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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.
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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
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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.
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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.
<TABLE>
SMS PATENTS ISSUED
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<S> <C> <C>
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
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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
</TABLE>
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:
<TABLE>
NORTH AMERICA EUROPE ASIA
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<S> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
YEAR ENDED MAY 31, 1997 HIGH LOW
------------------------------------ ------- ------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
Annual Report
Page Number
-------------
<S> <C>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
SIGNATURE TITLE
- --------- -----
<S> <C>
/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
</TABLE>
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
EXHIBITS DESCRIPTION
- -------- ---------------------------------------------------------------------
<S> <C>
*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 . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
______________________________
* Filed herewith
16
<PAGE>
EXHIBIT 3(i)
SCHMITT INDUSTRIES, INC.
SECOND RESTATED ARTICLES OF INCORPORATION
ARTICLE I
NAME
The name of this Corporation is Schmitt Industries, Inc.
ARTICLE II
CAPITAL STOCK
2.1 AUTHORIZED CAPITAL. The total number of shares which this Corporation
is authorized to issue is 22,000,000, consisting of 20,000,000 shares of Common
Stock and 2,000,000 shares of Preferred Stock. The Common Stock is subject to
the rights and preferences of the Preferred Stock as hereinafter set forth.
2.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be
issued from time to time in one or more series in any manner permitted by law
and the provisions of these Second Restated Articles of Incorporation, as
determined from time to time by the Board of Directors and stated in the
resolution or resolutions providing for the issuance thereof. The Board of
Directors shall have the authority to fix, determine and amend, subject to the
provisions hereof, the designations, preferences, limitations and relative
rights of the shares of any series that is wholly unissued or is to be
established. Unless otherwise specifically provided in the resolution
establishing any series, the Board of Directors shall further have the
authority, after the issuance of shares of a series whose number it has
designated, to amend the resolution establishing such series to decrease the
number of shares of that series, but not below the number of shares of such
series then outstanding. In the event that there are no issued or outstanding
shares of a series of Preferred Stock which this Corporation has been authorized
to issue, unless otherwise specifically provided in the resolution establishing
such series, the Board of Directors, without any further action on the part of
the holders of the outstanding shares of any class or series of stock of this
corporation, may amend these Second Restated Articles of Incorporation to delete
all reference to such series.
2.3 DIVIDENDS. The holders of shares of Preferred Stock shall be entitled
to receive dividends, out of the funds of this Corporation legally available
therefor, at the rate and at the time or times, whether cumulative or
noncumulative, as may be provided by the
Page 1 - SECOND RESTATED ARTICLES OF INCORPORATION
<PAGE>
Board of Directors in designating a particular series of Preferred Stock. If
such dividends on the Preferred Stock shall be cumulative, then if dividends
shall not have been paid, the deficiency shall be fully paid or the dividends
declared and set apart for payment at such rate, but without interest on
cumulative dividends, before any dividends on the Common Stock shall be paid or
declared and set apart for payment. The holders of Preferred Stock shall not be
entitled to receive any dividends thereon other than the dividends referred to
in this section.
2.4 REDEMPTION. The Preferred Stock may be redeemable at such price, in
such amount, and at such time or times as may be provided by the Board of
Directors in designating a particular series of Preferred Stock. In any event,
such Preferred Stock may be repurchased by this Corporation to the extent
legally permissible.
2.5 LIQUIDATION. In the event of any liquidation, dissolution or winding
up of the affairs of this Corporation, whether voluntary or involuntary, then,
before any distribution shall be made to the holders of Common Stock, the
holders of Preferred Stock at the time outstanding shall be entitled to be paid
the preferential amount or amounts per share as may be provided by the Board of
Directors in designating a particular series of Preferred Stock and dividends
accrued thereon to the date of such payment. The holders of Preferred Stock
shall not be entitled to receive any distributive amount upon the liquidation,
dissolution or winding up of the affairs of this Corporation other than the
distributive amounts referred to in this section, unless otherwise provided by
the Board of Directors in designating a particular series of Preferred Stock.
2.6 CONVERSION. Shares of Preferred Stock may be convertible into Common
Stock of this Corporation upon such terms and conditions, at such rate and
subject to such adjustments as may be provided by the Board of Directors in
designating a particular series of Preferred Stock.
2.7 VOTING RIGHTS. Holders of Preferred Stock shall have such voting
rights as may be provided by the Board of Directors in designating a particular
series of Preferred Stock.
ARTICLE III
NO PREEMPTIVE RIGHTS
Except as may otherwise be provided by the Board of Directors, no holder of
any shares of this Corporation shall have any preemptive right to purchase,
subscribe for or otherwise acquire any securities of this Corporation of any
class or kind now or hereafter authorized.
Page 2 - SECOND RESTATED ARTICLES OF INCORPORATION
<PAGE>
ARTICLE IV
NO CUMULATIVE VOTING
There shall be no cumulative voting of shares in this Corporation.
ARTICLE V
DIRECTORS
5.1 NUMBER. The Corporation shall have at least one director, the actual
number to be determined as set forth in the Bylaws.
5.2 STAGGERED TERMS. The Board of Directors shall be divided into three
classes if the number of directors is four or more, with said classes to be as
equal in number as may be possible. Any director or directors in excess of the
number divisible by three shall be first assigned to Class 1, and any additional
director shall be assigned to Class 2, as the case may be. (For example, if
there are five directors, the fourth director shall be in Class 1 and the fifth
director in Class 2.) At the first election of directors to such classified
Board of Directors, each Class 1 Director shall be elected to serve until the
next ensuing annual meeting of shareholders, each Class 2 Director shall be
elected to serve until the second annual meeting of shareholders and each Class
3 Director, shall be elected to serve until the third ensuing annual meeting of
shareholders. At each annual meeting of shareholders following the meeting at
which the Board of Directors is initially classified, the number of directors
equal to the number of directors in a class whose term expires at the time of
such meeting shall be elected to serve until the third ensuing annual meeting of
shareholders. Notwithstanding any of the foregoing provisions of this Article
V, directors shall serve until their successors are elected and qualified or
until their earlier death, resignation or removal from office, or until there is
a decrease in the number of directors; provided, however, that no decrease in
the number of directors shall have the effect of shortening the term of any
incumbent director.
5.3 REMOVAL. The directors of this Corporation may be removed only for
cause, in the manner provided in the Bylaws, by the affirmative vote of the
holders of not less than two-thirds of the shares entitled to elect the director
or directors whose removal is being sought.
5.4 VACANCIES. Vacancies on the Board of Directors, including vacancies
caused by an increase in the number of Directors, shall be filled by a majority
vote of the remaining directors only, unless there are no directors remaining,
in which case the vacancies shall be filled by the shareholders, and except as
set forth in the Bylaws.
Page 3 - SECOND RESTATED ARTICLES OF INCORPORATION
<PAGE>
ARTICLE VI
LIMITATION ON DIRECTOR LIABILITY
To the fullest extent permitted by the Oregon Business Corporation Act, as
it exists on the date hereof or may hereafter be amended, a director of this
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for his or her conduct as a director. Any amendment to or
repeal of this Article shall not adversely affect any right or protection of a
director of this Corporation with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS
To the fullest extent permitted by the Oregon Business Corporation Act and
the Bylaws of this Corporation, this Corporation is authorized to indemnify any
of its officers and directors. The Board of Directors shall be entitled to
determine the terms of indemnification, including advance of expenses, and to
give effect thereto through the adoption of Bylaws, approval of agreements, or
by any other manner approved by the Board of Directors. Any amendment to or
repeal of this Article shall not adversely affect any right of an individual
with respect to any right to indemnification arising prior to such amendment or
repeal.
ARTICLE VIII
BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws of this Corporation subject to approval by a majority of the
Continuing Directors (as defined in Article XI hereof); provided, however,
that the Board of Directors may not repeal or amend any bylaw that the
shareholders expressly have provided may not be amended or repealed by the
Board of Directors. The shareholders shall also have the power to adopt,
amend or repeal the Bylaws of this Corporation by the affirmative vote of the
holders of not less than two-thirds of the outstanding shares entitled to
vote thereon and, to the extent, if any, provided by resolution adopted by
the Board of Directors authorizing the issuance of a class or series of
Preferred Stock, by the affirmative vote of the holders of not less than
two-thirds
Page 4 - SECOND RESTATED ARTICLES OF INCORPORATION
<PAGE>
of the outstanding shares of Common Stock and/or such class or series of
Preferred Stock, voting as separate voting groups.
ARTICLE IX
SPECIAL MEETINGS OF SHAREHOLDERS
The President or the Board of Directors may call special meetings of the
shareholders for any purpose. Further, a special meeting of the shareholders
shall be held if the holders of not less than 25% of all the votes entitled to
be cast on any issue proposed to be considered at such special meeting have
dated, signed and delivered to the Secretary of this Corporation one or more
written demands for such meeting, describing the purpose or purposes for which
it is to be held.
ARTICLE X
AMENDMENTS TO RESTATED ARTICLES OF INCORPORATION
This Corporation reserves, and the rights of the shareholders of this
Corporation are granted subject to, the right to amend or repeal any of the
provisions contained in these Second Restated Articles of Incorporation as
follows:
10.1 SUPERMAJORITY VOTING. Except as provided in Section 10.2 of this
Article, the Second Restated Articles of Incorporation may be amended or
repealed only upon the affirmative vote of the holders of at least two-thirds of
the outstanding shares entitled to vote thereon and, to the extent, if any,
provided by resolution adopted by the Board of Directors authorizing the
issuance of a class or series of Preferred Stock, by the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Common Stock and/or
of such class or series of Preferred Stock, voting as separate voting groups.
10.2 MAJORITY VOTING. Notwithstanding the provisions of Section 10.1 of
this Article, if an amendment or repeal of a Section or Article of the Second
Restated Articles of Incorporation is approved by a majority of the Continuing
Directors (as defined in Section 11.1 hereof), voting separately and as a
subclass of directors, such amendment or repeal shall require the affirmative
vote of the holders of at least a majority of the outstanding shares entitled to
vote thereon and, to the extent, if any, provided by resolution adopted by the
Board of Directors authorizing the issuance of a class or series of Preferred
Stock, by the affirmative vote of the holders of at least a majority of the
Common Stock and/or of such class or series of Preferred Stock, voting as
separate voting groups.
Page 5 - SECOND RESTATED ARTICLES OF INCORPORATION
<PAGE>
ARTICLE XI
SPECIAL VOTING REQUIREMENTS
In addition to any affirmative vote required by law, by these Second
Restated Articles of Incorporation or otherwise, any "Business Combination" (as
hereinafter defined) involving this Corporation shall be subject to approval in
the manner set forth in this Article.
11.1 DEFINITIONS. For the purpose of this Article:
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of this Corporation or any of its Subsidiaries with any other
corporation; (ii) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition or encumbrance, whether in one transaction or a series of
transactions, by this Corporation or any of its Subsidiaries of all or a
substantial part of this Corporation's assets otherwise than in the usual and
regular course of business; or (iii) any agreement, contract or other
arrangement providing for any of the foregoing transactions.
(b) "Continuing Director" means any member of the Board of Directors
(i) who was a member of the Board of Directors on September 26, 1997, or (ii)
who is elected to the Board of Directors after September 26, 1997, after being
nominated by a majority of the Continuing Directors voting separately and as a
subclass of directors on such nomination.
(c) "Subsidiary" means a domestic or foreign corporation, a majority
of the outstanding voting shares of which are owned, directly or indirectly, by
this Corporation.
11.2 VOTE REQUIRED FOR BUSINESS COMBINATIONS.
(a) Except as provided in subsection 11.2(b) hereof, the
affirmative vote of the holders of not less than two-thirds of the
outstanding shares entitled to vote thereon and, to the extent, if any,
provided by resolution adopted by the Board of Directors authorizing the
issuance of a class or series of Preferred Stock, the affirmative vote of the
holders of not less than two-thirds of the outstanding shares of Common Stock
and/or of such class or series of Preferred Stock, voting as separate voting
groups, shall be required for the adoption or authorization of a Business
Combination.
(b) Notwithstanding subsection 11.2(a) hereof, if a Business
Combination shall have been approved by a majority of the Continuing Directors,
voting separately and as a subclass of directors, such Business Combination, if
required to be approved by this Corporation's shareholders by the Oregon
Business Corporation Act or these Second Restated Articles of Incorporation,
shall be approved only with the affirmative vote of the holders of not less than
a majority of the outstanding shares entitled to vote thereon and, to the
extent, if any, provided by resolution adopted by the Board of Directors
authorizing the issuance of a class or series of Preferred Stock, the
affirmative vote of the holders of not less than a majority of the outstanding
shares of Common Stock and/or such class or series of Preferred Stock, voting as
Page 6 - SECOND RESTATED ARTICLES OF INCORPORATION
<PAGE>
separate voting groups.
Page 7 - SECOND RESTATED ARTICLES OF INCORPORATION
<PAGE>
<PAGE>
EXHIBIT 3(ii)
SCHMITT INDUSTRIES, INC.
SECOND RESTATED BYLAWS
SECTION 1
SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
1.1 ANNUAL MEETING. The annual meeting of the shareholders of this
corporation (the "Corporation") for the election of directors and for the
transaction of such other business as may properly come before the meeting shall
be held once in each calendar year (not being more than 13 months after the
holding of the last preceding annual meeting) at the principal office of the
Corporation, or at some other place, all as determined by the Board of
Directors.
1.2 SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the President or Board of
Directors. Further, a special meeting of the shareholders shall be held if the
holders of not less than 25% of all votes entitled to be cast on the issue
proposed to be considered at such special meeting have dated, signed and
delivered to the Secretary one or more written demands for such meeting,
describing the purpose or purposes for which it is to be held. The meetings
shall be held at such time and place as the Board of Directors prescribe, or, if
not held upon the request of the Board of Directors, at such time and place may
be established by the President or by the Secretary in the President's absence.
1.3 NOTICE OF MEETINGS. Written notice of the place, date and time of the
annual shareholders' meeting and written notice of the place, date, time and
purpose or purposes of special shareholders' meetings shall be delivered not
less than 10 or more than 60 days before the date of meeting, either personally,
by facsimile, or by mail, or in any other manner approved by law, by or at the
direction of the President or the Secretary, to each shareholder of record
entitled to notice of such meeting. Mailed notices shall be deemed to be
delivered when deposited in the mail, first-class postage prepaid, correctly
addressed to the shareholder's address shown in the Corporation's current record
of shareholders. Notice given in any other manner shall be deemed effective
when dispatched to the shareholder's address, telephone number or other number
appearing on the records of the Corporation.
1.4 WAIVER OF NOTICE. Except where expressly prohibited by law or the
Articles of Incorporation, notice of the place, date, time and purpose or
purposes of any shareholders' meeting may be waived in a signed writing
delivered to the Corporation by any shareholder at any time, either before or
after the meeting. Attendance at the meeting in person or by proxy waives
objection to lack of notice or defective notice of the meeting unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting. A shareholder waives objection to
consideration of a particular matter at a meeting that is not within the purpose
or purposes described in the meeting notice, unless the shareholder objects to
considering the matter when it is presented.
Page 1 - SECOND RESTATED BYLAWS
<PAGE>
1.5 SHAREHOLDERS' ACTION WITHOUT A MEETING. The shareholders may take any
action without a meeting that they could properly take at a meeting, if one or
more written consents setting forth the action so taken are signed by all of the
shareholders entitled to vote with respect to the subject matter and are
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. Actions taken under this section are effective when all
consents are in the possession of the Corporation, unless otherwise specified in
the consent. A shareholder may withdraw consent only by delivering a written
notice of withdrawal to the Corporation prior to the time that all consents are
in the possession of the Corporation.
1.6 TELEPHONE MEETINGS. Shareholders may participate in a meeting of
shareholders by means of a conference telephone or any similar communication
equipment that enables all persons participating in the meeting to hear each
other during the meeting. Participation by such means shall constitute presence
in person at a meeting.
1.7 LIST OF SHAREHOLDERS. At least 10 days before any shareholders'
meeting, the Secretary of the Corporation or the agent having charge of the
stock transfer books of the Corporation shall have prepared an alphabetical list
of the names of the shareholders on the record date who are entitled to notice
of a shareholders' meeting, arranged by voting group, and within each voting
group, by class or series of shares, and showing the address of and number of
shares held by each shareholder.
1.8 QUORUM AND VOTING. The presence in person or by proxy of the holders
of a majority of the votes entitled to be cast on a matter at a general or
special meeting shall constitute a quorum of shareholders for that matter. If a
quorum exists, action on a matter shall be approved by a voting group if the
votes case within a voting group favoring the action exceed the votes cast
within the voting group opposing the action, unless a greater number of
affirmative votes is required by the Articles of Incorporation or by law. If
the Articles of Incorporation or Oregon law provide for voting by two or more
voting groups on a matter, action on a matter is taken only when voted upon by
each of those voting group counted separately. Action may be taken by one
voting group on a matter even though no action is taken by another voting group.
1.9 ADJOURNED MEETINGS. If a shareholders' meeting is adjourned to a
different place, date or time, whether for failure to achieve a quorum or
otherwise, notice need not be given of the new place, date or time if the new
place, date or time is announced at the meeting before adjournment. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in these Bylaws, that determination shall apply to any
adjournment thereof, unless Oregon law requires fixing a new record date. If
Oregon law requires that a new record date be set for the adjourned meeting,
notice of the adjourned meeting must be given to shareholders as of the new
record date. Any business may be transacted at an adjourned meeting that could
have been transacted at the meeting as originally called.
1.10 PROXIES. A shareholder may appoint a proxy to vote or otherwise act
for the shareholder by signing an appointment form, either personally or by an
agent. No
Page 2 - SECOND RESTATED BYLAWS
<PAGE>
appointment shall be valid after 11 months from the date of its execution
unless the appointment form expressly so provides. An appointment of a proxy
is revocable unless the appointment is coupled with an interest. No
revocation shall be effective until written notice thereof has actually been
received by the Secretary of the Corporation or any other officer or agent
authorized to tabulate votes.
1.11 BUSINESS FOR SHAREHOLDERS' MEETINGS.
1.11.1 BUSINESS AT ANNUAL MEETINGS.
(a) In addition to the election of directors, other proper
business may be transacted at an annual meeting of shareholders, provided that
such business is properly brought before such meeting. To be properly brought
before an annual meeting business must be (i) brought by or at the direction of
the Board or (ii) brought before the meeting by a shareholder by inclusion in
the Corporation's proxy statement pursuant to the provisions of Rule 14a-8 under
Section 14 of the Securities Exchange Act of 1934, as amended, or any successor
provision, when and if such Rule is applicable thereto, or if such business is
not so included in the Corporation's proxy statement, only pursuant to written
notice thereof in accordance with subsection 1.12 hereof, and received by the
Secretary not fewer than 60 nor more than 90 days prior to the date of such
annual meeting (or, if less than 60 days' notice or prior public disclosure of
the date of the annual meeting is given or made to the shareholders, not later
than the close of business on the tenth business day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made, whichever first occurs).
(b) Any such shareholder notice shall set forth (i) the
name and address of the shareholder proposing such business; (ii) a
representation that the shareholder is entitled to vote at such meeting;
(iii) a statement of the number of shares of the Corporation which are
beneficially owned by the shareholder and the date upon which such shares
were acquired; (iv) a representation that the shareholder intends to appear
in person or by proxy at the meeting to propose such business; and (v) as to
each matter the shareholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting, the language of the
proposal (if appropriate), and any material interest of the shareholder in
such business.
(c) No business shall be conducted at any annual meeting
of shareholders except in accordance with this subsection 1.11.1. If the
facts warrant, the Board, or the chairman of an annual meeting of
shareholders, may determine and declare that (i) a proposal does not
constitute proper business to be transacted at the meeting or (ii) the
business was not properly brought before the meeting in accordance with the
provisions of this subsection 1.11.1 and, if, in either case, it is so
determined, any such business shall not be transacted.
1.11.2 BUSINESS AT SPECIAL MEETINGS. At any special meeting of the
shareholders, only business within the purpose or purposes described in the
meeting notice required by Section 1.3 may be conducted.
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1.12 NOTICE TO CORPORATION. Any written notice required to be delivered by
a shareholder to the Corporation pursuant to Section 1.2 or Section 1.11 hereof
must be given, either by personal delivery or by registered or certified mail,
postage prepaid, to the Secretary at the Corporation's principal office.
SECTION 2
BOARD OF DIRECTORS
2.1 NUMBER AND QUALIFICATION. The business affairs and property of the
Corporation shall be managed under the direction of a Board of Directors, the
number of members of which shall be no fewer than two nor more than nine, as
established from time to time by the Board of Directors. The Board of Directors
may increase or decrease this number or this range by resolution. A member of
the Board of Directors does not need to be a shareholder of the Corporation.
2.2 ELECTION--TERMS OF OFFICE.
2.2.1 The directors shall be elected by the shareholders at each
annual shareholders' meeting or at a special shareholders' meeting called for
such purpose.
2.2.2 The Board of Directors shall be divided into three classes
if the authorized number of directors is four or more, with said classes to be
as equal in number as may be possible. Any director or directors in excess of
the number divisible by three shall be first assigned to Class 1 and any
additional director shall be assigned to Class 2, as the case may be. (For
example, if there are five directors, the fourth director shall be in Class 1
and the fifth director in Class 2.) At the first election of directors to such
classified Board of Directors, each Class 1 Director shall be elected to serve
until the next ensuing annual meeting of shareholders, each Class 2 Director
shall be elected to serve until the second ensuing annual meeting of
shareholders and each Class 3 Director, shall be elected to serve until the
third ensuing annual meeting of shareholders. At each annual meeting of
shareholders following the meeting at which the Board of Directors is initially
classified, the number of directors equal to the number of directors in the
class whose term expires at the time of such meeting shall be elected to serve
until the third ensuing annual meeting. Notwithstanding any of the foregoing
provisions of this Section 2, directors shall serve until their successors are
elected and qualified or until their earlier death, resignation or removal from
office, or until there is a decrease in the number of directors; provided,
however, that no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director.
2.2.3 The term of office of a director shall commence effective
immediately upon election, unless otherwise specified in a resolution approved
by the shareholders in connection with the election of such director. Directors
shall serve until their successors are elected and qualified or until their
earlier death, resignation or removal from office, or until there is a decrease
in the authorized number of directors; provided, however, that no decrease in
the number of directors shall have the effect of shortening the term of any
incumbent
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director.
2.3 NOMINATIONS.
2.3.1 Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors. Nominations
for the election of directors may be made (a) by or at the direction of the
Board or (b) by any shareholder of record entitled to vote for the election of
directors at such meeting; provided, however, that a shareholder may nominate
persons for election as directors only if written notice (in accordance with
Section 1.12 hereof) of such shareholder's intention to make such nominations is
received by the Secretary not later than (i) with respect to an election to be
held at an annual meeting of the shareholders, not fewer than 60 nor more than
90 days prior to the date of such annual meeting (or, if less than 60 days'
notice or prior public disclosure of the date of the annual meeting is given or
made to the shareholders, not later than the close of business on the tenth
business day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made, whichever first occurs)
and (ii) with respect to an election to be held at a special meeting of the
shareholders for the election of directors, the close of business on the tenth
business day following the date on which notice of such meeting is first mailed
to shareholders.
2.3.2 Any such shareholder's notice shall set forth (a) the name
and address of the shareholder who intends to make a nomination; (b) a
representation that the shareholder is entitled to vote at such meeting; (c) a
statement of the number of shares of the Corporation which are beneficially
owned by the shareholder and the dates upon which such shares were acquired;
(d) a representation that the shareholder intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(e) as to each person the shareholder proposes to nominate for election or
reelection as a director, the name and address of such person and such other
information regarding such nominee as would be required in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
such nominee been nominated by the Board, and a description of any arrangements
or understandings between the shareholder and such nominee and any other persons
(including their names) pursuant to which the nomination is to be made; and
(f) the consent of each such nominee to serve as a director if elected.
2.3.3 If the facts warrant, the Board, or the chairman of a
shareholders' meeting at which directors are to be elected, shall determine and
declare that a nomination was not made in accordance with the foregoing
procedure and, if it is so determined, the defective nomination shall be
disregarded. The right of shareholders to make nominations pursuant to the
foregoing procedure is subject to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation. The procedures set forth in this Section 2.3 for nomination
for the election of directors by shareholders are in addition to, and not in
limitation of, any procedures now in effect or hereafter adopted by or at the
direction of the Board or any committee thereof.
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2.4 REMOVAL.
2.4.1 Any director or the entire Board may be removed for cause by
the holders of not less than two-thirds of the shares entitled to elect the
director or directors whose removal is sought. Such action may only be taken at
a special meeting of the shareholders called expressly for that purpose,
provided that notice of the proposed removal, which shall include a statement of
the charges alleged against the director, shall have been duly given to the
shareholders together with or as a part of the notice of the meeting.
2.4.2 The vacancy created by the removal of a director under this
Section 2.4. shall be filled only by a vote of the holders of two-thirds of the
shares then entitled to elect the director removed. Such vote may be taken at
the same meeting at which the removal of such director was accomplished, or at
such later meeting, annual or special, as the shareholders may decide.
2.5 VACANCIES. Subject to the provisions of Section 2.4 hereof and unless
the Second Restated Articles of Incorporation provide otherwise, vacancies in
the Board of Directors, whether caused by resignation, death, retirement,
disqualification, increase in the number of directors, removal or otherwise, may
be filled for the remainder of the term by the Board of Directors only or, if
the directors in office constitute less than a quorum of the Board of Directors,
by an affirmative vote of a majority of the remaining directors, unless there
are no directors remaining in which case the vacancies shall be filled by the
shareholders. The term of a director elected to fill a vacancy expires at the
next annual shareholders' meeting. A vacancy that will occur at a specific
later date may be filled before the vacancy occurs, but the new director may not
take office until the vacancy occurs.
2.6 QUORUM AND VOTING. At any meeting of the Board of Directors, the
presence in person (including presence by electronic means such as a telephone
conference call) of 50% of the number of directors presently in office shall
constitute a quorum for the transaction of business. Notwithstanding the
foregoing, in no case shall a quorum be less than one-third of the authorized
number of directors. If a quorum is present at the time of a vote, the
affirmative vote of a majority of the directors present at the time of the vote
shall be the act of the Board of Directors and of the Corporation except as may
be otherwise specifically provided by the Articles of Incorporation, by these
Bylaws, or by law. A director who is present at a meeting of the Board of
Directors when action is taken is deemed to have assented to the action taken
unless: (a) the director objects at the beginning of the meeting, or promptly
upon his or her arrival, to holding it or to transacting business at the
meeting; (b) the director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or (c) the director delivers written
notice of his or her dissent or abstention to the presiding officer of the
meeting before its adjournment or to the Corporation within a reasonable time
after adjournment of the meeting. The right of dissent or abstention is not
available to a director who votes in favor of the action taken.
2.7 REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held at such place, date and time as shall from time to time be fixed by
resolution of the Board.
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2.8 SPECIAL MEETINGS. Special Meetings of the Board of Directors may be
held at any place and at any time and may be called by the Chairman of the
Board, if there is one, the President or any two or more directors.
2.9 NOTICE OF MEETING.
2.9.1 Unless the Articles of Incorporation provide otherwise, any
regular meeting of the Board of Directors may be held without notice of the
date, time, place, or purpose of the meeting. Any special meeting of the Board
of Directors must be preceded by at least two days' notice of the date, time,
and place of the meeting, but not of its purpose, unless the Articles of
Incorporation or these Bylaws require otherwise. Each director shall have a
mailing address, telephone number and facsimile number on record with the
Corporation for purposes of receiving notice.
2.9.2 Notice may be given personally, by facsimile, by mail, or in
any other manner allowed by law. Oral notice shall be sufficient only if a
written record of such notice is included in the Corporation's minute book.
Notice shall be deemed effective at the earliest of: (a) receipt; (b) delivery
to the proper address or telephone number of the director as shown in the
Corporation's records: or (c) three days after its deposit in the United States
mail, as evidenced by the postmark, if correctly addressed and mailed with
first-class postage prepaid.
2.9.3 Notice of any meeting of the Board of Directors may be
waived by any director at any time, by a signed writing, delivered to the
Corporation for inclusion in the minutes, either before or after the meeting.
Attendance or participation by a director at a meeting shall constitute a waiver
of any required notice of meeting unless the director promptly objects to
holding the meeting or to the transaction of any business on the grounds that
the meeting was not lawfully convened and the director does not thereafter vote
for or assent to action taken at the meeting.
2.10 DIRECTORS' ACTION WITHOUT A MEETING. The Board of Directors or a
committee thereof may take any action without a meeting that it could properly
take at a meeting if one or more written consents setting forth the action are
signed by all of the directors, or all of the members of the committee, as the
case may be, either before or after the action is taken, and if the consents are
delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. Such action shall be effective upon the signing of a consent
by the last director to sign, unless the consent specifies a later effective
date.
2.11 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by
resolutions adopted by a majority of the members of the Board of Directors in
office, may create from among its members one or more committees and shall
appoint the members thereof. Each such committee must have two or more members,
who shall be directors and who shall serve at the pleasure of the Board of
Directors. Each committee of the Board of Directors may exercise the authority
of the Board of Directors to the extent provided in its enabling resolution and
any pertinent subsequent resolutions adopted in like manner, provided that the
authority of each such committee shall be subject to applicable law. Each
committee of the Board of Directors
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shall keep regular minutes of its proceedings and shall report to the Board
of Directors when requested to do so.
2.12 TELEPHONE MEETINGS. Members of the Board of Directors or of any
committee appointed by the Board of Directors may participate in a meeting of
the Board of Directors or committee by means of a conference telephone or
similar communications equipment that enables all persons participating in the
meeting to hear each other during the meeting. Participation by such means
shall constitute presence in person at a meeting.
2.13 COMPENSATION OF DIRECTORS. The Board of Directors may fix the
compensation of directors as such and may authorize the reimbursement of their
expenses.
SECTION 3
OFFICERS
3.1 OFFICERS ENUMERATED--APPOINTMENT. The officers of the Corporation
shall consist of such officers and assistant officers as may be designated by
resolution of the Board of Directors. The officers shall include a President
and a Secretary, and may include a Chairman of the Board, one or more Vice
Presidents, a Treasurer, and any assistant officers or other officers having
such designations as shall be determined by the Board of Directors. The
officers shall hold office at the pleasure of the Board of Directors. Unless
otherwise restricted by the Board of Directors, the President may appoint any
assistant officer or other officers, the Secretary may appoint one or more
Assistant Secretaries, and the Treasurer may appoint one or more Assistant
Treasurers; provided that any such appointments shall be recorded in writing in
the corporate records.
3.2 QUALIFICATIONS. None of the officers of the Corporation needs to be a
director. Any two or more corporate offices may be held by the same person.
3.3 DUTIES OF THE OFFICERS. Unless otherwise prescribed by the Board of
Directors, the duties of the officers shall be as follows:
3.3.1 CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside at meetings of the Board of Directors and of the
shareholders, shall be responsible for carrying out the plans and directives of
the Board of Directors, shall report to and consult with the Board of Directors
and, if the Board so resolves, shall have such other powers and duties as the
Board of Directors may from time to time prescribe.
3.3.2 PRESIDENT. The President shall exercise the usual executive
powers pertaining to the office of President. In the absence of a Chairman of
the Board, the President shall preside at meetings of the Board of Directors and
of the shareholders, perform the other duties of the Chairman of the Board
prescribed in this section, and perform such other duties as the Board of
Directors may from time to time designate. In addition, if there is no
Secretary in office, the President shall perform the duties of the Secretary.
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3.3.3 VICE PRESIDENT. Each Vice President shall perform such
duties as the Board of Directors may from time to time designate. In addition,
in the absence or disability of the President, the Vice President (or if there
is more than one Vice President, then in the order designated by the Board of
Directors) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all restrictions upon the President.
3.3.4 SECRETARY. The Secretary shall be responsible for and shall
keep, personally or with the assistance of others, records of the proceedings of
the directors and shareholders; authenticate records of the Corporation; attest
all certificates of stock in the name of the Corporation; keep the corporate
seal, if any, and affix the same to certificates of stock and other proper
documents; keep a record of the issuance of certificates of stock and the
transfers of the same; and perform such other duties as the Board of Directors
may from time to time designate.
3.3.5 TREASURER. The Treasurer shall have the care and custody
of, and be responsible for, all funds and securities of the Corporation and
shall cause to be kept regular books of account. The Treasurer shall cause to
be deposited all funds and other valuable effects in the name of the Corporation
in such depositories as may be designated by the Board of Directors. In
general, the Treasurer shall perform all of the duties incident to the office of
Treasurer, and such other duties as from time to time may be assigned by the
Board of Directors.
3.3.6 ASSISTANT OFFICERS. Assistant officers may consist of one
or more Vice Presidents, one or more Assistant Secretaries, one or more
Assistant Treasurers and such other titles as may be designated from time to
time. Each assistant officer shall perform those duties assigned to him or her
from time to time by the Board of Directors, the President, or the officer who
appointed him or her.
3.4 VACANCIES. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting.
3.5 REMOVAL. Any officer or agent may be removed by action of the Board
of Directors with or without cause, but any removal shall be without prejudice
to the contract rights, if any, of the person removed. Election or appointment
of an officer or agent shall not itself create any contract rights.
3.6 COMPENSATION. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors.
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SECTION 4
SHARES AND CERTIFICATES OF SHARES
4.1 SHARE CERTIFICATES. Share certificates shall be issued in numerical
order, and each shareholder shall be entitled to a certificate signed by the
Chairman of the Board, President or a Vice President, and signed by the
Secretary or an Assistant Secretary. Share certificates may be sealed with the
corporate seal, if any. Facsimiles of the signatures and seal may be used as
permitted by law. Every share certificate shall state:
(a) the name of the Corporation;
(b) that the Corporation is organized under the laws
of the State of Oregon;
(c) the name of the person to whom the share
certificate is issued;
(d) the number, class and series (if any) of shares
that the certificate represents; and
(e) if the Corporation is authorized to issue shares
of more than one class or series, that upon
written request and without charge, the
Corporation will furnish any shareholder with a
full statement of the designations, preferences,
limitations and relative rights of the shares of
each class or series, and the authority of the
Board of Directors to determine variations for
future series.
4.2 CONSIDERATION FOR SHARES. Shares of the Corporation may be issued for
such consideration as shall be determined by the Board of Directors to be
adequate. The consideration for the issuance of shares may be paid in whole or
in part in cash, or in any tangible or intangible property or benefit to the
Corporation, including but not limited to promissory notes, service performed,
contracts for services to be performed, or other securities of the Corporation.
Establishment by the Board of Directors of the amount of consideration received
or to be received for shares of the Corporation shall be deemed to be a
determination that the consideration so established is adequate.
4.3 TRANSFERS. Shares may be transferred by delivery of the certificate,
accompanied either by an assignment in writing on the back of the certificate,
or by a written power of attorney to sell, assign and transfer the same, signed
by the record holder of the certificate. Except as otherwise specifically
provided in these Bylaws, no shares of stock shall be transferred on the books
of the Corporation until the outstanding certificate thereof has been
surrendered to the Corporation.
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4.4 LOSS OR DESTRUCTION OF CERTIFICATES. In the event of the loss or
destruction of any certificate, a new certificate may be issued in lieu thereof
upon satisfactory proof of such loss or destruction, and upon the giving of
security against loss to the Corporation by bond, indemnity or otherwise, to the
extent deemed necessary by the Board of Directors, the Secretary, or the
Treasurer.
4.5 FIXING RECORD DATE. The Board of Directors may fix in advance a date
as the record date for determining shareholders entitled: (a) to notice of or to
vote at any shareholders' meeting or any adjournment thereof; (b) to receive
payment of any share dividend; or (c) to receive payment of any distribution.
The Board of Directors may in addition fix record dates with respect to any
allotment or rights of conversion or exchange of any securities by their terms,
or for any other proper purpose, as determined by the Board of Directors and by
law. The record date shall be not more than 70 days and, in case of a meeting
of shareholders, not less than 10 days (or such longer period as may be required
by Oregon law) prior to the date on which the particular action requiring
determination of shareholders is to be taken. If no record date is fixed for
determining the shareholders entitled to notice of or to vote at a meeting of
shareholders, the record date shall be the date before the day on which notice
of the meeting is mailed. If no record date is fixed for the determination of
shareholders entitled to a distribution (other than one involving a purchase,
redemption, or other acquisition of the Corporation's own shares), the record
date shall be the date on which the Board adopted the resolution declaring the
distribution. If no record date is fixed for determining shareholders entitled
to a share dividend, the record date shall be the date on which the Board of
Directors authorized the dividend.
SECTION 5
BOOKS, RECORDS AND RECORDS
5.1 RECORDS OF CORPORATE MEETINGS, ACCOUNTING RECORDS AND SHARE REGISTERS.
5.1.1 The Corporation shall keep, as permanent records, minutes of
all meetings of the Board of Directors and shareholders, and all actions taken
without a meeting, and all actions taken by a committee exercising the authority
of the Board of Directors. The Corporation or its agents shall maintain, in a
form that permits preparation of a list, a list of the names and addresses of
its shareholders, in alphabetical order by class of shares, showing the number,
class, and series, if any, of shares held by each.
5.1.2 The Corporation shall also maintain appropriate accounting
records, and at its principal place of business shall keep copies of: (a) its
Articles of Incorporation or restated Articles of Incorporation and all
amendments in effect; (b) its Bylaws or restated Bylaws and all amendments in
effect; (c) minutes of all shareholders' and directors meetings and records of
all actions taken without meetings for the past three years; (d) appropriate
accounting records; (e) all written communications to shareholders generally in
the past three years; (f) a list of the names and business addresses of its
current officers and directors; and (g) its most recent annual report to the
Secretary of State.
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5.2 COPIES OF CORPORATE RECORDS. Any person dealing with the Corporation
may rely upon a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors or shareholders, when certified by the
President, Vice President, Secretary or Assistant Secretary.
5.3 EXAMINATION OF RECORDS.
5.3.1 A shareholder shall have the right to inspect and copy,
during regular business hours at the principal office of the Corporation, in
person or by his or her attorney or agent, the corporate records referred to in
subsection 5.1.2 hereof if the shareholder gives the Corporation written notice
of the demand at least five business days before the date on which the
shareholder wishes to make such inspection.
5.3.2 In addition, if a shareholder's demand is made in good faith
and for a proper purpose, a shareholder may inspect and copy, during regular
business hours at a reasonable location specified by the Corporation, excerpts
from minutes of any meeting of the Board of Directors, records of any action of
a committee of the Board of Directors, minutes of any meeting of the
shareholders, and records of actions taken by the shareholders or the Board of
Directors without a meeting, to the extent not subject to inspection under
subsection 5.3.1, accounting records of the Corporation, or the record of
shareholders; provided that the shareholder shall have made a demand describing
with reasonable particularity the shareholder's purpose and the records the
shareholder desires to inspect, and provided further that the records are
directly connected to the shareholder's purpose.
5.3.3 This section shall not affect any right of shareholders to
inspect records of the Corporation that may be otherwise granted to the
shareholders by law.
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SECTION 6
FISCAL YEAR
The fiscal year-end of the Corporation shall be May 31.
SECTION 7
CORPORATE SEAL
The corporate seal of the Corporation, if any, shall be in the form shown
here.
SECTION 8
MISCELLANEOUS PROCEDURAL PROVISIONS
The Board of Directors may adopt rules of procedure to govern any meetings
of shareholders or directors to the extent not inconsistent with law, the
Articles of Incorporation, or these Bylaws, as they are in effect from time to
time. In the absence of any rules of procedure adopted by the Board of
Directors, the chairman of the meeting shall make all decisions regarding the
procedures for any meeting.
SECTION 9
AMENDMENT OF BYLAWS
The Board of Directors is expressly authorized to adopt, amend and repeal
the Bylaws of the Corporation, subject to approval by a majority of the
Continuing Directors (as defined in the Articles of Incorporation); provided,
however, the Board of Directors may not repeal or amend any bylaws that the
shareholders have expressly provided may not be amended or repealed by the Board
of Directors. The shareholders of the Corporation also have the power to adopt,
amend or repeal the Bylaws of the Corporation by the affirmative vote of the
holders of not less than two-thirds of the outstanding shares and, to the
extent, if any, provided by resolution adopted by the Board of Directors
authorizing the issuance of a class or series of Preferred Stock, by the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares of Common Stock and/or of such class or series of Preferred Stock, voting
as separate voting groups.
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SECTION 10
INDEMNIFICATION OF DIRECTORS AND OTHERS
10.1 GRANT OF INDEMNIFICATION. Subject to Section 10.2, each person who
was or is made a party or is threatened to be made a party to or is involved
(including, without limitation, as a witness) in any threatened, pending, or
completed action, suit or proceeding, whether formal or informal, civil,
criminal, administrative or investigative (hereinafter "proceeding"), by reason
of the fact that he or she is or was a director of the Corporation or who, while
a director of the Corporation, is or was serving at the request of the
Corporation as a director, officer, employee or agent of this or another
corporation or of a partnership, joint venture, trust, other enterprise, or
employee benefit plan, whether the basis of such proceeding is alleged action in
an official capacity as a director or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent permitted by applicable law, as then in
effect, against all expense, liability and loss (including attorneys' fees,
costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director and shall inure to the benefit of his or her heirs, executors
and administrators.
10.2 LIMITATIONS ON INDEMNIFICATION. Notwithstanding Section 10.1, no
indemnification shall be provided hereunder to any such person to the extent
that such indemnification would be prohibited by the Oregon Business Corporation
Act or other applicable law as then in effect, nor, except as provided in
Section 10.4 with respect to proceedings seeking to enforce rights to
indemnification, shall the Corporation indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person except where such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation.
10.3 ADVANCEMENT OF EXPENSES. The right to indemnification conferred in
this Section 10 shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition, except where the Board of Directors shall have adopted a resolution
expressly disapproving such advancement of expenses.
10.4 RIGHT TO ENFORCE INDEMNIFICATION. If a claim under Section 10.1 is
not paid in full by the Corporation within 60 days after a written claim has
been received by the Corporation, or if a claim for expenses incurred in
defending a proceeding in advance of its final disposition authorized under
Section 10.3 is not paid within 60 days after a written claim has been received
by the Corporation, the claimant may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim and, to the extent
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. The claimant shall be presumed to be
entitled to indemnification hereunder upon submission of a written claim (and,
in an action brought to enforce a claim for expenses
Page 14 - SECOND RESTATED BYLAWS
<PAGE>
incurred in defending any proceeding in advance of its final disposition,
where the required undertaking has been tendered to the Corporation), and
thereafter the Corporation shall have the burden of proof to overcome the
presumption that the claimant is so entitled. It shall be a defense to any
such action (other than action with respect to expenses authorized under
Section 10.3) that the claimant has not met the standards of conduct which
make it permissible hereunder or under the Oregon Business Corporation Act
for the Corporation to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the Corporation.
10.5 ALTERNATIVE PROCEDURES. Pursuant to ORS 60.414 or any successor
provision of the Oregon Business Corporation Act, the procedures for
indemnification and advancement of expenses set forth in this section are in
lieu of the procedures required by ORS 60.404 or any successor provision of the
Oregon Business Corporation Act.
10.6 NONEXCLUSIVITY. The right to indemnification and the advancement of
expense conferred in this Section 10 shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Articles of Incorporation or the Bylaws of the Corporation, general or
specific action of the Board, contract or otherwise.
10.7 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS. The Corporation
may, by action of its Board of Directors from time to time, provide
indemnification and pay expenses in advance of the final disposition of a
proceeding to officers, employees and agents of the Corporation on the same
terms with the same scope and effect as the provisions of this section with
respect to the indemnification and advancement of expenses of directors of the
Corporation or pursuant to rights granted pursuant to, or provided by, the
Oregon Business Corporation Act or such other terms as the Board may deem
proper.
10.8 INSURANCE AND OTHER SECURITY. The Corporation may maintain insurance,
at its expense, to protect itself and any individual who is or was a director,
officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against or incurred by the individual in that capacity or arising from
his or her status as an officer, director, agent or employee, whether or not the
Corporation would have the power to indemnify such person against the same
liability under the Oregon Business Corporation Act. The Corporation may enter
into contracts with any director or officer of the Corporation in furtherance of
the provisions of this Section 10 and may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Section 10.
10.9 AMENDMENT OR MODIFICATION. This Section 10 may be altered or amended
at any time as provided in these Bylaws, but no such amendment shall have the
effect of diminishing the rights of any person who is or was an officer or
director as to any acts or omissions taken or omitted to be taken prior to the
effective date of such amendment.
10.10 EFFECT OF SECTION. The rights conferred by this section shall be
deemed to be contract rights between the Corporation and each person who is or
was a director or officer.
Page 15 - SECOND RESTATED BYLAWS
<PAGE>
The Corporation expressly intends each such person to rely on the rights
conferred hereby in performing his or her respective duties on behalf of the
Corporation.
SECTION 11
REPRESENTATION OF SHARES OF OTHER CORPORATIONS
Unless otherwise restricted by the Board of Directors, the President and
any Vice President of the Corporation are each authorized to vote, represent and
exercise on behalf of the Corporation all rights incident to any and all shares
of other corporations standing in the name of the Corporation. This authority
may be exercised by such officers either in person or by a duly executed proxy
or power of attorney.
Page 16 - SECOND RESTATED BYLAWS
<PAGE>
EXHIBIT 10.1
SCHMITT INDUSTRIES, INC.
AMENDED AND RESTATED
STOCK OPTION PLAN
1. PURPOSES. The purposes of this Schmitt Industries, Inc. Amended and
Restated Stock Option Plan ("Plan") are to:
1.1 Closely associate the interests of the management of Schmitt
Industries, Inc. ("Company") and its subsidiaries with the
shareholders of the Company by reinforcing the relationship between
the participants' rewards and shareholder gains;
1.2 Provide management with an equity ownership in the Company
commensurate with the Company's and its subsidiaries' performance as
reflected in increased value of the Company's common shares;
1.3 Maintain competitive compensation levels;
1.4 Provide a means whereby the Company can continue to attract,
motivate, and retain key employees who can contribute materially to
the Company's and its subsidiaries' growth and success; and
1.5 Provide a means whereby the Company and its subsidiaries can
continue to attract, motivate and retain the services of selected
non-employee agents, consultants, advisors, persons involved in the
sale or distribution of the Company's and its subsidiaries' products
and independent contractors of the Company and its subsidiaries.
2. ADMINISTRATION. This Plan shall be administered by the Board of
Directors of the Company ("Board") or, in the event the Board shall appoint
and/or authorize a committee to administer this Plan, by a committee of the
Board consisting of at least two (2) non-employee directors ("Committee"). The
administrator of this Plan, whether the Board or Committee, shall hereinafter be
referred to as the "Plan Administrator." The Plan Administrator shall
administer the Plan in accordance with the following:
2.1 INCAPACITY OF PLAN ADMINISTRATOR. No member of the Board or the
Committee shall vote with respect to the granting of an option created
under this Plan ("Option(s)") to himself or herself. Any Option
granted to a director for his or her services as such shall not be
effective until approved by the full Board.
<PAGE>
2.2 REGISTRATION UNDER THE SECURITIES ACT. If the Company registers
any of its equity securities pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") and any
officers or directors are eligible to receive Options, the following
provisions shall apply to the administration of this Plan with respect
to grants made to directors, officers or other Optionees (as
hereinafter defined) affected by Section 16(b) of the Exchange Act.
The Plan Administrator shall be constituted at all times so as to meet
the requirements of Section 16(b) of the Exchange Act, as amended from
time to time. The members of any committee serving as Plan
Administrator shall be appointed by the Board for such term as the
Board may determine. The Board may from time to time remove members
from, or add members to, the committee. Vacancies on the committee,
however caused, may be filled by the Board. Currently, the Plan
Administrator is a committee. If, at any time, an insufficient number
of disinterested non-employee directors is available to serve on such
committee, interested non-employee directors may serve on the
committee; however, during such time, no Options shall be granted to
any person if the granting of such Option would not meet the
requirements of Section 16(b) of the Exchange Act. For purposes of
this Section 2, a disinterested director shall be a member of the
Board who meets the definition of "disinterested person" as set forth
in the rules and regulations promulgated under Section 16(b) of the
Exchange Act, as amended from time to time (the "16(b) Rules").
Currently, a disinterested director for purposes of this Section 2 is
a member of the Board who for one (1) year prior to service as an
administrator of this Plan has not been (and during service as a Plan
Administrator, will not be) granted or awarded equity securities,
including options for equity securities pursuant to this Plan or any
other plan of the Company or its affiliates, except for certain
exclusions described in Rule 16b-3. For purposes of this Section 2, a
non-employee director shall be a member of the Board who meets the
definition of "non-employee director" as set forth in the 16(b) Rules.
Currently, a non-employee director is a member of the Board who (i) is
not currently an officer of the Company or a parent or subsidiary of
the Company, or otherwise currently employed by the Company or a
parent or subsidiary of the Company; (ii) does not receive
compensation, either directly or indirectly, from the Company or a
parent or subsidiary of the Company, for services rendered as a
consultant or in any capacity other than as a director, except for an
amount that does not exceed the dollar amount for which disclosure
would be required pursuant to Item 404(a) of Regulation S-K
promulgated under the Exchange Act (("S-K"); (iii) does not possess an
interest in any other transaction for which disclosure would be
required pursuant to Item 404(b) of S-K; and (iv) is not engaged in a
business relationship for which disclosure would be required pursuant
to Item 404(b) of S-K.
2.3 PROCEDURES. The Board may designate one of the members of the
Plan Administrator as chairman. The Plan Administrator may hold
meetings at such times and places as it shall determine. The acts of
a majority of the members of the Plan Administrator present at
meetings at which a quorum exists, or acts reduced to or approved in
writing by all Plan Administrator members, shall be
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<PAGE>
valid acts of the Plan Administrator.
2.4 RESPONSIBILITIES. Except for the terms and conditions explicitly
set forth in this Plan, the Plan Administrator shall have the
authority, in its discretion, to determine all matters relating to the
Options, including selection of the individuals to be granted Options,
the number of shares to be subject to each Option, the exercise price
for such Option ("Exercise Price"), and all other terms and conditions
of the Options. The interpretation and construction by the Plan
Administrator of any terms or provisions of this Plan or any Option,
or of any rule or regulation promulgated in connection with this Plan,
shall be conclusive and binding on all interested parties, so long as
such interpretation and construction with respect to incentive stock
options correspond to the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended ("Code"), and the regulations issued
thereunder, and any amendment or successor sections or regulations.
2.5 SECTION 16(b) COMPLIANCE AND BIFURCATION OF PLAN. If the Company
registers any of its equity securities pursuant to Sections 12(b) and
12(g) of the Exchange Act, it is the intention of the Company that
this Plan then comply in all respects with Rule 16b-3 under the
Exchange Act and, if any Plan provision is later found not to be in
compliance with such Section, the provision shall be deemed null and
void. In all events, the Plan shall be construed in favor of its
meeting the requirements of Rule 16b-3. Notwithstanding anything in
the Plan to the contrary, the Board, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of
any provision of the Plan to participants who are officers and
directors subject to Section 16(b) of the Exchange Act without so
restricting, limiting or conditioning the Plan with respect to other
participants.
3. STOCK SUBJECT TO THIS PLAN. The stock subject to this Plan shall be
the Company's common stock ("Common Stock"). The Company shall have authorized
and have in reserve for issuance at the time of exercise of any Option a
sufficient number of shares of Common Stock to meet the Company's obligation.
The maximum number of shares of Common Stock which may be issued under the Plan
shall be eight hundred thousand (800,000). If any Option expires or is
surrendered, exchanged for another Option, cancelled or terminated for any
reason without having been exercised in full, the unpurchased shares subject to
such Option shall again be available for purposes of this Plan, including for
replacement Options which may be granted in exchange for such expired,
exchanged, surrendered, cancelled or terminated Options.
4. ELIGIBILITY. An incentive stock option in accordance with Section 422
of the Code ("Incentive Option") may be granted only to an individual who, at
the time the option is granted, is an employee of the Company or a related
corporation, as defined below, and who the Plan Administrator may from time to
time select for participation in this Plan. Members of the Board shall not be
eligible for grants of Incentive Options unless they are also employees of the
Company or any of its related corporations. At the discretion of the Plan
Administrator, employees, officers, directors of the Company or any of its
related corporations (including non-employee directors), selected non-employee
agents, consultants, advisors, persons involved in the
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<PAGE>
sale or distribution of the Company's or related corporations' products and
independent contractors of the Company or any of its related corporations
also may receive stock options which are not qualified under Section 422 of
the Code ("Nonqualified Option") (Qualified and Nonqualified Options are
included collectively within the term "Options" as used in this Plan). Any
party to whom an Option is granted shall be referred to as an "Optionee."
As used in this Plan, the term "related corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock of one of the
other corporations in such chain. When referring to a parent corporation, the
term "related corporation" shall mean any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company if, at the time of
granting of the Option, each of the corporations other than the Company owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock of one of the other corporations in such chain.
5. TERMS AND CONDITIONS OF OPTIONS. Options granted under this Plan
shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with this Plan. Notwithstanding the
foregoing, Option agreements shall include or incorporate by reference the
following terms and conditions:
5.1 NUMBER OF SHARES. Each Option agreement shall state the number
of shares of stock subject to the Option.
5.2 OPTION PRICE. The Option agreement shall state the Exercise
Price per share, and the Plan Administrator shall act in good faith to
establish the Exercise Price as follows:
5.2.1 INCENTIVE OPTIONS. Subject to subsection 5.2.3, the
Exercise Price of Incentive Options shall be not less than the
fair market value per share of the Common Stock at the time the
Incentive Option is granted.
5.2.2 INCENTIVE OPTIONS TO GREATER THAN 10% SHAREHOLDERS.
With respect to Incentive Options granted to shareholders then
holding greater than ten percent (10%) of the then-issued and
outstanding shares of voting stock of the Company, the Exercise
Price shall be as required by Section 6.
5.2.3 FAIR MARKET VALUE. With respect to Incentive Options,
the fair market value per share of the Common Stock shall be
determined by the Plan Administrator in good faith at the time
the Incentive Option is granted.
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<PAGE>
5.2.4 SUBSTITUTED OPTIONS. Options granted in substitution
for outstanding Options in the Company in connection with the
merger, consolidation, continuation acquisition of property or
stock of the Company or a subsidiary of the Company or another
corporation or any subsidiary of another corporation may be
granted with an exercise price equal to the exercise price for
the substituted option of the Company or other corporation,
subject to any adjustment consistent with the terms of the
transaction pursuant to which the substitution is to occur.
5.2.5 NONQUALIFIED OPTIONS. The Exercise Price of
Nonqualified Options shall be as is determined by the Plan
Administrator in good faith at the time of their issuance.
5.3 TERM, MATURITY AND VESTING. Subject to the restrictions
contained in Sections 5.8 and 6, the term of each Incentive Option
shall be ten (10) years from the date it is granted unless a shorter
period of time is established by the Plan Administrator, but in no
event shall the term of any Incentive Option exceed ten (10) years.
The term of each Nonqualified Option shall also be ten (10) years from
the date it is granted unless a shorter period of time is established
by the Plan Administrator. The Plan Administrator shall specify which
Options granted hereunder are Incentive Options and which are
Nonqualified Options.
No Option shall be exercisable until it has vested. The vesting
schedule for each Option shall be specified by the Plan Administrator
at the time of grant; PROVIDED, that if no vesting schedule is
specified at the time of grant, the Option shall vest according to the
following schedule:
<TABLE>
<CAPTION>
NUMBER OF YEARS PERCENTAGE OF TOTAL
FOLLOWING DATE OF GRANT OPTION VESTED
----------------------- -------------------
<S> <C>
One 25%
Two 50%
Three 75%
Four 100%
</TABLE>
The Plan Administrator may specify a vesting schedule for all or any
portion of an Option based on the achievement of performance
objectives established in advance of the commencement by the Optionee
of services related to the achievement of the performance objectives.
Performance objectives shall be expressed in terms of one or more of
the following: return on equity, return on assets, share price,
market share, sales, earnings per share, costs, net earnings, net
worth, inventories, cash and cash equivalents, gross margin or the
Company's performance relative to its internal business plan.
Performance objectives may be in respect of the performance of the
Company as a whole (whether on a consolidated or unconsolidated
basis), a related corporation, or a subdivision, operating unit,
product or product line of either of the foregoing. Performance
objectives may be absolute or relative and may be expressed in terms
of a
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<PAGE>
progression or a range. An option which is exercisable (in whole
or in part) upon the achievement of one or more performance objectives
may be exercised only following written notice to the Optionee and
the Company by the Plan Administrator that the performance objective
has been achieved.
5.4 EXERCISE. Subject to the limitations on exercise described in
subsection 5.3 above and any additional holding period required by
applicable law, each Option may be exercised in whole or in part;
provided, however, that only whole shares will be issued pursuant to
the exercise of any Option. During an Optionee's lifetime, any
Options granted under this Plan are personal to him or her and are
exercisable solely by such Optionee. Options shall be exercised by
delivery to the Company of a written notice of the number of shares
with respect to which the Option is to be exercised, together with
payment of the Exercise Price in accordance with Section 5.5.
5.5 PAYMENT OF EXERCISE PRICE. Payment of the Exercise Price shall
be made in full at the time the written notice of exercise of an
Option is delivered to the Company, and shall be in cash, bank
certified or cashier's check or personal check (unless at the time of
exercise the Plan Administrator in a particular case determines not to
accept a personal check) for the Common Stock being purchased. The
Plan Administrator can determine in its discretion (i) at the time an
Incentive Option is granted, or (ii) at any time before exercise of
Nonqualified Options that additional forms of payment will be
permitted, including installment payments on such terms and over such
period as the Plan Administrator may determine. To the extent
permitted by the Plan Administrator and applicable laws and
regulations (including, but not limited to, federal tax and securities
laws and regulations and state corporate law), an option may be
exercised by:
5.5.1 DELIVERY OF COMMON STOCK. Delivery of shares of Common
Stock held by an Optionee having a fair market value equal to the
Exercise Price, such fair market value to be determined in good
faith by the Plan Administrator;
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5.5.2 DELIVERY OF PROMISSORY NOTE. Delivery of a
full-recourse promissory note executed by the Optionee; provided
that (i) such note if delivered in connection with an Incentive
Option shall, and such note if delivered in connection with a
Nonqualified Option may, bear interest at a rate specified by the
Plan Administrator, but in no case less than the rate required to
avoid imputation of interest (taking into account any exceptions
to the imputed interest rules) for federal income tax purposes;
(ii) the Plan Administrator shall specify the term and other
provisions of such note at the time an Incentive Option is
granted or at any time prior to exercise of a Nonqualified
Option; (iii) the Plan Administrator may require that the
Optionee pledge the Optionee's shares to the Company for the
purpose of securing the payment of such note, and may require
that the certificate representing such shares be held in escrow
to perfect the Company's security interest; (iv) the note
provides that ninety (90) days following the Optionee's
termination of employment with the Company or a related
Corporation, the entire outstanding balance under the note shall
become due and payable, if not previously due and payable; and
(v) the Plan Administrator in its sole discretion may at any time
after granting an Option restrict or rescind the right to pay
using a promissory note upon written notification to any
Optionee;
5.5.3 DELIVERY OF SALE PROCEEDS. Delivery of a properly
executed written exercise notice, together with irrevocable
instructions to a broker, all in accordance with the regulations
of the Federal Reserve Board, to promptly deliver to the Company
the amount of sale or loan proceeds to pay the exercise price and
any federal, state or local withholding tax obligations that may
arise in connection with the exercise; provided, that the Plan
Administrator may at any time determine that this subsection
5.5.3, to the extent the instructions to the broker call for an
immediate sale of the shares, shall not be available to any
Optionee who is subject to Section 16(b) of the Exchange Act if
such transaction would result in a violation of Section 16(b), or
if such Optionee is not an employee at the time of exercise; or
5.5.4 DELIVERY OF WITHHOLDING NOTICE. Delivery of a properly
executed written exercise notice together with instructions to
the Company to withhold upon exercise from the shares that would
otherwise be issued that number of shares having a fair market
value equal to the Exercise Price.
5.6 WITHHOLDING TAX REQUIREMENT. The Company or any related entity
shall have the right to retain and withhold from any payment of cash
or Common Stock under this Plan the amount of taxes required by any
government to be withheld or otherwise deducted and paid with respect
to such payment. At its discretion, the Company may require an
Optionee receiving shares of Common Stock to reimburse the Company for
any such taxes required to be withheld by the Company, and may
withhold any distribution in whole or in part until the
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<PAGE>
Company is so reimbursed. In lieu of such withholding or
reimbursement, the Company shall have the right to withhold from any
other cash amounts due or to become due from the Company to the
Optionee an amount equal to such taxes or to retain and withhold a
number of shares having a market value not less than the amount of
such taxes required to be withheld by the Company to reimburse the
Company for any such taxes and cancel (in whole or in part) any such
shares so withheld. If required by Section 16(b) of the Exchange
Act, the election to pay withholding taxes by delivery of shares held
by any person who at the time of exercise is subject to Section 16(b)
of the Exchange Act, shall be made during the quarterly 10-day window
period required under Section 16(b) of the Exchange Act for exercises
of stock appreciation rights.
5.7 TRANSFERABILITY OF OPTION. Options and the rights and privileges
conferred by this Plan shall not be transferred, assigned or pledged
in any manner (whether by operation of law or otherwise) other than
(i) by will or by the applicable laws of descent and distribution, or
(ii) by gift to members of the Optionee's family, including
grandparents, parents, spouses, siblings, children, grandchildren and
great-grandchildren, or trusts for the benefit of such family members
or to charitable organizations, and shall not be subject to execution,
attachment or similar process. Any attempt to transfer, assign,
pledge or otherwise dispose of any Option or of any right or privilege
conferred by this Plan, contrary to the Code or to the provisions of
this Plan, or the sale or levy or any attachment or similar process
upon the rights and privileges conferred by this Plan shall be null
and void. Notwithstanding the foregoing, an Optionee may, during the
Optionee's lifetime, designate a person who may exercise the Option
after the Optionee's death by giving written notice of such
designation to the Plan Administrator. Such designation may be
changed from time to time by the Optionee giving written notice to the
Plan Administrator revoking any earlier designation and making a new
designation. In the event that no such designation is made, the
executor or personal representative of the Optionee's estate shall
have any rights then remaining to the Optionee or his estate under
this Plan.
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<PAGE>
5.8 DURATION OF OPTION. Vested Options shall terminate, to the
extent not previously exercised, upon the occurrence of the first of
the following events: (i) the expiration of the Option, as designated
by the Plan Administrator in accordance with section 5.3; (ii) the
date of an Optionee's termination of employment with the Company or
any related corporation for cause (as determined in the sole
discretion of the Plan Administrator); (iii) the expiration of ninety
(90) days from the date of an Optionee's termination of employment
with the Company or any related corporation for any reason whatsoever
other than cause, death or Disability (as defined below) unless, the
exercise period is extended by the Plan Administrator until a date not
later than the expiration date of the Option; or (iv) the expiration
of one year from (A) the date of death of the Optionee or (B)
cessation of an Optionee's employment by reason of Disability (as
defined below) unless, the exercise period is extended by the Plan
Administrator until a date not later than the expiration date of the
Option. If an Optionee's employment is terminated by death, any
Option held by the Optionee shall be exercisable only by the person or
persons to whom such Optionee's rights under such Option shall pass by
the Optionee's will or by the laws of descent and distribution of the
state or county of the Optionee's domicile at the time of death. For
purposes of the Plan, unless otherwise defined in the Agreement,
"Disability" shall mean any physical, mental or other health condition
which substantially impairs the Optionee's ability to perform his or
her assigned duties for one hundred twenty (120) days or more in any
two hundred forty (240) day period or that can be expected to result
in death. The Plan Administrator shall determine whether an Optionee
has incurred a Disability on the basis of medical evidence acceptable
to the Plan Administrator. Upon making a determination of Disability,
the Plan Administrator shall, for purposes of the Plan, determine the
date of an Optionee's termination of employment.
Unless accelerated in accordance with Section 7, unvested Options
shall terminate immediately upon termination of employment of the
Optionee by the Company for any reason whatsoever, including death or
Disability. For purposes of this Plan, transfer of employment between
or among the Company and/or any related corporation shall not be
deemed to constitute a termination of employment with the Company or
any related corporation. For purposes of this subsection with respect
to Incentive Stock Options, employment shall be deemed to continue
while the Optionee is on military leave, sick leave or other bona fide
leave of absence (as determined by the Plan Administrator). The
foregoing not withstanding, employment shall not be deemed to continue
beyond the first ninety (90) days of such leave, unless the Optionee's
re-employment rights are guaranteed by statute or by contract.
5.9 STATUS OF SHAREHOLDER. Neither the Optionee nor any party to
which the Optionee's rights and privileges under the Option may pass
shall be, or shall have any of the rights or privileges of, a
shareholder of the Company with respect to any of the shares issuable
upon the exercise of any Option unless and until such Option has been
exercised.
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5.10 RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any
Option shall confer upon any Optionee any right to continue in the
employ of the Company or of a related entity, or to interfere in any
way with the right of the Company or of any related corporation to
terminate, at will, his or her employment or other relationship with
the Company at any time.
5.11 MODIFICATION AND AMENDMENT OF OPTION. Subject to the
requirements of Code Section 422 with respect to Incentive Options and
to the terms, conditions and limitations of this Plan, the Plan
Administrator may modify or amend outstanding Options. The
modification or amendment of an outstanding Option shall not, without
the consent of the Optionee, impair or diminish any of his or her
rights or any of the obligations of the Company under such Option.
Except as otherwise provided in this Plan, no outstanding Option shall
be terminated without the consent of the Optionee. Unless the
Optionee agrees otherwise, any changes or adjustments made to
outstanding Incentive Options shall be made in such a manner so as not
to constitute a "modification" as defined in Code Section 424(h) and
so as not to cause any Incentive Option to fail to continue to qualify
as an "incentive stock option" as defined in Code Section 422(b).
5.12 LIMITATION ON VALUE FOR INCENTIVE OPTIONS. As to all Incentive
Options, to the extent that the aggregate fair market value of the
Common Stock with respect to which Incentive Options are exercisable
for the first time by the Optionee during any calendar year (under
this Plan and all other incentive stock option plans of the Company, a
related corporation or a predecessor corporation) exceeds $100,000,
those Options (or the portion of an Option) beyond the $100,000
threshold shall be treated as Nonqualified Options. If the Internal
Revenue Service publicly rules, issues a private ruling to the
Company, any Optionee, or any legatee, personal representative or
distributee of an Optionee or issues regulations changing or
eliminating such annual limit, the dollar limitation in the preceding
sentence shall be adjusted correspondingly.
6. GREATER THAN 10% SHAREHOLDERS. In the case of Incentive Options
granted to employees who own at the time of their grant ten percent (10%) or
more of the then-issued and outstanding voting stock of the Company, the
following rules shall apply:
6.1 EXERCISE PRICE AND TERM OF INCENTIVE OPTIONS. If Incentive
Options are granted to employees who own more than ten percent (10%)
of the total combined voting power of all classes of stock of the
Company or any related corporation, the term of such individual's
Incentive Options shall not exceed five (5) years and the Exercise
Price shall be not less than one hundred ten percent (110%) of the
fair market value of the Common Stock at the time the Incentive Option
is granted. This provision shall control notwithstanding any contrary
terms contained in an Option agreement or any other document.
6.2 ATTRIBUTION RULE. For purposes of subsection 6.1, in determining
stock
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ownership, an employee shall be deemed to own such shares as are
owned by those persons or entities defined in Code Section 424. For
purposes of this Section 6, stock owned by an employee shall include
all stock actually issued and outstanding immediately before the grant
of the Incentive Option to the employee.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate number and
class of shares for which Options may be granted under this Plan, the number and
class of shares covered by each outstanding Option and the Exercise Price per
share thereof (but not the total price), and each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a split-up or consolidation
of shares or any like capital adjustment, or the payment of any stock dividend.
7.1 EFFECT OF LIQUIDATION, REORGANIZATION OR CHANGE IN CONTROL.
7.1.1 CASH, STOCK OR OTHER PROPERTY FOR STOCK. Except as
provided in subsection 7.1.2, upon a merger (other than a merger
of the Company in which the holders of Common Stock immediately
prior to the merger have the same proportionate ownership of
Common Stock in the surviving corporation immediately after the
merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or
the creation of a holding company) or liquidation of the Company,
as a result of which the shareholders of the Company receive
cash, stock or other property in exchange for or in connection
with their shares of Common Stock, any Option granted under this
Plan shall terminate, but the Optionee shall have the right
immediately prior to any such merger, consolidation, acquisition
of property or stock, separation, reorganization or liquidation
to exercise such Option in whole or in part, to the extent the
vesting requirements set forth in the Option agreement have been
satisfied, unless stated otherwise in the Optionee's individual
Option agreement.
7.1.2 CONVERSION OF OPTIONS ON STOCK-FOR-STOCK EXCHANGE. If
the shareholders of the Company receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of
Common Stock in any transaction involving a merger (other than a
merger of the Company in which the holders of Common Stock
immediately prior to the merger have the same proportionate
ownership of Common Stock in the surviving corporation
immediately after the merger), consolidation, acquisition of
property or stock, separation or reorganization (other than a
mere reincorporation or the creation of a holding company), all
Options granted under this Plan shall be converted into options
to purchase shares of Exchange Stock unless the Company and the
Corporation issuing the Exchange Stock, in their sole discretion,
determine that any or all such Options shall not be converted
into options to purchase shares of Exchange Stock, but instead
shall terminate in accordance with the provisions of subsection
7.1.1. The amount and price of converted options shall be
11
<PAGE>
determined by adjusting the amount and price of the Options in
the same proportion as used for determining the number of shares
of Exchange Stock the holders of the Common Stock receive in such
merger, consolidation, acquisition of property or stock,
separation or reorganization. Unless accelerated by the Board,
the exercise limitations set forth in the Option agreement and
the Plan shall continue to apply for the Exchange Stock.
7.1.3 CHANGE IN CONTROL. In the event of a "Change in
Control," as defined below, of the Company, unless otherwise
determined by the Board prior to the occurrence of such Change in
Control, any Options or portions of such Options outstanding as
of the date such Change in Control is determined to have occurred
that are not yet fully vested on such date shall become
immediately exercisable in full.
7.1.4 DEFINITION OF "CHANGE IN CONTROL". For purposes of
this Plan, a "Change in Control" shall mean (a) the first
approval by the Board or by the stockholders of the Company of an
Extraordinary Event, (b) a Purchase or (c) a Board Change. For
purposes of the Plan, such terms shall have the following
meanings:
7.1.4.1 An "Extraordinary Event" shall mean any of the
following actions: (i) any consolidation or merger of the
Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of Common
Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the
surviving corporation immediately after the merger; (ii) any
sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or
substantially all, the assets of the Company; or, (iii) the
adoption of any plan or proposal for liquidation or
dissolution of the Company.
7.1.4.2 A "Purchase" shall mean the acquisition by any
person (as such term is defined in Section 13(d) of the
Exchange Act) of any shares of Common Stock or securities
convertible into Common Stock without the prior approval of
a majority of the Continuing Directors (as defined below) of
the Company, if after making such acquisition such person is
the beneficial owner (as such term is defined in Rule 13d-3
under the Exchange Act) directly or indirectly of Securities
of the Company representing twenty percent (20%) or more of
the combined voting power of the Company's then outstanding
securities (calculated as provided in paragraph (d) of such
Rule 13d-3).
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<PAGE>
7.1.4.3 A "Board Change" shall have occurred if individuals
who constitute the Board of the Company at the time of
adoption of this Plan (the "Continuing Directors") cease for
any reason to constitute at least a majority of the Board,
provided that any person becoming a Director subsequent to
the date of adoption of this Plan whose nomination for
election was approved by a vote of at least a majority of
the Continuing Directors (other than a nomination of an
individual whose initial assumption of office is in
connection with an actual threatened election contest
relating to the election of the Directors of the Company, as
such terms are used in Rule 14a-11 of Regulation 14A under
the Exchange Act) shall be deemed to be a Continuing
Director.
7.2 FRACTIONAL SHARES. In the event of any adjustment in the number
of shares covered by any Option, any fractional shares resulting from
such adjustment shall be disregarded and each such Option shall cover
only the number of full shares resulting from such adjustment.
7.3 DETERMINATION OF BOARD TO BE FINAL. All Section 7 adjustments
shall be made by the Board, and its determination as to what
adjustments shall be made, and the extent of such adjustments, shall
be final, binding and conclusive. Unless an Optionee agrees
otherwise, any change or adjustment to an Incentive Option shall be
made in such a manner so as not to constitute a "modification" as
defined in Code Section 424(h) and so as not to cause his or her
Incentive Option to fail to continue to qualify as an incentive stock
option as defined in Code Section 422(b).
8. SECURITIES REGULATION. Shares shall not be issued with respect to an
Option unless the exercise of such Option and the issuance and delivery of such
shares pursuant to the exercise of such Option shall comply with all relevant
provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance,
including the availability of an exemption from registration for the issuance
and sale of any shares under this Plan. Inability of the Company to obtain from
any regulatory body having jurisdiction, the authority deemed by the Company's
counsel to be necessary for the lawful issuance and sale of any shares under
this Plan or the unavailability of an exemption from registration for the
issuance and sale of any shares under this Plan shall relieve the Company of any
liability in respect of the non-issuance or sale of such shares as to which such
requisite authority shall not have been obtained.
As a condition to the exercise of any Option, the Company may require the
Optionee to represent and warrant at the time of any such exercise that the
shares are being purchased only for investment and without any present intention
to sell or distribute such shares if, in the opinion of counsel for the Company,
such a representation is required by any relevant provision of the
aforementioned laws. At the option of the Company, a stop-transfer order
against any shares of stock may be placed on the official stock books and
records of the Company, and a legend
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<PAGE>
indicating that the stock may not be pledged, sold or otherwise transferred
unless an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law
or regulation, may be stamped on stock certificates in order to assure
exemption from registration. The Plan Administrator may also require such
other action or agreement by the Optionees as may from time to time be
necessary to comply with the federal and state securities laws. THIS
PROVISION SHALL NOT OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE
OPTIONS OR STOCK HEREUNDER. Should any of the Company's capital stock of the
same class as the stock subject to Options be listed on a national securities
exchange, all stock issued under this Plan if not previously listed on such
exchange shall be authorized by that exchange for listing on such exchange
prior to the issuance of such stock.
9. AMENDMENT AND TERMINATION. This Plan may be amended from time to time
as follows:
9.1 BOARD ACTION. The Board may at any time suspend, amend or
terminate this Plan; provided, that except as set forth in Section 7,
the approval of the Company's shareholders is necessary within twelve
(12) months before or after the adoption by the Board of any amendment
which will:
9.1.1 increase the number of shares which are to be reserved
for the issuance of Options;
9.1.2 permit the granting of stock options to a class of
persons other than those presently permitted to receive Options;
or
9.1.3 require shareholder approval under applicable law,
including Section 16(b) of the Exchange Act.
Any amendment made to this Plan which would constitute a
"modification" to Incentive Options outstanding on the date of such
amendment, shall not be applicable to such outstanding Incentive
Options, but shall have prospective effect only, unless the Optionee
agrees otherwise.
9.2 AUTOMATIC TERMINATION. Unless sooner terminated by the Board,
this Plan shall terminate ten (10) years from the earlier of (i) the
date on which this Plan is adopted by the Board or (ii) the date on
which this Plan is approved by the shareholders of the Company. No
Option may be granted after such termination or during any suspension
of this Plan. The amendment or termination of this Plan shall not,
without the consent of the option holder, alter or impair any rights
or obligations under any option previously granted under this Plan.
10. EFFECTIVENESS OF THIS PLAN. This Plan shall become effective upon
adoption by the Board so long as it is approved by the Company's shareholders
any time within twelve (12) months before or after the adoption of this Plan.
14
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EXHIBIT 10.5
TECHNOLOGY TRANSFER AGREEMENT
THIS AGREEMENT is made between Schmitt Industries, Inc., an Oregon corporation
having a principal place of business at 2765 N.W. Nicolai, Portland, Oregon
97210 (hereinafter "Schmitt") and Centerline Engineering, Inc., an Illinois
corporation having a principal place of business at 1146 Beatty Mound Road,
Jerseyville, Illinois 62052 and the following individuals: Michael Harms having
a principal place of residence at R. R. #2, Box 6, Dow, Illinois 62035, Michael
Smith having a principal place of residence at 1109 Reddish Drive, Jerseyville,
Illinois 62052, and Nelson Miller having a principal place of residence at R. R.
#4, Box 136, Jerseyville, Illinois 62052, (hereinafter "Centerline").
WHEREAS, Centerline has developed certain Technology relating to a
non-contact gauging apparatus and method and has filed with the U.S. Patent and
Trademark Office a Patent Application directed to the Technology; and
WHEREAS, Schmitt is desirous of acquiring from Centerline all rights in and
to said Technology.
NOW, THEREFORE, Centerline and Schmitt, in consideration of the premises
and mutual covenants stated herein and other good and valuable consideration,
the sufficiency of which is hereby acknowledged, do hereby agree as follows:
I. DEFINITIONS
When used in this Agreement, the following terms shall have the meaning
indicated:
A. Technology: Any invention, improvement, discovery, product,
apparatus, method, formula or process, or patent or patent application
with respect thereto, know-how or trade secret relating to the gauging
of cylindrical rolls which has been developed by Centerline.
B. Device: Any apparatus employing the Technology, the manufacture, use
or sale of which by a third party would constitute an infringement of
any claim in an issued patent (or pending application), which claim
covers an invention invented solely by Centerline and relating to the
Technology.
C. Prototype: The measurement machine built by Centerline and employing
the Technology which was disclosed to Schmitt on April 17, 1998.
D. Patent Application: U.S. Patent Application Serial No. 08/844,727
filed April 18, 1997 entitled "Non-contact Gauging Apparatus And
Method."
E. Net Sales Price: The gross amount billed for any Devices sold,
excluding Schmitt's actual cost of transporting the Devices to its
customers, the actual cost
1
<PAGE>
of installation (if any), income or business taxes paid to any
governmental entity whether domestic or foreign, the actual cost of
insurance paid in connection with the delivery of devices to
customers, and the actual cost, not exceeding 24% of gross sales
price, of any commissions or rebates given to unrelated non-user
customers, distributors, or sales representatives.
II. WARRANTY
A. Centerline warrants that to the best of Centerline's knowledge that
the Technology is secret and has not been published or otherwise
publicly disclosed, or revealed to anyone not having an obligation of
confidentiality to keep the Technology confidential.
B. Centerline warrants that it has the right and power to enter into this
Agreement and to grant, sell, assign and transfer all rights in the
Technology to Schmitt.
C. Centerline warrants that it has not heretofore entered into any
contract in conflict with this Agreement and has not sold, granted,
assigned or transferred to any third party any right, license or
privilege relating to the Technology.
D. Centerline warrants that it has not filed or caused to be filed any
applications for letters patent in the U.S. or anywhere else in the
world relating to the Technology except U.S. Provisional Patent
Application Serial No. 60/015,670, filed April 19, 1996 and U.S.
Patent Application Serial No. 08/844,727, filed April 18, 1997.
E. Centerline warrants that it knows of no patents, trade secrets or
proprietary rights of others which would be infringed or violated by
the making, using, selling, testing, promoting or distributing of
the Prototype by Schmitt.
III. TRANSFER OF THE TECHNOLOGY
A. Centerline agrees to assign to Schmitt, and hereby does assign to
Schmitt, the entire right, title and interest in and to the
Technology, including, without limitation, the right to file for and
prosecute patent applications in the name of Schmitt relating to the
Technology wherever such right may be legally exercised.
B. Centerline agrees to supply to Schmitt, at no additional charge, the
technical information and material in Centerline's possession required
to adequately disclose the Technology, including the operation and
method of manufacture of
2
<PAGE>
the Prototype. This technical information shall include, but is not
limited to, all presently existing prototypes, drawings, schematics,
software code, blueprints, and test reports, relating to the
performance, function, operation, design, and manufacture of the
Prototype.
IV. ROYALTIES, PAYMENTS AND RECORD KEEPING
A. Schmitt agrees to pay to Centerline One Hundred Thousand Dollars
($100,000), said fee to be paid as follows:
1. A payment of Twenty-Five Thousand Dollars ($25,000) shall be due
and payable by Schmitt to Centerline upon the execution of this
Agreement by both parties.
2. A payment of Twenty-Five Thousand Dollars ($25,000) shall be due
and payable by Schmitt to Centerline on or before May 11, 1998
provided that Centerline has delivered the Prototype to Schmitt
or before May 11, 1998, and provided that by May 6, 1998,
Centerline has:
a. Obtained a new assignment of the invention disclosed and
claimed in the Patent Application from all inventors to
Centerline and forwarded said assignment(s) to the U.S.
Patent and Trademark Office for recordation;
b. Assigned the Patent Application to Schmitt and forwarded
said assignment to the U.S. Patent and Trademark Office for
recordation;
c. Filed with the U.S. Patent and Trademark Office an amendment
under Rule 312 to correct typographical errors in the Patent
Application;
d. Filed at Schmitt's expense with the U.S. Patent and
Trademark Office a Petition to Correct Inventorship to
correct the inventorship in the Patent Application; and
e. Paid the Issue Fee for the Patent Application.
3. A payment of Twenty-Five Thousand Dollars ($25,000) shall be due
and payable by Schmitt to Centerline on or before July 17, 1998,
provided that by June 30, 1998:
3
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a. Centerline personnel (including Michael Harms and Michael
Smith) have cooperated with Schmitt in connection with the
preparation and filing of a continuation-in-part application
("the CIP Patent Application") claiming priority to the
Patent Application to be prepared by Schmitt; and
b. Centerline has physically transferred to Schmitt all
information and equipment relating to the Technology being
assigned by this Agreement.
4. A payment of Twenty-Five Thousand Dollars ($25,000) shall be due
and payable by Schmitt to Centerline on or before October 16,
1998.
B. Schmitt agrees to pay to Centerline a royalty of the greater of:
1. One Thousand Dollars ($1,000) per Device; or
2. Five percent (5%) of the Net Sales Price obtained from the sale
of each Device shipped by Schmitt.
However, Centerline hereby waives the first Fifty Thousand Dollars
($50,000) of earned royalty after the date of this Agreement.
C. The royalties provided for under this Agreement shall be paid
quarterly, and Schmitt agrees to pay Centerline on or before the last
day of the months of January, April, July and October the total amount
of royalties due and payable under this Agreement during the calendar
quarter immediately preceding said dates.
D. Schmitt agrees to keep an accurate account of the operations coming
under the scope of this Agreement and shall render a statement in
writing to Centerline with each royalty payment indicating how many
Devices have been sold and shipped during the period for which
royalties are being paid.
V. PATENTS
A. Centerline agrees, without further consideration, to sign all lawful
papers and to perform all other lawful acts which Schmitt may request,
including the prompt execution of all original, divisional,
substitute, reissue, and other United States and foreign patent
applications on said Technology, including the Patent Application and
the CIP Patent Application, and all lawful documents requested by
Schmitt to further the prosecution of any of such patent applications.
4
<PAGE>
B. Centerline agrees to cooperate at Schmitt's expense to the best of its
ability in the execution of all lawful documents and the production of
evidence in any nullification, reissue, extension, or infringement
proceedings involving any patents covering the Technology.
C. Centerline agrees that Schmitt may, at its sole discretion and at its
expense, file and prosecute foreign patent applications relating to
the Technology.
VI. IMPROVEMENTS
If, during the next ten (10) years, Centerline makes any improvements
relating to the Technology, Centerline shall promptly communicate such
improvement to Schmitt and give Schmitt full information regarding the
improvement. Such information may be transmitted orally, in writing,
and through demonstrations as the occasion requires and shall be
sufficient for technical personnel of the parties to understand and apply
and evaluate the subject matter. In order to facilitate such improvements,
Schmitt will provide to Jerseyville Precision Inc., at 1148 Beatty Mound
Road, Jerseyville, Illinois on behalf of Centerline, the most current model
of the Device at no cost to Centerline or Jerseyville Precision, Inc. for
improvement and demonstration. In exchange, Centerline agrees to convey
and assign any such improvements to Schmitt at no additional price to
Schmitt.
VII. NONCOMPETE
A. Centerline agrees that Michael Harms, Michael Smith, and Nelson
Miller, during the term of this Agreement and thereafter for a period
of two (2) years, will not directly or indirectly use any of the
Technology or perform activities relating to gauging of cylindrical
rolls in any business, profession, or other endeavor which is either
directly or indirectly in competition with the business of Schmitt.
B. Centerline agrees that during the term of this Agreement and
thereafter Centerline Engineering Inc. will not directly or indirectly
use any of the Technology or perform activities relating to gauging of
cylindrical rolls in any business, profession, or other endeavor which
is either directly or indirectly in competition with the business of
Schmitt.
C. If any court finds the provisions in part VII. of this Agreement to be
unreasonable, the parties agree that the court may so modify this
Agreement to the extent necessary to make the provisions reasonable.
5
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VIII. TERM AND TERMINATION
A. This Agreement shall become effective from the date of its execution
and shall, unless terminated earlier by one of the parties hereto in
accordance with its terms, expire upon the expiration of the last
patent having a claim covering the Device or method of using the
Device, or in two (2) years from the date of its execution if no
patent issues.
B. In the event that either party defaults or breaches any of the
provisions of this Agreement, the non-defaulting party reserves the
right to terminate this Agreement upon sixty (60) calendar days
written notice to the defaulting party; unless, however, the
defaulting party within the sixty (60) calendar day period referred
to, cures the default or breach.
IX. GENERAL PROVISIONS
A. ARBITRATION: Any controversy or claim arising out of or relating to
this Agreement or the breach thereof shall be settled by arbitration
in St. Louis, Missouri in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrator(s) may be entered in any Court having
jurisdiction thereof.
B. ATTORNEY'S FEES: In the event of a dispute between the parties
arising under this Agreement, the party prevailing in such dispute
shall be entitled to collect such party's costs from the other party
including, without limitation, court and investigation costs and
reasonable attorney's fees and disbursements.
C. ASSIGNMENT: This Agreement shall be binding by both parties to their
successors and assignees and personal representatives, including
specifically Michael Harms, Michael Smith, and Nelson Miller.
D. INTERPRETATION AND CONSTRUCTION: This Agreement is written and will
be administered under the laws and applicable regulations of commerce
of the State of Oregon.
E. SEVERABILITY: In the event any one or more of the provisions
contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect the validity of
any other provision hereof and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision were not
contained herein provided the Agreement as so modified preserves the
basic intent.
6
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F. WAIVER: The failure of any party at any time to require performance
by any other party of any of the provisions herein shall not operate
as a waiver of the right of said party to request strict performance
of the same or like provisions, or any other provisions hereof, at a
later date.
G. ENTIRE AGREEMENT: This Agreement represents the entire agreement
between the parties on the subject matter hereof and supersedes all
prior discussions, agreements, and understandings of every kind and
nature between them. No modification of this Agreement will be
effective unless in writing and signed by both parties.
IN WITNESS WHEREOF, the parties hereto intending to be legally bound have
caused the presents to be signed, in duplicate, effective as of the date of the
last signature hereto.
SCHMITT INDUSTRIES, INC. CENTERLINE ENGINEERING INC.
/s/ Wayne A. Case /s/ Nelson Miller
- ------------------------------------- -----------------------------------
By: Wayne A. Case By: Nelson Miller
Its: President Its: Chairman and CEO
Date: May 8, 1998 Date: April 23, 1998
-------------------------------- ----------------------------
INDIVIDUALLY
The following undersigned
individuals agree to assist
Centerline in fulfilling all of its
duties and obligations outlined in
this Agreement.
/s/ Michael Harms
-----------------------------------
Michael Harms
/s/ Michael Smith
-----------------------------------
Michael Smith
/s/ Nelson Miller
-----------------------------------
Nelson Miller
7
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EXHIBIT 13.1
About Schmitt Industries
Schmitt Industries designs, manufactures and markets two distinct types of
precision measurement systems. Schmitt's automatic balancing systems for
rotating machinery are used by many of the world's leading automotive, aerospace
and bearing manufacturers. The second Schmitt product line, non-contact
measurement laser systems, are targeted to high-tech manufacturers worldwide and
ensure that silicon wafers and computer hard disks meet exacting standards for
surface microroughness.
The company's mission is to provide the best possible products and quality
for its customers, to provide challenging and rewarding employee
opportunities and to provide the greatest possible return to shareholders.
Schmitt recorded fiscal 1998 revenues of $10,626,084. The company currently
employs 50 people in three international locations: Alsbach, Germany;
Coventry, England; and at its corporate headquarters in Portland, Oregon.
Company shares are traded on the NASDAQ National Market under the symbol,
SMIT.
Financial Highlights
In thousands of dollars except per share information
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenues $ 10,626 $ 10,542 $ 7,080 $ 4,415 $ 2,575
Operating Income 1,339 2,296 1,509 697 313
Net Income After 1,250 1,725 1,217 249 182
Taxes
Net Income Per $ .17 $ .23 $ .16 $ .04 $ .03
Share, Diluted
Stockholders' 8,688 7,429 4,887 3,464 3,215
Equity
</TABLE>
a) Graph of Schmitt's Revenues, 1994-98
b) Graph of Schmitt's Operating Income, 1994-98
c) Graph of Schmitt's Net Income per share, 1994-98
a) Photo of Wayne A. Case
To our shareholders:
...our balance sheet remains strong, even healthier than
a year ago. Schmitt Industries is debt free and assets approach $10 million.
For the first six months of fiscal 1998, all signs pointed to another banner
year of record sales and net profits at Schmitt Industries. Then, with little
warning, the Asian financial crisis hit, precipitating a sales slump in our
non-contact measurement product line that serves the high-technology
industry. As a result, fiscal 1998 ended with slightly increased sales over a
year ago, but profits fell short of expectations.
The good news, however, is that we further strengthened our hold on the U.S.
market for balancer systems for the machine-tool industry. And we are making
significant strides in the European balancer market through Schmitt Hofmann
Systems (SHS) and Schmitt Europe Limited (SEL). Sales were up 130% in the
United Kingdom and 91% in Germany. The solid performance in our balancer
product line helped offset the decline in our Asian markets.
We've also taken another key step toward further solidifying our presence in
the machine tool industry. We are introducing a strategic new product, the
<PAGE>
SB-4500 electronic control system, which allows multi-tasking among multiple
balancers. More importantly, this controller provides a convenient integrated
platform for introducing additional machine-control products. We plan to
expand our product offerings to users of grinding machines and other machine
tools, while continuing to support our existing and growing balancer markets.
As a relatively small company, we have the capability to react rapidly to
market changes and redeploy our research and development strategies when
necessary.
As the situation in Asia plays out, we are concentrating more on the
worldwide machine-tool market, where demand remains high. To that end, we are
applying non-contact measurement laser technology to a new series of
dimensional gauging and microroughness measurement products, which will ship
in the fourth quarter of this year.
While we are shifting focus away from Asian markets, we must emphasize that
this is only for the short-term. Our non-contact measurement tools, utilizing
advanced laser technology, continue to make inroads in the hard-disk and
silicon wafer markets. During fiscal 1998, we introduced the DTM-2000, a
high-speed production-line testing system that has no equal in the industry.
When the Asian markets rebound, we will be well-positioned to reap the
benefits. I am pleased to report that our balance sheet remains strong, even
healthier than a year ago. Schmitt Industries is debt free and assets
approach $10 million. This solid bottom line provides the impetus as we
confidently move forward to: aggressively research new products, study
additional acquisition opportunities, and seek strategic partnerships both in
the U.S. and abroad.
Wayne A. Case
President and Chairman of the Board
The need to evolve.
Schmitt's automatic balancing systems for grinding machinery are preferred by
many of the world's leading manufacturers. In fact, the company has garnered
a greater than 50% market share for its products in the U.S. alone. However,
to further solidify its presence in the industry, Schmitt recognized the need
to evolve its balancer product line into ultra-high-speed markets. At the
same time, the company wanted to broaden its machine-control product
offerings beyond balancers.
How small is a micron
A human hair is about 50 microns. Grass grows at about 5 microns a minute.
One micron is to a drop of water, as a teaspoon of water is to an Olympic
swimming pool.
a) Photo of Schmitt's automatic balancing system components.
Beyond traditional balancers.
Schmitt's new SB-4500 electronic control system offers significant
enhancements, including higher speed balancing, multi-functionality, improved
balancer control and faster balancing cycles. Since the industry is moving
toward ever increasing speed requirements and tighter tolerance control, the
SB-4500 ably supports these increased market needs. The new platform allows
integrated control of multiple balancers, and supports additional product
functions. With this control system, Schmitt plans to expand its industrial
machine-tool product lines and markets.
<PAGE>
The SB-4500 provides a common interface for several different balancer
products, and it allows for multi-language capabilities, plus worldwide
compatible voltage and safety specifications. The product will eventually
replace Schmitt's existing controls for balancers manufactured in the U.S.,
as well as additional controls manufactured in Germany.
Schmitt's latest technology advancement measures and controls vibrations to
.04 millionths of an inch, a ten-fold improvement over the company's current
balancer capability. Industry experts rate this performance as the best in
the business.
In its goal to tap new markets, Schmitt is broadening its product line beyond
balancers. The company is developing advanced non-contact dimensional profile
and surface measurement gauging for the roll-grinder industry, which will be
introduced by the fourth quarter of 1998.
The Schmitt Industries Story
Back in 1987, the founders of Schmitt Industries conducted comprehensive
market research into industrial manufacturing. In the process, they learned
that there was no simple, reliable solution for in-process balancing of
grinding machines. Precision grinding is a necessary step for nearly every
industrial manufacturing endeavor.
Over the years, our balancer line has grown to include power transmission
technology, computer controls and sensors, external balancers and adapters,
internal balancers, ring balancers and hydro-kompensers. But we've never lost
focus of our overriding company philosophy: we bring to market products
customers want.
We currently control over 50% of the U.S. balancer market, and we are
continuing to make strong gains within the European marketplace. In 1995, we
acquired a former competitor in Germany, and that strategic business move has
accelerated our market penetration in Europe, while adding key products to
our balancer line.
Schmitt balancer systems are production-proven in thousands of major
manufacturing installations from coast-to-coast and around the world,
including many of the largest manufacturing firms. Schmitt balancer products
conform to strict ISO-9001 quality and measurement standards.
The latest addition to the Schmitt balancer family is the SB-4500 electronic
control system. This new product enables multi-tasking among multiple
balancers, and serves as an integrated platform for additional machine
control products in the machine tool industry. The SB-4500 increases balancer
speed and performance, and enables vibration measurements down to
one-thousandth of a micron.
After conducting careful market research, Schmitt acquired TMA Technologies
in May 1995, and along with it the company's fledgling laser technology.
Schmitt refined this technology, assembled a separate company division called
Schmitt Measurement Systems (SMS), and developed a new line of non-contact
surface measurement products.
All smooth surfaces exhibit some degree of microroughness, even if only at
the atomic level. Using proprietary light-scatter technology, Schmitt
Measurement Systems provides rapid, accurate, repeatable and non-destructive
surface measurements. SMS products are proving invaluable to manufacturers of
hard disks, hard disk drives, and silicon wafers.
In 1997, SMS developed the DTM-2000, an automated production-line system that
enables 100% testing of hard disks and delivers ten times the throughput of
conventional systems. The SMS product line also features light-scatter
measurement products, utilized by NASA and the Department of Defense for
precision measuring of space optics, cameras, and telescope lenses. Schmitt
Industries, by virtue of its debt-free balance sheet and $10 million in
assets, continues to devote significant resources to the research and
development of new products.
<PAGE>
And our company vision remains steadfast: "To provide the finest quality
products for our customers, to provide challenging and rewarding employment
opportunities, and to provide the greatest possible return to our
shareholders."
The balancer puzzle.
Grinding machines--one of the world's most common machine tools--are designed
for many different operations. However, all grinding machines have one
feature in common: a rotating grinding wheel, which requires constant
balancing. Major manufacturers, including the automotive industry, bearing
companies and makers of hydraulic systems all incorporate grinding machines
within their operations. The challenge is to design and fit applicable
balancers on a wide variety of machines.
a) Photo of Schmitt's External Balancer, Internal Balancer and
Hydrokompensers.
Three key answers.
Schmitt Industries designs, manufactures and markets a line of balancers that
covers the diverse needs of the market--both domestic and international. The
balancer line is made up of three principal types of products--external
balancers, internal balancers and hydrokompensers.
Schmitt has become the leader in its industry by responding to market needs. The
company pre-engineers balancer applications, installs complete systems, offers
comprehensive customer service, and maintains ample inventory of all products.
In the U.S., external balancers are far and away the optimum solution for
most grinding machines. Schmitt external balancers are easy to mount, highly
reliable and require little operator training, making them exceedingly
popular. Internal balancers are typically specified by European manufacturers
of grinding machines, and hydrokompensers fit unique applications when
external and internal balancers are not appropriate. Hydrokompensers are
particularly suited for ultra-high speed functions--balancing grinding wheels
that rotate at more than 15,000 RPM.
Together Schmitt Balance Systems (SBS) and Schmitt Hofmann Systems (SHS)
offer a breadth of products that satisfies nearly any manufacturing
requirement. Schmitt also customizes balancers to fit applications. As the
needs of the machine-tool industry grow more sophisticated, Schmitt will
maintain its focus on the market, and continue to develop products that meet
the increasing process control requirements of our customers.
Mitsubishi Siltec, a major supplier of silicon wafers to computer chip
makers, needed an efficient, non-destructive method for testing the
microroughness of its products. All silicon wafers exhibit a microscopic
level of surface roughness, stemming from chemical deposition, grinding,
polishing, etching, or any number of other production techniques. Silicon
wafer manu-facturing processes must be very precise and controlled, and these
processes heavily rely on the surface roughness of the wafer. Quantifying
microroughness is critical.
a) Photo of silicon wafer texture measurement system.
Smoothing over market needs.
In 1995, Schmitt acquired TMA Technologies, a U.S. company that researched and
developed laser technology. Schmitt engineers are harnessing this revolutionary
technology within a series of products that conduct non-contact surface
<PAGE>
measurements. And an entirely new company division has been created--Schmitt
Measurement Systems (SMS).
The flagship product of SMS--the TMS-2000W--provided an ideal solution for
Mitsubishi Siltec. The TMS-2000W enables fast, repeatable non-destructive
measurements down to a few hundredths of an angstrom, a level unattainable by
any other testing method. This system also provides a way for Mitsubishi
Siltec to quantify and control its manufacturing process. The TMS-2000W and
the complementary TMS-3000W are marketed worldwide by means of a strategic
partnership with Veeco Process Metrology.
While the TMS-2000W represents an excellent solution for the silicon
manufacturing environment, Schmitt engineers also developed the Microscan--a
mobile light-scatter surface-measurement tool. The Microscan is used by the
National Aeronautic and Space Administration (NASA) to measure microroughness
and reflectance on mirrors and space optics.
SMS product developers are aided by the world's most powerful light-scatter
laboratory, including eight lasers that operate at 20 different wavelengths.
Consequently, Schmitt contracts with customers to provide them with
comprehensive light-scatter analysis for industrial, military and space
optics applications.
The 100% problem.
In magnetic disk manufacturing, surface features are so small they cannot be
seen visually. Traditional test methods that utilize optical and microscope
technology do not provide the necessary resolution and speed to measure 100%
of production.
HMT, one of the world's premier suppliers of magnetic disks for hard drives,
was experiencing quality errors and omissions, due to a random testing
policy. The company needed to implement 100% testing, and do it afford-ably.
Schmitt answered with a technological breakthrough.
How small is an angstrom
The point of a needle is about 1 million angstroms in diameter. Fingernails
grow at about 50 angstroms per second. One angstrom is to a grain of sand,
as a child's wading pool is to the Atlantic Ocean.
a) Photo of Schmitt's non-contact texture measurement system used in the
production of disks.
100% success.
Senior management at Schmitt Industries met with HMT representatives to
discuss the development of a 100% production-test system for magnetic disks
for hard drives. Schmitt Measurement Systems (SMS) engineers began research
and development in earnest, and less than six months later, the company
unveiled the DTM-2000. This new system utilizes light-scatter measurement
technology to automatically process hard disks and render microroughness
measurements at rapid speed--one every three seconds.
HMT conducted extensive preliminary testing on the DTM-2000 with highly
satisfactory results. The automated system provides throughput of 1,200 hard
disks per hour at measurement levels as low as one-tenth of an angstrom. In
addition, the DTM-2000 is the first metrology system that offers disk drive
manufacturers the ability to make critical non-contact measurements on both
sides of disks, simultaneously. This technology leap makes 100% inspection
economically feasible.
HMT purchased seven new DTM-2000 systems, each with a market value of
$165,000. Schmitt is currently working with Veeco, its worldwide marketing
partner, to introduce the DTM-2000 to additional prospects in the disk drive
industry. According to the 1997 annual survey in Data Storage magazine, 400
million hard disks are manufactured annually, and the industry is expected to
grow by 15%
<PAGE>
per year. This should result in strong future demand for SMS non-contact
measurement products.
Consolidated Balance Sheets
May 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets
Current assets
Cash $1,127,076 $ 504,662
Trading securities -- 168,000
Accounts receivable 1,197,951 2,725,512
Inventories 4,166,755 2,479,820
Prepaid expenses 120,466 30,668
Deferred tax asset 34,623 136,000
Income tax receivable 190,806 --
Total current assets 6,837,677 6,044,662
Property and Equipment
Land 299,000 299,000
Buildings and improvements 1,190,920 1,025,868
Furniture, fixtures, and equipment 906,058 760,596
Vehicles 139,261 146,299
2,535,239 2,231,763
Less accumulated depreciation and amortization 691,258 530,587
1,843,981 1,701,176
Other Assets
Long-term deferred tax asset 837,560 679,000
Other assets 100,000 90,415
937,560 769,415
Total Assets $9,619,218 $8,515,253
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 681,524 $ 530,667
Accrued royalties 55,335 131,983
Accrued commissions 131,154 111,996
Other accrued liabilities 63,076 62,832
Income taxes payable -- 68,563
Current portion of long-term debt -- 29,061
Total current liabilities 931,089 935,102
Long-Term Debt, net of current portion -- 150,922
Commitments and Contingencies(Note 7)
Stockholders' Equity
Common stock, no par value, 20,000,000 shares authorized,
7,099,139 and 7,081,889 shares issued and outstanding
at May 31, 1998 and 1997, respectively 5,072,634 4,952,411
Cumulative foreign exchange translation adjustment (147,708) (36,270)
Retained earnings 3,763,203 2,513,088
Total stockholders' equity 8,688,129 7,429,229
Total Liabilities and Stockholders' Equity $9,619,218 $8,515,253
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
For the years ended May 31, 1998, 1997 and 1996 1998 1997 1996
<S> <C> <C> <C>
Net Sales $10,626,084 $10,541,972 $7,080,128
Cost of Sales 4,632,485 3,875,790 2,547,054
Gross profit 5,993,599 6,666,182 4,533,074
General, Administrative, and Sales Expense 4,275,059 4,164,271 3,023,916
Research and Development Expense 379,798 205,800 --
Operating expenses 4,654,857 4,370,071 3,023,916
Operating income 1,338,742 2,296,111 1,509,158
Other Income and Expense
Interest expense (42,231) (16,273) (45,130)
Interest income 44,581 25,007 27,853
Unrealized gain (loss) on trading securities -- 22,400 (61,222)
Miscellaneous income 259,924 25,430 16,132
Other income and expense 262,274 56,564 (62,367)
Income Before Provision for Income Taxes 1,601,016 2,352,675 1,446,791
Provision for Income Taxes 350,901 627,947 229,538
Net income $ 1,250,115 $ 1,724,728 $1,217,253
Net income per common share, basic $ .18 $ .25 $ .18
Weighted average number of common
shares, basic 7,091,269 7,031,449 6,887,975
Net income per common share, diluted $ .17 $ .23 $ .16
Weighted average number of common
shares, diluted 7,456,172 7,561,744 7,416,713
</TABLE>
Consolidated Statements
of Cash Flows
<TABLE>
<CAPTION>
For the years ended May 31, 1998, 1997 and 1996 1998 1997 1996
<S> <C> <C> <C>
Cash Flows Relating to Operating Activities
Net income $1,250,115 $1,724,728 $1,217,253
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 347,228 264,440 196,021
Amortization -- 72,393 189,103
<PAGE>
Unrealized (gain) loss on trading securities -- (22,400) 61,222
Deferred taxes (57,183) 198,426 (30,822)
(Increase) decrease in:
Trading securities 168,000 -- 150,000
Accounts receivable 1,527,561 (1,313,707) (444,024)
Inventories (1,686,935) (235,556) (613,626)
Prepaid expenses (89,798) (14,762) (4,004)
Notes receivable -- -- 10,000
Income taxes receivable (190,806) -- 50,000
Other assets (9,585) (90,415) (121,907)
Increase (decrease) in:
Accounts payable 150,857 185,839 (96,215)
Accrued liabilities, royalties, and (57,246) 62,198 126,784
commissions
Income taxes payable (44,809) (226,186) 294,749
Net cash provided by 1,307,399 604,998 984,534
operating activities
Cash Flows Relating to Investing Activities
Purchase of property and equipment (514,283) (461,168) (406,675)
Proceeds from disposal of equipment 24,250 10,651 --
Acquisition of assets of Hofmann (496,000)
Maschinenbau GmbH
Net cash used in investing activities (490,033) (946,517) (406,675)
Cash Flows Relating to Financing Activities
Repayment of long-term debt (179,983) (34,895) (69,131)
Long-term repayments mortgage -- -- (233,920)
Exercise of stock options 96,469 409,106 92,188
Net cash (used in) provided by financing (83,514) 374,211 (210,863)
activities
Effect of foreign exchange translation on cash (111,438) (36,270) --
Increase (Decrease) in Cash $ 622,414 $ (3,578) $ 366,996
Cash, beginning of year 504,662 508,240 141,244
Cash, end of year $1,127,076 $504,662 $508,240
Supplemental Disclosure of Cash Flow
Information
Cash paid during the period for interest $ 42,231 $ 15,272 $ 45,130
Cash paid during the period for income taxes $ 405,800 $ 450,871 $ 11,600
Supplemental Schedule of Noncash Investing and
Financing Activities
<PAGE>
Discount associated with long-term debt $ -- $ -- $ (78,085)
Reduction of goodwill $ (155,438) $ (215,973) $ (424,011)
Income tax benefit of stock options exercised $ (23,754) $ (444,793) $ (113,800)
</TABLE>
Consolidated Statements of
Changes in Stockholders' Equity
<TABLE>
<CAPTION>
For the years ended May 31,
1998, 1997 and 1996
Shares Amount Cumulative Retained Total
Foreign Earnings
Exchange (Accumulated
Translation Deficit)
Adjustment
<S> <C> <C> <C> <C> <C>
Balance,
May 31, 1995 6,886,889 $3,892,524 $ -- $ (428,893) $3,463,631
Stock options exercised 31,250 92,188 -- -- 92,188
Income tax benefit from exercise -- 113,800 -- -- 113,800
of stock options
Net income -- -- -- 1,217,253 1,217,253
Balance,
May 31, 1996 6,918,139 4,098,512 -- 788,360 4,886,872
Cumulative foreign exchange -- -- (36,270) -- (36,270)
translation adjustment
Stock options exercised 163,750 409,106 -- -- 409,106
Income tax benefit from exercise -- 444,793 -- -- 444,793
of stock options
Net income -- -- -- 1,724,728 1,724,728
Balance,
May 31, 1997 7,081,889 4,952,411 (36,270) 2,513,088 7,429,229
Cumulative foreign exchange -- -- (111,438) -- (111,438)
translation adjustment
Stock options exercised 17,250 96,469 -- -- 96,469
Income tax benefit from exercise -- 23,754 -- -- 23,754
of stock options
Net income -- -- -- 1,250,115 1,250,115
Balance,
May 31, 1998 7,099,139 $5,072,634 $ (147,708) $3,763,203 $8,688,129
</TABLE>
<PAGE>
NOTE 1 Organization and Nature of Operations
Schmitt Industries, Inc. (the Company) is engaged in the design, assembly,
marketing, and distribution of electronic and mechanical components for
machine tool products and laser measurement systems worldwide.
On June 13, 1996, the Company established Schmitt Europe, Ltd. (SEL).
In addition, on December 2, 1996, the Company established Schmitt Hofmann
Systems GmbH (SHS) which acquired certain assets of the grinding wheel
balance division of Hofmann Maschinenbau GmbH.
NOTE 2 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements as of May 31, 1998 and 1997, and the
consolidated statements of income for the years ended May 31, 1998, 1997 and
1996 include those of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
the preparation of the consolidated financial statements.
Revenue Recognition
Revenue from product sales is recognized upon shipment. Sales are reported
net of applicable cash discounts and allowances for returns.
Inventory
Inventory is valued at the lower of cost or market. Cost is determined on the
average cost basis. As of May 31, 1998 and 1997, inventories consisted of raw
materials ($2,502,310 and $1,165,554, respectively), work-in-process ($60,075
and $258,912, respectively), and finished goods ($1,604,370 and $1,055,354,
respectively).
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of three to seven years for
furniture, fixtures, and equipment; three years for vehicles; and twenty-five
years for buildings and improvements.
Technology Rights
From time to time the Company acquires certain rights to technology developed
by unaffiliated parties. Costs to acquire technology rights are capitalized
and amortized on a straight-line basis over the estimated useful life. Any
related royalty costs are expensed as related revenues are earned.
Capitalized acquired technology is included in other assets net of
accumulated amortization.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration
of credit risk are trade accounts receivable. Credit terms generally include
a discount of 1-1/2% if the invoice is paid within ten days, with the net
amount payable in 30 days. No allowance for doubtful accounts is considered
necessary.
For the year ended May 31, 1998, approximately 24% of consolidated sales
were made to one customer. During the year ended May 31, 1998, the Company
renewed a strategic partnership with an entity to distribute systems
manufactured by Schmitt Measurement Systems, Inc., for a period of two years.
For the year ended May 31, 1997 and 1996, approximately 22% and 15% of
consolidated sales were made to one customer, respectively.
Income Taxes
The Company follows the method of accounting for income taxes proscribed by
the Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," (FAS 109) whereby deferred tax assets and liabilities are
recognized for the future tax consequences of differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
<PAGE>
Research and Development Costs
Research and development costs are charged to expense when incurred.
Trading Securities
Trading securities consist of common stock and are stated at fair value, which
is estimated based on quoted market prices. Unrealized gains or losses are
included in other income and expense. Total realized gain on trading securities
during fiscal 1998 was approximately $186,000 and is included in other income.
No trading securities were held at May 31, 1998.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Consolidated Statement of Cash Flows
The Company considers short-term investments which are highly liquid, readily
convertible into cash, and have original maturities of less than three months
to be cash equivalents for purposes of the cash flows statement.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (FAS 123) encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB 25). Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Foreign Currency Translation
Financial statements for the Company's subsidiaries outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
stockholders' equity titled "Cumulative Foreign Exchange Translation
Adjustment."
Fair Value of Financial Instruments
The carrying amounts of financial instruments approximate their fair values
at May 31, 1998. The fair market value of long-term debt approximates
carrying amounts based on discounted cash flow analyses.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with current year presentations.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," (FAS 128), during 1998. All prior earnings per share
data have been restated to conform to the provisions of this statement. Basic
earnings per share is computed using the weighted average number of shares
outstanding. Diluted earnings per share is computed using the weighted
average number of shares outstanding, adjusted for the incremental shares
attributed to outstanding options to purchase common stock. Using the
treasury shares method as required by FAS 128, incremental shares of 364,903,
530,295 and 528,738 in 1998, 1997 and 1996, respectively, were used in the
calculation of diluted earnings per share.
New Accounting Pronouncements
Between June 1997 and June 1998, the FASB issued three pronouncements,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," (FAS 130), Statement of Financial Accounting Standards No. 131,
<PAGE>
"Disclosures about Segments of an Enterprise and Related Information," (FAS
131), and Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," (FAS 133), which will be
effective in future reporting periods. Management has evaluated the
provisions of these pronouncements and expects that their adoption will have
no effect on results of operations or the financial position of the Company.
NOTE 3 Company Acquisitions
On May 23, 1995, in a business combination accounted for as a purchase, the
Company acquired TMA Technologies, Inc., which designs, manufactures, and
markets optical quality assurance instruments. Subsequent to this acquisition,
the Company changed the name of TMA Technologies, Inc., to Schmitt Measurement
Systems, Inc. (SMS), and moved the operations to Portland, Oregon.
In transactions related to the acquisition, the Company established a
royalty pool and has vested each shareholder and debt holder an interest in
the royalty pool equal to the amount actually invested by shareholders or
loaned by debt holders including interest payable through March 31, 1995. The
royalty pool is funded at 5% of net sales (defined as gross sales less
returns, allowances, and sales commissions) of Schmitt Measurement Systems,
Inc.'s, products and future derivative products developed by Schmitt
Industries, Inc., which utilize these technologies. As part of the royalty
pool agreement, each of the former shareholders and debt holders released TMA
Technologies, Inc., for any claims with regard to the acquisition except
their rights to future royalties. Long-term debt of $179,983 was fully paid
to certain TMA Technologies, Inc. debt holders in fiscal year 1998.
On December 2, 1996, the Company purchased the inventories ($462,933)
and equipment ($33,067) of the grinding wheel balancer division of Hofmann
Maschinenbau GmbH for $496,000 and subsequently established Schmitt Hofmann
Systems GmbH. (See Note 1)
The results of both SHS and SMS are included in the accompanying
consolidated financial statements since the date of acquisition.
NOTE 4 Line of Credit
The Company has an unsecured short-term line of credit agreement with Wells
Fargo Bank, to a limit of $1,500,000. The line is guaranteed by the Company's
wholly-owned subsidiary, Schmitt Measurement Systems, Inc. Interest is payable
at the bank's prime rate, or LIBOR +2.50%. The line of credit is renewable
annually. No balance was outstanding as of May 31, 1998 or May 31, 1997.
NOTE 5 Income Taxes
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
Year ended May 31,
1998 1997 1996
<S> <C> <C> <C>
Current $243,264 $826,368 198,716
Deferred 383,887 77,824 312,235
Decrease in (276,250) (276,245) (281,413)
valuation
allowance
Total provision $350,901 $627,947 $229,538
for income taxes
</TABLE>
Deferred tax assets (liabilities) are comprised of the following components:
<PAGE>
<TABLE>
<CAPTION>
Year ended May 31,
1998 1997
<S> <C> <C>
Depreciation $ (29,861) $ (48,000)
Net operating loss carryforwards 1,038,559 1,314,809
Inventory basis differences 34,623 16,760
Other asset capitalization 13,840 142,181
Other deferred assets 49,254 64,250
Gross deferred tax assets 1,136,276 1,538,000
Deferred tax asset valuation (234,231) (675,000)
allowance
Net deferred tax asset $ 872,184 $ 815,000
</TABLE>
Through the acquisition of Schmitt Measurement Systems, Inc., the
Company acquired approximately $5.5 million of U.S. federal net operating
loss carryforwards. As of May 31, 1998, approximately $3 million of these net
operating losses remain (which expire in the years 2007 through 2009). The
deferred tax asset valuation allowance in fiscal years 1996 through 1998 is
attributed to these net operating losses. A portion of the reduction in
valuation allowance related to the net operating loss carryforward
represented tax asset benefit that reduced intangible assets acquired with
TMA (see Note 3).
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal tax rate to pre-tax income
due to the following:
<TABLE>
<CAPTION>
Year ended May 31,
1998 1997 1996
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
State taxes, net of federal 3.2 4.4 2.2
benefit
Change in deferred tax (27.5) (20.9) (48.8)
valuation allowance
Reduction of goodwill
associated with the
acquisition of Schmitt 10.3 9.2 29.3
Measurement Systems, Inc.
Other permanent differences 1.9 -- (0.9)
Effective tax rate 21.9% 26.7% 15.8%
</TABLE>
NOTE 6 Employee Benefit Plans
The Company adopted the Schmitt Industries, Inc. 401(k) Profit Sharing Plan &
Trust effective June 1, 1996. Employees must meet certain age and service
requirements to be eligible. Participants may contribute up to 15% of their
eligible compensation which is partially matched by the Company. The Company
may further make either a profit sharing contribution or a discretionary
contribution. Contributions made to this Plan during the year ended May 31,
1998 and May 31, 1997 were $135,335 and $116,248, respectively.
The Company adopted a Simplified Employee Pension Plan (SEP) during the
year ended May 31, 1993. All permanent employees were eligible to participate
once they met the age and length of employment requirements. Contributions
were $41,840 during the year ended May 31, 1996. The Plan was terminated
effective May 31, 1996.
NOTE 7 Contingency
<PAGE>
The Company is party to a legal action initiated by a competitor alleging
wrongful misrepresentation of the competitor's product. The claim is
considered, by management and the Company's legal counsel, to be without
merit. The extent of potential liability, if any, cannot be estimated at this
time.
NOTE 8 Segments of Business
The Company operates principally in two segments of business: the
manufacturing of mechanical components for the machine tool industry, and the
manufacturing of laser measurement systems for the computer disk and wafer
industries. The segment, which manufactures mechanical components for the
machine tool industry, reported gross sales of $8,286,243 for the year ended
May 31, 1998. This includes inter-company sales of $754,131. This segment
reported gross sales of $6,488,348 for the year ended May 31, 1997, including
inter-company sales of $336,875. The segment which manufactures laser
measurement systems for the computer disk and wafer industries reported gross
sales of $3,108,769 for the year ended May 31,1998, which includes
inter-company sales of $14,797. For fiscal year ended May 31, 1997, the
measurement products segment reported gross sales of $4,390,499. There were
no inter-company sales. The mechanical components segment and laser
measurement segment had sales of $4,801,151 and $2,278,977, respectively, for
the year ended May 31, 1996, which had no inter-company sales.
Geographically, U.S. sales were $7,873,148 and $8,728,082 for fiscal years
ended May 31, 1998 and 1997, respectively. Foreign sales were $3,521,864 and
$2,150,765 for the same years, respectively. This includes inter-company
sales of $768,928 for the year ended May 31, 1998 and $336,875 for the year
ended May 31, 1997. For the years ended May 31, 1998 and 1997, respectively,
export sales by the U.S. segment totaled $344,100 and $612,704.
Income from operations for the years ended May 31, 1998, 1997 and 1996
for the mechanical components segment was $363,656, $176,927 and $648,777,
respectively. Income from operations for the years ended May 31, 1998, 1997
and 1996 of the laser measurement segment was $975,086, $2,119,184, and
$830,381, respectively. Consolidated income from operations includes an
adjustment of $90,000 for the elimination of inter-company rent for the year
ended May 31, 1998 and $30,000 for the years ended May 31, 1997 and 1996.
Income from operations for the U.S. segment was $1,423,502 and $2,393,558,
respectively, for the years ended May 31, 1998 and 1997 and for the foreign
segment, losses of $84,760 and $97,447, respectively, for the same years.
Identifiable assets at May 31, 1998, 1997 and 1996, were $6,235,232,
$5,246,517, and $4,162,209 for the mechanical components segment and
$3,383,986, $3,268,736, and $1,823,731 for the laser measurement segment.
Identifiable assets at May 31, 1998 and 1997, were $8,890,325 and $7,034,431
for the U.S. segment and $728,893 and $1,480,822 for the foreign segment.
Depreciation expense incurred during the years ended May 31, 1998, 1997 and
1996, by the mechanical components segment was $206,335, $156,374 and
$115,778, respectively. The laser measurement segment incurred depreciation
expense of $140,893, $108,066 and $80,243, for the years ended May 31, 1998,
1997 and 1996, respectively. Amortization expense incurred during the years
ended May 31, 1998, 1997 and 1996, by the mechanical components segment was
$-0-, $72,393 and $91,756, respectively. The laser measurement segment did
not incur amortization expense for years 1998 and 1997, but incurred
amortization expense of $97,347 for the year ended May 31, 1996. The
U.S. segment incurred depreciation expense of $276,102 and $226,735 during
the years ended May 31, 1998 and 1997, respectively. The foreign segment
incurred depreciation expense of $71,126 and $37,705, respectively, for these
same years. The U.S. segment incurred amortization expense of $72,393 in
fiscal
<PAGE>
year ended May 31, 1997. The foreign segment has not incurred amortization
expense. Capital expenditures for the years ended May 31, 1998, 1997 and
1996, were $238,016, $297,998 and $317,861 by the mechanical components
segment and $276,267, $163,170 and $88,814 by the laser measurement segment,
respectively. Capital expenditures for the years ended May 31, 1998 and 1997,
were $466,801 and $291,128 by the U.S. segment and $47,482 and $170,040 by
the foreign segment, respectively.
Income from operations represents sales less costs and operating
expenses. In computing income from operations, all overhead expenses have
been allocated to both industry segments, as they are an integral part of
profit recognition for each segment. Identifiable assets by segment of
business are those assets used in the Company's operations in each segment.
There are no unallocated Company assets.
NOTE 9 Stock Options
Prior to 1995, the Company granted stock options to officers and employees of
the Company. Stock options for up to 10% of the outstanding shares eligible
for grant provided that the stock options for any one individual did not
exceed 5% of the issued and outstanding shares of common stock. The purchase
price of the optioned shares was equal to not less than the average closing
price of the Company's common stock for the ten trading days immediately
preceding the grant date of the stock options. The maximum term of each stock
option did not exceed five years and all options were vested and exercisable
upon grant. The options expire in the year 1999.
A 1995 Stock Option Plan was adopted by the Board of Directors on
December 19, 1995, for the benefit of employees other than officers. An
option granted under the Plan may be either an incentive stock option (ISO),
or a nonstatutory stock option (NSO). ISOs may be granted only to employees
of the Company and are subject to certain limitations, in addition to
restrictions applicable to all stock options under the Plan. Options not
meeting these limitations will be treated as NSOs. The purchase price of ISOs
is fair market value on the date of grant; purchase price of NSOs may vary
from fair market value. Vesting is generally on a cumulative basis over four
years at 25% per year. This plan, which originally provided for 300,000
shares available for option, was amended during the year ended May31, 1997,
with the maximum number of available shares increased to 500,000. The options
expire in years 2006 through 2008.
The following summarizes the options outstanding as of May 31, 1998:
For the 485,750 options granted prior to 1995, the exercise price range was
$0 to $2.00, the weighted average price was $1.72 and the remaining average
contractual life was 0.6 years. For the 386,750 shares granted under the 1995
Stock Option Plan, the exercise price range was $2.01 to $6.00, the weighted
average price was $5.22 and the remaining average contractual life was
8.2 years.
The Company has adopted the disclosure only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For
the years ended May 31, 1998, 1997 and 1996, total value of options granted
was computed to be $877,963, $395,740 and $801,878, respectively, which would
be amortized on a straight-line basis over the vesting period of the options.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for the awards in 1998, 1997 and
1996, consistent with the provisions of SFAS No. 123, the Company's pro forma
net income for the years ended May 31, 1998, 1997 and 1996, would be $889,944
and $1,436,760 and $602,835, respectively. Pro forma basic earnings per share
for
<PAGE>
the years ended May 31, 1998, 1997 and 1996 would be $.13, $.20 and $.09,
respectively. Pro forma diluted earnings per share for the years ended May 31,
1998, 1997 and 1996 would be $.12, $.19 and $.18, respectively.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option and pricing model. The weighted average
assumptions used for fiscal 1998, 1997 and 1996 were a risk-free interest
rate of 5.6%, 7.5% and 7.5%, respectively, an expected dividend yield of 0%,
0% and 0%, respectively, an expected life of 8, 10, and 10 years,
respectively, and a volatility of 52%, 51% and 51%, respectively.
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts.
<TABLE>
<CAPTION>
Options prior to 1995 1995 Stock Option Combined
Plan Plans
Weighted Weighted
Average Average
Exercise Exercise Combined
Shares Price Shares Price Shares
<S> <C> <C> <C> <C> <C>
Options outstanding, May 31, 1995 614,500 $1.72 -- $ -- 614,500
Options granted in 1996 -- $ -- 295,000 $5.83 295,000
Options exercised in 1996 (18,750) $1.96 (12,500) $4.38 (31,250)
Options outstanding, May 31, 1996 595,750 $1.72 282,500 $5.83 878,250
Options granted in 1997 -- -- 67,500 $5.83 67,500
Options exercised in 1997 (110,000) $1.72 (53,750) $4.38 (163,750)
Options forfeited in 1997 -- -- (14,000) -- (14,000)
Options outstanding, May 31, 1997 485,750 $1.72 282,250 $5.83 768,000
Options granted in 1998 -- -- 174,000 $6.63 174,000
Options exercised in 1998 -- -- (17,250) $5.59 (17,250)
Options forfeited in 1998 -- -- (52,250) $8.33 (52,250)
Options outstanding, May 31, 1998 485,750 $1.72 386,750 $5.22 872,500
Options vested at May 31, 1998 485,750 113,000 598,750
</TABLE>
Management's Discussion and Analysis
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 industry and
the risk factors listed from time to time in the Company's SEC reports,
including but not limited to the Current Report on Form 8-K dated June 5,
1996. Accordingly, actual results may differ, possibly materially, from the
predictions contained herein.
<PAGE>
During fiscal 1998 the measurement markets the Company serves declined,
particularly in the Asian region during the third and fourth quarters. The
Company has responded to this decline in demand for its products by launching
new products for both the laser measurement markets and the mechanical
balancer markets. As a result of these changes by management, the Company's
sales in fiscal 1998 increased slightly from fiscal 1997. The Company expects
current levels of product sales and profitability to continue in the near
future. However, there can be no assurance that the Company will continue to
be profitable with increased sales levels in future time periods.
Sales outside the United States accounted for approximately 20% of the
Company's revenues in each of the fiscal 1996, 1997 and 1998. Some foreign
customers will purchase in their own country's currencies, thereby imposing
on the Company a currency risk. All U.S. sales (74% of total sales in fiscal
1998) were in U.S. dollars and less than 10% of total sales in fiscal 1998
were in currencies other than U.S. dollars; as a result, currency
fluctuations have historically had little impact on revenue realization.
However, significant variations in the value of the U.S. dollar, relative to
currencies of countries in which the Company has significant competitors, can
impact future sales. The Company does not engage in currency hedging. In
addition, the longer payment cycles of international sales can have a
negative impact on liquidity. The Company believes that international sales
will continue to grow in future periods.
A substantial portion of the Company's revenues is derived from sales to
end users through selling agents and directly to builders of machine tools.
For fiscal 1997 and 1998, sales to a single customer did not exceed 10% of
total balancer revenues. In fiscal 1997 the Company entered into a strategic
partnership with Veeco Instruments Inc. (NASDAQ:VECO) to act as the exclusive
sales and marketing agent for SMS's laser light scatter products. As a result
of this agreement, 24% of consolidated fiscal 1998 sales were through Veeco
as compared with 22% in fiscal 1997. The Company is dependent on the sales
activities of its selling agents, and there can be no assurance that these
agents will continue to be successful in their efforts to market the
Company's products. The Company enjoys substantial repeat business from a
broad base of customers, but there can be no assurance that these customers
will continue to buy the Company's products in the future.
Increased revenues during fiscal 1996, 1997 and 1998 principally have
been the result of increased volume of product shipments. Product
improvements and available features have resulted in modestly increased
average product prices.
The Company operates in a highly competitive industry characterized by
increasingly rapid technological changes. The Company's competitive advantage
and future success are therefore dependent on its ability to develop new
products, to qualify these new products with its customers, to successfully
introduce these products to the marketplace on a timely basis, to commence
production to meet customer demands and to develop new markets in the
industries for its products and services. The successful introduction of new
technology and products is increasingly complex. If the Company is unable,
for whatever reason, to develop and introduce new products in a timely manner
in response to changing market conditions or customer requirements, its
results of operations could be adversely impacted.
a) Graph of Schmitt's Shareholders' Equity, 1994-98.
Results of Operations
<PAGE>
Sales in fiscal 1998 increased to $10,626,084 from $10,541,972 in fiscal 1997
and $7,080,128 in fiscal 1996. Schmitt Measurement System (SMS) sales
accounted for $3,093,972 of fiscal 1998 sales compared with fiscal 1997 sales
of $4,390,499. Net income for fiscal 1998 totaled $1,250,115 vs. fiscal 1997
totals of $1,724,728. This decline was directly attributable to reduced sales
of SMS measurement products.
Historically the Company has enjoyed a high gross profit margin in
excess of 60% on its SBS Dynamic Balancing products and its SMS measurement
products. Fiscal year 1998 gross profits totaled 56%. Cost of sales as a
percentage of sales for fiscal 1996, 1997 and 1998 was 35.9%, 36.7% and
43.6%, respectively. The introduction of the TMS-2000 during the third
quarter of fiscal 1996 had a positive impact on sales and net earnings for
fiscal 1996 and 1997. The fiscal 1998 decline in sales of TMS-2000 and
TMS-2000W series products resulted in a negative impact on sales and net
earnings. Management expects these trends in sales and profits of the TMS
series products to continue throughout the 1998 calendar year. Management
anticipates that cost of sales as a percentage of sales will be similar in
future time periods to the Company's historical performance. No assurances
can be made that the Company will be profitable or will generate increased
sales in future time periods.
General selling and administrative expenses as a percentage of net sales
were 40% in fiscal 1998, 40% in fiscal 1997, and 43% in fiscal 1996. During
each of these fiscal years, the Company increased spending in marketing and
selling programs to support the development of international markets,
particularly in the European and Asia-Pacific regions, and to increase the
awareness of new products. Administrative expenses have increased during each
of the last three fiscal years to support the Company's growth, improve
information technology capability and protect the Company's intellectual
property rights.
The Company has had minor variable cost increases in periods of
increased sales; therefore, fixed costs have been spread over an increasing
sales revenue as unit sales of SBS and SMS products increased. Even with two
operating segments, management believes the Company's costs will not increase
at the same rate that sales are anticipated to increase in fiscal 1999 and
beyond, although there can be no such assurance.
Net income for fiscal 1998 decreased to $1,250,511, a 28% decrease from
fiscal 1997 and 3% increase over fiscal 1996. Net income per basic share
decreased to $0.18 in fiscal 1998 from $0.25 in fiscal 1997 and remained the
same as fiscal 1996.
The Company's future operating results depend, to a considerable extent,
on its ability to maintain a competitive advantage in both the products and
services it provides. For this reason, the Company believes it is critical to
continue to make future investments in research and development to ensure the
flow of innovative, productive, high-quality products and support services.
Accordingly, the Company expects research and development expenses to
continue to increase in the immediate future.
a) Graph of Schmitt's Total Assets, 1994-98.
Liquidity and Capital Resources
The Company's financial condition remained very strong, with a ratio of
current assets to current liabilities of 7.3:1 at May 31, 1998, compared with
6.5:1 at May 31, 1997. As of May 31, 1998, the Company had $1,127,076 in
cash, and trading securities, compared with $672,662 at May 31, 1997.
Accounts receivable have decreased as revenue growth has slowed. At May 31,
1998, accounts receivable totaled $1,197,951 compared with $2,725,512 at May 31,
1997. At May 31, 1998, none of the Company's accounts receivable were
<PAGE>
considered a doubtful collection. The Company generally experiences a payment
cycle of 30-80 days on invoices. Management believes its credit policies and
collection policies are effective and appropriate for the marketplace that it
serves and the Company has had no bad debt write-offs since its inception in
1986. There can be no assurance that the Company's collection procedures will
continue to be successful.
Working capital increased from $5,109,560 at May 31, 1997 to $5,906,588
at May 31, 1998. During fiscal 1997 the Company spent $496,000 to acquire
certain assets of a former European competitor, Hofmann Maschinenbau GmbH
(SHS). Additionally the Company spent $461,168 on the purchase of worldwide
corporate assets of property and equipment in fiscal 1997. During fiscal 1998
the Company spent $514,283 to acquire certain worldwide corporate assets of
property and equipment to assist in production and product development.
Although the Company has no current material commitments for capital
expenditures, product development to extend SBS products to new markets and
to bring SMS products to advanced commercial status is expected to result in
increased capital expenditures for equipment in fiscal 1999.
The Company maintains levels of inventory sufficient to satisfy normal
customer demands, plus an increasing short-term delivery requirement for a
majority of its products. Additionally, inventories are periodically adjusted
according to management's forecast for future business activity. Management
believes its ability to provide prompt deliveries gives it a competitive
advantage for certain sales. It is expected that current inventory levels
will be maintained or increased as new products are introduced. The average
finished goods inventory turnover ratio for fiscal 1996, 1997 and 1998 was
1.7, 2.1 and 1.4, respectively.
The acquisition of SMS resulted in a tax loss carryforward in excess
$5 million, which is available to offset earnings from SMS through the year
2010. As of May 31, 1998 the Company's gross deferred tax asset balance was
$3,233,155.
a) Graph of Schmitt's Return on Equity (in percent), 1994-98.
The Company has completed an evaluation of Year 2000 computer
information processing problems and Year 2000 program requirements for
internal operations and Company products and does not expect to experience
Year 2000 problems in those areas. A survey analysis of external vendors is
in process and is anticipated to be complete by December 31, 1998. The
Company's Year 2000 compliance evaluation will then be complete. The Company
does not believe it has significant exposure to Year 2000 problems with
significant vendors, customers and financial institutions and does not expect
that Year 2000 will have a material cost or impact on Company operations.
However, there can be no assurance that the systems of other companies on
which the Company relies will not have an adverse effect on the Company's
systems.
Management believes that its cash flows from operations, available
credit resources and its improving cash position will provide adequate funds
on both a short-term and long-term basis to cover currently foreseeable debt
payments, lease commitments and payments under existing and anticipated
supplier agreements. Management believes that such cash flow (without the
raising of external funds) is sufficient to finance current operations,
projected capital expenditures, anticipated long-term sales agreements and
other expansion-related contingencies during fiscal 1998.
b) Graph of Schmitt's Working Capital, 1994-98.
Summarized Quarterly Financial Data
In thousands, except per share information (unaudited)
<PAGE>
<TABLE>
<CAPTION>
1998 Quarter Ended August 31 November 30 February 28 May 31
<S> <C> <C> <C> <C>
Sales $2,666,941 $3,220,475 $2,372,320 $2,366,348
Gross Profit 1,504,589 1,833,637 1,059,200 1,596,173
Net Income 354,551 695,449 101,794 98,321
Net Income Per Share, 0.05 0.10 0.01 0.01
Basic
Net Income Per Share, 0.05 0.09 0.01 0.01
Diluted
Market Price of Common
Stock
Low 7.50 8.00 7.38 5.69
High 9.75 12.00 10.13 8.13
<CAPTION>
1997 Quarter Ended August 31* November 30* February 28* May 31*
<S> <C> <C> <C> <C>
Sales $1,793,698 $2,738,314 $2,918,912 $3,091,048
Gross Profit 1,069,558 1,725,676 1,827,858 2,043,090
Net Income 140,276 607,344 458,655 518,453
Net Income Per Share, 0.02 0.09 0.07 0.07
Basic
Net Income Per Share, 0.02 0.08 0.06 0.07
Diluted
Market Price of Common
Stock
Low 8.88 7.88 7.88 7.00
High 13.75 11.00 11.00 10.75
</TABLE>
*Quarterly data have been restated to account for inter-company transactions.
Common Stock Information and Dividend Policy
As of July 15, 1998, there were 7,099,139 shares of Common Stock outstanding
held by approximately 129 holders of record. The number of holders does not
include individual participants in security position listings. Management
estimates that there are over 2,500 shareholders who own the Company's stock.
The Company has not paid any dividends on its Common Stock since 1994.
The Company's present policy is to retain earnings to finance the Company's
business. Any future dividends will be dependent upon the Company's financial
condition, results of operations, current 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.
The sum of quarterly earnings per share does not equal annual earnings
per share as a result of the computation of quarterly versus annual average
shares outstanding.
Selected Financial Data
In thousands, except per share information
<TABLE>
<CAPTION>
Year Ended 5/31/98 5/31/97 5/31/96 5/31/95 5/31/94
<S> <C> <C> <C> <C> <C>
Sales $10,626 $10,542 $7,080 $4,415 $2,575
Net Income $ 1,250 $ 1,725 $1,217 $ 249 $ 182
Net Income Per $ 0.18 $ 0.25 $ 0.18 $ 0.04 $ 0.03
Share, Basic
Weighted Average
Number of Shares 7,091 7,031 6,888 6,887 5,978
(000)
Net Income Per $ 0.17 $ 0.23 $ 0.16 $ 0.04 $ 0.03
Share, Diluted
<PAGE>
Weighted Average
Number of Shares 7,456 7,562 7,417 7,116 6,203
(000)
Stockholders' $ 8,688 $ 7,429 $4,887 $3,464 $3,215
Equity
Total Assets $ 9,619 $ 8,515 $5,986 $4,619 $4,232
</TABLE>
Report of Independent Accountants
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
Schmitt Worldwide Customers
Adam Opel AG
Akashic Memories Corporation
Allied Signal Aerospace Company
Allison Engine Company
American Axel
American Koyo Bearing Mfg. Corp.
American NTN Bearing Company
Asahi Komag
Atlas Copco Airpower N.V.
Audi AG
Barden Corporation
Black & Decker Corporation
Blohm Maschinenbau Gmbh
BMW Motoren GmbH
Boeing Company
Briggs & Stratton
<PAGE>
Bryant Grinder Corporation
Caterpillar Belgium S.A.
Caterpillar Incorporated
Chrysler Corporation
Cincinnati Milacron
Cummins Engine Company
Daewoo International Corporation
Daimler Benz
Dana Corporation
Deere & Company
Diesel Technology Corporation
Dresser-Rand
Eaton Corporation
Emerson Power Transmission
Erwin Junker
FAG Bearing Ltd.
Federal Mogul Corporation
Fiat
Ford France S.A.
Ford Motor Company
Fuji Electric
General Electric Corporation
General Motors Corporation
Goldcrown Machinery
Greenfield Industries
Gyhring Automation
Harley-Davidson Motor Company
HMT Technology Corporation
Honda Motor Company, Honda
Of America
IBM Deutschland
INA Bearing Corporation
Jones & Shipman, Inc.
Komag, Inc.
Koube Steel
Koyo Machinery USA
Landis, Landis Lund
Lockheed Martin
Mercedes Benz AG
Milwaukee Electric Tool
Mitsubishi Chemical
Mitsubishi Material Silicon
Mitsubishi Motor Company Ltd.
NASA
Navistar International Transportation
New Venture Gear
Nissan Motors Ltd.
Normac, Inc.
Norton Company
Okamoto Corporation
Okunia Machinery, Inc.
Opel Austria GmbH
Parker Hannifin Corporation
Pratt & Whitney
Raytheon
<PAGE>
Reliance Electric Company
Rexnord Corporation
Reynolds Metals
Robert Bosch Corporation
Robert Bosch GmbH
Saturn Corporation
Seagate Substrates
SEH America, Inc.
Siemens Automotive Systems
SKF Bearing Industries
SKF GmbH
Sumitomo Heavy Industries
Texas Instruments
The Timken Company
The Torrington Company
Timken France
Toyoda Machinery USA, Toyoda
Machinery, Ltd.
TRW Automotive Components
United Grinding Technologies
University Of Connecticut Grinding
Research Center
Volkswagen AG
Volvo
Weldon Machine Tool
Western Digital
Weyburn-Bartel
Corporate Offices
Schmitt Industries, Inc.
2765 NW Nicolai St.
Portland, OR 97210
Phone: (503) 227-7908
Fax: (503) 223-1258
Web: www.schmitt-ind.com
Schmitt Europe Ltd.
University of Warwick Science Park
Sir William Lyons Road
Coventry, England CV4 7EZ
Phone: 44-1203-697192
Fax: 44-1203-412697
Schmitt Hofmann Systems GmbH
Schwingungsmesstechnik
Birkenweg 8 (Gewerbegebiet)
D - 64665 Alsbach, Germany
Phone: 49-6257-9351-21
Fax: 49-6257-9351-23
Transfer Agent & Registrar
Interwest Transfer Company
Salt Lake City, Utah U.S.A.
Banking Reference
Wells Fargo Bank
Portland, Oregon U.S.A.
Certified Public Accountants
PricewaterhouseCoopers, LLP
<PAGE>
Portland, Oregon U.S.A.
Stock Listing
NASDAQ National Market
Symbol: SMIT
Officers
Wayne A. Case
President & Chief Executive Officer
David W. Case
Vice President of Operations
Annie N. Windsor
Chief Financial Officer
Linda M. Case
Corporate Secretary
Directors
Wayne A. Case
President & Chief Executive Officer
Schmitt Industrties
Maynard Brown
Partner, Brown McCue, Attorneys
David L. Dotlich, Ph.D.
Faculty, University of Michigan
Business School, Business Consultant
David M. Hudson
President, Coldstream Holdings, Inc.
Trevor Nelson
Financial Consultant
The Stewart Thomas Group
Dennis T. Pixton
President, Chief Operating Officer
Michaels of Oregon Co.
John A. Rupp
Business Executive - Self Employed
Form 10-K Available
A copy of the Company's Form 10-K as filed with the Securities and Exchange
Commission is available to shareholders free of charge upon request addressed
to the Secretary at the Company's Corporate Offices.
Annual Meeting
The annual meeting of shareholders will be held Friday, October 9, 1998 at
3:00 p.m. at the Corporate Offices.
Forward-looking Statements
This summary annual report, other than the historical financial information,
contains statements regarding future sales and earnings growth and projects
or processes currently under development which are forward-looking statements
that involve risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking statements,
including delays in technology or product developments, shipment or
cancellation of orders, timing of future orders, customer reorganizations,
fluctuations in demand and the other risks detailed from time-to-time in the
Company's reports which are filed with the Securities and Exchange Commission.
Schmitt Industries, Inc.
2765 NW Nicolai Street
<PAGE>
Portland, Oregon 97210
Phone: (503) 227-7908
Fax: (503) 223-1258
Web: www.schmitt-ind.com
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF SCHMITT INDUSTRIES, INC.
AS OF MAY 31, 1998
<TABLE>
<CAPTION>
State of Incorporation or
Subsidiary Country in Which Organized
--------------------------------- --------------------------
<S> <C>
Schmitt Measurement Systems, Inc. Montana
Schmitt Hoffman Systems GmbH Germany
Schmitt Europe, Ltd. United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-3910) of Schmitt Industries, Inc. of our
report dated July 17, 1998 appearing on page 13 of this Form 10-K.
PricewaterhouseCoopers LLP
Portland, Oregon
August 27, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Annual Report on Form 10-K, and to the
inclusion in the Form S-8 Registration Statement No. 333-3910, of our report
dated July 10, 1997, on our audits of the consolidated financial statements
of Schmitt Industries, Inc., and its subsidiaries.
Moss Adams LLP
Portland, Oregon
August 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCHMITT
INDUSTRIES, INC. INDEPENDENT AUDITOR'S REPORT AND CONSOLIDATED FINANCIAL
STATEMENTS MAY 31, 1998, 1997, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 1127
<SECURITIES> 0
<RECEIVABLES> 1198
<ALLOWANCES> 0
<INVENTORY> 4167
<CURRENT-ASSETS> 6838
<PP&E> 2535
<DEPRECIATION> 691
<TOTAL-ASSETS> 9619
<CURRENT-LIABILITIES> 913
<BONDS> 0
0
0
<COMMON> 5073
<OTHER-SE> 3615
<TOTAL-LIABILITY-AND-EQUITY> 9619
<SALES> 10626
<TOTAL-REVENUES> 10626
<CGS> 4632
<TOTAL-COSTS> 4655
<OTHER-EXPENSES> (262)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 1601
<INCOME-TAX> 351
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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