Exhibit 10.1

 

EMPLOYMENT AGREEMENT

OF

MICHAEL S. MCAFEE

 

This Employment Agreement (“Agreement”) is made effective the 21st day of
September, 2005, by and between Schmitt Industries, Inc., an Oregon corporation
(“Schmitt”), and Michael S. McAfee (“McAfee”).

 

In consideration of the promises and mutual covenants set forth in this
Agreement, Schmitt and McAfee promise and agree as follows:

 

1.                                      Term of Employment.   Schmitt hereby
employs McAfee, and McAfee hereby accepts employment with Schmitt, on and
subject to the terms and conditions provided in this Agreement for a period of
two (2) years commencing on September 21, 2005 and ending on September 20, 2007
(the “Term”), unless earlier terminated pursuant to Section 5.

 

2.                                      Scope of Duties.

 

2.1                               Duties.   McAfee shall serve as the Chief
Financial Officer (“CFO”) and Corporate Treasurer of Schmitt, and, subject to
the policies of Schmitt’s Board of Directors (“Board”) as enacted from time to
time, shall be responsible for Schmitt’s day-to-day financial and accounting
operations as directed by Schmitt’s President.

 

2.2                               Facilities and Staff.   McAfee will be
furnished with such facilities, services, staff and working conditions,
consistent with Schmitt’s current practices, as are suitable to his position and
appropriate for the performance of his duties. It is further understood by
McAfee that this job is a “Hands-on position” that requires that McAfee be
capable of handling, and be willing to handle, all work activities suitable to
his position.

 

2.3                               Full Time and Attention.    McAfee will
loyally and conscientiously devote substantially all of his business and
professional time, attention and energies (exclusive of periods of sickness and
disability and such normal holiday and vacation periods as have been established
by Schmitt) to the affairs of Schmitt.  Notwithstanding the above:

 

2.3.1                     McAfee may expend a reasonable amount of time for
educational, professional or charitable activities; and

 

2.3.2                     This Agreement shall not be interpreted to prohibit
McAfee from making passive personal investments or conducting private business
affairs, as long as those activities do not materially interfere with the
services required under this Agreement.

 

2.4                               Competitive Activities.   During the Term of
his employment hereunder, unless specifically authorized by the Board of
Directors, McAfee shall not, directly or indirectly, either as an officer,
director, investor, employee, consultant, agent, independent contractor,
principal, partner, shareholder, or in any other capacity whatsoever, engage or
participate in any business activities or business entity that is, in any way,
competitive with any of the business of Schmitt.

 

2.5                               Indemnification and Insurance.   During the
Term of his employment hereunder, McAfee will receive the full benefit of the
indemnification provisions for officers and directors that are then contained in
Schmitt’s Articles of Incorporation and Bylaws, and shall be a named insured
under Schmitt’s Director’s and Officer’s liability insurance policy, as such
indemnification provisions and insurance policies are in effect from time to
time.

 

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3.                                      Compensation and Expenses.

 

3.1                          Compensation.   During the term of this Agreement,
Schmitt will pay McAfee an initial base salary of $125,000.00 per year, payable
at such times and in such increments as are consistent with Schmitt’s usual
policies.  Any proposed salary change will be determined by the Compensation
Committee of the Board; provided, however, that McAfee’s salary shall never be
less than the amount set forth above, unless agreed to in writing by McAfee. 
McAfee shall also be eligible for bonuses as may be determined by the Chairman
of the Board and/or the Board’s Compensation Committee.

 

3.2                          Stock Options.  McAfee will be granted 25,000
Schmitt stock options on September 21, 2005 at the then market closing price. 
These options are for a ten-year period; 6,250 options vest each year, with the
first 6,250 options vesting on September 21, 2005.

 

3.3                               Expenses.   Schmitt will reimburse McAfee for
all reasonable travel, entertainment and miscellaneous expenses incurred by him
in connection with the performance of his duties under this Agreement including
annual costs of license and certification fees and continuing education relevant
to performance of McAfee’s duties to Schmitt.  Schmitt will also reimburse
McAfee for premiums paid on his AICPA long-term disability and life plans as
long as he is not participating in Schmitt’s long-term disability and life
plans.  Such reimbursement will be made in accordance with general policies and
procedures of Schmitt in effect from time to time relating to reimbursement.

 

3.4                               Taxes and Withholding.   Schmitt shall
withhold or deduct from sums due to McAfee hereunder all amounts required by
applicable state or federal law.

 

4.                                      Benefits.

 

4.1                               Vacation.   During the term of this Agreement,
McAfee will be entitled to at least 15 days of vacation per year, to be taken
and accounted for in accordance with Schmitt’s policies for same in effect from
time to time, or such additional time as is in accordance with Schmitt’s
published rules regarding vacation.

 

4.2                               Group Benefits.   McAfee may participate in
any pension, insurance or other employee benefit plan that is maintained by
Schmitt from time to time for employees similarly situated.

 

5.                                      Termination.

 

5.1                               Termination.   Notwithstanding the Term of
this Agreement, McAfee’s employment with Schmitt may be terminated upon the
occurrence of any one of the following events.  With respect to Sections 5.1.2,
5.1.3 and 5.1.7, the determination to terminate McAfee under those provisions
must be made in good faith by all of the directors (except McAfee if he is at
the time a director):

 

5.1.1                     The conviction of McAfee for any crime that is a
felony under applicable law;

 

5.1.2                     Fraud by McAfee in the performance of his duties or in
his reporting to the management of Schmitt;

 

5.1.3                     At Schmitt’s option, if any one of the following
conditions occurs and persists after Schmitt has given McAfee prior written
notice of its intent to terminate his employment with the specific reasons
therefore, and McAfee fails to correct the specified problems within a period of
30 days of the effective date of the notice:

 

(A)                              Chronic alcoholism, drug abuse, or addiction;

 

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(B)                                Material failure of McAfee to apply his
full-time attention and best efforts to the business of Schmitt; or

 

(C)                                Material breach by McAfee of any of the terms
and conditions of this Agreement.

 

5.1.4                     The death of McAfee;

 

5.1.5                     At McAfee’s option, in the event of the insolvency of
Schmitt;

 

5.1.6                     At McAfee’s option, with or without cause, by McAfee
giving Schmitt not less than 90 days prior written notice of termination; or

 

5.1.7                     At Schmitt’s option, without cause, by Schmitt giving
McAfee written notice of termination.

 

5.2                               Effect of Termination.

 

5.2.1                     If McAfee’s employment under this Agreement is
terminated pursuant to Section 5.1.7, McAfee shall be entitled to receive, for
the entire Payment Period (as defined below), (i) the equivalent monthly salary
in effect immediately prior to termination to that set forth in Section 3.1.1;
and (ii) participation for the balance of the entire Payment Period to extent
eligible in all relevant employee benefit programs to which he would have been
entitled if he had continued to serve as CFO of Schmitt during the Payment
Period.  All payments required to be made to McAfee pursuant to this
Section 5.2.1 shall continue to be made regardless of whether McAfee secures
other employment with any other employer.  For purposes of this section, the
term “Payment Period” shall mean a period commencing on the date McAfee is
terminated pursuant to Section 5.1.7 and ending on September 30, 2007.

 

5.2.2                     If McAfee’s employment under this Agreement is
terminated for any other reason than that set forth in Sections 5.1.4 or 5.1.7,
McAfee shall (i) have no rights to compensation or reimbursement for salary or
bonus for any period subsequent to the date of such termination, (ii) have no
right to participate in any employee benefit programs under Section 4 for any
period subsequent to the date of such termination; provided that Schmitt will
remain obligated to meet any obligations that it may have under COBRA, and
(iii) have no right to any bonus that would have been payable on a date
subsequent to McAfee’s termination date.

 

5.3                               Effect of Merger, Dissolution or Transfer of
Assets.   In the event of any voluntary or involuntary dissolution of Schmitt,
any merger or consolidation of Schmitt with a third party whereby Schmitt is not
a surviving entity, or any sale of all or substantially all of the assets of
Schmitt to any third party and in the further event that the surviving or
acquiring entity declines to assume this Agreement and/or McAfee’s employment is
terminated by Schmitt or the surviving entity within 90 days of the effective
date thereof, such nonassumption or termination will be deemed to have taken
place pursuant to section 5.1.7 and McAfee shall be entitled to the benefits set
forth in section 5.2.1.

 

6.                                      Inventions.   Inventions made or
conceived entirely or partially by McAfee while employed by Schmitt will be the
property of Schmitt.  As used in this Section, the term “inventions” includes
all creations, whether or not patentable or copyrightable, and all ideas,
reports, or other creative works, including, without limitation, computer
programs, manuals and related material, which relate to the existing or proposed
business of Schmitt or any other business or research and development effort
conducted by Schmitt.  All of McAfee’s inventions which are copyrightable shall
be works for hire.  McAfee will cooperate with Schmitt to patent or copyright
all inventions by executing all documents tendered by

 

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Schmitt for such purpose.  McAfee hereby grants to Schmitt a power of attorney
coupled with an interest, whereby Schmitt may execute and deliver any and all
documents necessary to so patent or copyright any inventions in McAfee’s name,
place and stead as if such execution and delivery were done by him, with such
power of attorney accruing in the event that he fails to cooperate as required
by the preceding sentence.  Notwithstanding the above, this provision does not
apply to any invention which was developed solely on McAfee’s own time and not
using any of Schmitt’s equipment, supplies, facilities or information, unless
(a) the invention relates directly to the business of Schmitt or to Schmitt’s
actual or demonstrably anticipated research or development, or (b) the invention
results from any work performed by McAfee for Schmitt.  The obligations
contained in this Section shall survive the termination of this Agreement.

 

7.                                      Nondisclosure of Confidential
Information.   McAfee acknowledges that during the term of this Agreement he
will learn and will have access to confidential information regarding Schmitt
and its affiliates, including without limitation (i) confidential or secret
plans, programs, documents, agreements or other material relating to the
business, services or activities, and (ii) trade secrets, market reports,
customer investigations, customer lists, files, accounts and other similar
information that is proprietary information (collectively referred to as
“Confidential Information”).  McAfee acknowledges that such Confidential
Information is a special, valuable and unique asset.  All records, file
materials and Confidential Information obtained by McAfee in the course of
employment with Schmitt or its affiliates or service as a director of Schmitt or
its affiliates are confidential and proprietary and shall remain the exclusive
property of the appropriate entity owning the same.  McAfee will not for any
reason use for his own benefit, or for the benefit of any person with whom he
may be associated, any Confidential Information or disclose any such
Confidential Information to any person for any reason or purpose whatsoever
without the prior written consent of Schmitt, unless such Confidential
Information previously shall have became public knowledge through no action or
omission of McAfee.  McAfee, within three (3) days from the date upon which his
employment with Schmitt is terminated or otherwise upon the request of Schmitt,
shall return to Schmitt any and all documents and material that constitutes
Confidential Information.  The obligations contained in this Section shall
survive the termination of this Agreement.

 

8.                                      Specific Performance.   Schmitt and
McAfee recognize that the services rendered under this Agreement by McAfee are
special, unique and of an extraordinary character. Accordingly, in the event of
any breach by McAfee of the provisions of Section 6 or 7 of this Agreement and
in addition to any other remedies available to Schmitt by law, Schmitt may
specifically enforce McAfee’s obligations under such sections.

 

9.                                      Miscellaneous.

 

9.1                               Assignability.   The rights and obligations of
Schmitt under this Agreement shall inure to the benefit of and be binding up the
successors and assigns of Schmitt.  The rights and obligations of McAfee
hereunder may not be assigned or alienated and any attempt to do so by McAfee
will be void.

 

9.2                               Separability.   If any provision of this
Agreement otherwise is deemed to be invalid or unenforceable or is prohibited by
the laws of the state or jurisdiction where it is to be performed, this
Agreement shall considered divisible as to such provisions and such provision
shall be inoperative in such state or jurisdiction and shall not be part of the
consideration moving from either of the parties to the other.  The remaining
provisions of this Agreement shall be valid and binding and of like effect as
though such provision were not included.

 

9.3                               Notice.   All notices, requests, demands and
other communications hereunder shall be in writing and shall be deemed to have
duly given if personally delivered, telexed or telecopied to, or, if mailed,
when mailed to the other party by certified mail, return receipt requested, at
(a) in the case of Schmitt, the location of its principal executive offices, or
(b) in the case of McAfee, the location of his principal residence or last known
principal residence.

 

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9.4                               Jurisdiction and Venue.   The jurisdiction and
venue of all actions between the parties shall lie exclusively in Multnomah
County, Oregon.

 

9.5                               Governing Law.   The validity, performance,
construction and effect of this Agreement shall be governed by the laws of the
State of Oregon, without giving effect to the conflict of laws rules thereof.

 

9.6                               Arbitration.   The parties shall settle by
arbitration any controversy or claim arising out of or relating to this
Agreement, including without limitation, the making, performance, or
interpretation of this Agreement.  The arbitration shall be conducted in
Portland, Oregon in accordance with the then-current Commercial Arbitration
Rules of the American Arbitration Association. The arbitration shall be held
before a single arbitrator (unless otherwise agreed by the Parties). The
arbitrator shall be chosen from a panel of attorneys knowledgeable in the fields
of business and employment law in accordance with the then-current Commercial
Arbitration Rules of the American Arbitration Association. If the arbitration is
commenced, the Parties agree to permit discovery proceedings of the type
provided by the Oregon Rules of Civil Procedure both in advance of, and during
recesses of, the arbitration hearings.  The Parties further agree that the
arbitrator shall have the authority to grant injunctive relief, including
preliminary injunctive relief, and that an arbitrator’s order for such relief
may be entered in and enforced by a federal or state court of competent
jurisdiction in Oregon. The prevailing Party shall be entitled to its reasonable
and actually incurred attorneys’ fees arising in connection with the enforcement
of its rights hereunder, as determined by the arbitrator. The Parties agree that
all facts and other information relating to any arbitration arising under this
Agreement shall be kept confidential to the fullest extent permitted by law. 
The prevailing Party in any arbitration regarding this Agreement may enter the
arbitration award in a federal or state court of competent jurisdiction in
Oregon.

 

9.7                               Waiver; Amendment.   The waiver by any party
to this Agreement of a breach of any provision hereof by any party shall not be
construed as a waiver of any subsequent breach by any party.  No provision of
this Agreement may be terminated, amended, supplemented, waived or modified
other than by an instrument in writing signed by the party against whom the
enforcement of the termination, amendment, supplement, waiver or modification is
sought.

 

9.8                               Advice of Counsel.   McAfee acknowledges that
he has had sufficient opportunity to review this Agreement with counsel of his
choosing before signing.

 

9.9                               Entire Agreement.   This Agreement constitutes
the entire agreement between the parties regarding the subject matter, and there
are no other understandings, either written or oral, which affect the terms
hereof.  This Agreement may be supplemented, modified or amended only by a
subsequent written agreement between the parties.

 

 

DATED effective the day and year first above written.

 

SCHMITT INDUSTRIES, INC.

Michael S. McAfee

 

 

 

 

 

By:

  /s/ Wayne A. Case

 

    /s/ Michael S. McAfee

 

 

Wayne A. Case

 

 

 

President and Chairman of the Board

 

 

 

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