SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
(Mark one)
[x] Quarterly Report under section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1999
[ ] Transition Report under section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-27908
Semiconductor Laser International Corporation
------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 16-1494566
- ---------------------------------------- -------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15 Link Drive, Binghamton, New York 13904
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (607) 722-3800
Check whether the issuer (1) 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 a 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 [ ]
As of October 31, 1999, there were outstanding 15,153,955 shares of the
issuer's common stock, par value $.01 per share.
Transitional Small Business Disclosure Format
Yes [ ] No [x]
<PAGE>
1
Part I. Financial Information
Item 1. Financial Statements
Semiconductor Laser International Corporation
Balance Sheet
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash $ 112,695 $ 844,185
Accounts Receivable, net of allowance for
doubtful accounts of $560,645 and $560,645,
respectively 296,193 348,749
Inventory 333,806 724,890
Prepaid expenses and other assets 180,853 148,008
------------ ------------
Total current assets 923,547 2,065,832
Property, plant and equipment, net 2,691,926 2,629,748
Deposits and other assets 123,957 145,831
------------ ------------
Total assets $ 3,739,430 $ 4,841,411
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 1,127,589 $ 460,509
Notes payable ( Line of Credit ) 550,000 1,000,000
Accrued expenses and other liabilities 164,235 397,060
Current portion of long-term debt 37,170 43,392
------------ ------------
Total current liabilities 1,878,994 1,900,961
Long-term debt 765,687 724,931
Accrued royalty payments 100,000 100,000
------------ ------------
Total liabilities 2,744,681 2,725,892
------------ ------------
Commitments and contingencies (Note 5)
Shareholders' Equity
Preferred stock, Series B $.01 par value,
1,000,000 shares authorized; 1,000,000
issued and outstanding at September 30, 1999 - 10,000
Common stock, $.01 par value, 20,000,000 shares
authorized, 10,039,552 issued and outstanding
at December 31, 1998, and 15,153,955 issued
and outstanding at September 30, 1999 100,396 151,540
Common Stock Issuable 41,073 -
Treasury stock (248,241) (248,241)
Additional paid-in capital 18,061,560 21,906,625
Accumulated deficit (16,960,039) (19,704,405)
------------ ------------
Total Shareholders' Equity 994,749 2,115,519
------------ ------------
Total liabilities and
Shareholders' Equity $ 3,739,430 $ 4,841,411
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
2
Semiconductor Laser International Corporation
Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 600,110 $ 441,560 $ 1,375,016 $ 1,103,107
Cost of sales (962,588) (403,282) (2,399,532) (1,709,688)
----------- ----------- ----------- -----------
Gross margin (362,478) 38,278 (1,024,516) (606,581)
Operating expenses:
Research and development expenses - 16,788 7,273 61,318
Sales and marketing expenses 40,421 67,839 343,867 264,413
General and administrative expenses 738,681 671,837 1,807,205 1,841,299
---------- ---------- ----------- -----------
Loss from operations (1,141,580) (718,186) (3,182,861) (2,773,611)
Interest income 5,109 22,969 37,119 29,371
---------- ---------- ----------- -----------
Net loss (1,136,471) (695,217) (3,145,742) (2,744,240)
========== ========== =========== ===========
Net loss per share, basic and dilutive ($0.11) ($0.05) ($0.35) ($0.22)
========== ========== =========== ===========
Weighted average shares outstanding 10,039,552 13,476,629 9,078,563 12,374,959
========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
3
Semiconductor Laser International Corporation
Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1999
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,145,742) $(2,744,240)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 152,846 158,031
Amortization of deferred expenses - 15,517
Change in assets and liabilities:
Increase in accounts
receivable, net (420,999) (52,556)
Increase in inventory (129,900) (391,084)
Decrease in prepaid expenses
and other assets 42,337 32,845
(Increase)decrease in deposits
and other assets 312,820 (21,874)
Increase (decrease) in accounts
payable 312,627 (667,080)
Increase in accrued expenses
and other liabilities 8,441 232,814
----------- -----------
Net cash used in operating activities (2,867,570) (3,437,627)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (176,501) (96,325)
----------- -----------
Net cash provided from (used for)
investing activities (176,501) (96,325)
----------- -----------
Cash flows from financing activities
Proceeds from short-term debt 550,000 450,000
Payments on long-term debt (27,113) (40,756)
Issuance of warrants - 31,500
Issuance of stock, net of expenses 1,042,835 3,824,698
----------- -----------
Net cash provided by (used for) financing
activities 1,565,722 4,265,442
----------- -----------
Net (decrease) increase in cash (1,478,349) 731,490
Cash at beginning of period 1,934,574 112,695
----------- -----------
Cash at end of period $ 456,225 844,185
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
4
Semiconductor Laser International Corporation
Notes to Financial Statements
September 30, 1999
(Unaudited)
1. Organization
Semiconductor Laser International Corporation (the"Company") was
incorporated in New York State in September 1993 (inception) and,
subsequently, reincorporated in Delaware in September 1997, to produce high
power semiconductor diode laser wafers and bars ("HPDLs"), and to market
these products worldwide.
The Company's primary activities since incorporation, as a development stage
enterprise, had been research and development, business and financial
planning, raising capital and constructing and equipping its manufacturing
facility. The Company had previously relied on facilities provided through
the Wright Cooperative Research and Development Agreement (CRDA) with the
U.S. Air Force for the development and quality control testing of its HPDLs
The CRDA expired in September 1996. The Company has since completed the
construction of its manufacturing facility in Binghamton, New York, where it
is conducting all activities.
Effective April 1, 1997, the Company ceased operating as a development stage
enterprise as it began commercial production of its products.
2. Financial Resources and Liquidity
The Company has incurred net losses from inception (September 21,1993) and
had at September 30, 1999 an accumulated deficit of $19,704,405 and working
capital of $164,871. Such losses have resulted primarily from a lack
of adequate sales revenue to generate net profits. Subsequently, the Company
has operated with the proceeds from the Company's initial public offering and
private equity financing (see Note 5). The Company expects that its cash and
working capital requirements will continue to be significant as its
operations expand. The Company anticipates that such cash and working
capital requirements will be satisfied through a combination of revenue
growth and additional private equity financing.
There is no assurance, however, that the Company will be able to obtain funds
to support its operations. As a result of the foregoing, there remains
substantial doubt as to the Company's ability to continue as a going concern.
In the past the Company has been able to raise the capital necessary ($21.9
million from inception to date) but there can be no assurance that the
Company will be able to raise additional capital. If the Company achieves
cash breakeven by the end of 2000, then its cash needs would be minimized or
eliminated. However, based upon past performance there can be no assurance
that this will happen. The accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
3. Basis of Presentation
The accompanying unaudited financial statements have been prepared by the
Company. Certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted. In the opinion of the
Company's management, the disclosures made are adequate to make the
information presented not misleading, and the financial statements contain
all adjustments necessary to present fairly the financial position as of
September 30, 1999 and the results of operations and cash flows for the nine
months ended September 30, 1999 and 1998. The results of operations for the
nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
<PAGE>
5
4. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenue and expenses during the period. Actual
results could differ from those estimates.
Inventory
Inventory is valued at the lower of cost or market on a first in, first out
(FIFO) method. Prior to July 1, 1999, the Company manufactured its product
on a job basis, however subsequent to July 1, 1999 the Company began building
finished goods and certain semi-assembled products for anticipated sales,
thus representing the increase in work-in-process and finished goods since
December 31, 1998.
Depreciation and amortization
Property, plant and equipment are recorded at cost and depreciated over the
assets' estimated useful lives ranging from three to twenty years.
Depreciation is computed using the straight-line method for financial
reporting and the modified accelerated cost recovery system for income tax
purposes. Expenditures for major renewals and betterments that extend the
useful lives of property, plant and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expense as incurred.
Intangible assets are amortized using the straight-line method over five
years.
Impairment of long-lived assets
Assessments of the recoverability of long-lived assets are conducted when
events or circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The determination of impairment is based on
the ability to recover such carrying value from the future undiscounted
cash flows of related operations.
<PAGE>
6
Revenue recognition
Revenue recognition is based on the terms of the underlying sales agreements
(purchase orders or contracts). Revenues for fixed price milestone contracts
are recognized upon the completion and billing of the milestone. Customers
entering into long-term contracts with the Company include the U. S.
Government, prime or subcontractors for which the U.S. Government may be the
end customer and other domestic end-users.
Warranty Costs
The Company provides for the recognition of the potential for rework to its
products by establishing a warranty reserve based on an historic analysis of
past experience.
Research and development
Research and development costs are expensed as incurred.
Supplemental Cash Flow Disclosures
Common Stock was issued to Company vendors in February and May, 1999 to
satisfy payable obligations. A total of 135,147 shares of Common Stock were
issued to satisfy $50,023 of accounts payable.
Income taxes
The Company follows the asset and liability method for deferred income taxes.
This method provides that deferred tax assets and liabilities are recorded
using currently enacted tax rates applied to the differences between the tax
bases of assets and liabilities and their carrying values for financial
statement purposes. A valuation allowance is recorded when it is more likely
than not that deferred tax assets will not be realized. Presently, a
valuation allowance has been recorded for the net deferred tax assets of the
Company, consisting primarily of the net operating loss carryforward.
Net loss per share
Net loss per share is computed using the weighted average number of common
shares outstanding.
As of September 30, 1999, the Company had outstanding warrants and options to
purchase 3,446,334 and 578,355 shares of common stock, respectively, which
are not included in the calculation of earnings per share for the nine months
ended September 30, 1999, and would not be included in such calculation due
to the anti-dilutive nature of these instruments.
<PAGE>
7
5. Commitment, Contingencies and Other Matters
Operating Leases
In October 1996, the Company entered into a master equipment lease agreement
with FINOVA Technology Finance, Inc. ("FINOVA"). The agreement provided for
the sale and ultimate leaseback by the Company of up to $3,500,000 of
equipment, furnishings and fixtures. As part of the consideration for the
agreement, the Company issued a warrant certificate for 58,334 warrants,
entitling FINOVA to purchase a corresponding number of shares of the
Company's common stock at $5.00 per share. The warrants could not have been
assigned, sold, transferred or otherwise disposed of prior to February 27,
1998. The warrants are currently exercisable. The warrants have been valued
at $167,710, the fair market value of the Company's warrants at the date of
issuance and such value is being amortized over the term of the lease.
Rent expense under non-cancellable operating leases, including the FINOVA
leases, was $832,241 for the nine months ended September 30, 1999. Rent
expense under non-cancellable operating leases, including the FINOVA leases,
was $788,390 for the nine months ended September 30, 1998.
Pursuant to a Forbearance Agreement, dated as of July 6, 1999, between the
Company and FINOVA, FINOVA agreed to forbear from collecting certain overdue
monthly payments for April, 1999, until June 30, 1999, and interest only
payments for the months of May, June and July, 1999, until July 30, 1999. In
addition, pursuant to a letter agreement, dated November 18, 1999, FINOVA
has agreed to enter into a forbearance agreement with the Company under which
FINOVA agrees to collect interest only payments for the months of October,
November and December, 1999 and to defer principal payments to the end of the
lease terms.
Future minimum payments under non-cancellable operating leases, including the
FINOVA lease agreement, at September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Commitment
------------- -------------
<S> <C> <C>
1999(1)(2) $ 292,166(1)
2000 1,109,656
2001(2) 297,668
-------------
$1,699,490
=============
(1) Three months
(2) Information does not reflect latest forbearance agreement with
FINOVA
</TABLE>
Litigation/Investigation
The Company is currently engaged in litigation with a former employee who the
Company sought action against relative to a breach of confidentiality and
defamation of character. The former employee has responded with a counter
claim alleging defamation of character and is seeking $500,000 in damages.
The litigation is presently in the discovery stage. The Company believes the
counter claim is without merit and is vigorously defending such action. The
Company further believes that the ultimate outcome of such action will not
have a material impact on the financial condition or results of operations of
the Company.
Since April 1998, the Company has been responding to informal requests for
information from the Securities and Exchange Commission. In August 1998, the
Company learned that in June 1998, the Commission had issued a formal order
of investigation to determine whether violations of certain aspects of the
federal securities laws had occurred in connection with the Company. Pursuant
to this formal order of investigation, the Company and certain of its current
and former officers and directors have produced documents pursuant to
subpoenas from the Northeast Regional Office of the Commission. The Company
is not able to speculate as to the specific subject matter of the
investigation on the Company. There can be no assurance as to the timeliness
of the completion of the investigation or as to the final result thereof, and
no assurance can be given that the final result of the investigation will not
have a material adverse effect on the Company. The Company has cooperated
with the investigation, and will continue to respond to requests for
information in connection with the investigation if received.
In August 1998, the Company learned that the United States Attorney's Office
for the Southern District of New York is investigating whether violations of
securities laws have occurred in connection with the Company's public
disclosures. The Company has cooperated with the investigation and has
responded to a grand jury subpoena issued in connection with the
investigation. There can be no assurance as to the timeliness of the
completion of the investigation or as to the final result thereof, and no
assurance can be given that the final result of the investigation will not
have a material adverse effect on the Company or its current management.
Management believes that there are meritorious defenses to the issues raised
by this investigation and intends to defend this matter vigorously.
The Company is currently engaged in litigation with Newport Corporation, a
vendor who is seeking to recover $100,508 for goods allegedly sold to the
Company. Based on losses sustained by the Company as a result of previously
supplied defective equipment from this vendor, the Company's counterclaim
exceeds the amount sued for by Newport Corporation. The Company believes
that the ultimate outcome of the action will not have a material impact on
the financial condition or results of operations of the Company.
The Company is currently engaged in litigation with IOS Capital Corporation,
a vendor who is seeking to recover $55,821 on the basis of an alleged default
by the Company in making its lease agreement installments for color copying
equipment. The vendor was incapable of providing a working product acceptable
to the Company and the equipment was returned to the vendor accordingly. The
Company believes that the ultimate outcome of the action will not have a
material impact on the financial condition or results of operations of the
Company.
The Company's allowance for doubtful accounts includes an allowance for a
receivable due from Rocky Mountain Instruments ("RMI") which is in dispute.
The Company has commenced an action against RMI to collect this amount.
<PAGE>
8
Financing
The Company entered into the Securities Purchase Agreement (the "Securities
Purchase Agreement"), dated as of February 5, 1999, between the Company and
bmp, as amended by Amendment No. 1 to Securities Purchase Agreement (the
"Amendment"), dated as of April 28, 1999, between the Company and bmp (the
Securities Purchase Agreement, as amended by the Amendment is hereinafter
referred to as the "Amended Purchase Agreement").
Pursuant to the terms of the Securities Purchase Agreement, bmp agreed to
make a two stage equity investment in the Company in an amount ranging
between $2,050,000 and $2,750,000. The first stage of the investment was
consummated on February 8, 1999 by the parties, and bmp purchased 2,000,000
newly issued shares of the Company's Common Stock at a purchase price of
$0.375 per share for an aggregate purchase price of $750,000. bmp had
previously purchased 367,650 shares of the Company's Common Stock in
unrelated open market transactions. In the second stage of the investment,
bmp agreed to purchase a minimum of 650,000 and a maximum of 1,000,000 newly
issued shares of non-voting Series B Stock of the Company (such minimum or
maximum number of shares to constitute all of the issued and outstanding
shares of Series B Stock) at a purchase price of $2.00 per share, or $0.40
per share of Common Stock into which the Series B Stock is convertible, for a
minimum aggregate purchase price of $1,300,000 and a maximum aggregate
purchase price of $2,000,000, subject to the satisfaction of certain
conditions contained in the Securities Purchase Agreement.
Pursuant to the Amendment, bmp agreed to purchase the maximum of 1,000,000
newly issued shares of Series B Stock as contemplated by the Securities
Purchase Agreement for an aggregate purchase price of $2,000,000, to be paid
in several installments. On April 29, 1999, bmp purchased 232,500 shares of
Series B Stock for a purchase price of $465,000 (the "April Installment"),
on May 31, 1999 bmp purchased 192,500 shares of Series B Stock for a purchase
price of $385,000 (the "May Installment") and on June 26, 1999, bmp
purchased 575,000 shares of Series B Stock for a purchase price of $1,150,000
(the "June Installment").
The shares of common stock issued to bmp contain certain demand and piggyback
registration rights and the preferred stock contains certain antidilution
rights.
In connection with the Amendment, the Company entered into a consulting
agreement (the "Consulting Agreement"), dated as of April 28, 1999, between
the Company and bmp Management Consultants GmbH ("bmp Consultants"), a German
limited liability corporation wholly owned by bmp AG Venture Capital &
Network Management, the parent company of bmp, providing for the retention of
bmp Consultants as strategic and financial consultants to the Company, for an
aggregate consulting fee of $200,000. The $200,000 aggregate consulting fee
is payable as follows: (i) six monthly installments of $15,000 beginning
immediately following the funding of the April Installment and ending five
months following such funding date, (ii) $50,000 payable at the closing of
the June Installment and (iii) six monthly installments beginning six months
following the funding of the April Installment and ending eleven months
following such funding date. Per a verbal agreement with bmp Consultants SLI
will be billed on a work performed basis. As of September 30, 1999, bmp
Consultants had been paid $53,000.
In connection with the Amendment, on June 26, 1999, the Company issued to bmp
a five year warrant to purchase an aggregate of 500,000 shares of Common
Stock, at an exercise price of $0.50 per share (the "bmp Warrant"). The
shares issuable upon exercise of the bmp warrant contain certain demand and
piggyback registration rights. In addition, bmp is eligible to receive a
finder's fee in the amount of 5% of the net proceeds of any transaction
involving the raising of debt or equity capital in a private placement from a
source introduced to the Company by bmp consummated by the Company within 24
months following payment of the June Installment.
In conjunction with the Securities Purchase Agreement, on February 16, 1999,
the Company issued to BSB Bank & Trust Company, warrants to purchase an
aggregate of 500,000 shares of the Company's common stock at an exercise
price of $0.575 per share. The warrants expire on February 16, 2004, and
contain certain registration rights. The value of the warrants has been
reflected as deferred financing costs in the Company's financial statements
and will be amortized over the period commencing from date of issue to
May 31, 2000.
The Company has completed a private placement of Common Stock with certain
accredited investors introduced to the Company by a funding source referred
to the Company by bmp. As of September 30, 1999, 2,979,256 shares of Common
Stock have been issued at an aggregate purchase price of $1,117,221. The
Company received $1,061,422 net of finder's fees. The shares of Common Stock
issued in this private placement contain certain piggyback registration
rights.
<PAGE>
9
Item 2. Management's Discussion and Analysis or Plan of Operation
Certain statements in this Report under the caption "Management's
Discussion and Analysis and Plan of Operation" and elsewhere constitute or may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"),
including, without limitation, statements regarding future cash requirements.
The Company desires to avail itself of certain "safe harbor" provisions of the
Litigation Reform Act and is therefore including this special note to enable
the Company to do so. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: inability to obtain additional financing on
acceptable terms, manufacturing delays due to equipment or technical problems,
delays in product development; costs associated with and outcome of pending
investigations described elsewhere herein; failure to receive or delays in
receiving regulatory approval; lack of enforceability of patents and proprietary
rights; general economic and business conditions; industry capacity; industry
trends; demographic changes; competition; material costs and availability; the
loss of any significant customers; changes in business strategy or development
plans; quality of management; availability, terms and deployment of capital;
business abilities and judgment of personnel; availability of qualified
personnel; changes in, or the failure to comply with, government
regulations; and other factors referenced in this report.
Overview
The Company was considered a development stage company until April 1, 1997.
During 1997, the Company began the commercialization of many of its proposed
products. Since its inception in 1993, the Company had been engaged primarily in
research and development, business and financial planning, recruitment of key
management and technical personnel, raising capital to fund operations and the
development of its HPDL product prototypes. The Company has since completed the
construction and equipping of the first phase of its manufacturing facility and
has begun the commercialization of its products and the generation of sales
revenues. The Company is seeking to increase sales in order to fully utilize its
production capacity. Increasing sales levels and higher utilization of
production capacity are critical to the Company's financial success. Financial
resources and liquidity during this period of growth are of utmost importance
and concern to the Company. Recent events including cash flow problems have
placed considerable strain on Company management, financial, manufacturing and
other resources.
The manufacture of semiconductor lasers such as those sold by the Company is a
highly complex and precise process, requiring production in a highly controlled
and clean environment with the utilization of materials free of defects and
contamination. These factors have a significant impact on production yields and
product reliability which in turn affect operating results and future customer
acceptance. The Company as well as other semiconductor laser manufacturers have,
from time to time, experienced technical production problems which have resulted
in adverse financial consequences. No assurance can be given that the Company's
systems, procedures, procurement efforts and production process are such that
these problems will not be experienced in the future.
Since the onset of commercial production, the Company, on occasion, has been
unable to manufacture certain products in quantities sufficient to meet the
demands of its existing customer base and that of new customers based upon
equipment and/or other technical problems arising at various points during the
production process. Previous problems with fiber coupling subcontractors have
been corrected. Due to ongoing problems with the Company's HVAC which have been
temporarily corrected the Company hired a new HVAC company in early August.
Since that time the Company has not experienced any significant down time due
to the system. However, the Company has been informed that the current system
is not designed to handle high temperature and high humidity conditions and is
prone to malfunction during periods of rapid temperature variations. The
Company has installed the necessary equipment to prevent the system from
malfunctioning during periods of rapid temperature variations. In addition, the
Company has been provided with proposals for a more complete and permanent
solution and is currently evaluating various alternatives. The Company is also
considering possible legal action against the HVAC equipment manufacturer and
the HVAC system installer.
The Company entered into a licensing agreement with Northwestern University (the
"Northwestern License") on September 1, 1996. The Northwestern License is for
the exclusive rights to produce, market and sell aluminum-free HPDLs worldwide
using certain patents and knowhow, as defined in the Northwestern License, owned
by Northwestern University. Under the terms of the Northwestern License, the
rights expire upon the expiration of the patents or ten years from the date of
the first commercial sale in countries where no patent rights exist. The Company
also has the right to terminate the Northwestern License after three years.
No later than August 1999, the Company began to sell to its customers
aluminum-free HPDLs that the Company had manufactured. The Company has notified
Northwestern of such sales and has proffered to Northwestern royalties for such
sales. Thus, the Company believes it has met the milestones specified in the
License Agreement and will continue to sell, ship and invoice aluminum-free
HPDLs. However, technical difficulties and reliability issues, which are not
now anticipated, could delay large scale production of the product.
In consideration for the Northwestern License, the Company paid Northwestern
University a non-refundable license fee of $21,000 plus $10,000 of the Company's
unregistered common stock (1,231 shares). In addition, the Company issued 1,500
shares of unregistered common stock, valued at $2,586. These amounts have been
charged to research and development expense. Royalties are also payable and
have been paid for sales derived from this technology, based on net sales volume
on a sliding scale from 4% to 1%.
The Company entered into a Joint Venture Agreement (the "Orthogenesis
Agreement"), dated September 28, 1999, between the Company and Orthogenesis
System, Inc. ("Orthogenesis"). Pursuant to the Orthogenesis Agreement, the
Company and Orthogenesis agreed to develop, sell and distribute low level laser
systems used in non-invasive medical treatments for the purpose of
biostimulation. Primarily intended for use with certain medical conditions, its
principal focus is on arthritic conditions, accelerated wound healing and
chronic pain. Potential secondary applications include acute injuries, such as
those relating to sports or casual physical overexertion. The laser also has
potential to be used in related areas within veterinary practices.
Under the Orthogenesis Agreement, the Company and Orthogenesis each have a
50% voting interest in the joint venture and the Company has been granted an
exclusive license to manufacture the Orthogenesis laser system for the term of
the joint venture. The Company has agreed to manufacture and sell the
Orthogenesis laser system at the Company's total cost of manufacturing
(including material, direct labor and overhead costs) such system. The Company
has also agreed to perform the financial and accounting functions for the
joint venture and will be responsible for responding to customers' complaints.
Orthogenesis has agreed to be responsible for marketing, research and
development and product upgrades of such systems. Profits derived from the sale
of the Orthogenesis laser system will be divided 75% to the Company and 25% to
Orthogenesis.
The Company believes that it has the capability of manufacturing this system
without any significant initial capital investment. The system has shown
promise in early tests although no definitive study has been completed to date
and there can be no assurance that any future studies will be favorable. The
Company intends to commence marketing in Canada and in certain other countries
where it expects it will be permitted to sell the system without any additional
regulatory approval and expects to eventually apply for FDA approval to enable
it to sell the system in the United States. The Company's ability to obtain FDA
approval and to increase sales materially is dependent on its ability to raise
capital for the joint venture.
The Company received notice from The Nasdaq Stock Market that its securities
were delisted from The Nasdaq SmallCap Market, effective as of the close of
business on May 26, 1999. The Nasdaq Stock Market based its determination on the
Company's failure to meet the minimum bid price requirement for its common stock
and the minimum net tangible assets requirement set forth under the Nasdaq
Marketplace Rules. The Company's securities are currently quoted on the
NASDAQ OTC Bulletin Board(Symbol SLIC) and are also traded over the Berliner
Freiverkehr, an electronic quotation system in Germany similar to the OTC
Bulletin Board. The delisting of the Company's Common Stock could cause the
market price of the Common Stock to decline and could make it much more
difficult to buy or sell the Common Stock on the open market.
Results of Operations
Three months ended September 30, 1999, compared to three months ended September
30, 1998.
Sales were $441,560 for the three months ended September 30, 1999 as compared to
$600,110 for the same period in the prior year. The decrease in sales was the
result of decreased government contract and commercial revenue. The decrease
in commercial revenue was caused by fewer orders received.
Cost of sales for the three months ended September 30,1999 decreased
approximately $559,000 compared to the same period in 1998 as a result of a
decrease in product sales which decreased cost of goods sold by approximately
$188,000 primarily in material cost and the cost of government contracts and
approximately $371,000 due to the inclusion of certain finished goods and
work-in-process inventories on the balance sheet, offset to the cost of goods
sold, in the third quarter of 1999. In the same period in 1998, these cost were
charged to cost of goods sold. See Inventory Note on Page 5 (Inventory Change).
Research and development labor cost expense of approximately $17,000 was
recorded for the three months ended September 30, 1999.
Sales and Marketing expenses increased approximately $27,000 for the three
months ended September 30, 1999 as compared to the same period in 1998. The
increase occurred primarily in travel and meeting expenses necessitated to
stimulate increased order activity and was offset by reduced expenses for
brochures and catalogs.
General and administrative expenses decreased approximately $67,000 for the
three months ended September 30, 1999 as compared to the same period in 1998.
Significant reductions occurred in professional fees (due primarily to reduced
legal expenses) and office expenses offset by increases in labor costs and
repairs and maintenance.
Interest income increased for the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998, as a result of higher
cash balances available from investment.
Nine months ended September 30, 1999, as compared to the nine months ended
September 30, 1998.
Sales for the nine months ended September 30, 1999 decreased approximately
$272,000 over the same period in the prior year as a result of reduced
commercial and government contract revenue.
Cost of sales for the nine months ended September 30, 1999, decreased
approximately $690,000 over the nine months ended September 30, 1998, as a
result of the decrease in product sales in 1999, accounting for approximately
$319,000 of the decrease. The reduction was primarily in labor and materials.
The remaining $371,000 decrease is attributable to the impact on cost of goods
sold of the finished goods and work-in-process inventory inclusion on the
balance sheet previously discussed.
Research and development labor cost expenses of approximately $61,000 were
recorded for the nine months ended September 30, 1999.
Sales and marketing expense decreased approximately $80,000 for the nine months
ended September 30, 1999 as compared to the nine months ended September 30, 1998
primarily as a result of decreased costs associated with advertising offset by
increased expenses in travel and marketing.
General and administrative expenses increased approximately $34,000 for the
nine months ended September 30, 1999 as compared to the same period in the prior
year. Increases occurred primarily in labor costs and loan interest expense
due to the full utilization of the $1 million line of credit in 1999.
Interest income decreased as a result of lower cash balances available for
investment.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 1999 were $844,185 as
compared to $112,695 at December 31, 1998, a net increase of $731,490 for the
nine months ended September 30, 1999. The increase was the result of $3,437,627
used in operating activities, $96,325 used in investing activities and
$4,265,442 provided by financing activities.
<PAGE>
10
The $4,265,442 provided by financing activities was derived from the issuance of
4,979,256 shares of common stock which provided $1,824,698(net of legal
expenses), 1,000,000 shares of Series B Convertible Preferred Stock which
provided $2,000,000 and 500,000 warrants which provided $31,500 and an increase
in the availability under the line of credit of $450,000(See "Financing" under
Note 5 in the Notes to the Financial Statements). The Company drew down
against the additional availability under the line by borrowing $300,000 in the
month of March and $150,000 in the month of April. The aforementioned were
offset by payments on the long-term debt.
The Company has a $1,000,000 collateralized line of credit with BSB for purposes
of providing working capital. The line of credit bears interest at prime plus
2.5% on the used portion and matures May 31, 2000. At September 30, 1999, the
Company had the full $1,000,000 outstanding under this Line of Credit.
Additionally, the Company's ability to satisfy its cash maintenance requirements
in accordance with the eligibility formula of its line of credit agreement will
likely depend on its ability to raise additional capital in the fourth quarter.
The Company entered into the Securities Purchase Agreement, dated as of
February 5, 1999, between the Company and bmp, as amended by Amendment No. 1 to
the Securities Purchase Agreement, dated as of April 28, 1999, between the
Company and bmp.
Pursuant to the terms of the Securities Purchase Agreement, bmp agreed to
make a two stage equity investment in the Company in an amount ranging
between $2,050,000 and $2,750,000. The first stage of the investment was
consummated on February 8, 1999 by the parties, and bmp purchased 2,000,000
newly issued shares of the Company's Common Stock at a purchase price of
$0.375 per share for an aggregate purchase price of $750,000. bmp had
previously purchased 367,650 shares of the Company's Common Stock in
unrelated open market transactions. In the second stage of the investment,
bmp agreed to purchase a minimum of 650,000 and a maximum of 1,000,000 newly
issued shares of non-voting Series B Stock of the Company (such minimum or
maximum number of shares to constitute all of the issued and outstanding
shares of Series B Stock) at a purchase price of $2.00 per share, or $0.40
per share of Common Stock into which the Series B Stock is convertible, for a
minimum aggregate purchase price of $1,300,000 and a maximum aggregate
purchase price of $2,000,000, subject to the satisfaction of certain
conditions contained in the Securities Purchase Agreement.
Pursuant to the Amendment, bmp agreed to purchase the maximum of 1,000,000
newly issued shares of Series B Stock as contemplated by the Securities
Purchase Agreement for an aggregate purchase price of $2,000,000, to be paid
in several installments. On April 29, 1999, bmp purchased 232,500 shares of
Series B Stock for a purchase price of $465,000, on May 31, 1999 bmp purchased
192,500 shares of Series B Stock for a purchase price of $385,000 and on
June 26, 1999, bmp purchased 575,000 shares of Series B Stock for a purchase
price of $1,150,000.
In connection with the first installment of the bmp investment, BSB agreed to
increase the amount available under the Line of Credit to $1,000,000, to extend
the maturity date thereof until June 30, 1999 and to further extend the maturity
of the Line of Credit until May 31, 2000 upon the investment by bmp in the
Company of an additional $1.3 million dollars, subject to the absence of any
material adverse change in the business. BSB waived the requirement that the
Company maintain the balance of the Line of Credit within its collateral base
formula until the earlier of June 30, 1999 or the date that the Company was in
receipt of funds equaling an additional $1.3 million arising out of the final
installments of the bmp investment. Upon funding by bmp of the full amount of
the final installments of the investment, BSB extended the maturity date of the
Line of Credit until May 31, 2000. The Company issued warrants to purchase an
aggregate of 500,000 shares of Common Stock to BSB, at an exercise price of
$0.575 per share, in consideration for the modifications to the Line of Credit.
The warrants expire in 2004 and contain certain registration rights.
Pursuant to a Forbearance Agreement, dated as of July 6, 1999, between the
Company and FINOVA, FINOVA agreed to forbear from collecting certain overdue
monthly payments for April, 1999, until June 30, 1999, and interest only
payments for the months of May, June and July, 1999, until July 30, 1999. In
addition, pursuant to a letter agreement dated November 18, 1999, FINOVA has
agreed to enter into a forbearance agreement with the Company under which FINOVA
agrees to collect interest only for the months of October, November and
December, 1999 and to defer principal payments to the end of the lease term.
Prior to July 1, 1999, the Company manufactured its product on a job basis,
however subsequent to July 1, 1999 the Company began building finished goods
and certain semi-assembled products for anticipated sales, thus representing an
approximate $200,000 increase in work-in-process and finished goods since
December 31, 1998. See Note 4 to Financial Statements.
The Company has completed a private placement of Common Stock with certain
accredited investors introduced to the Company by a funding source referred to
the Company by bmp. 2,979,256 shares of Common Stock were issued at an
aggregate purchase price of $1,117,221 in the private placement. The Company
received $1,061,392 net of finder's fees. The shares of Common Stock issued in
this private placement contain certain piggyback registration rights.
The Company's allowance for doubtful accounts includes allowances for a
receivable due from RMI which is in dispute. The Company has commenced an
action against RMI to collect this amount.
<PAGE>
11
The Company has incurred net losses from inception (September 21, 1993) and has
an accumulated deficit at September 30, 1999 of $20,075,200. Such losses have
resulted from the Company's activities as a development stage company and have
been financed primarily out of proceeds from the Company's initial public
offering and private equity financing. The Company expects that its cash and
working capital requirements will continue to be significant as its operations
expand. Potential sources for such cash and working capital requirements are
revenue growth and additional private equity financing. It is anticipated that
the Company will continue to incur losses for the immediate future until it is
able to achieve profitable operations or to generate sales sufficient to support
its operations.
The need to raise equity capital at current stock prices is likely to result in
substantial dilution to shareholders and could result in a change of control.
The Company's current business plan requires additional capital infusion in the
fourth quarter of this fiscal year and subsequent infusions until such time as
the Company's sales are sufficient to provide internally generated and
sustainable cash flows. However, achieving positive cash flow is dependent upon
sales levels which the Company has not historically achieved. The Company is
currently seeking to raise additional equity capital through a private
placement. The Company is also evaluating the availability of additional
borrowing capacity against its real estate and equipment. Without an additional
equity infusion of approximately $250,000, the Company estimates it would have
sufficient cash flow to operate until December 31, 1999. For Fiscal 2000, the
Company is seeking to raise approximately $3-5 million in a combination of debt
and equity capital, including additional availability from a secured financing.
There can be no assurance that the Company will be able to obtain additional
debt or equity financing when needed, on commercially reasonable terms or at
all.
<PAGE>
12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in litigation as described in Note 5 in the
financial statements.
Item 2. Changes in Securities and Use of Proceeds.
The Company has scheduled a special meeting of its stockholders to be held
on December 14, 1999, for the purpose of increasing the number of
authorized shares of its Common Stock from 20,000,000 to 75,000,000.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Edwin B. Spievack, who served as a director of the Company from May 1999
until the beginning of September 1999, advised the Company of his
determination to resign his position as director of the Company. Mr.
Spievack was elected by the Board of Directors of the Company on May 7,
1999 and was approved by the stockholders of the Company on June 11, 1999.
Mr.Spievack resigned as of September 7, 1999. There has been no
disagreement between the Company and Mr.Spievack. The Board of Directors
elected Dr. Vincent T. Tomaselli as a director of the Company, to replace
Mr. Spievack, on September 14, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Joint Venture Agreement, dated as of September 28,1999, by
and between the Company and Orthogenesis Systems, Inc.
10.2 Forbearance Letter Agreement, dated November 18, 1999,
between the Company and FINOVA
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Semiconductor Laser International Corporation
---------------------------------------------
(Registrant)
Date: November 22, 1999 By:/s/ Geoffrey T Burnham
----------------------------
Geoffrey T. Burnham
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
November 22, 1999 By:/s/ Leonard E. Lundberg
----------------------------
Leonard E. Lundberg
Chief Financial Officer,
Principal Financial Officer
And Principal Accounting Officer
[TYPE] EX-10.1
JOINT VENTURE AGREEMENT
This Joint Venture Agreement ("Agreement"), dated as of September 28, 1999,
by and among Semiconductor Laser International Corporation ("SLI"), a Delaware
corporation, and Orthogenesis Systems, Inc. ("Orthogenesis"), a New York
corporation.
WHEREAS, SLI and Orthogenesis desire to form a joint venture for the
development, production, commercialization, marketing and sale of certain
medical laser system products.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties and agreements set forth herein, and for other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties do hereby agree as follows:
1. Incorporation of Recitals. The above recitals are true and correct and
are incorporated herein by reference.
2. Definitions. Capitalized terms used in thisAgreement shall have the
meanings set forth below:
(a) "Company" or "Joint Venture" shall mean Orthogenesis Technologies, LLC,
a Delaware limited liability company which shall be a joint venture between SLI
and Orthogenesis.
(b) "Inventions" shall mean processes for the creation of medical laser
system products in addition to the Orthogenesis System and Component System
conceived or reduced to practice during the term of this Agreement.
(c)"Know-How" shall mean any and all information generated during the Term
of this Agreement which is owned or controlled by SLI or Orthogenesis and
directly relates to the Systems and shall include, without limitation,
manufacturing data and any other information, documentation and devices relating
to the Systems and useful for the development, commercialization or safety and
effectiveness of the Systems.
(d) "Orthogenesis" shall have the meaning ascribed thereto in the prologue
hereof.
(e) "Orthogenesis System" shall mean the medical laser system product which
is described in Schedule I attached hereto and incorporated herein by reference.
(f) "Patent Rights" shall mean the patents and patent applications listed
on Schedule II attached hereto and incorporated herein by reference, and any
patents which issue from the patent applications listed on Schedule II, and all
substitutions, additions, extensions, reissues, renewals, divisions,
continuations and continuations-in-part thereof and any foreign counterparts
thereto.
(g) "Proprietary Information" shall mean that portion of the Know-How which
is(i) in written, graphical or in other tangible form and stamped
"Proprietary", "Confidential" or with
1
a similar legend, (ii) stored in a computer format and designated
"Proprietary", "Confidential" or with a similar legend or (iii) described orally
and designated orally as "Proprietary", "Confidential" or with a similar
designation.
(h) "SLI" shall have the meaning ascribed thereto in the prologue hereof.
(i) "Systems" the combined Orthogenesis System and other Inventions which
SLI shall manufacture and sell to the Company.
3.Formation of the Joint Venture; Responsibilities; Distribution of Profits.
(a) Promptly after the execution of this Agreement, SLI and Orthogenesis
shall organize the Company by filing a Certificate of Formation in the form
attached hereto as Exhibit A with the Secretary of State of the State of
Delaware and adopt a Management Agreement in the form attached hereto as Exhibit
B. Voting interests in the Joint Venture shall be allocated 50% to SLI and 50%
to Orthogenesis. The business of the Company shall be to commercialize, market
and sell the Systems. The Company's headquarters shall be located in the County
of Broome in the State of New York.
(b) The Board of Managers of the Company shall at all times consist of four
managers, two of which shall be designated by SLI and two of which shall be
designated by Orthogenesis. The Board of Managers shall make decisions on all
operating matters and extraordinary matters shall be voted upon by the members.
(c) The following persons shall be elected to the offices set forth below
opposite his name to serve in such offices until the Board of Managers shall
elect their respective successors:
President Geoffrey T. Burnham
Vice President Robert H. Zawada
Secretary Theodore J. Zawada
Treasurer Leonard Lundberg
(d) SLI shall manufacture and sell the Systems to the Company at SLI's
total cost of manufacturing (including material, direct labor and overhead
costs) the Systems. The Company will sell the Systems to customers of the Joint
Venture at an additional margin determined by the Board of Managers. Transfer
cost per unit will be refined as production history is developed and will be
modified annually based on actual cost expenditures.
2
(e) SLI shall perform the financial and accounting functions for the
Company and shall be responsible for responding to customers' complaints.
(f) Orthogenesis shall be responsible for marketing, research and
development and product upgrades of the Systems.
(g) The Company's profits (or net income) shall be allocated 75% to SLI and
25% to Orthogenesis. Except as provided in Section 5(e) and Section 12, losses,
costs and expenses shall be shared by SLI and Orthogenesis in proportion to
their respective membership interests.
(h) SLI and Orthogenesis shall each have access to examine all financial
records and accounts of the Company.
(i) At such time as $500,000 in financing is raised by the Company as
contemplated by Section 6 hereof or SLI and Orthogenesis mutually agree based
upon the level of committed sales orders, the Board of Directors of the Company
shall hire a full-time engineer and such other employees as they deem necessary.
4. Collateral for Orders of the Joint Venture. All customer orders of the
Joint Venture shall require appropriate partial payment in advance and letters
of credit to collateralize the balance as determined by the Board of Managers
unless otherwise agreed to by the Company and the distribution representative
and/or customer agent.
5. Exclusive License; Patent Rights.
(a) SLI hereby grants to the Joint Venture an exclusive license of the
Patent Rights and Know-How of SLI insofar as they relate to the manufacture of
the Orthogenesis System to make, use and sell the Systems worldwide in the field
of medical laser system products for the uses described on Schedule I. The term
of such license shall be coterminous with the Term of the Joint Venture.
(b) Orthogenesis hereby grants to the Joint Venture an exclusive license of
the Patent Rights and Know-How of Orthogenesis insofar as they relate to the
manufacture of the Orthogenesis System to make, use and sell the Systems
worldwide in the field of medical laser system products for the uses described
on Schedule I. The term of such license shall be coterminous with the Term of
the Joint Venture.
(c) All Patent Rights of Orthogenesis, including, without limitation, the
existing patentable technology developed by or licensed to Orthogenesis to be
used in the development of the Systems, shall be and remain the exclusive
property of Orthogenesis but subject to the exclusive license referred to in
paragraph 5(a) above.
3
(d) All Patent Rights of SLI, including, without limitation, the existing
patentable technology developed by or licensed to SLI to be used in the
development of the Systems, shall be and remain the exclusive property of SLI
but subject to the exclusive license referred to in paragraph 5(b) above.
(e) SLI and Orthogenesis shall each be responsible for defending and
indemnifying each other and the Joint Venture from and against claims by third
parties for patent infringement pertaining to the patented or patentable
technology assigned and licensed by SLI or Orthogenesis, as the case may be, to
the Company. The cost of prosecuting claims of the Company against third parties
to enforce the intellectual property rights of the Joint Venture shall be shared
by SLI and Orthogenesis in proportion to their membership interest. Costs borne
by a party in excess of its proportionate share shall be treated a secured loan
payable in equal installments over a five year period and secured by the assets
of the Joint Venture.
(f) SLI shall bear the costs and expenses involving evaluation of the
patentability of the Orthogenesis System and obtaining letters of patent
thereon. In the event that SLI shall determine that letters patent, required to
perform the obligations to manufacture the Systems, cannot be obtained, SLI
shall provide written notice thereof to SLI and Orthogenesis shall unilaterally
have the right but not the obligation to terminate this Agreement by providing
Orthogenesis with written notice of such termination. Any funds so expended by
SLI shall be in the form of a loan to the Joint Venture which will be repaid out
of the proceeds from future financing or profits.
6. Financing. If SLI and Orthogenesis mutually determine that the
operations of the Company require financing, SLI and Orthogenesis will each use
its best efforts to secure such financing.
7. Proprietary Information. The parties hereto agree to treat Proprietary
Information in confidence and to undertake the following additional obligations
with respect thereto:
(a) To use Proprietary Information for the sole purpose of performing their
obligations hereunder;
(b) Not to disclose Proprietary Information except as mutually agreed to;
(c) To limit dissemination of Proprietary Information to only those
employees who have the need to know; and
(d) To return Proprietary Information and all documents, notes, or physical
evidence thereof to the originator thereof upon termination of this Agreement.
8. Representation and Warranties. The parties hereto individually and
separately represent and warrant to each other, as of the date hereof, as
follows:
4
(a) Each is a corporation duly organized, validly existing and in good
standing under the laws of the states of their respective formations, and each
is duly qualified to do business, and is in good standing, in each other
jurisdiction in which the nature of its business requires it to be so qualified;
(b) The execution, delivery and performance of this Agreement by such party
hereto and the transactions contemplated hereby have been duly authorized by all
necessary corporate or other actions, and no other proceedings, corporate or
otherwise, are necessary to authorize this Agreement, which, when executed, will
constitute the valid and binding agreement of each party, enforceable in
accordance with its terms.
(c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will constitute a violation
or breach of (i) the organizational documents of such party, (ii) any
contractual restriction contained in any indenture, loan or credit agreement,
lease, mortgage, security agreement, bond, note, or other agreement or
instrument binding or affecting such party or any its assets or (iii) any law,
rule, regulation, order, license requirement, writ, judgment, award, injunction
or decree applicable to, binding on or affecting such party or its assets;
(d) No approval, consent, notice, order, authorization, registration,
qualification or other action by any governmental authority or such other person
or party is required for the conduct of business by any party in connection with
the due execution, delivery and performance by such party of this Agreement;
(e) Such party has no prior commitments, arrangements, agreements or other
understandings with, or any other obligations to, any other party which might
interfere with, or preclude the due and proper fulfillment of, its obligations
under this Agreement;
(f) Neither execution of this Agreement by such party nor the fulfillment
of the terms and conditions of this Agreement by such party will violate the
rights of any third party or result in the creation of any right which may
adversely affect the Patent Rights;
(g) No work to be done by such party in performing its obligations
hereunder will violate any confidential relationship or otherwise constitute a
misappropriation or other unauthorized use of secrets or technical Know-How of
any such party;
(h) Such party owns or has the right to use all rights which are necessary
to perform its obligations under this Agreement, and its performance of its
obligations will not violate the proprietary rights of any other party;
(i) Schedule II contains a complete and accurate list (including ownership
or licensing status) of the Patent Rights of such party which are being licensed
to the Company under this Agreement; and
5
(j) The Patent Rights and license to the Company under this Agreement do
not and will not infringe upon any copyrights or patents, or any other
proprietary rights, of any other person, firm or corporation.
9. Term of the Joint Venture. The term of the joint venture shall commence
on the date hereof and expire on the second (2nd) anniversary of the date of
this Agreement (the "Term"); subject to earlier termination in accordance with
the terms and conditions contained in Section 5(f) and Section10 hereof. The
Term shall be extended automatically for successive five year periods unless
terminated by either party on thirty (30) days notice to the other party
provided that the sole grounds for termination shall be pursuant to Section 10
hereof or if sales of the Company do not reach or exceed the level specified
below:
$1,000,000 average annual sales for the first two years of the Term
(measured on the second anniversary of the date hereof);
$2,000,000 average annual sales for the next five years (measured on the
seventh anniversary of the date hereof);
$2,000,000 average annual sales for each successive five year period and
net income equal to 5% of sales (measured on the twelfth anniversary of the date
hereof and every five years thereafter -- i.e., on the seventeenth anniversary,
the twenty-second anniversary, etc.);
10. Termination; Survival. Either party in its sole discretion, may
terminate this Agreement upon written notice given to the other party as set
forth herein in the event of any one of the following:
(a) In the event of a breach of any material agreement, obligation,
representation or warranty made hereunder by either party, the non-breaching
party shall give notice in writing to the breaching party of the nature of such
breach, including the details of such breach. If such breach is not remedied
within sixty (60) days after receipt of such notice, or, if not capable of being
cured in such sixty (60) day period, if the breaching party shall not have
commenced the cure of such breach in good faith and be diligently pursuing the
cure of such breach within such sixty (60) day period (which in all cases shall
be cured within one hundred twenty (120) days) the non-breaching party shall be
entitled to terminate this Agreement upon notice in writing to the breaching
party.
(b) The parties hereto may terminate this Agreement, such termination to be
evidenced by a writing executed by each of them, if a court of competent
jurisdiction shall have issued an order, decree or ruling permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement, and such order, decree, ruling or other action shall have become
final and nonappealable.
6
(c) In the event that a case or proceeding under the bankruptcy laws of the
United States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed by or against either party and not dismissed within ninety
(90) days thereof, the other party may terminate this Agreement by providing
written notice.
11. Binding Effect; Assignment and Transfer. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding the foregoing, no party may assign or
transfer any of its rights and obligations hereunder or any interest herein
without the prior written consent of the other party hereto except if such
consent is sought by reason of a merger, sale of stock or sale of substantially
all of its assets in which the successor shall have a net worth at least equal
to the selling party immediately prior to the transfer, such consent shall not
be unreasonably withheld
12. Costs and Expenses. Each party agrees to pay its own respective costs
and expenses in connection with the negotiation and execution of this Agreement.
13. Indemnification.
(a) Indemnification by SLI. SLI shall defend, indemnify and hold harmless
each of the Company and Orthogenesis and their respective officers, directors,
shareholders, partners, employees, licensees, agents, successors and assignees
from and against any and all liabilities, losses and expenses whatsoever,
including without limitation claims, damages, judgments, awards, settlements,
investigations, costs and expenses (including without limitation reasonable
attorneys' fees and disbursements) which any of them may incur or become
obligated to pay arising out of or resulting from any breach by SLI, of any of
its representations, warranties or obligations under this Agreement.
(b) Indemnification by Orthogenesis. Orthogenesis shall defend, indemnify
and hold harmless each of the Company and SLI and their respective officers,
directors, shareholders, partners, employees, licensees, agents, successors and
assignees from and against any and all liabilities, losses and expenses
whatsoever, including without limitation claims, damages, judgments, awards,
settlements, investigations, costs and expenses (including without limitation
reasonable attorneys' fees and disbursements) which any of them may incur or
become obligated to pay arising out of or resulting from any breach by
Orthogenesis of any of its representations, warranties or obligations under this
Agreement.
(c) Indemnification Procedure. Any party seeking indemnification under this
Section shall give the party from which indemnification is sought prompt notice.
14. Amendments; Waivers and Consents. No modification, amendment or waiver
of or with respect to any provision of this Agreement or any related documents,
nor consent to any departure by any party from any of the terms or conditions
hereof, shall be effective unless it shall
7
be in writing and signed by all of the parties hereto. Any waiver or
consent shall be effective only in the specific instance and for the purpose for
which given. Such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or future failure. This Agreement
embodies the entire agreement between the parties hereto with respect to the
subject hereof and supersedes all prior agreements and understandings relating
to the subject hereof.
15. GOVERNING LAW; CONSENT AND WAIVER.
(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE SUBSTANTIVE LAW OF THE STATE OF NEW YORK
WITHOUT REGARD TO ITS CONFLICTS OF LAW PROVISIONS.
(b) EACH OF THE PARTIES HERETO HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND
OF THE UNITED STATES LOCATED IN THE COUNTY OF BROOME AND STATE OF
NEW YORK.
(c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY WAIVES
ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE,
ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR IN ANY WAY
CONNECTED WITH THIS AGREEMENT. INSTEAD ANY DISPUTE RESOLVED IN
COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT JURY.
16. Descriptive Heading. The headings of the various paragraphs of this
Agreement are inserted for convenience of reference only and shall not be deemed
to affect the meaning or construction of any of the provisions herein.
17. Notices. All notices, requests and other communications to any party
hereunder shall be in writing (including telecopy, telex or similar writing) and
shall be deemed given or made as of the date delivered, if delivered personally
or by telecopy (provided that delivery by telecopy shall be followed by delivery
of an additional copy personally, by mail or overnight courier), one day after
being delivered by overnight courier or three days after being mailed by
registered or certified mail (postage prepaid, return receipt requested), to the
parties at the following addresses:
If to SLI, to:
Semiconductor Laser International Corporation
15 Link Drive
Binghamton, New York 13904
Attention: Geoffrey T. Burnham
Fax No.: (607) 722-3900
8
with a copy to:
Swidler Berlin Shereff Friedman LLP
919 Third Avenue
New York, New York 10022
Attention: Richard A. Goldberg, Esq.
Fax No.: (212) 758-9526
If to Orthogenesis, to:
Orthogenesis Systems, Inc.
81 Suburban Court
West Seneca, New York 14224
Attention: Robert H. Zawada
with a copy to:
Michael J. Poretta, Esq.
P.O. Box 240
20 Buffalo Street
Hamburg, New York 14075
Fax No.: (716) 649-0190
18. No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the parties hereto and their
respective successors and permitted assigns.
19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which,
when taken together, shall constitute one and the same agreement.
20. Severability. In the event that 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, in whole or in part, the validity of the
remaining provisions shall not be affected and the remaining portion of any
provision held to be invalid, illegal or unenforceable shall in no way be
affected, prejudiced or disturbed thereby.
9
IN WITNESS WHEREOF the parties have caused this agreement to be executed by
their respective officers, as of the date first above written.
SEMICONDUCTOR LASER
INTERNATIONAL CORPORATION
/s/ Geoffrey T. Burnham
By: ______________________________
Name: Geoffrey T. Burnham
Title: President
ORTHOGENESIS SYSTEMS, INC.
/s/ Robert H. Zawada
By:______________________________
Name: Robert H. Zawada
Title: President
10
Schedule I
The Orthogenesis System is low level laser therapy unit, used as a
non-invasive medical treatment laser for the purpose of biostimulation.
The use of the laser system is for the treatment of certain medical
conditions. Its' primary uses are for treatment of arthritic conditions,
accelerated wound healing and chronic pain. Secondary applications are for the
treatment of acute injuries, for example sprains and other soft tissue injuries
that may occur during athletic events. the laser also has application to
veterinary practice.
The laser is comprised of a series of diode laser units attached to an
electronic control system that regulates the output of the laser diodes. This
microprocessor based control system is settable, by the practitioner, so that
the user can program the operating parameters for treatment of a particular
condition.
11
Schedule II
List of Patent Rights:
[TYPE] EX-10.2
November 22, 1999
Mr. Len Lundberg
Chief Financial Officer
Semiconductor Laser International, Corp.
15 Link Drive
Binghamton, NY 13904
Dear Len:
FINOVA Capital Corporation (FINOVA) hereby agrees to financial
accommodations for Semiconductor Laser International for the
months of months of October, November and December on account nos.
S610001, S610002, S610003 and S610004. These accommodations will
take the form of a Forbearance Agreement with interest only collected
for October, November and December. Principal payments will be
deferred to the end of the lease terms.
Sincerely,
By: /s/ Gail Klepfisz
---------------------
Gail Klepfisz
Director - Credit
12
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