UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to_________________________
Commission file number 0-26972
SWISSRAY International, Inc.
(Exact name of registrant as specified in its charter)
New York 16-0950197
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 East 32nd Street, Suite 34-B, New York, New York 10016
(Address of principal executive offices) (Zip Code)
New York (212) 545 0095 Switzerland 011 41 41 914 12 00
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
<PAGE>
The number of shares outstanding of each of the issuer's class of common stock,
as of the latest practicable date.
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 25, 1998 is 4,638,976 shares, all of one class of $.01 par
value common stock.
1
<PAGE>
TABLE OF CONTENTS Page
No. PART I
Item 1. Financial Statements F1-F5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 3-7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
PART II
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9-10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
2
<PAGE>
<TABLE>
<CAPTION>
SWISSRAY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
ASSETS
September 30,
1998 June 30,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,259,277 $ 1,281,552
Accounts receivable, net of allowance for doubtful
accounts of $ 35,229 and $ 32,356 2,358,958 2,584,651
Inventories 8,515,878 7,701,145
Prepaid expenses and sundry receivables 1,278,332 1,501,909
------------- -------------
TOTAL CURRENT ASSETS 14,412,445 13,069,257
------------- -------------
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation
of $ 687,481 and $ 581,077 6,105,397 6,010,378
------------- ------------
OTHER ASSETS
Loan receivable 18,225 20,005
Licensing agreement, net of accumulated amortization of 3,476,602 3,600,766
$ 1,489,973 and $ 1,365,809
Patents and trademarks, net of accumulated amortization of 222,895 230,614
$ 90,434 and $ 82,716
Software development costs, net of accumulated amortization of 430,382 455,318
$ 146,828 and $ 121,892
Security deposits 40,211 38,280
Note receivable - long-term, net of allowance of $ 30,733 and $ 30,733 513,643 513,643
Goodwill, net of accumulated amortization of $ 180,439 and $ 136,939 1,752,836 1,796,336
Debt issance costs on convertible debentures, net of accumulated
amortization of $ 51,833 and $ 60,000 259,167 180,000
------------- -------------
TOTAL OTHER ASSETS 6,713,961 6,834,962
------------- -------------
TOTAL ASSETS $ 27,231,803 $ 25,914,597
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 229,857 $ 233,746
Notes payable - banks 5,437,017 3,551,091
Loan payable 136,019 125,029
Accounts payable 5,266,982 5,030,449
Accrued expenses 2,148,026 2,365,450
Restructuring 500,000 500,000
Customer deposits 22,050 176,583
Due to stockholders and officers 2,437 2,206
------------- ------------
TOTAL CURRENT LIABILITIES 13,742,388 11,984,554
------------- ------------
CONVERTIBLE DEBENTURES 9,289,818 7,645,969
Conversion Benefit - (315,327)
------------- ------------
Net Convertible Debentures 9,289,818 7,330,642
LONG-TERM DEBT, less current maturities 418,275 440,674
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 46,380 41,426
Additional paid-in capital 58,800,921 58,074,793
Accumulated deficit (53,697,204) (50,481,713)
Accumulated other comprehensive loss (1,368,775) (1,475,779)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 3,781,322 6,158,727
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,231,803 $ 25,914,597
============= =============
F 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SWISSRAY INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
September 30,
----------------------------------------------------------
1998 1997 1996
Restated Restated
Unaudited Unaudited Unaudited
----------- ----------- ----------
<S> <C> <C> <C>
NET SALES $ 3,656,441 $ 5,258,903 $ 2,467,175
COST OF SALES 2,836,914 3,313,091 1,189,257
----------- ------------ -----------
GROSS PROFIT 819,527 1,945,812 1,277,918
----------- ----------- -----------
OPERATING EXPENSES
Officers and directors compensation 155,187 95,735 127,211
Salaries 1,085,186 621,677 502,164
Selling 512,799 488,031 194,379
Research and development 406,038 473,839 499,522
General and administrative 450,640 212,180 868,302
Other operating expenses 264,489 135,877 331,902
Depreciation and amortization 293,749 198,723 172,958
---------- --------- ----------
TOTAL OPERATING EXPENSES 3,168,088 2,226,062 2,696,438
---------- --------- ----------
LOSS BEFORE OTHER INCOME (EXPENSES)
AND INCOME TAXES (2,348,561) (280,250) (1,418,520)
Other income (expenses) (183,367) 138,499 19,898
Interest expense (653,896) (2,694,153) (29,982)
----------- ----------- -----------
OTHER INCOME (EXPENSES) (837,263) (2,555,654) (10,084)
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS (3,185,824) (2,835,904) (1,428,604)
Income tax provision - 876 -
Extraordinary income (expenses) (29,667) 150,708 -
------------ ----------- -----------
NET LOSS $ (3,215,491) $(2,686,072) $(1,428,604)
============ =========== ===========
LOSS PER COMMON SHARE BASIC
Loss from continuing operations $ (0.70) $ (1.41) $ (1.01)
Extraordinary items (0.01) 0.07 -
------------ ----------- -----------
NET LOSS $ (0.71) $ (1.34) $ (1.01)
------------ ----------- -----------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,510,201 2,007,631 1,418,506
F 2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SWISSRAY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
-------------------------------------------------------
1998 1997 1996
Restated Restated
Unaudited Unaudited Unaudited
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES
Net loss $ (3,215,491) $ (2,686,072) $ (1,428,604)
Adjustment to reconcile net loss to net
cash used by operating activities
Depreciation and amortization 306,906 235,131 172,958
Provision for bad debts - (36,910) (9,968)
Financing costs incurred - 91,425 -
Operating expenses through
issuance of stock options - - 588,846
Issuance of common stock in lieu of
interest payments 587,197 10,947 -
Interest expense on debt issuance cost and
conversion benefit - 2,508,382 -
Early extinguishment of debt (gain) 29,667 (150,708) -
(Increase) decrease in operating assets:
Accounts receivable 222,819 166,561 1,303,848
Accounts receivable - others - 77,411 -
Inventories (814,733) (767,265) (843,472)
Prepaid expenses and sundry receivables 223,577 (115,254) (457,291)
Increase (decrease) in operating liabilities:
Accounts payable 236,533 (115,064) (1,499,529)
Accounts payable-affiliates - - (1,541)
Accrued expenses 276,803 (601,348) 338,796
Customers deposits (154,533) 10,995 (25,281)
----------- ----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (2,301,255) (1,371,769) (1,861,238)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of property and equipment (201,422) (179,888) (82,334)
Patents and trademarks - (21,423) (1,626)
Security deposits - 4,072 (31)
Loans receivable - (3,521) -
Repayments from (advances to) affiliates - - (149,222)
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (201,422) (200,760) (233,213)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 13,582,986 36,382 3,151,023
Proceeds from long-term borrowings - 469,306 -
Principal payment of short-term borrowings (11,204,161) (958,923) (2,069,828)
Principal payment of long-term borrowings (22,399) - (511,101)
Issuance of common stock for cash 1,500,000 3,873,000 -
Repayment from (payment to) stockholders and
officers - 170,173 -
----------- ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 3,856,426 3,589,938 570,094
----------- ----------- -----------
EFFECT OF EXCHANGE RATE ON CASH (376,024) 72,643 845
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 977,725 2,090,052 (1,523,512)
CASH AND CASH EQUIVALENT - beginning of period 1,281,552 3,091,307 3,252,658
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 2,259,277 $ 5,181,359 $ 1,729,146
----------- ----------- -----------
F 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SWISSRAY INTERNATIONAL, INC.
CONSOLITATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1998, 1997 and 1996
Additional Accumulated
Common Stock Paid-in Common Stock Accumulated Other
----------------- Capital to be reissued Deficit Comprehensive Total
Shares Amount (Restated) (Restated) (Restated) Loss (Restated)
-------- ---------- ---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - July, 1, 1996 1,418,506 $ 14,185 $ 25,770,534 $ - $ (14,293,416) $ (836,047) $ 10,655,256
COMPREHENSIVE LOSS:
Net loss - - - - (1,419,024) - (1,419,024)
Foreign currency
transation
gain net of taxes $ -0- - - - - - 5,869 5,869
-----------
TOTAL COMPREHENSIVE LOSS - - - - - - (1,413,155)
-----------
Stock options granted for
services - - 588,846 - - - 588,846
---------- ---------- ------------ ----------- ------------- ------------- -----------
BALANCE - September 30, 1996 1,418,506 14,185 26,359,380 - (15,712,440) (830,178) 9,830,947
BALANCE - July, 1, 1997 1,969,443 19,694 35,957,659 1,122,973 (27,978,604) (1,428,534) 7,693,188
COMPREHENSIVE LOSS:
Net loss - - - - (2,686,072) - (2,686,072)
Foreign currency
translation
losses net of taxes $ -0- - - - - - (65,518) (65,518)
-----------
TOTAL COMPREHENSIVE LOSS - - - - - - (2,751,590)
-----------
Issuance of common stock for cash 81,881 819 1,058,274 - - - 1,059,093
Stock options exercised for cash 10,000 100 72,900 - - - 73,000
Shares issued to officers for
services 48,259 483 1,122,490 (1,122,973) - - -
Issuance of common stock in lieu
of interest payment 797 8 10,939 - - - 10,947
Beneficial conversion feature of
convertible debentures - - 1,250,000 - - - 1,250,000
Early extinguishment of debt - - 65,625 - - - 65,625
---------- -------- ---------- ------------ ------------ ------------ ----------
BALANCE - September 30, 1997 2,110,380 21,104 39,537,887 - (30,664,676) (1,494,052) 7,400,263
BALANCE - July, 1, 1998 4,142,622 41,426 58,074,793 - (50,481,713) (1,475,779) 6,158,727
COMPREHENSIVE LOSS:
Net loss - - - - (3,215,491) - (3,215,491)
Foreign currency
translation
gain net of taxes $ -0- - - - - - 107,004 107,004
----------
TOTAL COMPREHENSIVE LOSS - - - - - - (3,108,487)
Issuance of common stock for cash 484,250 4,843 1,495,157 - - - 1,500,000
Issuance of common stock in lieu
of interest payment 11,110 111 34,153 - - - 34,264
Early extinguishment of Debt - - (803,182) - - - (803,182)
--------- --------- ---------- ----------- ------------ ------------ -----------
BALANCE - September 30, 1998 4,637,982 $ 46,380 $ 58,800,921 $ - $ (53,697,204) $(1,368,775) $ 3,781,322
--------- --------- ---------- ----------- ------------ ----------- -----------
F 4
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998
(1)The accompanying financial statements are unaudited. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted, although the Registrant believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the Registrant's annual
report on Form 10-K for the fiscal year ended June 30, 1998.
(2)In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of only a
normal and recurring nature, necessary to present fairly the financial position
of the Registrant as of September 30, 1998 and the results of operations and
cash flows for the interim period presented. Operating results for the three
months ended September 30, 1998 are not necessarily indicative of the results to
be expected for the full year ending June 30, 1999.
(3)INVENTORIES
Inventories are summarized by major classification as follows:
<TABLE>
<CAPTION>
September 30, June 30,
---------------------------
1998 1998
---------- ----------
<S> <C> <C>
Raw materials, parts and supplies $8,089,897 $7,047,001
Work in process 158,003 160.064
Finished goods 267,978 494.080
---------- ----------
$8,515,878 $7,701,145
========== ==========
</TABLE>
Inventories are stated at lower of cost or market, with cost being determined on
the first-in, first-out (FIFO) method. Inventory cost include material,
labor, and overhead.
F 5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
All references herein to the "Registrant" refer to Swissray
International Inc. All references herein to the "Company" refer to Swissray
International, Inc. and its subsidiaries.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF
THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this discussion which are not historical facts may be
considered forward looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including estimated cost savings to
be realized from restructuring activities and estimated proceeds from and timing
of facility sales. The words "believe," "expect," "anticipate," "estimate", and
similar expressions identify forward looking statements. Any forward looking
statements involve risks and uncertainties that could cause actual events or
results to differ, perhaps materially, from the events or results described in
the forward looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward looking statements, whether as a result of new information, future
events or otherwise. Risks associated with the Company's forward looking
statements include, but are not limited to, risks associated with the Company's
history of losses and uncertain profitability, need for market acceptance of the
AddOn Multi System, reliance on a single product, reliance on large customers,
risks associated with the Company's international operations, currency
fluctuations, the risk of new and different legal and regulatory requirements,
governmental approvals, tariffs and trade barriers, risks associated with
competition and technological innovation by competitors, dependence on patents
and proprietary technology, general economic conditions and conditions in the
healthcare industry, reliance on key management, limited manufacturing history
with respect to the AddOn-Multi-System, dependence on sole source suppliers,
future capital needs and uncertainty of additional financing, potential recalls
and product liability, dilution, effects of outstanding convertible debentures,
limited public market, liquidity, possible volatility of stock price, recently
adopted new listing standards for NASDAQ securities and environmental matters.
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements, related notes and other information
included in this quarterly report on Form 10-Q.
3
<PAGE>
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
Net sales amounted to $3,656,441 for the three-month period ended
September 30, 1998, compared to $5,258,903 for the three-month period ended
September 30, 1997 and $2,467,175 for the three-month period ended September 30,
1996. The 30.5% decrease in net sales was mainly due to the sale of the film and
processor business of Swissray Empower on June 30, 1998. The sales of film and
processors of Swissray Empower was $1,709,541 for the three-month period ended
September 30, 1997.
Gross profit amounted to $819,527 or 22.4% of net sales for the
three-month period ended September 30, 1998, compared to $1,945,812 or 37% of
net sales for the three-month period ended September 30, 1997 and $1,277,918 or
51.8% of net sales for the three-month period ended September 30, 1996. The
decrease in gross profit as a percentage of net revenues is attributable to the
fact that the percentage of OEM-sales (which has a relatively low margin) of
total sales increased to 49.9% of total sales for the three-month period ended
September 30, 1998 from 28.6% for the three-month period ended September 30,
1997
Operating expenses were $3,168,088, or 86.6% of net revenues, for the
three-month period ended September 30, 1998, compared to $2,226,062, or 42.3% of
net revenues for the three-month period ended September 30, 1997 and $2,696,438
or 109.3% of net revenues for the three-month period ended September 30, 1996.
The principle items were salaries (net of officers and directors compensation)
of $1,085,186 or 29.7% of net sales for the three-month period ended September
30, 1998 compared to $621,677 or 11.8% of net sales for the three-month period
ended September 30, 1997 and $502,164 or 20.4% of net sales for the three-month
period ended September 30, 1996 and selling expenses of $512,799 or 14.0% of net
sales for the three-month period ended September 30, 1998 compared to $488,031
or 9.3% of net sales for the three-month period ended September 30, 1997 and
$194,379 or 7.9% of net sales for the three-month period ended September 30,
1996. Research and development expenses were $406,038 or 11.1% of net sales for
the three-month period ended September 30, 1998 compared to $473,839 or 9.0% of
net sales for the three-month period ended September 30, 1997 and $499,522 or
20.2% of net sales for the three-month period ended September 30, 1996.
The increase of $463,509 or 74.6% in salaries is attributable to the salaries of
Swissray Medical Systems and Swissray Information Solution. Salaries for these
two companies amounted to $447,269 for the three-month period ended September
30, 1998. There were no salaries during the three month-period ended September
30, 1997 in these two companies.
Interest expenses decreased to $653,896 for the three month ended September 30,
1998 compared to $2,694,153 for the three month ended September 30, 1997 and
$29,982 for the three-month period ended September 30, 1996. This decrease is
primarily due the decrease of interest expense for amortization of Debenture
issuance cost and Conversion Benefit.
4
<PAGE>
FINANCIAL CONDITION
September 30, 1998 compared to June 30, 1998
Total assets of the Company on September 30, 1998 increased by
$1,317,206 to $27,231,803 from $25,914,597 on June 30, 1998, primarily due to
the increase of Current Assets. Current Assets increased $1,343,188 to
$14,412,445 on September 30, 1998 from $13,069,257 on June 30, 1998. The
increase in current assets is primarily attributable to the increase of Cash
and cash equivalents of $977,725 and the increase of inventory of $814,733
which was partially offset by the decrease in prepaid expenses and sundry
receivables of $223,577 and the decrease in Accounts receivable of
$225,693. Other Assets decreased $121,001 to $6,713,961 on September 30, 1998
from $6,834,962 on June 30, 1998. The decrease is primarily attributable to the
amortization of the licensing agreement, patents & trademark, software
development cost and the goodwill..
On September 30, 1998, the Company had total liabilities of $23,450,481
compared to $19,755,870 on June 30, 1998. On September 30, 1998, current
liabilities were $13,742,388 compared to $11,984,554 on June 30, 1998. Working
capital at September 30, 1998 was $670,057 compared to $1,084,703 at June 30,
1998.
5
<PAGE>
CASH FLOW AND CAPITAL EXPENDITURES THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1998
COMPARED TO THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THREE
MONTH PERIOD ENDED SEPTEMBER 30, 1996.
Cash used for operating activities for the three months ended September
30,, 1998 was $2,301,255 compared to $1,371,769 for the three months ended
September 30, 1997 and $1,861,238 for the three months ended September 30, 1996.
Cash used for investing activities was $201,422 for the three months ended
September 30, 1998 compared to $200,760 for the three months ended September 30,
1997 and $233,213 for the three months ended September 30, 1996. Cash flow from
financing activities for the three months ended September 30, 1998 was
$3,856,426 compared to $3,589,938 for three months ended September 30, 1997 and
$570,094 for the three months ended September 30, 1996.
The Company anticipates that its use of cash will be substantial for the
foreseeable future. In particular, management of the Company expects substantial
expenditures in connection with the production of the planned increase of sales,
the continuation of the strengthening and expansion of the Company's marketing
organization and, to a lesser degree, ongoing research and development projects.
The Company expects that funding for these expenditures will be available out of
the Company's, future cash flow and/or issuance of equity and/or debt
securities.
6
<PAGE>
However, the availability of a sufficient future cash flow will depend to a
significant extent on the marketability of the Company's AddOn-Multi-System.
Accordingly, the Company may be required to issue additional convertible
debentures or equity securities to finance such capital expenditures and working
capital requirements. There can be no assurance whether or not such financing
will be available on terms satisfactory to management.
On August 31, 1998 the Company issued $3,832,849 aggregate principal amount of
5% convertible debentures (the "Convertible Debentures") including a 25% premium
and accrued interest, convertible into Common Stock of the Company. The Company
did not receive any cash proceeds from the offering of the Convertible
Debentures. The full amount was paid by investors to holders of the Company's
Convertible Debentures issued on March 14, 1998 holding $3,000,000 of such
Convertible Debentures as repayment in full of the Company's obligations under
such Convertible Debentures. During the same period the Company issued
$2,311,000 aggregate principal amount of 5% Convertible Debentures, convertible
into Common Stock of the Company. After deducting fees, commissions and escrow
fees in the aggregate amount of $311,000 the Company received a net amount of
$2,000,000. The face amount of both Convertible Debentures are convertible into
shares of Common Stock of the Company commencing March 1, 1999 at a conversion
price equal to the lesser of 82% of the average closing bid price for the ten
trading days preceding the date of the conversion or $1.00 per share. Any
Convertible Debentures not so converted are subject to mandatory conversion by
the Company on the 24th monthly anniversary of the date of issuance of the
Convertible Debentures.
On October 6, 1998 the Company issued $2,940,000 aggregate principal amount of
5% convertible debentures (the "Convertible Debentures") including $540,000
repurchase of stock, convertible into Common Stock of the Company. After
deducting fees, commissions and escrow fees in the aggregate amount of $300,000
the Company received a net amount of $2,100,000. The face amount of the
Convertible Debentures is convertible into shares of Common Stock of the Company
any time after the closing date at a conversion price equal to the lesser of 82%
of the average closing bid price for the ten trading days preceding the date of
the conversion or $1.00. Any Convertible Debentures not so converted are subject
to mandatory conversion by the Company on the 24th monthly anniversary of the
date of issuance of the Convertible Debentures.
EFFECT OF CURRENCY ON RESULTS OF OPERATIONS
The result of operations and the financial position of the Company's
subsidiaries outside of the United States is reported in the relevant foreign
currency (primarily in Swiss Francs) and then translated into US dollars at the
applicable foreign exchange rate for inclusion in the Company's consolidated
financial statements. Accordingly, the results of operations of such
subsidiaries as reported in US dollars can vary significantly as a result of
changes in currency exchange rates (in particular the exchange rate between the
Swiss Franc and the US dollar).
7
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In October 1997, the Registrant and Swissray Healthcare, Inc. were served
with a complaint by a company engaged in the business of providing
services related to imaging equipment alleging that defendant received benefits
from breach of fiduciary duties and contract obligations and misappropriation of
trade secrets by certain former employees of such competitor. Such company also
obtained a temporary restraining order against the Registrant and Swissray
Healthcare, Inc. On November 10, 1997, the Court denied a Motion for a
preliminary injunction and the temporary restraining order was vacated. On
December 1, 1997 and January 30, 1998 the Registrant answered the Complaint and
Amended Complaint respectively by denying the allegations contained therein. The
Plaintiff in such action (on December 2, 1997) filed a Motion to reargue and
renew its prior denied Motion for a Preliminary Injunction and such Motion was
(by Order and Decision dated June 17, 1998) denied. The Company denied the
allegations, vigorously defended the litigation and thereafter settled such
litigation and all outstanding matters with respect thereto in July 1998 for
$60,000.
Dispute with Gary J. Durday ("Durday"), Kenneth R. Montler ("Montler") and
Michael E. Harle ("Harle"). On July 17, 1998, two legal proceedings were
commenced by Swissray, and two of its subsidiaries against Durday, Montler and
Harle. Harle and Montler are former Chief Executive Officers of Swissray Medical
Systems Inc. and Swissray Healthcare Inc., respectively, and Durday is the
former Chief Financial Officer of both of those companies. Each of them was
employed pursuant to an Employment Agreement dated October 17, 1997. In addition
these three individuals were owners of a company by the name of Service Support
Group LLC ("SSG"), the assets of which were sold to Swissray Medical Systems
Inc. pursuant to an Asset Purchased Agreement dated as of October 17, 1997,
whereby Messrs. Durday, Montler and Harle received, among other consideration
33,333 shares of the Company's common stock, together with a put option
entitling these individuals to require Swissray to purchase any or all of such
shares at a purchase price equal to $ 45 per share (on or after June 30, 1998
and until April 16, 1999, subject to certain adjustments set forth in the Asset
Purchase Agreement).
On July 17, 1998, Swissray and its subsidiaries, Swissray Medical Systems Inc.
and Swissray Healthcare Inc. commenced an arbitration proceeding before the
American Arbitration Association in Seattle, Washington (Case No.75 489 00196
98) alleging that Messrs. Durday, Montler and Harle fraudulently induced
Swissray and its subsidiaries to enter into the above referenced Asset Purchase
Agreement and otherwise breached that agreement. The relief sought in the
arbitration proceeding is the recovery of damages suffered as a result of this
alleged wrongful conduct and a rescission of the put option provided for in the
Asset Purchase Agreement. Messrs. Durday, Montler and Harle responded to the
allegations made in the arbitration proceeding and asserted counterclaims
against Swissray and its subsidiaries claiming
8
<PAGE>
a breach by them of their obligations under the Asset Purchase Agreement and
other relief.
The current status with respect to this matter is that an arbitrator has been
selected, but no date has yet been set for a hearing.
In addition to the above referenced arbitration proceeding, Swissray and its
subsidiaries commenced an action against Messrs. Durday, Montler and Harle in
the Supreme Court of the State of New York, County of New York (Index
603512/98), alleging that these individuals breached the obligations undertaken
by them in their respective employment agreements. Messrs. Durday Montler and
Harle have removed this action to the United States District Court for the
Southern District of New York (File No. 98 Civ. 5895; Judge McKenna), where it
is now pending. Counsel for Messrs. Durday, Montler and Harle have since
acknowledged that the action was improperly removed to federal court and have
agreed to remand that action to the Supreme Court of the State of New York,
County of New York. Counsel for Messrs. Durday, Montler and Harle have also
indicated that it is their intention to attempt to dismiss or stay the New York
action in order to have the issues raised in the action consolidated with the
issues to be determined in the American Arbitration Association proceeding, but
no formal action has been taken in that regard.
While the above may be considered to be in its early stage of litigation or
arbitration as indicated, it is the Company's management's intention to contest
each of these matters vigorously since Swissray believes that its claims are
meritorious, and that it has meritorious defenses to the claims asserted against
them.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Comapny sold certain convertible debentures during the months of
March, June, August and October 1998 to four (4) debenture holders. Such
debentures and/or one or more related documents contain various Company
warranties and representations which if not adhered to in full can create a
default which must be cured within the grace period allotted therefore. A
default occurred by virtue of the fact that the Company's securities ceased
trading on a recognized exchange as a result of NASDAQ delisting which occurred
on October 26, 1998. Such default if not cured in a timely manner or if not
waived by the debenture holder can cause the entire balance of the principal
indebtedness due to become immediately due and payable. By written agreement
dated December 1, 1998, each of the above referenced 4 debenture holders agreed
to and did waive any and all existing defaults (which would casue the aforesaid
principal indebtedness to become immediately cdue and payable) for a period of
one year. Such waiver of default is exclusive of and does not pertain to any
monetary penalties as are due and payable or may become due and payable to
such debenture holders by virtue of Company delays in obtaining effective date
from the SEC with respect to applicable Registration Statement(s) required to be
filed pursuant to Registration Rights Agreement(s) which accompanied above
referenced convertible debentures.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
In addition to the above and subsequent to the closing of the Company's June 30,
1998 fiscal year, the Company held a Special Meeting of Stockholders on August
31, 1998, at which time Company stockholders were asked to consider and act upon
proposals to (1) reverse stock split the currently issued and outstanding shares
of Company Common Stock on the basis of no less than 1 : 4 and no greater than 1
for 10; the exact number, (if any) within such parameter to be determined by the
Board of Directors in its discretion and (2) authorize the creation of a class
of Preferred Stock. The number of shares of Common Stock voted at the Special
Meeting approximated 75 % of all issued and outstanding securities as of the
record date and approximately 88 % of those shares voted in favor of the
aforesaid reverse stock split proposal (while the Company did not receive a
sufficient number of affirmative votes for the creation of a
9
<PAGE>
class of Preferred Stock).
At a Special Meeting of the Board of Directors on September 21, 1998, a reverse
stock split on the basis of 1 for 10 was approved with an effective date of
October 1, 1998.
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - NONE-
(b) Reports on Form 8-K 8-K
with date of report of
November 3, 1998 filed
November 6, 1998 indicating
change of auditor
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SWISSRAY INTERNATIONAL, INC.
By: /s/ RUEDI G. LAUPPER
---------------------------------
Ruedi G. Laupper, Chairman of the
Board of Directors, President and
Chief Executive Officer
Date: November 30, 1998
10
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