<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: February 28, 1998
-------------------------------------------
or
- ------
- ------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to:
------------------- ------------------
Commission File Number: 0-23996
-----------------------------------------------------
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
February 28, 1998 Common stock, no par value 7,096,889
<PAGE>
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets:
- February 28, 1998 and May 31, 1997 . . . . . . . . . 3
Consolidated Statements of Income:
- For the Three and Nine Months Ended
February 28, 1998 and February 28, 1997. . . . . . . 5
Consolidated Statements of Cash Flows
- For the Nine Months Ended
February 28, 1998 and February 28, 1997. . . . . . . 6
Supplemental Schedule of Non-Cash Investing
and Financing Activities . . . . . . . . . . . . . . 7
Notes to Interim Financial Statements . . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 8
Part II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 10
Signatures - . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exhibits - . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
Unaudited
--------------------------------
<S> <C> <C>
Cash $ 890,089 $ 504,662
Marketable securities & commercial paper 213,440 168,000
Accounts receivable 1,435,699 2,725,512
Inventories 3,887,751 2,479,820
Prepaid expenses 139,247 30,668
Deferred tax asset 244,585 136,000
------------ -----------
Total current assets 6,810,811 6,044,662
Property and equipment
Land 299,000 299,000
Buildings & leasehold improvements 1,195,093 1,025,868
Furniture and equipment 863,351 760,596
Vehicles 158,886 146,299
------------ -----------
2,516,330 2,231,763
Less accumulated depreciation 642,114 530,587
------------ -----------
Total property & equipment 1,874,216 1,701,176
Other assets
Long-term deferred tax 679,000 679,000
Other assets -0- 90,415
------------ -----------
Total other assets 679,000 769,415
Total assets $ 9,364,027 $ 8,515,253
------------ -----------
------------ -----------
</TABLE>
Page 3
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
Unaudited
--------------------------------
<S> <C> <C>
Current liabilities
Trade accounts payable $ 662,098 $ 530,667
Accrued liabilities 153,978 306,811
Income taxes payable -0- 68,563
Current portion of long term debt -0- 29,061
------------ -----------
Total current liabilities 816,076 935,102
Long-term debt, net of current portion -0- 150,922
------------ -----------
Total liabilities $ 816,076 $ 1,086,024
STOCKHOLDERS' EQUITY
Common stock
Authorized: 20,000,000 shares
without par value
Issued and outstanding:
February 28, 1998 5,058,406 4,952,411
and May 31, 1997 7,096,889 and
7,081,889 shares respectively
Cumulative foreign translation
adjustment (175,337) (36,270)
Retained earnings 3,664,882 2,513,088
------------ -----------
Total stockholders' equity 8,547,951 7,429,229
Total liabilities and stockholders' equity $ 9,364,027 $ 8,515,253
------------ -----------
------------ -----------
</TABLE>
Page 4
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1998
AND FEBRUARY 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
02/28/98 02/28/97 02/28/98 02/28/97
------------------------- -------------------------
<S> <C> <C> <C> <C>
Sales $2,372,320 $2,918,912 $8,259,736 $7,450,924
Cost of sales 1,313,120 1,059,330 3,862,310 2,776,712
---------- ---------- ---------- ----------
Gross profit 1,059,200 1,859,582 4,397,426 4,674,212
General and administrative
expenses 821,997 1,122,128 2,826,670 3,011,641
Research and development 78,655 56,650 270,579 116,161
---------- ---------- ---------- ----------
Total operating expense 900,652 1,178,778 3,097,249 3,127,802
Income from operations 158,548 680,804 1,300,177 1,546,410
Other income and expense
Interest income 7,784 14,805 31,803 27,156
Interest expense (20,104) (5,593) (22,252) (5,609)
Misc. income 55,566 38,448 176,066 69,127
---------- ---------- ---------- ----------
43,246 47,660 185,617 90,674
Income before income tax 201,794 728,464 1,485,794 1,637,084
Provision for income tax 100,000 269,809 334,000 430,809
---------- ---------- ---------- ----------
Net income for period $ 101,794 $ 458,655 $1,151,794 1,206,275
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share
Basic .01 .07 .16 .17
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted .01 .06 .15 .17
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Page 5
<PAGE>
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998 AND FEBRUARY 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
February 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income from operations $ 1,151,794 $ 1,206,275
Items not affecting cash:
Amortization -0- 23,815
Depreciation 111,487 199,768
Deferred taxes (108,585) (5,659)
Unrealized gain on trading securities (45,400) -0-
----------- -----------
1,109,296 1,424,199
Changes in certain assets & liabilities:
Decrease (increase) in accounts receivable 1,289,813 (759,740)
Decrease (increase) in marketable securities
& commercial paper -0- (176,782)
Decrease (increase) in inventory (1,407,931) (890,459)
Decrease (increase) in prepaid expenses (108,579) (13,943)
Decrease (increase) in other assets 90,415 -0-
Increase (decrease) in accounts payable 131,431 278,756
Increase (decrease) in other liabilities (152,833) 26,419
Increase (decrease) in income tax payable (68,563) (88,140)
----------- -----------
(226,247) (1,623,889)
----------- -----------
Net cash provided (used) by operating activities: 883,049 (199,690)
Cash flows used by investing activities:
Acquisition of capital assets: (284,567) (313,884)
----------- -----------
Net cash provided (used) by investing activities: (284,567) (313,884)
Cash flows from financing activities:
Line of credit -0- 400,000
Repayment of debt (179,983) -0-
Exercise of stock options 105,995 278,512
----------- -----------
Net cash provided (used) by financing activities: (73,988) 678,512
Effect of foreign exchange rate changes on cash: (139,067) -0-
Increase (decrease) in cash: 385,427 164,938
Cash beginning of period: 504,662 508,240
Cash end of period $ 890,089 $ 673,178
----------- -----------
----------- -----------
</TABLE>
Page 6
<PAGE>
February 28, 1998 February 28, 1997
----------------- -----------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<S> <C> <C>
Income tax benefit of stock options exercised $ 19,370 $ 330,000
--------- --------
--------- --------
Supplemental Information
Income taxes paid $ 399,200 $ 124,100
Interest paid $ 22,252 $ 5,609
</TABLE>
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information,
and all adjustments considered necessary for a fair presentation have been
included. Operating results for the three-month and nine-month periods ended
February 28, 1998 are not necessarily indicative of the results that may be
experienced for the fiscal year ending May 31, 1998.
These financial statements are those of the Company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in the preparation of the consolidated financial statements. Certain
prior year amounts have been reclassified to conform with current year
presentation. Such reclassifications had no effect on previously reported
results of operations or stockholders' equity.
<TABLE>
<CAPTION>
Note 2: EPS Reconciliation Three Months Ended Nine Months Ended
2/28/98 2/28/97 2/28/98 2/28/97
--------------------- ---------------------
<S> <C> <C> <C> <C>
Weighted average shares (basic) 7,095,711 7,042,886 7,088,728 7,012,557
Effect of dilutive stock options 342,639 159,226 382,614 154,973
Weighted average shares (diluted) 7,438,350 7,202,112 7,471,342 7,167,530
--------- --------- --------- ---------
</TABLE>
Page 7
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
THIRD QUARTER FISCAL YEAR 1998
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
The following information contains certain forward-looking statements that
anticipate future trends or events. These statements are based on certain
assumptions that may prove to be erroneous and are subject to certain risks
including but not limited to the uncertainties of the Company's new product
introductions and the risks of increased competition and technological change in
the Company's industry. Accordingly, actual results may differ, possibly
materially, from the predictions contained herein.
Company operations slowed during the third quarter of fiscal 1998, ended
February 28, 1998, as evidenced by decreases in sales and profit levels. Sales
of balancer products increased in the United States, the United Kingdom, Germany
and other world markets during the third quarter of this fiscal year, but sales
of measurement products slowed during this period due primarily to the impact of
delayed orders for the Asian markets. Management expects these reduced sales
trends of measurement products to continue throughout fiscal year 1998.
During the third quarter ended February 28, 1998, the Company experienced
declining sales of the TMS-2000 non-contact laser texture measurement systems
(TMS 2000) to the computer hard drive market. Sales of the TMS series products
have been made pursuant to an exclusive marketing agreement with Veeco (NASDAQ:
VECO). Veeco has projected reduced delivery of these products during the
balance of fiscal year 1998.
RESULTS OF OPERATIONS:
Sales in the third quarter of fiscal 1998 declined to $2,372,320 versus
$2,918,912 in the same period last year. This 19% decline was caused by delays
in orders from both domestic and international measurement customers. SMS sales
accounted for $675,051 of the third quarter sales, as compared with $916,226 in
third quarter 1997 SMS sales.
Third quarter cost-of-sales increased to 55% of sales versus 36% in the same
period last year. The declining sales of TMS-2000 products during the third
quarter had a negative impact on gross earnings and net earnings. Cost-of-sales
of SMS products was 59% of related revenues for the third quarter 1998 versus
42% in the same period last year. Management expects SMS cost-of-sales for
fiscal 1998 to be approximately 40% of related revenues.
Nine-month general operating expenses totaled $3,097,249 versus $3,127,802 for
the same period last year. The acquisition of Schmitt Hofmann Systems GmbH
("SHS") and Schmitt Europe Ltd. ("SEL") added to ongoing operating expenses.
General and administrative expenses for U.S.A. operations have declined slightly
in fiscal year 1998 as compared with the comparable nine-month period in fiscal
year 1997.
Sales by the German subsidiary, SHS, totaled $410,734 for the third quarter,
with SEL reporting $220,867 in sales for the period. These sales levels met
management's expectations and resulted from intensive efforts expended during
this quarter in Germany and the United Kingdom to expand sales levels. The
quarter included operating losses for SHS of $56,357 and operating profit at SEL
of $23,846.
Page 8
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
THIRD QUARTER FISCAL YEAR 1998
General operating expenses as a percentage of sales during the first nine months
of fiscal 1998 were 37% compared with 42% for the same period last year.
Management estimates these costs will stabilize at approximately 39% for fiscal
1998, down from 41% for fiscal 1997 and 43% in fiscal year 1996.
In the three-month period ended February 28, 1998, net income totaled $101,794
versus $458,655 for the same period last year. For the nine-month period, taxes
were accrued at approximately a 22% rate compared with 26% in the same period
last year. Management now anticipates that the tax rate for fiscal 1998 will
approximate 34%, due to the timing of tax benefit realization from net operating
loss carry forwards.
Nine-month net income was $1,151,794 versus $1,206,275 for the same period last
year. Nine-month income per share was $0.16 for fiscal year 1998 versus $0.17
last year on a basic basis and $.15 for fiscal year 1998 versus $.17 last year
on a diluted basis, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
The Company maintained its working capital position during the third quarter
while still financing the growth of the new measurement products and inventory
at SHS and SEL. Working capital totaled $5,994,735 at February 28, 1998 versus
$5,109,560 at May 31, 1997 fiscal year end. Corporate cash and marketable
securities levels stood at $1,103,529 at February 28, 1998.
During the nine-month period ended February 28, 1998, net cash provided by
operating activities totaled $883,049, including net income of $1,151,794.
Included in cash flow was a $1,407,931 increase in inventory. During the
period, accounts receivable decreased by $1,289,813 and marketable securities
and commercial paper appreciated $45,400. The increase in inventory was caused
by planned changes of balancer inventory for the U.S.A. and Europe and the ramp
up of the new DTM-2000 measurement product line.
The decrease in accounts receivable occurred because of reduced invoicing and
improved collections during the nine-month period ended February 28, 1998
compared with the same nine 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 uncollectable accounts, returns or allowances has been
established. Net cash used for repayment of debt was $179,983, which was used
for the retirement of long-term debt obligations. Net cash used by financing
activities was $73,988.
Management believes that cash 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 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.
Page 9
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders:
-- None --
Item 5. Other Information - None
Item 6(a) Exhibit 10.1 - Exclusive Distribution Agreement
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: 04/10/98 /s/ Wayne A. Case
----------------------------------------------------------
Wayne A. Case, President/CEO/Director
Date: 04/10/98 /s/ Annie Windsor
----------------------------------------------------------
Annie Windsor, Chief Financial Officer
Page 10
<PAGE>
SCHMITT INDUSTRIES, INC.
FORM 10-Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Location
- ------ ----------- --------
<S> <C> <C>
10.1 Exclusive Distribution Agreement Page 12
27 Financial Data Schedule Page 24
</TABLE>
Page 11
<PAGE>
EXCLUSIVE
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made this February 23, 1998, effective January 1, 1998.
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. (DBA VEECO PROCESS METROLOGY), 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 "Veeco").
WHEREAS
Veeco has committed to promote and sell the SMS products listed in Appendix (1)
hereto to Customers in the Territory, 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 Period" shall mean a period of twenty-four 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 TOTAL WORLD MICROELECTRONICS MARKETS FOR THE
PRODUCTS.
- - "Trademarks" shall mean the trademark "SMS" and its associated logo as
well as the trademarks registered by Veeco (or of its affiliated
companies) in the Territory.
- - "Patents" shall mean issued and pending SMS Patents applicable to the
products.
ARTICLE 2 - PURPOSE OF THIS AGREEMENT
2.1 SMS HEREBY APPOINTS VEECO AS ITS EXCLUSIVE DISTRIBUTOR FOR THE PROMOTION
AND SALE OF THE PRODUCTS TO MICROELECTRONICS CUSTOMERS IN THE TERRITORY,
UNDER THE TERMS AND CONDITIONS OF THIS AGREEMENT.
2.2 During the term of this Agreement, Veeco shall purchase the Products
exclusively from SMS for the purpose of their exclusive resale by Veeco
to Customers in the Territory. Veeco shall resell the Products purchased
from SMS under the names of one or more of the Trademarks and Patents of
SMS.
ARTICLE 3 - LEGAL STATUS
Veeco 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 Veeco any authority, express or implied, to bind or commit SMS
to any third party in any way.
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 Veeco, sell Products to Customers in the
Territory provided that such Customers request that SMS sell Products to
them in lieu of Veeco selling Products to them, in the event of such a
sale, SMS shall pay to Veeco, as a commission, a sum to be agreed to by
SMS and Veeco 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 Veeco upon SMS' receipt of
the sale proceeds.
<PAGE>
ARTICLE 5 - OBLIGATIONS OF VEECO
5.1 Veeco agrees to use reasonable efforts (i) to promote and sell the
Products to customers in the Territory, (ii) to provide the customers in
the Territory to whom Veeco sells the Products with reasonably diligent
and efficient services, in particular after-sale services, and (iii) to
purchase the agreed quantities of products as detailed in Appendix 3.
5.2 In order to carry out these responsibilities, Veeco, 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
Veeco 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;
(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;
(X) to provide SMS with a running 90 day advanced schedule of product
models and quantities to be purchased by Veeco.
<PAGE>
ARTICLE 6 - OBLIGATIONS OF SMS
6.1 SMS shall provide to Veeco, upon the request of Veeco, 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 Veeco'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 Veeco for the training of its
staff shall be borne by Veeco.
6.2 SMS shall furnish to Veeco, at no charge to Veeco, specifications,
promotional material and other documentation relevant to the Products
which are currently in its possession. SMS shall also furnish to Veeco
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 Veeco Products ordered by Veeco hereunder.
6.4 SMS shall promptly deliver to Veeco all Products ordered by Veeco
hereunder, in the condition warranted by SMS hereunder.
6.5 SMS shall produce all production products to ISO 9001 standards and have
all such products CE certified.
6.6 SMS shall use its best efforts to respond to specific market
requirements, as indicated by Veeco, to ensure adequate product
availability to suit market needs with short lead times.
ARTICLE 7 - WARRANTY
7.1 SMS warrants to Veeco that each Product sold and delivered to Veeco 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 Veeco receives notice from a purchaser of a Product, within
twenty-four (24) months of the delivery of a Product to such purchaser,
that the purchased Product fails to satisfy the warranty set forth in
Section 7.1, Veeco 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 Veeco.
ARTICLE 8 - PRICES - METHODS OF PAYMENT
8.1 The discounted prices applicable to the sales of Products by SMS to Veeco
shall be those appearing in Appendix 2, attached hereto.
<PAGE>
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 Veeco.
8.3 All monies due to SMS from Veeco for purchased Products shall be paid
within forty-five (45) days of the date of invoicing, and shall be paid
in United States dollars.
8.4 Veeco shall sell the Products to Customers at the list prices listed on
Appendix 2, unless otherwise agreed upon in writing by SMS and Veeco.
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 Veeco with three
(3) months prior written notice of any such modification, or immediately
with Veeco's agreement.
ARTICLE 10 - TRADEMARK/PATENTS - ASSISTANCE AGAINST UNFAIR COMPETITION AND
INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS
10.1 SMS hereby authorizes Veeco to use the Patents and 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 Veeco agrees in particular:
- to use the Patents and 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 Patent or Trademark infringement of
which Veeco becomes aware of in the Territory;
- to cease and desist from using the Patents or Trademarks owned by
SMS at the expiry or termination of this Agreement for any reason
whatsoever.
10.3 Veeco shall inform SMS of any act of unfair competition, and of any
infringement of the intellectual property rights of SMS, of which Veeco
may be aware.
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,
<PAGE>
indemnify and hold Veeco (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 and Veeco shall together aggressively defend the Patents and
Trademarks 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 two (2) Contractual Years.
This Agreement shall be automatically renewed for an additional two 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 current 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.
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:
<PAGE>
(i) either to authorize Veeco 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 Veeco 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 Veeco's stock and which were
purchased by Veeco from SMS, at a price equivalent to the net price (all
taxes excluded), paid to SMS by Veeco for such Products, less a 10%
restocking charge.
ARTICLE 14 - TERMINATION OF EXCLUSIVITY
The exclusive nature of Veeco's right to promote and sell a Product to
Customers in the Territory may be terminated by SMS in the event Veeco 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 Veeco ninety (90) days written notice thereof, to be sent by certified mail,
return receipt requested. The termination of the exclusive nature of Veeco's
right to promote and sell any one Product shall not affect the exclusive nature
of Veeco'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.
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.
<PAGE>
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.
Dated Portland, Oregon, February 23, 1998.
/s/ Wayne A. Case /s/ Timothy Stultz
- ---------------------------------------- -----------------------------------
Wayne A. Case, President Dr. Timothy Stultz, Vice President
Schmitt Measurement Systems, Inc. Sloan Technology Inc. dba Veeco
Process Metrology
<PAGE>
Exclusive
Distribution Agreement
by and between
Schmitt Measurement Systems, Inc. and
Sloan Technology Inc. dba Veeco Process Metrology.
APPENDIX 1
PRODUCTS
SMS Light Scatter Surface Measurement Systems for application to the
microelectronics markets.
TMS-2000
TMS-2000W
TMS-3000W
DTM-2000
It is understood and agreed between the parties that new products to service the
microelectronics markets may be required and developed by SMS at Veeco's
request. These products will be added to this agreement by mutual consent.
<PAGE>
Exclusive
Distribution Agreement
by and between
Schmitt Measurement Systems, Inc. and
Sloan Technology, Inc. dba Veeco Process Metrology
APPENDIX 2
[The text of Appendix 2 has been deleted and filed separately
with the Securities and Exchange Commission pursuant to a
request for confidential treatment.]
<PAGE>
Exclusive
Distribution Agreement
by and between
Schmitt Measurement Systems, Inc. and
Sloan Technology, Inc. dba Veeco Process Metrology
APPENDIX 3
[The text of Appendix 3 has been deleted and filed separately
with the Securities and Exchange Commission pursuant to a
request for confidential treatment.]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q OF
FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 890,089
<SECURITIES> 213,440
<RECEIVABLES> 1,435,699
<ALLOWANCES> 0
<INVENTORY> 3,887,751
<CURRENT-ASSETS> 6,810,811
<PP&E> 2,516,330
<DEPRECIATION> 642,114
<TOTAL-ASSETS> 9,364,027
<CURRENT-LIABILITIES> 816,076
<BONDS> 0
0
0
<COMMON> 5,058,406
<OTHER-SE> 3,489,545
<TOTAL-LIABILITY-AND-EQUITY> 9,364,027
<SALES> 8,259,736
<TOTAL-REVENUES> 8,259,736
<CGS> 3,862,310
<TOTAL-COSTS> 3,862,310
<OTHER-EXPENSES> 3,097,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,252
<INCOME-PRETAX> 1,485,794
<INCOME-TAX> 334,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,151,794
<EPS-PRIMARY> 16
<EPS-DILUTED> 15
</TABLE>
