLE>
<CAPTION>
Shares Voted In Favor Shares Voted Against Shares Abstained
--------------------- -------------------- ----------------
<S> <C> <C> <C>
5,070,714 536,767 48,500
</TABLE>
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: 01/14/99 /s/ Wayne A. Case
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Wayne A. Case, President/CEO/Director
Date: 01/14/99 /s/ Annie Windsor
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Annie Windsor, Chief Financial Officer
Page 11
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Location
- ------ ----------- --------
<S> <C> <C>
27 Financial Data Schedule Page 13
</TABLE>
Page 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10Q OF
NOVEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 596,494
<SECURITIES> 0
<RECEIVABLES> 1,545,241
<ALLOWANCES> 0
<INVENTORY> 4,871,952
<CURRENT-ASSETS> 7,167,346
<PP&E> 2,545,570
<DEPRECIATION> 790,280
<TOTAL-ASSETS> 9,856,863
<CURRENT-LIABILITIES> 1,211,444
<BONDS> 0
0
0
<COMMON> 5,025,376
<OTHER-SE> 3,596,127
<TOTAL-LIABILITY-AND-EQUITY> 9,856,863
<SALES> 4,146,324
<TOTAL-REVENUES> 4,146,324
<CGS> 2,199,193
<TOTAL-COSTS> 2,199,193
<OTHER-EXPENSES> 2,185,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,543
<INCOME-PRETAX> (155,576)
<INCOME-TAX> 11,500
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (167,076)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
