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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: May 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission File Number: 0-23996
SCHMITT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon 91-1151989
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization)
2765 N.W. Nicolai Street
Portland, Oregon 97210
(Address of principal executive offices) (Zip Code)
(503) 227-7908
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------ ------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - no par value
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of August 7, 1998, the aggregate market value of the registrant's Common
Stock held by nonaffiliates of the registrant was $24,992,657 based on the
closing sales price of the registrant's Common Stock on the Nasdaq National
Market. On that date, there were 7,099,139 shares of Common Stock outstanding.
Portions of the registrant's 1998 Annual Report to Shareholders are
incorporated by reference into Parts II and IV hereof, and portions of the
registrant's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company designs, assembles and markets computer-controlled balancing
equipment for use primarily by the machine tool industry. Through its wholly
owned subsidiary, Schmitt Measurement Systems, Inc. ("SMS"), a Montana
corporation, the Company also designs, manufactures and markets precision laser
measurement systems.
The Company was incorporated under the laws of British Columbia, Canada in
1984. The name of the Company was changed to Schmitt Industries Inc. in 1987.
In February 1996, the Company was "continued" from British Columbia to the state
of Wyoming and then merged into its wholly owned subsidiary, Schmitt Industries,
Inc., an Oregon corporation; Schmitt Industries, Inc. was the surviving entity.
The Company acquired its original balancing equipment technology pursuant
to a series of agreements from 1987 through 1991. The patented technology has
been substantially enhanced and advanced by the Company in the past decade.
In May 1995, the Company acquired TMA Technologies Inc. ("TMA"), a
designer, assembler and marketer of innovative industrial measurement systems
based on laser light scatter technologies. For all of the outstanding shares of
TMA, the Company paid $15,000, assumed approximately $515,000 of TMA debt and
agreed to make royalty payments to TMA's shareholders of 5% on sales of TMA
products and future Company products that utilize TMA's technologies, hardware,
software and existing patents, subject to a maximum royalty of $6 million. In
June 1995, TMA began operations in Portland and subsequently changed its name to
Schmitt Measurement Systems, Inc. ("SMS")
In June 1996, the Company formed a wholly owned subsidiary, Schmitt Europe,
Ltd., under the laws of Great Britain to market and sell the Company's products
in Great Britain.
In December 1996, the Company completed the acquisition of the assets of
the grinding wheel balancer division of Hofmann Machinenbau GmbH of Germany.
The Company operates this business as Schmitt Hofmann Systems GmbH, a wholly
owned subsidiary of the Company ("SHS"). The Company purchased the assets from
Hofmann Machinenbau GmbH for $496,000.
The Company's executive offices are located at 2765 N.W. Nicolai Street,
Portland, Oregon 97210, and its telephone number is (503) 227-7908.
BALANCING PRODUCTS
The Company's principal product is the Schmitt Dynamic Balance System (the
"SBS System"). It consists of a computer control unit, sensor, spindle mounting
adapter, and balance head. It was designed to be an inexpensive, yet highly
accurate, permanent installation on grinding machines. Today, the SBS System is
beginning to be evaluated by manufacturers for additional applications including
large electric motors, industrial fans, industrial brushing devices, turbines
and similar devices.
The SBS System is fully automated and consequently the user does not have
to pre-balance such devices as grinding wheels. This reduces the setup time of
such operations and ensures a smoother and more efficient operation.
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The SBS System operates on a principle of mass compensation for wheel
imbalance. The balance head contains two movable eccentric weights, each of
which is driven by electric motors through a precision gear train. These
weights can be repositioned to offset any imbalance in a grinding wheel or other
application. Imbalance or vibration is picked up by the sensor. The signal is
fed to a controller that filters the signal by revolutions per minute. The
controller then drives the two balance head weights in the direction that
reduces the amplitude of the vibration signal. When the weights are positioned
so the lowest vibration level is reached, the balance cycle is complete.
Notable features of the SBS System include its ability to fit almost all
machines, ease of installation, compact and modular construction, ability to
balance a wheel while on a machine, elimination of wheel vibration, automatic
monitor of balance, display in both English and metric systems, instrument grade
calibration, short balance process, measurement of both displacement and/or
velocity, and minimal user maintenance.
Benefits to the system user include improved quality of finished parts,
ease of product adaptation, minimal downtime, complete and ready installation,
elimination of need for static balancing, longer life for wheels, dressings,
diamonds and spindle bearings, the ability to balance within 0.2 microns and its
adaptability to all types of machines.
The precision grinding industry has a worldwide presence and is established
in all industrialized countries. In each major industrialized country there are
three major market segments: the machine tool builders, the rebuilders and
grinding machine users.
The first major market segment consists of machine tool builders who
actually design and manufacture a variety of cylindrical, surface, and specialty
application grinding machines that are sold at home and also exported to foreign
markets. SBS System products are distributed to a variety of world markets
through OEM (original equipment manufacturer) accounts, where a special pricing
(20%) discount is offered to the machine builder if the designer incorporates
the SBS System into its machine.
Examples of some of well-known worldwide machine tool builders who have
offered and/or installed the SBS System include ANCA (Australia), Bryant
Grinders Corporation (U.S.), Blohm Incorporated (U.S.), Blohm GmbH (Germany),
Capco Machinery (U.S.), Cincinnati Milacron (U.S.), Ecotech/SMTW (China/U.S.),
Gold Crown Machinery (U.S.), Gleason Works (U.S.), Litton IAS/Landis Grinding
(U.S.), Micron Machinery Limited (Japan/U.S.), Normac Incorporated (U.S.), NTC
Toyama America (U.S./Japan), Okomoto (Japan), Okuma Machine (Japan), Royal
Master Grinders (U.S.), Shigiya Machine (Japan), Sumitomo Heavy Industry
(Japan), CETOS Hostivar (Czech Republic), TOS Holice (Czech Republic), Toyoda
Machine (Japan) and Weldon Machine Tool (U.S.).
One successful marketing channel to tool builders is the sale of the SBS
System to users who purchase new machines and thereby experience the benefits of
the SBS System and then purchase additional units for application to their older
machines.
The second major market segment consists of machine tool rebuilders who are
found in all industrial nations and who develop their business with users by
offering to completely update and refurbish older machine tools. These
rebuilders typically tear the old machine apart and install new bearings, new
electronics, and new advanced features, such as an SBS Automatic Wheel Balancer.
The Company currently sells its product directly to all major machine rebuilders
in the U.S. and to some countries in Western Europe.
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Grinding machine users in industrialized countries are the third major
market segment. Users become aware of the SBS System through trade shows, trade
magazine advertising, distributors, field representatives, referrals and new
machine suppliers.
Precision grinding is increasing as a worldwide method of material removal
and material processing. Therefore, the Company believes that there may be an
increase in market growth and an increase in the need for automatic balancers.
Precision grinding is necessary in all major manufacturing areas such as the
automotive industry (camshafts, crankshafts, valves), bearings (roller and
tapered types), ceramics (precision shaping), electric motors (shafts), pumps
(shafts and turbines), aircraft (engine parts), and general manufacturing.
The Company's business is conducted with many customers located throughout
the world. Examples of some of the more well known of these include Black &
Decker, Briggs and Stratton, Caterpillar Inc., Daewoo International Corp., Eaton
Corporation, Ford Motor Company, General Electric Corp., General Motors,
Ingersoll Rand, Sumitomo Heavy Industries, Texas Instruments, The Timken
Company, Torrington, TRW Automotive Components and Westinghouse Electric Corp.
The acquisition of SHS has added additional balancer designs to the
Company's worldwide product line. The SHS internal spindle balancers and ring
balancers add to the total balancer package available from the Company. These
proven designs, along with the original water balancer, allow Schmitt to broaden
its machine applications. The Company is now developing additional electronic
controllers that will operate all Schmitt, including SHS, balancers from a
single electronic controller.
In Fiscal 1996, 1997 and 1998, net sales of the Company's balancing
products totaled $4,801,151, $6,151,473, and $7,532,112, respectively. Net
sales of balancing products accounted for 68% of the Company's revenue in
Fiscal 1996, 58% in Fiscal 1997 and 71% in Fiscal 1998. See Note 8 to
Consolidated Financial Statements.
COMPETITION. Management believes that the SBS System is the only fully
automatic balancing system marketed in the world. All other competitive
balancing products require special setup and training or calibration to the
specific machine. The Company believes that the SBS System is currently the only
balancing product on the market that fits all machines with wheel sizes from 6
to 48 inches in diameter and spindle rpm of 500 through 7,500.
Competitive products include European manufacturers building water
balancers and electromechanical balancers similar to the SBS System. Water
balancers are currently priced at about 1.5 times the level of the SBS System
because of expensive plumbing and water chambers machined into the wheel hub.
The machines are disassembled and parts remachined or replaced within the
spindle assembly, a process that takes from one to two days. The system is
"tuned" or "calibrated" to the machine by a factory service technician.
Although water systems are unable to balance at low rpm, they work at mid- and
high-speeds when properly monitored by regularly cleaning filters and checking
clearance of water jets. This technology is the oldest in the market and is
employed in the SHS-installed systems. After the acquisition of SHS in December
1996, the Company considers European electromechanical balancers to be the its
major competition due to their established base in Europe.
Electromechanical balancers similar to the SBS System are produced by
several European companies, located primarily in Switzerland, Germany, Spain and
Italy. These European balancers have deficiencies in electronics which render
them less effective in solving essential balancing requirements. They cannot
achieve the consistent low balance levels obtained by the SBS System and cannot
operate effectively at 500 rpm (low speed) or at 7,500 rpm (high speed). In
addition, these balancers have
4
inferior brush and cable assemblies which cause down time and high
maintenance. None of these companies can compete effectively with the
Company in providing mounting adapters for all grinding machines.
The SBS System list price is $7,800 worldwide. Water balancers produced by
German companies other than SHS are priced at $11,000 to $15,000, and the
electromechanical systems are priced at $8,000 to $10,000 worldwide. Market
surveys by management indicate that customers perceive values of an automatic
balancer to approximately $8,000; therefore, Company pricing is geared to
obtaining a dominant market position and meeting competitive supplier prices.
The market strategy is to establish the SBS System as the dominant product with
the best quality, reliability and performance and superior economic value.
SCHMITT MEASUREMENT SYSTEMS, INC.
HISTORICAL BACKGROUND. SMS manufactures and markets a line of laser-based,
precision measurement systems. In addition, SMS operates a precision light
scatter measurement laboratory which is utilized by third-party equipment
manufacturers and others.
Light scatter technology involves using lasers, optics and detectors to
throw a beam of light on a material sample and recording its
reflection/transmission. Analysis of light scatter information can determine
material characteristics such as surface roughness and defects, without
introducing contaminants and causing changes to the tested material.
SMS PRODUCTS. The principal products of SMS are laser-based measurement
products and technology that can be applied to both military and industrial
markets. Historically, TMA (now SMS) did not pursue industrial markets but
instead concentrated on military markets. The Company believes that this
strategy was a significant contributing factor in the failure of TMA to achieve
profitable operations.
The Company believes that the patents, patent applications, trademarks and
other proprietary technology acquired with TMA can be successfully refocused
into industrial markets, including electronics, computer disk manufacturers and
flat-panel display manufacturers.
The Company is developing a product review and marketing plan. Over the
long term, the Company expects SMS products to add to sales and profitability of
the Company. Net sales of SMS products totaled $2,278,977 or 32% of the
Company's total revenue in Fiscal 1996, $4,390,499 or 42% of the Company's total
revenue in Fiscal 1997, and $3,093,972 or 29% of the Company's total revenue in
Fiscal 1998. See Note 8 to Consolidated Financial Statements.
SMS operates three businesses: a light-scatter measurement laboratory,
laser-based light-scatter measurement products and other laser alignment
products. SMS provides a highly advanced, extremely precise measurement
services laboratory to a wide variety of industrial and commercial businesses,
using advanced laser, light scatter technology.
The laboratory uses three SMS CASI Scatterometers for measuring surface
roughness. The true value of the laboratory is not only its extremely precise
measurement capability but also that the item being tested is not altered,
touched or destroyed. Thus, the laboratory is widely used by the semiconductor
and computer hard disk industries, as well as manufacturers of critical optical
components in aerospace and defense systems. Customers of the laboratory have
included Aerojet, AT&T Bell Labs, Eastman Kodak, General Electric, IBM, NASA and
dozens of other industrial companies, universities and government agencies.
5
The three SMS CASI Scatterometers in the laboratory are angle-resolved BRDF
measurement instruments providing customers with precise roughness measurements
of optical surfaces, diffuse materials, semiconductor wafers, magnetic storage
media, precision-machined surfaces, as well as surfaces affecting the cosmetic
appearance of consumer products. A Scatterometer uses ultraviolet or infrared
laser light as a nondestructive probe to measure surface quality, optical
performance, smoothness, appearance, defects and contamination on a wide variety
of materials.
The sample is mounted on stages capable of moving bidirectionally and/or in
rotation. The incident angle can be set anywhere up to an 85DEG. angle from
surface normal. The detector sweeps around the sample in the incident plane
measuring scattered and specular light. During the scan, the computer controls
gain, filter and aperture changes through user-defined parameters. The
instrument background is measured separately and can be compared with the sample
data.
The CASI Analysis Software simplifies analysis of scatter data. BRDF
values are used to calculate total integrated scatter, PSD and RMS roughness.
Annotated results print on the HP PaintJet printer as viewgraphs or
publication-ready figures.
The laboratory generated approximately 2% of SMS's total revenue during
Fiscal 1997 and 3% during Fiscal 1998. Total revenue for this business is
expected to rise modestly in the future while representing a smaller percentage
of SMS's business. Use of the laboratory, leading to orders for SMS's
laser-based light scatter measurement products by its customers, represents the
best marketing channel for SMS's current and future products. Existing products
(such as the Scan and the Model 2002 alignment laser system) and products being
developed in conjunction with the measurement services laboratory are being
marketed to a variety of industrial customers.
The Scan System consists of a hand-held control unit, an interchangeable
measurement head and a separate charging unit. To perform a measurement, the
operator places the measurement head on the objective area and presses the
button. Each measurement takes less than five seconds. The results are
displayed and stored in system memory. The Scan can store 700 measurements in
255 files and provides the capability to program pass/fail criteria. Software
is available for control, analysis and file conversion. From a single
measurement, a user can determine RMS surface roughness, reflectance and scatter
light levels (BRDF) on flat or curved surfaces under any lighting conditions.
The Auto-Collimating Alignment Laser System - Model 2002 is an extremely
accurate laser alignment system. The incorporation of a solid-state laser diode
provides increased beam stability and eliminates warm-up time. A new unique TMA
See-Thru target design completely eliminates beam displacement and power loss.
The addition of an operator selectable auto-collimating feature provides one arc
second accuracy over a large angular range. A microprocessor automates system
configuration. A new bus interconnect reduces setup time and allows up to seven
operator selectable targets, reducing time required to perform measurements. A
complete Model 2002 system consists of an auto-collimating laser, power supply,
digital display, See-Thru and end targets, carrying case and cable assemblies.
The Company introduced a new product, a Dual Texture Measurement machine
called the DTM-2000, in the first half of Fiscal 1998. Using the Company's
patented non-contact light scatter process of surface measurement, the automated
DTM-2000 provides for measurements on both sides of computer hard disks at
1,200 disks per hour at a measurement range of 2 angstroms to 200 angstroms.
On April 23, 1998, the Company entered into a Technology Transfer Agreement
with Centerline Engineering, Inc. and several individuals for the purchase of
the rights to a non-contact gauging
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apparatus. The $100,000 purchase included the technology, the prototype and
instruction manuals, technical information, and related patent applications.
BUSINESS AND MARKETING STRATEGY
MARKETING. The Company designs, assembles and markets all of its products,
except SMS products which are marketed through a strategic alliance with Veeco
Instruments Inc. ("Veeco"). The Company's operations are divided into a number
of different areas. The production organization, which is responsible for all
assembly, purchasing and production engineering, is directed by the Vice
President of Operations. The Product Marketing Division is responsible for the
sale of SBS System products. This division is managed by the President/CEO and
four Marketing Managers. Three of the Marketing Managers are responsible for
domestic sales. The fourth Marketing Manager is responsible for sales in
mainland China, Japan and Korea. The President/CEO is responsible for sales in
both eastern and western Europe and also oversees the efforts of the four
Marketing Managers. The technical services division is responsible for
providing technical support to customers and is managed by the Vice President of
Operations. In addition, there is a research and development group which is
supervised directly by the President/CEO and the Vice President of Operations.
The Company markets and sells the SBS System in a variety of ways. First,
the Company uses the conventional channels provided by independent
manufacturer's representatives and distributors. There are currently 25
individuals and/or organizations in the United States acting in one of these
capacities. Independent sales agents are paid a 10% commission; distributors are
sold products at a 15% discount.
Second, trade shows represent a significant amount of marketing/sales
effort. These events are held throughout the world and have proven to be
excellent sources of business for the Company. A representative from the
Company, usually one of the marketing managers and/or Wayne A. Case, attends
these events along with local Company representatives. These individuals attend
a display booth that features professional products, an SBS System demonstration
stand, product literature, and technical literature. Representatives from all
facets of the market to which the Company directs its sales efforts attend these
trade shows.
Third, original equipment manufacturers often include the SBS System on the
machine tools which they produce. Users thus purchase the SBS System
concurrently with the machine tools. The SBS Systems are also often installed
by machine builders prior to displaying their own machine tools at various trade
shows. These samples often become endorsements that prove to be beneficial to
the Company's sales efforts.
In the United States, most products are shipped directly to customers from
the Company's distribution center in Portland, Oregon. Where the Company has
distributors, the product is shipped to the distributor, who in turn pays the
Company directly and then delivers and installs the product for the end user.
Western European distribution to customers is handled by shipping the product
directly from the Company's Portland headquarters to the end users.
The acquisition of SMS (formerly TMA) has resulted in revision of marketing
strategy of both the balancer business and the new measurement products. The
Company is evaluating all products acquired through the acquisition of TMA and
evaluating existing measurement product and balancing product distributors and
agents to determine the most efficient mix.
On February 23, 1998, the Company entered into an Exclusive Distribution
Agreement, effective January 1, 1998, with Sloan Technology, Inc. (dba Veeco
Process Metrology), a subsidiary of Veeco
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(NASDAQ : VECO), pursuant to which Veeco was appointed the exclusive
distributor for the promotion and sale of SMS products. Veeco is also to
provide customers with after-sale services. The initial term of the
agreement ends on December 31, 1999 and is automatically renewed for
consecutive two-year periods unless either party notifies the other of its
intention to terminate the agreement six months prior to the expiration of
the then current term. This agreement replaces an earlier agreement with
Veeco having similar terms and dated September 18, 1996.
In fiscal 1998, approximately 24% of the Company's total revenue was
attributable to sales made to Veeco. No other customer accounted for more than
10% of the Company's total revenue in fiscal 1998.
The SBS System customer base consists of over 250 companies. The SMS
customer base consists of approximately 200 companies, many of which are also
purchasers of the Company's balancing products.
MANUFACTURING. The Company does not use any unique sources of supply or
raw materials in its products for either SBS System balancing products or SMS
measurement products. Essential electronic components used are available in
large quantities from various suppliers. These electronic components are
assembled into the SBS System and SMS electronic control units to meet the
Company's quality and assembly standards. Company-owned software and firmware
are coupled with the electronic components to provide the basis of the Company's
various electronic control units. The Company believes several sources of
supplies exist for all electronic components and assembly work that is used in
its electronic control system. The Company's primary outside supplier of
electronic assembly is Laughlin-Wilt Group, Inc. ("Laughlin-Wilt") of Beaverton,
Oregon, a custom supplier of assembled electronic products for several Pacific
Northwest companies. In the event of supply problems, the Company believes that
two or three alternatives could be developed within 30 days to supplement or
replace Laughlin-Wilt.
Mechanical parts for the Company's SBS System and SMS products are produced
to the customers' drawings and specifications by local high quality CNC machine
shops. Several such CNC machine shops exist in the local area, and the Company
is not dependent on any one supplier of mechanical components. Principal
suppliers of components for the Company's products include MacKay Manufacturing
of Spokane, Washington; OEM Manufacturing of Corvallis, Oregon; Eagle Industries
of Newberg, Oregon; and Forest City Gear of Roscoe, Illinois.
The Company uses in-house skilled assemblers to construct and test
vendor-supplied components. Component inventory of finished vendor-supplied
parts is held on the Company property to assure adequate flow of parts to
meet customer order requirements. Inventory is monitored by a computer
control system designed to assure timely re-ordering of components.
In-house personnel assemble various products and test all finished
components before placing them in the finished goods inventory. Finished goods
inventory is maintained via computer to assure timely shipment and service to
customers. All customer shipments are from the finished goods inventory.
In November 1996, the Company's Quality Control Program received full
ISO-9001 certification.
PATENTS AND TRADEMARKS
SBS SYSTEM PRODUCTS. The Company manufactures its products under copyright
protection in the U.S. for all electronic board designs which are also further
protected with encapsulation of the finished product to protect the Company's
technologies and software. U.S. Patent No. 4951526 was issued to the
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Company in 1990 and covers both the new ring balancer and the existing SBS
Balance Heads that the Company markets to the grinding industries.
The trademark "SBS" is a registered trademark of the Company and is affixed
to all products and literature created in the Company's balance product line.
The Company pays no licenses or royalties on its balancing technologies and
has offered no concessions, labor agreements or royalty agreements on its
balancing product lines.
SMS PRODUCTS. The trademark "SMS" is a registered trademark of the Company
and is affixed to all products and literature created in the Company's
measurement product line.
The following tables include information about patents and trademarks
issued and patents pending with respect to SMS products.
SMS PATENTS ISSUED
- -------------------------------------------------------------------------------
5196906 1993 Scan: surface measurement
5416590 1995 GapMaster: gap and mismatch
5596403 1997 Pitch, yaw of a single laser beam system and method of
measuring angular position
5625451 1997 Methods and apparatus for characterizing a surface
5661556 1997 System for measuring the total integrated scatter of a
surface
SMS TRADEMARKS
- -------------------------------------------------------------------------------
Scan 1992 Surface measurement system
CASI 1993 Surface inspection system
Accunet 1994 Distance measurement NET
FMS 1994 Finished measurement systems
Surf-Map 1995 Surface inspection process
SMS 1995 Schmitt Measurement System
PRODUCT DEVELOPMENT
Prior to Fiscal 1996, research and development activities of the Company
were focused on the enhancement of the existing product lines for balancers and
on development work toward the new ring balance product. Since its May 1995
acquisition of TMA, the Company has expended significant efforts evaluating
existing and potential new products for the light-scatter precision measurement
market.
During Fiscal 1994 and 1995, the Company developed the Ring Balancer, a
dynamic balancer shaped as a "ring" that allows the device to be fitted "around"
a rotating shaft rather than on the end of a shaft where the current Company
products are mounted. This mounting and configuration will allow the Company to
apply its ring balancers to virtually any rotating device such as fans,
turbines, large motors, centrifuges and other industrial machine tools.
During the last several years, the Company has developed several new major
offshoot products of its balancing technologies to widen market opportunities.
All costs associated with these developments have been borne directly by the
Company's customers, with minimal development costs to the Company. Research
and development costs for existing product line enhancements are treated as
product improvements and expenses, including costs toward the new Ring Balancer.
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During Fiscal 1998, the Company continued to develop new balancing products
and expended considerable time and effort in evaluating and developing new
laser-based measurement products. During Fiscal 1998, the Company developed and
began marketing the DTM-2000 Automatic Disk Measurement System.
During Fiscal 1996, 1997 and 1998, the Company's research and development
expense totaled $0, $205,800 and $379,798, respectively.
INTERNATIONAL SALES
The Company's sales in the last three fiscal years have been generated from
the following geographic areas:
NORTH AMERICA EUROPE ASIA
------------- ----------- ---------
Fiscal 1998 $ 8,006,428 $ 2,488,344 $ 131,312
Fiscal 1997 8,664,819 1,601,369 275,394
Fiscal 1996 6,298,170 442,470 339,488
BACKLOG
The Company does not generally track backlog. Normally, orders are shipped
within several weeks after receipt unless the customer requests otherwise.
EMPLOYEES
As of July 15, 1998, the Company employed 50 individuals worldwide on a
full-time basis. There were no regular part-time employees. None of the
Company's employees is covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's design and assembly facilities and executive offices are
located in a 7,500-square foot building in Portland, Oregon owned by the
Company; a 33,000-square foot facility, located across the street from the
executive offices and also owned by the Company, houses SMS's operations.
Schmitt Europe Ltd. occupies a 1,893-square foot facility in Coventry, England
pursuant to a five-year lease beginning February 1, 1997 with a basic monthly
rent of L1,708 (approximately $2,790 as of July 15, 1998). SHS occupies a
5,194-square foot facility in Alsbach, Germany pursuant to a five-year lease
beginning February 1, 1997 with a basic monthly rent of DM 5,442 (approximately
$3,022 as of July 15, 1998). The Company believes its facilities are adequate
to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings currently pending against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter ended May 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since May 5, 1997, the Company's Common Stock has been traded on the Nasdaq
National Market; prior to that it was traded on the Nasdaq-Small Cap Market.
The Common Stock is traded under the symbol "SMIT."
The following tables set forth the high and low sales prices of the
Company's Common Stock as reported on the Nasdaq-Small Cap Market and on the
Nasdaq National Market (since May 5, 1997) for the periods indicated.
YEAR ENDED MAY 31, 1997 HIGH LOW
------------------------------------ ------- ------
First Quarter $ 13.75 $ 8.88
Second Quarter $ 11.00 $ 7.88
Third Quarter $ 11.00 $ 7.88
Fourth Quarter $ 10.25 $ 7.00
YEAR ENDED MAY 31, 1998 HIGH LOW
------------------------------------ ------- ------
First Quarter $9.75 $7.50
Second Quarter $12.00 $8.00
Third Quarter $10.13 $7.38
Fourth Quarter $8.13 $5.69
As of July 15, 1998, there were 7,099,139 shares of Common Stock
outstanding held by 129 holders of record. The number of holders does not
include individual participants in security position listings; the Company
believes that there are more than 2,500 individual holders of shares of Common
Stock.
The Company has not paid any dividends on its Common Stock since 1994. The
Company's current policy is to retain earnings to finance the Company's
business. Future dividends will be dependent upon the Company's financial
condition, results of operations, current and anticipated cash requirements,
acquisition plans and plans for expansion and any other factors that the
Company's Board of Directors deems relevant. The Company has no present
intention of paying dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is included in the Company's Annual
Report to Shareholders for the fiscal year ended May 31, 1998 ("Annual Report")
under the heading "Selected Financial Data" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is included in the Annual Report
under the heading "Management's Discussion and Analysis" and is incorporated
herein by reference.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this Item are
included in the Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
In July 1997, the Company replaced its independent accountant, Moss Adams
LLP, with PricewaterhouseCoopers LLP. This decision was made by the Audit
Committee of the Company's Board of Directors.
Moss Adams LLP's reports for the fiscal years ended May 31, 1996 and
May 31, 1997 did not contain an adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles. During Fiscal 1996 and 1997 and until Moss Adams LLP's dismissal,
there were no disagreements with Moss Adams LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope of
procedure, which disagreements, if not resolved to the satisfaction of Moss
Adams LLP, would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
PART III
Certain information required by Part III is included in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders ("Proxy
Statement") and is incorporated herein by reference. The Proxy Statement will be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 not
later than 120 days after the end of the fiscal year covered by this Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Proxy Statement
under the heading "Proposal No.1: Election of Directors" and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Proxy Statement
under the heading "Executive Compensation" and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Proxy Statement
under the heading "Principal Shareholders" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the definitive Proxy
Statement under the heading "Certain Transactions" and is incorporated herein by
reference.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. INDEPENDENT AUDITOR'S REPORT:
To the Board of Directors and Shareholders of
Schmitt Industries, Inc.
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of income, of cash flows and
of changes in stockholders' equity present fairly, in all
material respects, the financial position of Schmitt Industries,
Inc. and its subsidiaries at May 31, 1998, and the results of
their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the
opinion expressed above. The financial statements of Schmitt
Industries, Inc. for the years ended May 31, 1996 and 1997 were
audited by other independent accountants whose report dated
July 10, 1997 expressed an unqualified opinion on those
statements.
PricewaterhouseCoopers LLP
Portland, Oregon
July 17, 1998
2. INDEPENDENT AUDITOR'S REPORT:
To the Board of Directors and Stockholders of
Schmitt Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Schmitt Industries, Inc. and Subsidiaries as of May 31, 1997 and
1996, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
13
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Schmitt Industries, Inc. and Subsidiaries as of
May 31, 1997 and 1996, and the results of their operations and
cash flows for the years then ended in conformity with generally
accepted accounting principles.
Moss Adams LLP
Portland, Oregon
July 10, 1997
3. FINANCIAL STATEMENTS:
The following financial statements required by this Item are
included in the Company's Annual Report to Shareholders for the
fiscal year ended May 31, 1998 and are incorporated by reference
herein:
Annual Report
Page Number
-------------
A. Consolidated Balance Sheets as of May 31, 1998 and
May 31, 1997 ....................................... 10
B. Consolidated Statements of Income for each of the
years ended May 31, 1998, May 31, 1997 and May 31,
1996 ............................................... 11
C. Consolidated Statements of Cash Flows for each of
the years ended May 31, 1998, May 31, 1997 and May
31, 1996 ........................................... 12
D. Consolidated Statements of Changes in
Stockholders' Equity for each of the years ended
May 31, 1998, May 31, 1997 and May 31, 1996 ........ 13
E. Notes to Financial Statements ...................... 14
4. FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules are omitted either because they
are not applicable, not required, or the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K: None.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SCHMITT INDUSTRIES, INC.
By: /S/ Wayne A. Case
-----------------------------------
Wayne A. Case
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Date: August 28, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on August 28, 1998.
SIGNATURE TITLE
- --------- -----
/s/ Wayne A. Case Chairman of the Board, President
- ---------------------------- and Chief Executive Officer
Wayne A. Case (Principal Executive Officer)
/s/ Annie Windsor Chief Financial Officer
- ---------------------------- (Principal Financial and
Annie Windsor Accounting Officer)
/s/ David L. Dotlich Director
- ----------------------------
David L. Dotlich
/s/ David M. Hudson Director
- ----------------------------
David M. Hudson
/s/ Trevor Nelson Director
- ----------------------------
Trevor Nelson
/s/ Dennis T. Pixton Director
- ----------------------------
Dennis T. Pixton
15
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
- -------- ---------------------------------------------------------------------
*3(i) Second Restated Articles of Incorporation of Schmitt Industries, Inc.
(the "Company") . . . . . . . . . . . . . . . . . . . . . . . . . . .
*3(ii) Second Restated Bylaws of the Company . . . . . . . . . . . . . . . .
*10.1 Schmitt Industries, Inc. Amended & Restated Stock Option Plan . . . .
10.2 Agreement dated April 21, 1995 between TMA Technologies, Inc. and the
Company. Incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996 . .
10.3 Exclusive Distribution Agreement dated February 23, 1998 between
Sloan Technology Inc. and the Company. Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended February 28, 1998. (Confidential treatment
has been granted for certain portions of this Agreement; these
confidential portions have been filed separately with the Securities
and Exchange Commission.) . . . . . . . . . . . . . . . . . . . . . .
10.4 Sales Contract dated November 19, 1996 between Herr Dirk Pfeil,
receiver of Hofmann Machinenbau GmbH, and Schmitt Hofmann Systems
GmbH. Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
February 28, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . .
*10.5 Technology Transfer Agreement dated April 23, 1998 between Centerline
Engineering, Inc. and the Company . . . . . . . . . . . . . . . . . .
*13.1 Annual Report to Shareholders of Schmitt Industries, Inc. for fiscal
year ended May 31, 1998 . . . . . . . . . . . . . . . . . . . . . . .
*21.1 Subsidiaries of Schmitt Industries, Inc. . . . . . . . . . . . . . .
*23.1 Consent of PricewaterhouseCoopers LLP . . . . . . . . . . . . . . . .
*23.2 Consent of Moss Adams LLP . . . . . . . . . . . . . . . . . . . . . .
*27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . .
______________________________
* Filed herewith
16