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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
____
xx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 1996
-------------------------
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, 1996 Common stock, no par value 7,038,889
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SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- November 30, 1996 and May 31,1996 . . . . . . . . . . . . 3
Consolidated Statements of Income:
- For the Three Months and Six Months Ended
November 30, 1996 and November 30, 1995. . . . . . . . . . . 5
Consolidated Statements of Cash Flows
- For the Six Months Ended
November 30, 1996 and November 30, 1995. . . . . . . . . . . 6
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
Page 2
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Part I - Financial Information
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
November 30, 1996 May 31, 1996
Unaudited
----------------- -------------
Cash $ 479,530 $ 508,240
Marketable securities & commercial paper 226,942 145,600
Accounts receivable 1,681,163 1,411,805
Inventories 2,367,920 1,781,331
Deferred tax asset 915,695 593,740
Prepaid expenses 4,393 15,906
Income tax receivable 49,100 -0-
----------- -----------
Total current assets 5,724,743 4,456,622
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 837,333 834,850
Furniture and equipment 742,466 660,371
----------- -----------
1,878,799 1,794,221
Less accumulated depreciation (435,588) (312,189)
----------- -----------
Total property & equipment 1,443,211 1,482,032
Other assets
Marketing rights 735,914 735,914
Less accumulated amortization (683,437) (663,521)
----------- -----------
Total other assets 52,477 72,393
Total assets $7,220,431 $6,011,047
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
November 30, 1996 May 31, 1996
Unaudited
----------------- -------------
Current liabilities
Trade accounts payable $ 326,789 $ 344,828
Accrued liabilities 337,997 244,613
Income taxes payable -0- 294,749
Current portion of long term debt 40,346 40,346
--------- ---------
Total current liabilities 705,132 924,536
Long term deferred tax liability
25,107 25,107
Long-term debt, net of current portion 174,532 174,532
--------- ---------
Total liabilities $ 904,771 $1,124,175
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
November 30, 1996 7,038,889 shares 4,679,680 4,098,512
May 31, 1996 6,918,139 shares
Retained earnings 1,635,980 788,360
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Total stockholders' equity 6,315,660 4,886,872
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Total liabilities and stockholders' equity $7,220,431 $6,011,047
--------- ---------
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Page 4
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
11/30/96 11/30/95 11/30/96 11/30/95
--------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $2,738,314 $1,520,028 $4,532,012 $2,866,897
Cost of sales 1,012,638 592,274 1,736,778 1,100,679
---------- ----------- ---------- ----------
Gross profit 1,725,676 927,754 2,795,234 1,766,218
General and administrative
expenses 922,675 640,236 1,684,409 1,231,861
---------- ----------- ---------- ----------
Income from operations 803,001 287,518 1,110,825 534,357
Other income and expense
Interest income 6,878 2,902 12,351 8,411
Interest expense (16) (5,313) (16) (10,699)
Depreciation (58,690) (47,907) (122,154) (92,864)
Amortization (4,385) (49,362) (23,065) (85,936)
Misc. income 10,556 17,790 30,679 10,752
---------- ----------- ---------- ----------
(45,657) (81,890) (102,205) (170,336)
Income before income tax 757,344 205,628 1,008,620 364,021
Provision for income tax 50,000 (2,471) 161,000 72,529
---------- ----------- ---------- ----------
Net income for period $ 707,344 $ 208,099 $ 847,620 $ 291,492
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net income per common
share and common
share equivalent
Primary .09 .03 .11 .04
--- --- --- ---
--- --- --- ---
Diluted .09 .03 .11 .04
--- --- --- ---
--- --- --- ---
</TABLE>
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED)
Cash flows from operating activities: Nov. 30, 1996 Nov. 30, 1995
------------- --------------
Net earnings from operations $ 847,620 $291,492
Items not affecting cash:
Amortization 23,065 85,936
Depreciation 122,154 92,866
Deferred taxes 8,045 -0-
---------- ---------
1,000,884 470,294
Cash flows from changes in assets &
liabilities:
Increase (decrease) in accounts payable (18,039) (57,873)
Increase (decrease) in current-mortgage -0- 607
Increase (decrease) in other liabilities 93,383 27,756
Decrease (increase) in accounts receivable (269,358) 61,453
Decrease (increase) in marketable
securities & commercial paper (81,342) (3,360)
Decrease (increase) in inventory (586,589) (339,312)
Decrease (increase) in prepaid expenses 11,513 6,966
Decrease (increase) in other assets -0- (35,661)
Increase (decrease) in corp income tax (343,849) 19,529
Decrease (increase) in income tax
receivables -0- 50,000
Decrease (increase) in note receivable -0- 10,000
---------- ---------
(1,194,281) (259,895)
---------- ---------
Net cash provided (used) by operating
activities: (193,397) 210,399
Cash flows from investing activities:
Acquisition of capital assets (86,482) (265,608)
---------- ---------
Net cash provided (used) by
financing activities: (86,482) (265,608)
Cash flows from financing activities:
Mortgage payable -0- (6,894)
Exercise of stock options 251,169 -0-
---------- ---------
Net cash provided (used) by financing
activities: 251,169 (6,894)
Increase (decrease) in cash (28,710) (62,103)
Cash beginning of period 508,240 141,244
Cash end of period $479,530 $ 79,141
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SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Income tax benefit of stock options exercised ($330,000)
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--------
Supplemental Information
Income taxes paid $ 110,100 $ 3,297
Interest paid $ 16 $ 10,699
NOTES TO INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
and all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month and six-month period ended November 30, 1996 are not necessarily
indicative of the results that may be experienced for the fiscal year ending May
31, 1997.
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.
Page 7
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including but not limited to the uncertainties of the Company's new product
introduction and the risks of increased competition and technological change in
the Company's industry. Accordingly, actual results may differ, possibly
materially, from the predictions contained herein.
Company operations improved dramatically during the second quarter of fiscal
1997, ended November 30, 1996, as evidenced by major increases in sales and
profit levels. During the second quarter, the Company entered into an agreement
to acquire "Schmitt Hofmann Systems GmbH" in Germany. The Company purchased the
assets of Hofmann Maschinenbau GmbH and then formed a new wholly owned
subsidiary as of 12/1/96 for a total cost of $500,000.
During the second quarter ended November 30, 1996, the Company, through its
wholly owned subsidiary Schmitt Measurement Systems, Inc. ("SMS"), continued to
sell TMS-2000 non-contact laser texture measurement systems (TMS 2000) to the
computer hard drive market. The Company has secured additional orders for these
products and expects substantial delivery during the balance of fiscal year
1997.
RESULTS OF OPERATIONS:
Sales in the second quarter of fiscal 1997 increased to $2,738,314 versus
$1,520,028 in the same period last year. This 80% increase was caused by
across-the-board gains in orders from both domestic and international customers.
Management believes sales increases resulted from improved marketing coverage
and advertising and the weakening of domestic competitors. Additionally, SMS
sales accounted for $1,283,742 of the second quarter sales as the TMS-2000 had
increased shipments, as compared to $394,292 in second quarter 1996 SMS sales.
Second quarter cost-of-sales decreased to 37% of sales versus 42% in the same
period last year. The continued sales of TMS-2000 products during the second
quarter had a positive impact on gross earnings and net earnings. Cost-of-sales
of SMS products was 28% for the first half of 1997 versus 37% in the same period
last year. Management expects SMS cost-of-sales for fiscal 1997 to be
approximately 34%.
The second quarter general and administrative expenses totaled $922,675 versus
$640,236 for the same period last year. This increase is attributed to the
increased sales level this year and a lower level of expenses in the same period
last year. The expansion in advertising, sales training costs, computer
purchases and employee salaries continued. Also, an increasing percentage of
the Company's products are being sold through commissioned agents and salesmen,
as compared with last year, a trend management expects to continue.
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
General and administrative expenses as a percentage of sales during the second
quarter of fiscal 1997 were 34% compared to 45% for the same period last year,
and management feels these costs will stabilize at approximately 40% for fiscal
1997, down from 43% for fiscal 1996 and 47% in fiscal 1995.
In the six-month period ended November 30, 1996 net income totaled $847,620
versus $291,492 for the same period last year. For the second quarter period
ending November 30, 1996, net income totaled $707,344 vs. $208,099 for the same
period last year. Taxes were accrued at a modest rate for the second quarter
given a total of 16% rate compared with 40% in the same period last year for the
first six months of Fiscal Year 1997. Management anticipates that the tax rate
for fiscal 1997 will approximate 30% due to prior year tax credits and refunds.
Second quarter net income per common share and common share equivalent on both a
primary and a fully diluted basis totaled $.09 versus $0.03 last year for the
same period. Fiscal year 1997 six month primary and fully diluted EPS and
Common Stock Equivalent were $0.11 versus $0.04 last year.
LIQUIDITY AND CAPITAL RESOURCES:
The Company increased its working capital position during the second quarter
while still financing the growth of the new SMS products and inventory growth.
Working capital totaled $5,059,958 at November 30, 1996 versus $3,532,086 at May
31, 1996 fiscal year end. Corporate cash and marketable securities levels stood
at $706,472 at November 30, 1996.
During the six-month period ended November 30, 1996 net cash provided by
operating activities totaled $847,620. Included in cash flow from operations
was a $586,589 increase in inventory. During the period, accounts receivable
increased by $269,358 to a total of $1,681,163 and marketable securities and
commercial paper increased by $81,342 to $226,942.
The increase in accounts receivable occurred because of the increased sales
during the second quarter ended November 30, 1996 compared with the first three
months of fiscal year 1997. As a result of its high-quality customer base, the
Company has experienced near 100% collection and no reserve for uncollectables,
returns or allowances has been established.
Management believes that its cash flow from operations, available credit
resources and its improving cash position will provide adequate funds on a
short-term basis to cover currently foreseeable debt payments, lease commitments
and payments under existing and anticipated supplier agreements. Management
believes that such cash flow is sufficient to finance current short-term
operations, projected capital expenditures, anticipated short-term sales
agreements and other contingencies during the next six months.
Management is currently reviewing long-range capital requirements as they relate
to expansion of products and markets. This analysis is expected to be completed
within the next three months and may or may not result in future decisions to
seek additional funding for the Company via debt or equity to service the
Company's future growth requirements.
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders:
The Company conducted an Annual Shareholders Meeting on October 25, 1996.
The matters voted upon, together with the results of voting, were as
follows:
1.) The following persons were elected to the Board of Directors of the
Company, to serve until the next annual meeting of the shareholders
and until their successors shall be duly elected:
SHARES VOTED SHARES SHARES
DIRECTOR IN FAVOR WITHHELD ABSTAINED
----------- ---------- -------- ---------
Maynard E. Brown 5,566,770 700 3,250
Wayne A. Case 5,567,270 200 3,250
David L. Dotlich 5,558,310 9,160 3,250
David M. Hudson 5,558,310 9,160 3,250
Trevor Nelson 5,557,810 9,660 3,250
John A. Rupp 5,566,220 1,250 3,250
2.) The Schmitt Industries, Inc. Stock Option Plan, as amended and
restated, was approved.
SHARES VOTED SHARES VOTED SHARES SHARES
IN FAVOR AGAINST ABSTAINED NOT VOTED
------------ ---------- --------- ---------
3,508,700 92,104 56,414 1,913,502
3.) Moss Adams was appointed as independent auditors to examine the
financial statements of the Company and its subsidiaries for the
fiscal year ending May 31, 1997.
SHARES VOTED SHARES VOTED SHARES
IN FAVOR AGAINST ABSTAINED
------------ ------------- -------
5,523,634 37,536 9,550
Page 10
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Part II - OTHER INFORMATION CONTINUED
Item 5. Other Information - None
Item 6(a) Exhibit 10.1 - Contract/Distribution Agreement
Exhibit 11.1 - Schedule of Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
Item 6(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHMITT INDUSTRIES, INC.
------------------------
(Registrant)
Date: 1/10/97
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Wayne A. Case, President/CEO/Director
Date: 1/10/97
---------------------------------------------------------------
Annie Windsor, Chief Financial Officer
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SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
Number Description Location
--------- ---------------------------------------- ------------
10.1 Contract/Distribution Agreement Page 13
11.1 Schedule of Computation of Net Income Page 25
27 Financial Data Schedule Page 26
Page 12
<PAGE>
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made this September 18, 1996.
BY AND BETWEEN
SCHMITT MEASUREMENT SYSTEMS, INC., a company organized and existing under the
laws of the State of Oregon, U.S.A., having its registered office at 2765 NW
Nicolai St., Portland, Oregon 97210, represented hereto by Mr. Wayne A. Case,
acting in his capacity as President and Chairman of the Board (hereinafter
referred to as "SMS")
AND
SLOAN TECHNOLOGY INC., a company organized and existing under the laws of the
State of California, U.S.A., having its registered office at 602 East Montecito
Street, Santa Barbara, California 93013, represented hereto by Dr. Timothy
Stultz, Vice-President and General Manager (hereinafter referred to as "Sloan").
WHEREAS
Sloan is willing to promote and sell the SMS products listed in Appendix (1)
hereto to Customers in the Territory, as such terms are defined herein, under
the terms and conditions herein set forth.
NOW THEREFORE IT HAS BEEN AGREED AS FOLLOWS:
ARTICLE 1 - DEFINITIONS
Whenever used in this Agreement, the following terms and expressions, whether
used in the singular or in the plural, shall have the meaning set forth in the
Article 1, except where the context clearly otherwise requires:
- - "Contractual Year" shall mean any period of twelve consecutive months
starting from the date of entry into force of the Agreement or from any
anniversary date of entry into force of this Agreement.
- - "Customers" shall mean those persons and entities comprising the micro-
electronics markets, including, without limitations semi-conductor, device,
materials and equipment manufacturers, data storage products, materials
and equipment manufacturers, flat panel display products, materials and
equipment manufacturers, and university and research laboratories engaged
in the development, production and/or characterization of micro-electronic
materials and devices.
<PAGE>
- - "Products" shall mean the products listed in Appendix 1, attached hereto,
which products are manufactured and/or sold by SMS.
- - "Territory" shall mean the world subject, however, to the following:
SMS has granted to others the exclusive right to promote and sell the
Products in the States of Washington, Oregon, Idaho, California, Arizona,
New Mexico, Colorado, Texas and Utah, U.S.A. (the "Western U.S.A.
Distribution Agreement"), and Japan (the "Japan Distribution Agreement").
SMS represents and warrants that the Western U.S.A. Distribution Agreement
may be terminated by SMS upon ninety (90) days written notice and that the
Japan Distribution Agreement may be terminated by SMS as of December 31,
1997. SMS further represents and warrants that it will use its best
efforts to cause the immediate termination of the Western U.S.A.
Distribution Agreement and the Japan Distribution Agreement, but that in no
event shall the termination of the Western U.S.A. Distribution Agreement be
later than ninety (90) days from the date hereof, and in no event shall the
termination of the Japan Distribution Agreement be later than December 31,
1997. Upon the termination of the Western U.S.A. Distribution Agreement
and/or the Japan Distribution Agreement, the Territory shall be deemed to
include the geographic areas encompassed thereby.
- - "Trademarks" shall mean the trademark "SMS" and its associated logo as well
as the trademarks registered by Sloan (or of its affiliated companies) in
the Territory.
ARTICLE 2 - PURPOSE OF THIS AGREEMENT
2.1 SMS hereby appoints Sloan as its exclusive distributor for the promotion
and sale of the Products to Customers in the Territory, under the terms and
conditions of this Agreement.
2.2 During the term of this Agreement, Sloan shall purchase the Products
exclusively from SMS for the purpose of their exclusive resale by Sloan to
Customers in the Territory. Sloan shall resell the Products purchased from
SMS under the names of one or more of the Trademarks.
ARTICLE 3 - LEGAL STATUS
Sloan is an independent legal entity acting for its own account and at its own
risk in its capacity as distributor. Its relationship with SMS is that of a
purchaser and a seller. Nothing in this Agreement shall be construed as
conferring upon Sloan any authority, express or implied, to bind or commit SMS
to any third party in any way.
<PAGE>
ARTICLE 4 - EXCLUSIVITY - NON COMPETITION
4.1 During the term of this Agreement, SMS undertakes not to appoint, directly
or indirectly, any other distributor, agent or representative for the
promotion or sale of the Products to Customers in the Territory. SMS also
undertakes not to sell, directly or indirectly, the Products to the
Customers in the Territory. Notwithstanding the foregoing, SMS may upon
the written consent of Sloan, sell Products to Customers in the Territory
provided that such Customers request that SMS sell Products to them in lieu
of Sloan selling Products to them in the event of such a sale, SMS shall
pay to Sloan, as a commission, a sum to be agreed to by SMS and Sloan prior
to the effectuation of any such sale but which shall not be less than ten
percent (10%) of the gross sales price of the Products sold, such
commission to be paid to Sloan upon SMS' receipt of the sale proceeds.
ARTICLE 5 - OBLIGATIONS OF SLOAN
5.1 Sloan agrees to use reasonable efforts (I) to promote and sell the Products
to customers in the Territory, and (ii) to provide the customers in the
Territory to whom Sloan sells the Products with reasonably diligent and
efficient services, in particular after-sale services.
5.2 In order to carry out these responsibilities, Sloan, at its sole expense,
agrees:
(I) to take all measures reasonably necessary to ensure the
promotion, sale and service of the Products to Customers in the
Territory;
(II) to treat its Customers and conduct its business activities with a
view to maintaining and increasing the public goodwill and
reputation attached to the Products and to the Trademarks;
(III) to distribute to prospective purchasers of the Products such
commercial or technical catalogues, booklets, leaflets and other
printed documentation as SMS may, at its own expense, supply to
Sloan for such purpose;
(IV) to prepare, with the assistance of SMS, and distribute to
potential Customers any other booklets or documentation which are
reasonably necessary for the sale of the Products to Customers in
the Territory;
(V) to participate, at its own expense, in fairs, exhibitions or
other trade shows which are likely to promote the sale of the
Products to Customers in the Territory;
(VI) to apply its general conditions of sale and warranty in
compliance with the requirements of the laws, regulations and
practices applicable to the sale of the Products to Customers in
the Territory;
<PAGE>
(VII) to ensure adequate after-sales service for the Products in the
Territory by itself (or through any third party);
(VIII) to obtain all permits and authorizations required for the import
of the Products in the Territory; and
(IX) to purchase and maintain all necessary insurance policies
reasonably required in connection with the promotion and sale of
the Products to Customers in the Territory.
ARTICLE 6 - OBLIGATIONS OF SMS
6.1 SMS shall provide to Sloan, upon the request of Sloan, reasonable
assistance in promoting the sale of the Products to Customers in the
Territory. To this effect, SMS shall provide, at its offices, training to
Sloan's personnel with respect to the specifications, promotion, sale and
usage of the Products; the specifics of this training program shall be
jointly defined and agreed to in advance between the parties. Traveling
and living expenses incurred by Sloan for the training of its staff shall
be borne by Sloan.
6.2 SMS shall furnish to Sloan, at no charge to Sloan, specifications,
promotional material and other documentation relevant to the Products which
are currently in its possession. SMS shall also furnish to Sloan at the
prices set forth herein, demonstration units of the Products which are
currently in its possession.
6.3 SMS shall ensure an adequate Product flow so that it is able to promptly
deliver to Sloan Products ordered by Sloan hereunder.
6.4 SMS shall promptly deliver to Sloan all Products ordered by Sloan
hereunder, in the condition warranted by SMS hereunder.
ARTICLE 7 - WARRANTY
7.1 SMS warrants to the Sloan that each Product sold and delivered to Sloan
shall be fit for the purpose intended, free from defects in material and
workmanship, and be of the quality described in the Product specifications.
7.2 In the event Sloan receives notice from a purchaser of a Product, within
twenty-four (24) months of the delivery of the Product to such purchaser,
that the purchased Product fails to satisfy the warranty set forth in
Section 7.1, Sloan shall make such product available for inspection by SMS
and, within ten (10) days of such inspection, SMS shall at its own expense,
either (I) correct the defect by repairing the Product or, at its option,
(ii) replace the defective Product, and deliver the repaired or replaced
Product to Sloan.
<PAGE>
ARTICLE 8 - PRICES - METHODS OF PAYMENT
8.1 The discounted prices applicable to the sales of Products by SMS to Sloan
shall be those appearing in Appendix 2, attached hereto.
8.2 The prices set forth in Appendix 2, both list and discounted, shall remain
constant during the first Contractual Year. Such prices may be increased
for subsequent Contractual Years upon the written agreement of SMS and
Sloan.
8.3 All monies due to SMS from Sloan for purchased Products shall be paid
within sixty (60) days of the date of invoicing, and shall be paid in
United States dollars.
8.4 Sloan shall sell the Products to Customers at the list prices listed on
Appendix 2, unless otherwise agreed upon in writing by SMS and Sloan.
ARTICLE 9 - CHANGES IN THE PRODUCTS
9.1 SMS shall have the right to modify any of the Products provided, however,
(I) the modification does not change the performance to the specifications
of the Products, and (ii) SMS furnishes Sloan with three (3) months prior
written notice of any such modification, or immediately with Sloan's
agreement.
ARTICLE 10 - TRADEMARK - ASSISTANCE AGAINST UNFAIR COMPETITION AND INFRINGEMENT
OF INTELLECTUAL PROPERTY RIGHTS
10.1 SMS hereby authorizes Sloan to use the Trademarks owned by it but only in
connection with the promotion and sale of the Products pursuant to this
Agreement and under the terms and conditions described in Article 10.2
hereafter.
10.2 Sloan agrees in particular:
- to use the Trademarks owned by SMS only in connection with the
promotion and sale of the Products and the performance of this
Agreement;
- to inform forthwith SMS of any trademark infringement of which Sloan
becomes aware of in the Territory;
- to cease and desist from using the Trademarks owned by SMS at the
expiry or termination of this Agreement for any reason whatsoever.
10.3 Sloan shall inform SMS of any act of unfair competition, and of any
infringement of the intellectual property rights of SMS, of which Sloan may
be aware.
<PAGE>
10.4 SMS represents and warrants that it is the sole owner of the Products and
the intellectual property rights associated therewith, and that the
Products do not infringe on intellectual property rights of third parties.
SMS agrees to defend, indemnify and hold Sloan (and its affiliated
companies) harmless with respect to any claims by others that the promotion
and sale of any of the Products constitutes an act of unfair competition or
infringes on the intellectual property rights of another.
10.5 SMS shall aggressively defend its rights in the Products, and aggressively
prosecute actions against those who are unfairly competing with the
Products, or otherwise infringing on the intellectual property rights
associated with the Products.
ARTICLE 11 - TERM
This agreement shall enter into force on its date of signature by both parties
and shall remain in force for an initial period of one (1) Contractual Year.
This Agreement shall be automatically renewed for additional Contractual Years
unless either party notifies the other party, by certified letter with return
receipt requested, of its intention not to renew this Agreement six (6) months
prior to the expiry of the initial Contractual Year or any following Contractual
Year.
ARTICLE 12 - EARLY TERMINATION
12.1 Either party shall have the right to terminate this Agreement by sending a
ninety (90) day notice, by certified mail with return receipt requested, in
the event that the other party fails to perform any of its material
obligations under this Agreement, and has not ceased such failure within
thirty (30) days after receipt of notice in writing to that effect from the
first party, sent by certified letter with return receipt requested,
without prejudice to any damages which might be claimed by the non-
defaulting party.
12.2 Either party shall have the right to terminate forthwith this Agreement by
sending a notice, by certified mail with return receipt requested, to the
other party should this other party be subject to bankruptcy proceedings or
to a reorganization plan with creditors (whether amicable or decided by the
court), or in the event of appointment of a bankruptcy trustee, arrangement
for the benefit of creditors, or should this other party be subject to
winding-up or any other procedure evidencing the insolvency of this other
party.
<PAGE>
ARTICLE 13 - CONSEQUENCES OF EXPIRY OR EARLY TERMINATION
Upon expiry or termination of this Agreement as provided for in Articles 11 and
12 hereabove, SMS shall have the option:
(i) either to authorize Sloan to sell, on a non-exclusive basis, the remaining
stock of Products in its possession for a limited period of time, to be
defined by SMS and Sloan according to the magnitude of the remaining stock
of Products at the time of expiry or termination, or
(ii) to repurchase all Products still existing in Sloan's stock and which were
purchased by Sloan from SMS, at a price equivalent to the net price (all
taxes excluded), paid to SMS by Sloan for such Products, less a 10%
restocking charge.
ARTICLE 14 - TERMINATION OF EXCLUSIVITY
The exclusive nature of Sloan's right to promote and sell a Product to Customers
in the Territory may be terminated by SMS in the event Sloan fails to purchase
from SMS a minimum number of units of such Product, as set forth on Appendix 3,
attached hereto. Any such termination may be effected by furnishing to Sloan
ninety (90) days written notice thereof, to be sent by certified mail, return
receipt requested. The termination of the exclusive nature of Sloan's right to
promote and sell any one Product shall not affect the exclusive nature of
Sloan's right to promote and sell other Products, which exclusive right shall
continue unabated.
ARTICLE 15 - FORCE MAJEURE
Neither party hereto shall be in default hereunder by reason of its delay in the
performance or failure to perform any of its obligations hereunder due to any
event, circumstance or cause beyond its control such as, but not limited to,
Acts of God, strikes, lock-out, acts or restrictions of governmental
authorities, wars, threats of war, hostilities, shortage in the raw materials or
means of transportation, revolution, riots, epidemics, fire, floods, all of
which shall be considered as events of force majeure.
The party affected by any such event shall notify the other party within fifteen
(15) days of its occurrence. The performance of this Agreement shall then be
suspended for as long as any such event shall prevent the affected party from
performing its obligations hereunder. If such suspension lasts more than three
(3) months, either party may terminate forthwith this Agreement by sending a
thirty (30) day written notice to this effect to the other party by certified
letter with return receipt requested.
<PAGE>
ARTICLE 16 - CONFIDENTIALITY
Each party agrees at any times, even after the expiry or termination of this
Agreement, for any reason whatsoever, to keep and maintain secret and in strict
confidence all proprietary information received from the other party under this
Agreement and not to permit such proprietary information to be disclosed to
third parties as long as this information is not in the public domain, except
for the purpose of the promotion, sale and/or servicing of the Products as
provided for in this Agreement. See the secrecy agreement singed by both
Parties.
ARTICLE 17 - APPENDICES
The appendices to this Agreement form an integral part thereof. There are three
(3) appendices.
ARTICLE 18 - NOTICES
Any notice required or permitted hereunder, made by any party to the other
party, shall be in writing and sent by certified mail with return receipt
requested at the addresses shown herein or at the last address notified by
either party to the other.
ARTICLE 19 - ENTIRE AGREEMENT - MODIFICATIONS
This Agreement contains the entire agreement of the parties hereto relating to
the subject matter hereof and supersedes all previous agreements between the
parties pertaining to subject matters covered by this Agreement.
ARTICLE 20 - APPLICABLE LAW
This Agreement shall be governed by and interpreted in accordance with Oregon
Law.
ARTICLE 21 - JURISDICTION
All disputes between the parties which may arise under this Agreement shall be
submitted to the exclusive jurisdiction of the Courts of Oregon, even where
there are multiple defendants or appeals.
<PAGE>
Dated Portland, Oregon, September 18, 1996.
/s/ /s/
- ----------------------------------- -----------------------------------
Wayne A. Case, President Dr. Timothy Stultz, Vice President
Schmitt Measurement Systems, Inc. Sloan Instruments Inc.
<PAGE>
Distribution Agreement
by and between
Schmitt Measurement Systems, Inc. and
Sloan Technology Inc.
APPENDIX 1
PRODUCTS
SMS Light Scatter Measurement Systems for application to the
microelectronics markets.
TMS-2000
TMS-2000W
TMS-3000W
<PAGE>
Distribution Agreement
by and between
Schmitt Measurement Systems, Inc. and
Sloan Technology, Inc.
APPENDIX 2
GENERAL CONDITIONS OF SALE
PRODUCT LIST PRICE(1) DISCOUNT TRANSFER PRICE
TMS-2000 $65,000 40% $39,000
WITH COMPUTER
TMS-2000 $63,000 40% $37,800
WITHOUT COMPUTER
TMS-2000W $85,000 40% $51,000
WITH COMPUTER
TMS-2000W $83,000 40% $49,800
WITHOUT COMPUTER
TMS-3000W $125,000 40% $75,000
WITH COMPUTER
TMS-3000W $123,000 40% $73,800
WITHOUT COMPUTER
SPARES & CONSUMABLES per SMS parts list 40% 60% of list price
All prices are F.O.B. Portland, Oregon.
(1) Both parties agree to review pricing on a regular basis, and by mutual
consent, adjust as necessary to meet market needs, competitive requirements
and market opportunities.
<PAGE>
Distribution Agreement
by and between
Schmitt Measurement Systems, Inc. and
Sloan Technology Inc.
APPENDIX 3
MINIMUM ANNUAL QUANTITY & FIRST PERIOD FORECAST
Both parties will mutually agree upon annual minimum quantities of SMS products
which must be purchased by Sloan from SMS in order to maintain its exclusivity
rights under this agreement. It is also agreed that the first period of this
agreement will run from October 1, 1996 through December 31, 1997.
Both parties further agree that the timely assignment of distribution rights for
all regions of the World Wide Territory to Sloan is critical to achieving
targeted sales volumes. Further, both parties agree that product performance,
customer support, applications development and customer driven product
improvements also are key factors which directly impact long term success and
subsequent sales volumes.
Both parties are however committed to apply resources, support one another and
achieve total customer satisfaction in order to meet and/or exceed minimum
targeted quantities in support of a combined market success.
The initial annual minimum quantity agreed upon for the first period of this
Agreement is 110 systems.
A quarterly forecast for the first period of this Agreement is:
Q4 1996 12 units
Q1 1997 17 units
Q2 1997 22 units
Q3 1997 27 units
Q4 1997 32 units
<PAGE>
EXHIBIT 11.1
SCHMITT INDUSTRIES, INC.
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
11/30/96 11/30/95 11/30/96 11/30/95
------------------- -----------------
<S> <C> <C> <C> <C>
I. Net income for period $ 707,344 $ 208,099 $ 847,620 $ 291,492
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
II. Determination of shares
Weighted average number of
common shares outstanding 7,020,593 6,886,889 6,998,225 6,886,889
Common equivalent shares 516,032 256,949 423,724 228,367
(determined using the "treasury stock"
method) representing shares issuable upon
exercise of employee stock options
Weighted average number of shares used 7,536,625 7,143,838 7,421,949 7,115,256
in calculation of primary income per share
Shares issuable on exercise of stock options, 331 3,884 94,110 28,582
net of shares assumed to be purchased out of
proceeds at market price
Weighted average number of shares used in
fully diluted income per share 7,536,956 7,147,722 7,516,059 7,143,838
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
III. Net income per common share and common
share equivalent
Primary .09 .03 .11 .04
--- --- --- ---
--- --- --- ---
Fully diluted .09 .03 .11 .04
--- --- --- ---
--- --- --- ---
</TABLE>
Page 25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q OF
NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 479,530
<SECURITIES> 226,942
<RECEIVABLES> 1,681,163
<ALLOWANCES> 0
<INVENTORY> 2,367,920
<CURRENT-ASSETS> 5,724,743
<PP&E> 1,878,799
<DEPRECIATION> 435,588
<TOTAL-ASSETS> 7,220,431
<CURRENT-LIABILITIES> 705,132
<BONDS> 0
0
0
<COMMON> 4,679,680
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,220,431
<SALES> 4,532,012
<TOTAL-REVENUES> 4,532,012
<CGS> 1,736,778
<TOTAL-COSTS> 1,736,778
<OTHER-EXPENSES> 1,684,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 1,008,620
<INCOME-TAX> 161,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 847,620
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
