<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, 2000
----------------------
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, 2000:
Common stock, no par value 8,213,224
---------
<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, 2000 and May 31, 2000 3
Consolidated Statements of Operations:
- For the Three and Six Months Ended November 30, 2000 and 1999 4
Consolidated Statements of Cash Flows:
- For the Six Months Ended November 30, 2000 and 1999 5
Supplemental Schedule of Non-Cash Financing Activities 5
Notes to Consolidated Interim Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 11
Part II - OTHER INFORMATION 12
Signatures - 12
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
November 30, 2000
Unaudited May 31, 2000
------------------- ------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 641,270 $ 1,264,475
Accounts receivable 1,244,680 1,377,422
Inventories 5,118,438 4,635,792
Prepaid expenses 162,247 65,022
Income taxes receivable 73,913 24,918
------------------- ----------------
TOTAL CURRENT ASSETS 7,240,548 7,367,629
------------------- ----------------
PROPERTY AND EQUIPMENT
Land 299,000 299,000
Buildings and improvements 1,233,437 1,213,553
Furniture and equipment 1,040,885 933,841
------------------- ----------------
2,573,322 2,446,394
Less accumulated depreciation and amortization 990,506 896,844
------------------- ----------------
TOTAL PROPERTY AND EQUIPMENT 1,582,816 1,549,550
------------------- ----------------
OTHER ASSETS
Long-term investment 1,376,000 812,000
Long-term deferred tax asset 1,101,871 1,156,871
Other assets 461,211 66,667
------------------- ----------------
TOTAL OTHER ASSETS 2,939,082 2,035,538
------------------- ----------------
TOTAL ASSETS $ 11,762,446 $ 10,952,717
=================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 556,106 $ 471,596
Accrued liabilities 343,022 353,050
------------------- ----------------
TOTAL CURRENT LIABILITIES 899,128 824,646
------------------- ----------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares 7,901,126 7,259,399
authorized, 8,213,224 and 7,980,389 shares issued and
outstanding at November 30, 2000 and May 31, 2000
respectively
Accumulated other comprehensive (loss) (863,344) (1,196,683)
Retained earnings 3,825,536 4,065,355
------------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 10,863,318 10,128,071
------------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,762,446 $ 10,952,717
=================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 3
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
-------------------------------------------------------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 1,785,195 $ 2,343,343 $ 3,728,185 $ 4,356,140
Cost of sales 1,088,773 1,057,490 1,854,902 2,014,761
---------------- ---------------- ---------------- ----------------
Gross profit 696,422 1,285,853 1,873,283 2,341,379
---------------- ---------------- ---------------- ----------------
Operating expenses:
General, administrative and sales 1,056,602 1,041,198 2,092,068 1,874,268
Research and development 75,600 100,095 179,598 230,020
---------------- ---------------- ---------------- ----------------
Total operating expenses 1,132,202 1,141,293 2,271,666 2,104,288
---------------- ---------------- ---------------- ----------------
Operating (loss) income (435,780) 144,560 (398,383) 237,091
Other income 6,823 25,224 13,564 51,235
---------------- ---------------- ---------------- ----------------
(Loss) income before (benefit from)
provision for income taxes (428,957) 169,784 (384,819) 288,326
(Benefit from) provision for income taxes (160,000) 22,000 (145,000) 56,000
---------------- ---------------- ---------------- ----------------
Net (loss) income $ (268,957) $ 147,784 $ (239,819) $ 232,326
================ ================ ================ ================
Net (loss) income per common share:
Basic $ (.03) $ .02 $ (.03) $ .03
================ ================ ================ ================
Diluted $ (.03) $ .02 $ (.03) $ .03
================ ================ ================ ================
Shares used in per share calculations:
Basic 8,223,521 8,184,889 8,232,330 8,184,889
================ ================ ================ ================
Diluted 8,223,521 8,651,639 8,232,330 8,651,639
================ ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 4
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended November 30,
--------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS RELATING TO OPERATING ACTIVITIES
Net (loss) income $ (239,819) $ 232,326
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 103,611 135,676
Amortization 27,280 10,000
Deferred taxes (137,000) --
(Increase) decrease in:
Accounts receivable 198,002 (143,197)
Inventories (408,407) 211,683
Prepaid expenses (90,879) (56,921)
Income taxes receivable (48,995) 106,419
Increase (decrease) in:
Accounts payable 78,797 50,879
Accrued liabilities (10,028) 53,692
---------------- ----------------
Net cash (used in) provided by operating activities (527,438) 600,557
---------------- ----------------
CASH FLOWS RELATING TO INVESTING ACTIVITIES
Purchase of property and equipment (64,708) (102,956)
Disposal of property and equipment -- 14,324
Cash acquired in purchase of wholly-owned subsidiary 113,604 --
---------------- ----------------
Net cash provided by (used in) investing activities 48,896 (88,632)
---------------- ----------------
CASH FLOWS RELATING TO FINANCING ACTIVITIES
Repurchase of company stock (106,002) --
---------------- ----------------
Net cash (used in) financing activities (106,002) --
---------------- ----------------
EFFECT OF FOREIGN EXCHANGE TRANSLATION ON CASH (38,661) (43,073)
---------------- ----------------
(DECREASE) INCREASE IN CASH (623,205) 468,852
CASH, BEGINNING OF PERIOD 1,264,475 268,888
---------------- ----------------
CASH, END OF PERIOD $ 641,270 $ 737,740
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ -- $ 673
Cash paid during the period for income taxes $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Increase (decrease) in market value of long-term investment $ 564,000 $ (845,000)
Increase (decrease) in long-term deferred tax liability $ (192,000) $ 254,000
Common stock issued for purchase of wholly-owned subsidiary $ 747,725 $ --
Wholly-owned subsidiary - net tangible assets acquired $ (325,901) $ --
Wholly-owned subsidiary - intangible assets acquired $ (421,824) $ --
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 5
<PAGE>
SCHMITT INDUSTRIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999
(UNAUDITED)
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, 2000 are
not necessarily indicative of the results that may be experienced for the fiscal
year ending May 31, 2001.
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.
NOTE 2: EPS RECONCILIATION
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
--------------------------------------- -----------------------------------
2000 1999 2000 1999
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Weighted average shares (basic) 8,223,521 8,184,889 8,232,330 8,184,889
Effect of dilutive stock options -- 466,750 -- 466,750
----------------- ----------------- --------------- ---------------
Weighted average shares (diluted) 8,223,521 8,651,639 8,232,330 8,651,639
================= ================= =============== ===============
</TABLE>
For the three and six months ended November 30, 2000, incremental shares in the
amount of 274,000 were excluded from the diluted loss per share calculation, as
their effect was anti-dilutive.
NOTE 3: COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
---------------------------------------- ---------------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net income (loss) $ (268,957) $ 147,784 $ (239,819) $ 232,326
Other comprehensive income (loss):
Decrease (increase) in fair market
Value of long-term investment,
net of taxes 440,000 (902,000) 372,000 (591,000)
Foreign currency translation
Adjustment 20,930 (54,512) (38,661) (43,073)
------------------ ------------------ ------------------ -----------------
Total comprehensive income (loss) $ 191,973 $ (808,728) $ 93,526 $ (401,747)
================== ================== ================== =================
</TABLE>
The long-term investment is classified as an "Available-for-sale security". As
required under Statement of Financial Accounting Standards No. 115, all
unrealized gains and losses, net of tax benefits, are included in Accumulated
Other Comprehensive Income (Loss) and reported as a separate component of Other
Comprehensive Income (Loss) in Stockholders' Equity until realized. The
cumulative translation adjustment consists of unrealized gains/losses from
translation adjustments on intercompany foreign currency transactions that are
of a long-term nature.
NOTE 4: SEGMENTS OF BUSINESS
The Company operates two principal business segments: the manufacturing of
mechanical components for the machine tool industries and the manufacturing of
laser measurement systems for the computer disk, silicon wafer and dimensional
sizing industries. The segment that manufactures mechanical components reported
gross sales of $3,437,670 for the six months ended November 30, 2000, including
inter-company sales of $405,101. This segment reported gross sales of $4,122,674
for the six months ended November 30, 1999, including inter-company sales of
$440,111. The segment, which manufactures laser measurement systems, reported
gross sales of $717,261 for the
Page 6
<PAGE>
SCHMITT INDUSTRIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999
(UNAUDITED)
six months ended November 30, 2000, including inter-company sales of $21,645.
For the six months ended November 30, 1999, the measurement products segment
reported gross sales of $690,007, including inter-company sales of $16,430.
Geographically, US sales were $2,447,444 and $2,852,867 for six months ended
November 30, 2000 and 1999 respectively. Foreign sales were $1,707,487 and
$1,959,814 for the same six-month periods, respectively. This includes
inter-company sales of $410,324 for the six months ended November 30, 2000 and
$456,541 for the six months ended November 30, 1999. For the six months ended
November 30, 2000 and 1999, respectively, export sales by the US segment totaled
$373,161 and $479,052.
Income from operations for the six months ended November 30, 2000 and 1999 for
the mechanical components segment was $116,531 and $31,664 respectively. Income
(loss) from operations for the six months ended November 30, 2000 and 1999 for
the laser measurement segment was $(514,914), and $205,427, respectively.
Consolidated income (loss) from operations includes an adjustment of $15,000 for
the elimination of inter-company rent for the six months ended November 30, 2000
and 1999. Income (loss) from operations for the US segment was $(496,500) and
$324,014 respectively, for the six months ended November 30, 2000 and 1999 and
for the foreign segment, income (loss) from operations was $98,117 and $(86,923)
respectively for the same six months.
Long-term assets at November 30, 2000 were $3,426,256 and $1,095,642
respectively for the mechanical components and laser measurement segments. At
May 31, 2000, long-term assets for the mechanical components and laser
measurement segments were $3,107,721 and $477,367 respectively. Long-term assets
at November 30, 2000 were $4,426,695 and $95,203 for the US and foreign segments
respectively. At May 31, 2000, long-term assets for the US and foreign segments
were $3,489,686 and $95,402 respectively.
Depreciation expense incurred during the six months ended November 30, 2000 and
1999 by the mechanical components segment was $75,171 and $98,443, respectively.
The laser measurement segment incurred depreciation expense of $28,440 and
$37,233 for the six months ended November 30, 2000 and 1999, respectively.
Amortization expense incurred during each of the six months ended November 30,
2000 and 1999 by the mechanical components segment was $10,000. The laser
measurement segment incurred amortization expense of $17,280 and $-0- for the
six months ended November 30, 2000 and 1999 respectively. The US segment
incurred depreciation expense of $84,223 and $98,314 during the six months ended
November 30, 2000 and 1999, respectively. The foreign segment incurred
depreciation expense of $19,388 and $37,362 respectively, for these same
six-month periods. The US segment incurred amortization expense of $27,280 and
$10,000 in the six months ended November 30, 2000 and 1999. The foreign segment
has not incurred amortization expense. Capital expenditures for the six months
ended November 30, 2000 and 1999, were $31,713 and $100,386 by the mechanical
components segment and $32,995 and $2,570 by the laser measurement segment,
respectively. Capital expenditures for the six months ended November 30, 2000
and 1999 were $45,510 and $85,736 by the US segment and $19,198 and $17,220 by
the foreign segment, respectively.
Income (loss) 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 5: ACQUISITION OF ACUITY RESEARCH INCORPORATED
On June 1, 2000, in a business combination accounted for as a purchase, the
Company acquired Acuity Research Incorporated. Acuity designs, manufactures and
markets precision dimensional laser measurement sensors. The results of
operations of Acuity are included in the accompanying consolidated financial
statements since the date of acquisition. The Company issued 275,000 of its
common shares, valued at $747,725, in exchange for all of the outstanding stock
of Acuity. The purchase price was allocated, based upon management estimates, to
the estimated fair value of assets and liabilities acquired, with the allocation
as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets net of current liabilities $ 253,732
Fair value of equipment acquired $ 72,169
Intangible assets, patented technology acquired $ 421,824
----------------
Page 7
<PAGE>
SCHMITT INDUSTRIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999
(UNAUDITED)
$ 747,725
================
</TABLE>
The patents acquired are being amortized over useful lives ranging from eleven
to seventeen years.
NOTE 6: STOCK OPTIONS
On July 1, 2000, FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of Accounting
Principles Board Opinion No. 25" (FIN44) became effective. FIN 44 clarifies the
application of Opinion 25 for certain issues including the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award. In May 1999, the Company decreased the exercise prices of
426,750 outstanding stock options to $3.00 per share (the "repriced options").
In accordance with FIN 44, any of these options which are not exercised or
cancelled will be accounted for pursuant to a variable stock option plan.
Accordingly, compensation expense would have been recorded to the extent the
quoted market price of the Company's common stock exceeded the revised exercise
price of the repriced options.
In July 2000, management offered to repurchase the affected options and all of
the employees and directors accepted this offer. At the time of this offer,
329,250 of the repriced options were outstanding. The cost to repurchase these
options of $87,510 was included in operating expenses for the six months ended
November 30, 2000. The quoted market price did not exceed the revised exercise
price at any time from July 1, 2000 through the date the options were
repurchased.
NOTE 7: PRO FORMA RESULTS - IMPACT OF PURCHASE OF ACUITY RESEARCH
The following pro forma results of operations is provided for illustrative
purposes only and does not purport to be indicative of the consolidated results
of operations for future periods or what actually would have been realized had
the Company and Acuity Research been a consolidated entity during the periods
presented. The pro forma results combine the results of operations as if Acuity
had been acquired as of the beginning of the periods presented. The results
include the impact of the valuation assigned to the patented technology
acquired.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
(Actual) (Pro forma) (Actual) (Pro forma)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 1,785,195 $ 2,522,976 $ 3,728,185 $ 4,694,849
Net income (loss) $ (268,957) $ 198,726 $ (239,819) $ 305,079
Net income (loss) per share, basic $ (.03) $ .02 $ (.03) $ .04
Net income (loss) per share, diluted $ (.03) $ .02 $ (.03) $ .04
</TABLE>
Page 8
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
SECOND QUARTER FISCAL YEAR 2001
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.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED NOVEMBER 30, 2000 AND 1999:
Sales in the second quarter of fiscal 2001 decreased to $1,785,195 versus
$2,343,343 in the same period last year, with decreases in both industry
segments. Worldwide sales of balancer products were $1,485,625 for the
three-months ended November 30, 2000 compared to $1,899,321 for the same period
last year. The decrease in sales occurred in both domestic and foreign markets
and is due to general worldwide softness in the machine tool industry. Sales in
those markets could continue to be flat in calendar 2001, although increases in
Europe are possible due to improved sales and marketing efforts in that market.
Sales of measurement products totaled $299,570 in the second quarter of fiscal
2001 compared to $444,022 in the second quarter of fiscal 2000. The Company
expects improvement in measurement sales throughout calendar 2001 as a result of
the marketing and sales initiatives started in the first six months of the
current fiscal year and from the initial shipments of the TMS-2000-DUV and
Precision Roll Monitor products.
Second quarter cost of sales as percentage of sales increased to 61% versus 45%
in the same period last year. Most of the increase was due to an inventory
writedown of $286,267 in the measurement segment. When excluding this writedown,
cost of sales as a percentage of sales was 45%, virtually equal to the prior
year percentage. Cost of sales as a percentage of sales for the balancer segment
was 46%, a decrease from 48% for the same quarter in the prior fiscal year.
Improvement came about through the reduction in direct labor costs at the German
subsidiary. In the measurement segment (when excluding the fiscal 2001 inventory
writedown) cost of sales as a percentage of sales was 41% and 34% for the three
months ended November 30, 2000 and 1999, respectively. The increase was from
underabsorbed labor costs resulting from lower sales. Management expects
cost-of-sales of Balancer and Measurement products (exclusive of the inventory
writedown) to approximate these levels for the remainder of fiscal 2001.
Second quarter general, administrative and R&D expenses totaled $1,132,202
versus $1,141,293 for the same period last year. As a percentage of sales,
during the second quarter of fiscal 2001 these expenses were 63% compared to 49%
for the same period last year. Both general, administrative and sales and
research and development expenses increased as a percentage of sales compared to
year ago levels due to the decline in sales volume. Management estimates that
these costs, as a percentage of sales, will decline as sales increase in future
fiscal periods.
Sales by the foreign subsidiaries totaled $463,463 for the quarter versus
$526,102 for the same quarter last year. There was some softness in the market
during the second quarter in fiscal 2001, but these changes in the markets are
expected to be only short term as management anticipates sales for the remainder
of the fiscal year to approximate year ago levels.
In the three-month period ended November 30, 2000, the pretax (loss) amounted to
$(428,957) compared to pretax earnings of $169,784 for the same period last
year. Taxes were accrued at approximately 37% of domestic pretax income,
consistent with management's expectation of a fiscal 2001 tax rate. The
three-month net (loss) was $(268,957) compared to net earnings of $147,784 for
the same period last year. Three-month net (loss) per share, basic and diluted,
was $(.03) versus a net earnings per share, basic and diluted, of $.02 last
year.
SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999
Sales in the first six months of fiscal 2001 decreased to $3,728,185 versus
$4,356,140 in the same period last year. This decrease occurred in the Balancing
segment. Worldwide sales of balancer products were $3,032,569 for the six-
Page 9
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
SECOND QUARTER FISCAL YEAR 2001
months ended November 30, 2000 compared to $3,682,563 for the same period last
year. Once again, the decrease in sales occurred in both the domestic and
foreign markets and is due to the general worldwide softness in the machine tool
industry, a trend which first began to impact the Company in the first quarter
of fiscal 2001. Sales in those markets could continue to be flat in calendar
2001 with possible increases in Europe due to improved sales and marketing
efforts in that market. Sales of Measurement products totaled $695,616 in the
first six months of fiscal 2001 compared to $673,577 for the same period in
fiscal 2000. The Company expects improvement in measurement sales throughout
calendar 2001 as a result of the marketing and sales initiatives started in the
first six months of the current fiscal year and from the initial shipments of
the TMS-2000-DUV and Precision Roll Monitor products.
Cost-of-sales for the period increased to 50% of sales versus 46% in the same
period last year. The cost of sales percentage of Balancer products was 44%
compared to 48% for the same period last year, with the improvement due from the
reduction in direct labor costs at the German subsidiary. Cost-of-sales of the
measurement segment was 76% for the six-months ended November 30, 2000 versus
37% in the same period last year. However, when the $286,267 inventory writedown
is excluded, the cost of sales percentage is 35%, comparable to the year ago
percentage. Management expects cost-of-sales of Balancer and Measurement
products (exclusive of the inventory writedown) to approximate these levels for
the remainder of fiscal 2001.
Operating expenses for the six months ended November 30, 2000 totaled $2,271,666
versus $2,104,288 for the same period last year. As a percentage of sales,
operating expenses (including R&D) during the six months ended November 30, 2000
were 61% compared to 48% for the same period last year. Both general,
administrative and sales and research and development expenses increased as a
percentage of sales compared to year ago levels due to the decline in sales
volume. Management estimates that these costs, as a percentage of sales, will
decline as sales increase in future fiscal periods.
Sales by the foreign subsidiaries totaled $924,002 for the six-month period
versus $1,024,221 for the same period last year. There was some softness in the
European markets for balancer products during the six months ended November 30,
2000 but, as mentioned earlier, these changes are expected to be only short term
as management anticipates sales for the remainder of the fiscal year to
approximate year ago levels.
In the six-month period ended November 30, 2000, the pretax loss amounted to
$(384,819) compared to pretax earnings of $288,326 for the same period last
year. Taxes were accrued at approximately 38% of domestic pretax income,
consistent with management's expectation of a fiscal 2001 tax rate. The
six-month net loss was $(239,819) compared to net earnings of $232,326 for the
same period last year. The six-month net loss per share, basic and diluted, was
$(.03) versus a net earnings per share, basic and diluted, of $.03 last year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's working capital position declined slightly to $6,341,416 at
November 30, 2000 compared to $6,542,983 at May 31, 2000. Cash stood at $641,270
at November 30, 2000 compared to $1,264,475 at May 31, 2000.
During the six-month period ended November 30, 2000, net cash (used in)
operating activities totaled $(527,438), including the net operating loss of
$(239,819). Included in cash flow from operating activities were a $198,002
decrease in accounts receivable, a $408,407 increase in inventories and a
$68,769 increase in accounts payable and accrued expenses. The decrease in the
Company's accounts receivable was due to the lower sales during the six-month
period ended November 30, 2000 compared with the same period preceding May 31,
2000. As a result of its high-quality customer base, the Company has experienced
nearly 100% collection and no reserve for uncollectable accounts, returns or
allowances has been established. The increase in inventories, occurring
primarily in the balancing segment, has been carefully evaluated. While all
inventories in that segment are believed to be usable, these items are under an
inventory reduction program that is projected to produce a significant decrease
in the level of inventories over the next several months. The reduction will
come about both through sales in the ordinary course of business and more strict
purchasing procedures. In evaluating inventories in the measurement segment,
most items are believed to be capable of being sold in the ordinary course of
business. However, one portion is comprised of items that are used in a single
product only and is one that has not seen any sales for several months. While
sales
Page 10
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
SECOND QUARTER FISCAL YEAR 2001
of this product line could be realized in the future, management believed it was
prudent to take a conservative approach to valuation and therefore decreased the
value of these items by 90% or $286,267.
During the six-month period ended November 30, 2000, net cash provided by
investing activities was $48,896 consisting of the net cash acquired in the
purchase of Acuity Research less additions to property and equipment. Net cash
used in financing activities amounted to $106,002, which consists of the
purchase of 42,165 shares of the Company's common stock.
Management believes that cash from operations, available credit resources and
its working capital position will provide adequate funds on a short-term basis
to cover currently foreseeable payments, 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Interest Rate Risk
The Company does not have any derivative financial instruments as of November
30, 2000. However, the Company is exposed to interest rate risk. The Company
employs established policies and procedures to manage its exposure to changes in
the market risk of its marketable securities.
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. and European interest rates. In this regard, changes in
U.S. and European interest rates affect the interest earned on the Company's
cash equivalents and marketable securities as well as interest paid on debt.
The Company has a line of credit whose interest rate is based on various
published prime rates that may fluctuate over time based on economic changes in
the environment. The Company is subject to interest rate risk and could be
subject to increased interest payments if market interest rates fluctuate. The
Company does not expect any change in the interest rates to have a material
adverse effect on the Company's results from operations.
Foreign Currency Risk
The Company operates subsidiaries in the United Kingdom and Germany. The
Company's business and financial condition is, therefore, sensitive to currency
exchange rates or any other restrictions imposed on their currencies. To date,
the foreign currency exchange rates have not significantly impacted the
Company's profitability.
Page 11
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
SECOND QUARTER FISCAL YEAR 2001
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 Meeting of the Shareholders on
September 29, 2000. At the meeting, the following persons were
elected to fill the vacancies on the Board of Directors created
by the expiration of the Class 3 directors' terms, to serve until
the year 2003 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>
Maynard E. Brown 7,641,951 3,200 11,715
Wayne A. Case 7,626,851 18,300 11,715
</TABLE>
Item 5. Other Information - None
Item 6.(a) Exhibits - None
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: 1/16/2001 /s/ Wayne A. Case
-----------------------------------------------------------
Wayne A. Case, President/CEO/Director
Date: 1/16/2001 /s/ Robert C. Thompson
-----------------------------------------------------------
Robert C. Thompson, Chief Financial Officer
Page 12
