SWISSRAY INTERNATIONAL, INC.
___________________________
1998
ANNUAL REPORT
TO
SHAREHOLDERS
___________________________
<PAGE>
SWISSRAY INTERNATIONAL, INC.
320 West 77th Street,Suite 1A
New York, New York 10024
June 21, 1999
Dear Stockholder:
Swissray - Experience in Direct Digital Radiology
Our products and our Company have seen outstanding progress during 1998.
Today we are a stronger Company with a sucessful and innovative product line
that is setting precedents in modern medical imaging. Swissray remains the only
company marketing a direct digital multi-functional radiography system (ddR) for
clinical use.
Our ddR Multi-System represents an integrated approach to imaging, designed
to move the radiology industry into the filmless era. Twelve of these systems
have been installed worldwide to date in prestigious university research centers
and hospitals. Three systems were sold at the annual Radiological Society of
North America (RSNA) meeting in Chicago - a significant sales breakthrough. We
welcome the addition of Houston, Texas-based Kelsey-Seybold Clinic and the
Federal maximum security facility in Florence, Colorado to our client base. At
the RSNA conference, the system generated tremendous interest among
professionals, because of its attractiveness as a complete digital solution.
Combined with medical informatics, the system is a complete solution for
professionals, and is compatible in several operating environments including RIS
& PACS.
A world of cost consciousness brought on by managed care will only lift
Swissray to new heights as digitalizing images revolutionizes radiology to a
more effective and cost efficient process. More and more hospitals are forming
purchasing alliances that will demand the sort of streamlined solutions Swissray
has developed. However, the demand for discounting has hurt the profit margins
of other equipment manufacturers as they scramble to install picture archiving
and communications systems and as the digital x-ray environment pressures the
secondary film accessory market.
Our digital concept, though fully implemented in the USA, has not yet
reached the European market, and thus represents a very important and lucrative
target market for the Company. Distribution contracts with three major medical
equipment manufacturers for domestic and international sales are now in place
and are already strengthening the sales and service efforts throughout the USA
as well as in South America.
The Company srongly believes that profit from these endeavors is at hand;
and a system backlog assures increased visibility and growth. In conventional
X-ray, Swissray was successful with its OEM contracts, and last year
manufactured more than 400 systems.
Swissray is committed to advancing the medical industry and groundbreaking
direct digital x-ray systems, and our commitment to research and development is
strong. We thank all of our shareholders for sharing this innovative vision with
us, and for continued support as we extend our reach for the global market.
Our staff is endeavoring to ensure long-term growth that will accelerate
shareholder value. Our innovations are our primary wealth and are totally
committed to the customer. All of us look forward to a year of increased
visibility and growth.
Vert truly yours,
SWISSRAY International, Inc.
/s/ Ruedi G. Laupper
Ruedi G. Laupper
Chairman and President, CEO
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SELECTED FINANCIAL DATA
The summary information below represents financial information of the
Company for the fiscal years ended June 30, 1998, June 30, 1997, June 30, 1996,
June 30, 1995 (six month period), and December 31, 1994, which information was
derived from the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Swissray International, Inc.
Years Ended
(in Thousands, Except Per Share Data)
(Six Months)
-----------------------
6/30/98 6/30/97* 6/30/96* 6/30/95 (1) 12/31/94
-------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales 22,893 13,151 10,899 3,806 8,618
Cost of goods sold 18,082 8,445 5,793 2,484 5,363
-------- -------- -------- -------- ---------
Gross profit 4,811 4,706 5,106 1,322 3,255
Gross profit margin (%) 21% 36% 47% 35% 38%
Selling, general and
administrative expenses 18,748 17,450 14,966 2,307 3,175
-------- -------- -------- -------- ---------
Operating (loss) income (13,937) (12,744) (9,860) (985) 80
Other expense (income) net 281 (317) (1,004) 3,054 15
Interest expense 8,590 760 194 122 237
-------- -------- -------- -------- ---------
Loss from continuing
operations before income
taxes (22,808) (13,187) (9,050) (4,161) (172)
Income taxes (benefit) -- 110 (365) (339) 24
-------- -------- -------- -------- ---------
Loss from continuing
operations (22,808) (13,297) (8,685) (3,822) (196)
======== ======== ======== ======== =========
Loss per share from
continuing operations (8.48) (8.41) (6.69) (4.80) (0.30)
======== ======== ======== ======== =========
BALANCE SHEET DATA:
Working capital (deficit) 1,085 2,834 3,433 11,851 (1,236)
Total assets 25,915 24,788 18,793 13,027 3,899
Short-term debt, including
current portion, of long-term
debt 3,910 4,211 2,737 2,954 2,843
Convertible debentures 7,330 5,310 -- -- --
Long-term debt 441 525 -- 705 420
Stockholders' (deficit) equity 6,159 7,693 10,655 6,377 (798)
Total shares outstanding at
year end (2) 2,691 1,582 1,297 1,203 785
</TABLE>
(1) In 1995, the Company changed its fiscal year end from December 31 to June
30. As a result, the Company had a fiscal year beginning on January 1, 1995 and
ending on June 30, 1995. Accordingly, the Selected Financial Data for the period
ended June 30, 1995 is for a six month period.
(2) On October 1, 1998, the Company effectuated a reverse stock split of all
issued and outstanding common stock on the basis of 1 for 10, effective as of
the opening of business on October 1, 1998. All per share data has been restated
to reflect such change.
* Restated
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DIRECTORS AND OFFICERS
Ruedi G. Laupper, Chairman of the Board of Directors, President and Chief
Executive Officer
Josef Laupper, Secretary-Treasurer and Director
Ueli Laupper, Vice President and Director
Michael Laupper, Interim Chief Financial Officer
Dr. Erwin Zimmerli, Director
Dr. Sc. Dov. Maor, Director
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MARKET INFORMATION
(a) Market Information. The Registrant's common stock was listed on the
NASDAQ SmallCap Market and traded under the symbol SRMI until October 26, 1998
delisting. Since January, 1999 the Registrant's common stock has been trading on
the Electronic Over-the-Counter Bulletin Board under the same symbol. See also
paragraph (d) below. The following table sets forth, for the periods indicated,
the range of high and low bid prices on the dates indicated for the Company's
securities indicated below for each full quarterly period within the two most
recent fiscal years (if applicable) and any subsequent interim period for which
financial statements are included and/or required to be included.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1997 Quarterly Common Stock Price
By Quarter Ranges (1)(2)
------------------------------------ ----------------------------
Quarter Date High Low
------- ---- ---- ---
<S> <C> <C>
1st September 30, 1996 $50.625 $36.875
2nd December 31, 1996 $40.00 $23.75
3rd March 31, 1997 $35.625 $16.875
4th June 30, 1997 $32.50 $14.063
Fiscal Year Ended June 30, 1998 Quarterly Common Stock Price
By Quarter Ranges (1)(2)
------------------------------------- ----------------------------
Quarter Date High Low
------- ---- ---- ---
1st September 30, 1997 $16.375 $15.625
2nd December 31, 1997 $12.50 $11.25
3rd March 31, 1998 $16.875 $7.50
4th June 30, 1998 $10.00 $5.00
Fiscal Year Ended June 30, 1999 Quarterly Common Stock Price
By Quarter Ranges (1)(2)
------------------------------- ----------------------------
Quarter Date High Low
------- ---- ---- ---
1st September 30, 1998 $5.625 $1.88
2nd December 31, 1998 $1.375 $0.875
3rd March 31, 1999 $1.25 $0.375
</TABLE>
(1) The Registrant's common stock, $.01 par value (the "Common Stock"),
began trading on the NASDAQ SmallCap market on March 20, 1996 with an
opening bid of $47.50. See also paragraph (d) below.
(2) All prices indicated herein above (and elsewhere throughout this Form
10-K unless otherwise indicated) take into account and retroactively
reflect a 1 for 10 reverse stock split effective October 1, 1998.
(b) Holders. As of June 10, 1999 there were 677 stockholders of the
Registrant's Common Stock with 12,006,216 shares being outstanding.
(c) Dividends. See "Dividends" hereinafter.
(d) Recent NASDAQ Delisting. On October 26, 1998 NASDAQ determined to
delist Registrant's securities from The NASDAQ Stock Market effective with the
close of business October 26, 1998. The advise (accompanying the delisting
letter) indicated in pertinent part that (a) the bid price of Registrant's
common stock had fallen below $1.00 per share on October 26, 1998 despite the
Registrant having demonstrated ".. a closing bid price in excess of $1.00 for a
period of 17 consecutive trading days" and (b) the Registrant's 15 day extension
within which to timely file its Form 10-K for fiscal year ended June 30, 1998
had expired October 15, 1998 and, accordingly, "the Registrant is now deficient
in filing its 10-K for the fiscal year ended June 30, 1998".
The NASDAQ Listing and Hearing Review Council ("Review Counsel") may,
on its own motion, determine to review any Panel decision within 45 calendar
days after issuance of a written decision and if the Review Counsel determines
to review a decision it may affirm, modify, reverse, dismiss, or remand the
3
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decision to the Panel. The Registrant may also request the Review Council to
review its decision and such request must be made within 15 days of the date of
this decision. The institution of a review, whether by way of any request, or on
the initiative of the Review Council, does not operate as a stay of NASDAQ's
October 26, 1998 delisting decision.
Registrant formally requested review of NASDAQ's decision in a timely
manner and such request was confirmed by NASDAQ on November 16, 1998 wherein
NASDAQ indicated that the Registrant had until January 15, 1999 for its
submission of any additional information it may deem pertinent for purposes of
Review Council's consideration. Registrant understands that the Review Panel is
prepared to and will consider any and all additional information supplied to it
by the Registrant that did not exist at the time of delisting and, accordingly,
the Registrant intends to provide certain new and significant information for
NASDAQ's consideration.
On April 1, 1999 the NASDAQ Listing and Hearing Review Council
("Council") issued a Decision whereby it reversed and remanded the decision of
NASDAQ Panel with instructions, having found that the Company was not provided
with adequate notice and opportunity to respond to all of the basis upon which
the Panel apparently determined to delist the Company's securities.
The Council's instructions directs NASDAQ staff and Panel to determine
whether the Company complies with all continued listing requirements for the
Nasdaq SmallCap Market and demonstrates the ability to maintain compliance with
these requirements in the long term. Such Council's decision directs the staff
to conclude its review and provide its findings to the Panel within 45 days from
April 1, 1999. The decision further states that "If, at the time of the staff's
review, the staff finds that the Company meets all of the requirements for
continued for continued listing on the Nasdaq SmallCap Market, demonstrates the
ability to maintain compliance with these requirements in the long term, and
there are no new adverse developments, the Panel should relist the Company on
the SmallCap Market. If however, the staff finds that the Company does not meet
all of the continued listing requirements for the long term, the Panel must
notify the Company of which requirement(s) it fails to satisfy." (providing the
Company with 15 days to respond).
As of June 18, 1999 the Company has not been advised of NASDAQ's
determination with respect to such matter.
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DIVIDENDS
The payment by the Company of dividends, if any, in the future rests
within the discretion of its Board of Directors and will depend, among other
things, upon the Company's earnings, its capital requirements and its financial
condition, as well as other relevant factors. The Company has not paid or
declared any dividends upon its Common Stock since its inception and, by reason
of its present financial status and its contemplated financial requirements,
does not contemplate or anticipate paying any dividends upon its Common Stock
in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The focus of the Company for the fiscal year ended June 30, 1998 was
mainly on the industrialization and commercialization of the newly developed
products Add-On-Multi-System and Bucky Diagnost TS and the building and
strengthening of its organization and distribution channels in the principal
markets USA and Europe. Before, the main focus was on the development of the
above mentioned products.
In the USA the Company acquired, in October 1997, substantially all of
the assets of Service Support Group LLC (SSG), a company active in the business
of selling diagnostic imaging equipment and providing services related thereto
in the markets on the West Coast of the United States and took over
approximately 30 employees to have, together with the digital x-ray division of
Empower, direct market presence in the highest populated regions of the US; the
Company's principal market for digital Radiography. The Company also started its
activities, in the US and later also in Europe, in the business of information
solutions by providing a comprehensive package of consulting, services and
products to enable the Healthcare providers to perform the transition into
filmless Radiology. Significant amounts of money were invested in the opening of
the market of the Company's direct digital Add-On-Multi-Systems, both in the US
and in Europe.
During the start-up of the production of the Company's newly developed
products, the Add-On-Multi-System and the Bucky Diagnost TS, gross margins were
affected negatively because of the need of extra time for training the newly
hired production staff and implementation of the production run as well as
efforts made to improve and maintain highest product quality. The Company
expects to lower costs and time needed for production of these systems in a
later stage of the learning curve due to positive impact of the optimized
production run. The sales of Add-On-Multi-System was slowed down by certain
governmental requirements for the sale of Healthcare products, which differ from
one country to the other. The Company filed for CE approval of the Add- on
Multi-system in July 1998 and expects that the necessary approvals should be
forthcoming.
5
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The Company started a restructuring process in the fourth quarter of
its fiscal year ended June 30, 1998 with the employment of Mr. E.A. Kalbermatter
as the Company's new Chief Operation Officer. Mr. Kalbermatter is an
internationally experienced manager with expertise in the areas of electronics
and telecommunications, who has also served as managing director of Private &
Business Communications of ASCOM Ltd., Berne, Switzerland being responsible for
the turn-over of more than 1 billion Swiss Francs, with approximately 4,800
employees worldwide. With the sale of Empower's Film, Processor and Chemistry
Business to E.M. Parker, the Company continued its focus on digital Radiography.
The process of restructuring is ongoing and includes mainly internal
reorganization to achieve lean structures and cost savings.
RESULTS OF OPERATION
Net sales for the fiscal year ended June 30, 1998 were $22,892,978
compared to $13,151,701 and $10,899,222 for the fiscal years ended June 30, 1997
and June 30, 1996 respectively.
The 74% increase in net sales was partially due to the acquisition of
Empower on April 1, 1997 (Sales of Empower were $7,134,928 for the fiscal year
ended June 30, 1998 compared to $2,000,603 for the fiscal year ended June 30,
1997), the Asset purchase of Service Support Group LLC on October 17, 1997
(Sales of Swissray Medical Inc. which started its selling activities after the
asset purchase of Service Support Group was $1,577,298 for the fiscal year ended
June 30, 1998 compared to $0 for the fiscal year ended June 30, 1997) and the
increase in sales made under the Philips OEM Agreement of $6,500,529. Also sales
to third parties in Switzerland almost doubled in the fiscal year ended June 30,
1998 compared with the previous fiscal year. These increases have been partially
offset by the decrease of $1,519,159 in Sale of Elscint products and decreased
sales for Eastern Europe. The Company sold four of the Add-on-Multi-System
during the fiscal year ended June 30, 1998.
Gross profits amounted to $4,811,192 or 21% of net sales for the fiscal
year ended June 30, 1998, compared to $4,706,287 or 35.8% of net sales for the
fiscal year ended June 30, 1997 and $5,105,916 or 46.9% of net sales for the
fiscal year ended June 30, 1996.
The decrease in gross profits as a percentage of net revenues is
primarily attributable to the fact that sales of lower-margin products increased
substantially compared to the fiscal years ended June 30, 1997 and June 30, 1996
respectively. This is mainly attributable to increased sales of accessories,
which are generally low-margin products, as a result of the acquisition of
Empower (net sales of Empower contributed approximately 31% to the Company's net
sales). The Company also sold a significant number of units of newly developed
products, where the Company is at the beginning of the learning curve in the
production process, which results in higher production costs than in a later
stage of the learning curve. These products are the Bucky Diagnost TS produced
under the OEM Agreement with Philips (which contributed approximately 22% to the
Company's net sales) and the Add-on Multisystem (which contributed approximately
6% to the Company's net sales). The Company expects sales of accessories to be
of a smaller percentage of total sales for the fiscal year ending June 30, 1999
because of the sale of Empower's accessory business to E.M. Parker.
Operating expenses for the fiscal year ended June 30, 1998 were
$18,747,729 or 81.9% of net sales compared to $17,450,333 or 132.7% of net sales
for the fiscal year ended June 30, 1997 and compared to $14,966,147 or 137.3% of
net sales for the fiscal year ended June 30, 1996. The principal items were
selling expenses of $3,740,391 or 16.3% of net sales compared to $1,873,389 or
14.2% of net sales for the fiscal year ended June 30, 1997 and compared to
$1,140,604 or 10.5% of net sales for the fiscal year ended June 30, 1996 and
salaries (net of directors and officers compensation) of $4,168,540 or 18.2% of
net sales compared to $2,059,396 or 15.6% of net sales for the fiscal year ended
June 30, 1997 and compared to $1,829,535 or 16.8% of net sales for the fiscal
year ended June 30, 1996. Research and Development was $3,542,149 or 15.5% of
net sales compared to $5,786,158 or 44% of net sales for the fiscal year ended
June 30, 1997 and compared to $1,731,502 or 15.9% of net sales for the fiscal
year ended June 30, 1996.
6
<PAGE>
General and administrative expenses for the years ended June 30, 1997
and 1996 include value of stock options granted in the amount of $1,161,462 and
$6,374,468, respectively, whereas no stock options were granted during the
fiscal year ended June 30, 1998. The Company made an accrual of $500,000 for
planned restructuring of its organization. No such costs were accrued in the
fiscal years ended June 30, 1997 and June 30, 1996.
The increase of 102% in Salaries was mainly due to the acquisition of
Empower Inc. on April 1, 1997 (with salaries included in the consolidated
statement of operation only for one quarter of the fiscal year ended June 30,
1997) and the takeover of all of the employees of Service Support Group on
October 17, 1997. Both acquisitions where within the Company's marketing
strategy to build a strong market position with its own organization in one of
its principle markets. The number of employees in Switzerland was increased by
21 mainly to handle the significant rise in production volume.
The increase of 100% in selling expenses is the result of additional
significant efforts on the part of the Company to build a strong market position
in the United States and in Germany, the biggest European market as well as the
costs incurred for successful market introduction of the Company's direct
digital Add-on-Multi-System. The Company also made efforts to lay the groundwork
for the market introduction of Swissray Information Solutions comprehensive
package of consulting, services and products.
Research and development expenses decreased by 39%. Management
considered the relative size of the research and development expenses for the
fiscal year ended June 30, 1997 as high. The main focus of the R&D was the
industrialization phase of the Add-on-Multi-System and the development of
communication interfaces (DICOM 3.0, HL 7, Dicom Worklist etc.) to extend the
connectivity of the Add-on-Multi-System to communication networks such as HIS,
RIS, and PACS. Another important task was to finalize the Tahoma TMSSM software
and go into beta-tests. The Tahoma TMSSM, technology management systems are
based on the premise that technology is a resource that can be managed to
achieve organizational objectives, like reducing operating expense and improving
clinical performance. Additional research and development expenses have also
been incurred to maintain the technological advantages of the Company's
conventional X-ray equipment. Significant research and development expenses will
continue to be incurred for the development of new technologically advanced
products and the continuing improvement of existing products
The Company's operating loss increased to $13,936,537 for the fiscal
year ended June 30, 1998 from $12,744,046 for the fiscal year ended June 30,
1997 and $9,860,231 for the fiscal year ended June 30, 1996. The increase in the
Company's operating loss is due to the significant expenses associated with the
building of the Company's organization and market position primarily in one of
its principle markets, the USA. After taking into account Interest expenses,
other income, income tax benefits and extraordinary items of income (loss) the
resulting net loss of the Company for the fiscal year ended June 30, 1998
increased to $22,503,109 from $13,685,188 for the fiscal year ended June 30,
1997 and $8,266,080 for the fiscal year ended June 30, 1996. The increase of net
loss is mainly due to the significant amount of interest expenses which resulted
from the amortization of issuance cost and beneficial Conversion features of
Convertible debentures issued for financing purposes, which amounted to
$8,590,268 for the fiscal year ended June 30, 1998 compared to $759,853 for the
fiscal year ended June 30, 1997 and $193,930 for the fiscal year ended June 30,
1996. Extraordinary income include the Gain on early extinguishment of Debt
which resulted from refinancing of Convertible debentures.
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FINANCIAL CONDITION
Total assets of the Company on June 30, 1998 increased by $1,126,363 to
$25,914,597 from $24,788,234 on June 30, 1997, as the net effect of an increase
in inventory and goodwill and a decrease of cash and accounts receivables.
Current Assets decreased $1,024,089 to $13,069,257 on June 30, 1998 from
$14,093,346 on June 30, 1997. The decrease in current assets is primarily
attributable to the decrease of cash and accounts receivables and the increase
in inventory due to the delay in selling the Add-On-Multisystem for which a
minimum quantity (lot size) of parts had to be purchased to reach the goals for
costs and quality. Property and Equipment increased due to the extension and
expansion of the production plant in Hochdorf, Switzerland. Other Assets
increased $476,691 to $6,834,962 on June 30, 1998 from $6,358,271 on June 30,
1997. The increase in other assets was primarily due to an increase in
intangible assets.
On June 30, 1998, the Company had total liabilities of $19,755,870
compared to $17,095,046 on June 30, 1997. On June 30, 1998, current liabilities
were $11,984,554 compared to $11,259,798 on June 30, 1997. The increase in
current liabilities is primarily due to the increase in accrued expenses. On
June 30, 1998, the Company also had $7,330,642 (net of discounts) principal
amount of convertible debentures. Such debentures bear interest between 6% and
8% per annum and are repayable at maturity in Common Stock of the Registrant.
As of June 30, 1998, all of such convertible debentures could be converted into
Common Stock of the Registrant at a price equal to 80% of the average Closing
price during the ten trading days preceding the date of Conversion, except
$145,969 principal amount of debentures with a maturity date of December 1999,
which could be converted at a price equal to 85% of the average Closing price
during the five trading days preceding the date of Conversion. Such debentures
may have a dilutive effect on the investment of stockholders of the Registrant
upon Conversion or payment of the principal at maturity, but no funds of the
Company are expected to be used for their repayment. At June 30, 1998,long-term
debt net of the current portion thereof was $440,674 compared to $524,689 at
June 30, 1997. The decrease of long-term debt is due to a partial repayment.
Working capital at June 30, 1998 was $1,084,703 compared to $2,833,548 at June
30, 1997.
CASH FLOW AND CAPITAL EXPENDITURES
Cash used by operating activities for the fiscal year ended June 30,
1998 increased to $11,759,371 from $10,684,988 for the fiscal year ended June
30,1997 and $3,658,665 for the fiscal year ended June 30, 1996 and cash used by
investing activities increased to $4,517,140 for the fiscal year ended June 30,
1998 from $3,668,196 for the fiscal year ended June 30, 1997 compared to
$1,171,120 for the fiscal year ended June 30, 1996. Cash flow from financing
activities for the fiscal year ended June 30, 1998 was $14,799,200 compared to
$14,752,928 for the fiscal year ended June 30, 1997 and $5,788,694 for the
fiscal year ended June 30, 1996.
The Company's capital expenditures totaled $2,849,205 for the fiscal
year ended June 30, 1998 compared to $3,431,375 for the fiscal year ended June
30, 1997 and $932,066 for the fiscal year ended June 30, 1996. Capital
expenditures were primarily for the improvements of the Hochdorf facility and
the purchase of equipment. The increased financing needs resulted primarily from
the building and strengthening of the Company's organization and distribution
channels in the US and Europe and the improvements of the Hochdorf facility.
9
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The Company financed its liquidity needs during the fiscal year ended
June 30, 1998 primarily through the issuance of $16,190,000 principal amount of
convertible debentures. 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. However, the availability of a
sufficient future cash flow will depend to a significant extent on the
marketability of the Company's Add-on-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 U.S. 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 U.S. dollars can vary significantly as a result of
changes in currency exchange rates (in particular the exchange rate between the
Swiss Franc and the U.S. dollar). For the fiscal year ended June 30, 1998 the
Swiss Franc depreciated by approximately 9% against the US dollar compared to
the rate in effect during the fiscal year ended June 30, 1997. If such exchange
rate had remained in effect, the Company's net sales and net loss would have
been higher by approximately $1,241,942 and $657,457, respectively. For the
fiscal year ended June 30, 1997 the Swiss Franc depreciated by approximately 11%
against the US dollar compared to the rate in effect during the fiscal year
ended June 30, 1996. If such exchange rate had remained in effect, the Company's
net sales and net loss would have been higher by approximately $2,788,209 and
$2,335,548, respectively.
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TAXES
The Company is subject to taxation in many jurisdictions throughout the
world. The Company's effective tax rate and tax liability is affected by a
number of factors, such as the amount of taxable income in particular
jurisdictions, the tax rates in such jurisdictions, tax treaties between
jurisdictions, the extent to which the Company transfers funds between
jurisdictions and income is repatriated, and future changes in law. Generally,
the tax liability for each legal entity is determined either (i) on a non-
consolidated basis or (ii) on a consolidated basis only with other entities
incorporated in the same jurisdiction, in either case without regard to the
taxable losses of non-consolidated affiliated entities. As a result, the Company
may pay income taxes in certain jurisdictions even though the Company on an
overall basis incurs a net loss for the period.
ENVIRONMENTAL MATTERS
The Company is subject to various environmental laws and regulations in
the jurisdictions in which it operates. The Company, like many of its
competitors, has incurred, and will continue to incur, capital and operating
expenditures and other costs in complying with such laws and regulations. The
Company does not currently anticipate any material capital expenditures for
environmental control technology. Some risk of environmental liability is
inherent in the Company's business, and there can be no assurance that material
environmental costs will not arise in the future. However, the Company does not
anticipate any material adverse effect on its results of operations or financial
condition as a result of future costs of environmental compliance. See also Part
1, Item 1 -"Business-Environmental Matters."
INFLATION
Inflation can affect the costs of goods and services used by the
Company. The competitive environment in which the Company operates limits
somewhat the Company's ability to recover higher costs through increasing
selling prices. Moreover, there may be differences in inflation rates between
countries in which the Company incurs the major portion of its costs and other
countries in which the Company sells its products, which may limit the Company's
ability to recover increased costs, if not offset by future increase of selling
prices. To date, the Company's sales to high-inflation countries have either
been made in Swiss Francs or US dollars. Accordingly, inflationary conditions
have not had a material effect on the Company's operating results.
SEASONALITY
The Company's business has historically experienced a slight amount of
seasonal variation with sales in the first fiscal quarter slightly lower than
sales in the other fiscal quarters due to the fact that the Company's first
quarter coincides with the summer vacations in certain of the Company's markets.
BACKLOG
Management estimates that as of the end of the fiscal year ended June
30, 1998, the Company had an order backlog of $13,000,000.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
On occasion, the Company enters into currency forward contracts as a
hedge against anticipated foreign currency exposures and not for speculative
purposes. Such contracts, which are types of financial derivatives, limit the
Company's exposure to both favorable and unfavorable currency fluctuations. In
the past, the Company has used forward contracts exclusively in connection with
the purchase of material in currencies other than Swiss Francs or US dollars. In
the event of a default of the supplier under the purchase contract with respect
to which a forward contract has been concluded combined with an adverse currency
fluctuation, the Company may be exposed to a loss under the respective forward
contract. However, the Company believes that any such loss, should it occur,
would not have a material adverse effect on the results of the Company.
11
<PAGE>
SWIAARAY INTERNATIONAL, INC.
AND SUBSIDIARIES
__________________________
REPORT ON AUDIT
OF
CONSOLIDATED FINANCIAL STATEMENTS
__________________________
For the years ended June 30, 1998 and 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Swissray International, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Swissray
International, Inc. and subsidiaries as of June 30, 1998 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Swissray International, Inc.
and subsidiaries as of June 30, 1998, and the results of its operations, changes
in stockholders' equity and cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
-------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
November 20, 1998
<PAGE>
(LETTERHEAD OF BEDERSON & COMPANY LLP)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Swissray International, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Swissray
International, Inc., and its subsidiaries, as of June 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Swissray (Deutschland) Rontgentechnik
GmbH, a wholly-owned subsidiary, which statements reflect total assets of
$437,021 as of June 30, 1997 and total revenues of $1,255,140 for the year
ended. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it related to the amounts included
for Swissray (Deutschland) Rontgentechnick GmbH, is based solely on the report
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Swissray International, Inc. and
its subsidiaries, at June 30, 1997 and 1996 and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ BEDERSON & COMPANY LLP
-------------------------------------
Bederson & Company llp
West Orange, New Jersey
September 16, 1997
Except for Notes 17, 20 and 22, as of March 6, 1998,
and Note 1, 16, 23, 25, 26, 27, 29, 30, 31 and 32,
as of November 16, 1998
Member of TAG International with offices in principal cities worldwide
Affiliated with the American Institute of CPAs Division for Firms.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Swissray (Deutschland) Rontgentechnick Gmbh
Wiesbaden, Germany
We have audited the balance sheet of Swissray (Deutschland) Rontgentechnick
Gmbh as of June 30, 1997 and the related statements of income and stockholders'
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted our audit in accordance to all laws governed by German
regulations and with generally accepted auditing standards promulgated by the
American Institute of Certified public accountants. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Swissray (Deutschland)
Rontgentechnick Gmbh as of June 30, 1997, and the results of its operations for
the year then ended.
/s/ THEO LEPPER
-------------------------------------
Theo Lepper
Certified Public Accountant
Wiesbaden, Germany
August 8, 1997
<PAGE>
<TABLE>
<CAPTION>
SWISSRAY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 and 1997
ASSETS
1998 1997
----------------------------
(Restated)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,281,552 $ 3,091,307
Accounts receivable, net of allowance for doubtful
accounts of $ 32,356 and $ 148,390 2,584,651 5,154,794
Inventories 7,701,145 3,911,107
Prepaid expenses and sundry receivables 1,501,909 1,936,138
----------------------------
TOTAL CURRENT ASSETS 13,069,257 14,093,346
----------------------------
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation
of $ 581,077 and $ 320,110 6,010,378 4,336,617
----------------------------
OTHER ASSETS
Due from stockholders - 69,587
Loan receivable 20,005 17,396
Accounts receivable - long-term, net of allowance of
$ 891,409 and $ 814,178 for doubtful account - 240,912
Licensing agreement, net of accumulated amortization of
$ 1,365,809 and $ 869,151 3,600,766 4,097,424
Patents and trademarks, net of accumulated
amortization of $ 82,716 and $ 54,941 230,614 206,003
Software development costs, net of accumulated
amortization of $ 121,892 and $ 34,512 455,318 317,524
Organization cost, net of accumulated amortization of
$ 8,385 and $ 2,464 - 5,921
Security deposits 38,280 43,728
Note receivable - long-term, net of allowance of $ 30,733 and $ -0- 513,643 513,643
Goodwill, net of accumulated amortization of $ 136,939 and $ 9,023 1,796,336 410,814
Debt issuance costs on convertible debentures, net of accumulated
amortization of $ 60,000 and $ 200,566 180,000 435,319
----------------------------
TOTAL OTHER ASSETS 6,834,962 6,358,271
----------------------------
TOTAL ASSETS $25,914,597 $24,788,234
============================
</TABLE>
F 1
The accompanying notes are an integral part of these financial statements
<PAGE>
SWISSRAY INTERNATIONAL
CONSOLIDATED BALANCE SHEET (Continued)
JUNE 30, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 233,746 $ 243,135
Notes payable - banks 3,551,091 3,834,706
Loan payable 125,029 133,008
Accounts payable 5,030,449 5,336,749
Accrued expenses 2,365,450 1,401,938
Restructuring 500,000 -
Customer deposits 176,583 170,436
Due to stockholders and officers 2,206 139,826
----------------------------
TOTAL CURRENT LIABILITIES 11,984,554 11,259,798
----------------------------
CONVERTIBLE DEBENTURES 7,645,969 6,000,000
Conversion Benefit (315,327) (689,441)
----------------------------
Net Convertible Debentures 7,330,642 5,310,559
----------------------------
LONG-TERM DEBT, less current maturities 440,674 524,689
COMMON STOCK SUBJECT TO PUT 1,819,985 320,000
STOCKHOLDERS' EQUITY
Common stock 41,426 19,694
Additional paid-in capital 58,074,793 35,957,659
Common stock to be issued to officer
(48,259 shares in 1997) - 1,122,973
Accumulated deficit (50,481,713) (27,978,604)
Accumulated other comprehensive loss (1,475,779) (1,428,534)
Common stock subject to put (1,819,985) (320,000)
----------------------------
TOTAL STOCKHOLDERS' EQUITY 4,338,742 7,373,188
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,914,597 $ 24,788,234
============================
</TABLE>
F 2
The accompanying notes are an integral part of these financial statements
<PAGE>
SWISSRAY INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
(Restated) (Restated)
----------------------------------------------
<S> <C> <C> <C>
NET SALES $ 22,892,978 $ 13,151,701 $ 10,899,222
COST OF SALES 18,081,786 8,445,414 5,793,306
----------------------------------------------
GROSS PROFIT 4,811,192 4,706,287 5,105,916
----------------------------------------------
OPERATING EXPENSES
Officers and directors compensation 569,816 1,816,879 612,776
Salaries 4,168,540 2,059,396 1,829,535
Selling 3,740,391 1,873,389 1,140,604
Research and development 3,542,149 5,786,158 1,731,502
General and administrative 2,612,262 2,879,257 7,535,759
Restructuring cost 500,000 - -
Other operating expenses 1,735,877 1,645,800 1,098,346
Bad debts 133,196 619,160 491,487
Depreciation and amortization 1,745,498 770,294 526,138
----------------------------------------------
TOTAL OPERATING EXPENSES 18,747,729 17,450,333 14,966,147
----------------------------------------------
LOSS BEFORE OTHER INCOME (EXPENSES)
AND INCOME TAXES (13,936,537) (12,744,046) (9,860,231)
Other income (expenses) (281,227) 318,763 1,003,933
Interest expense (8,590,268) (762,168) (193,930)
----------------------------------------------
OTHER INCOME (EXPENSES) (8,871,495) (443,405) 810,003
----------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (22,808,032) (13,187,451) (9,050,228)
INCOME TAX PROVISION (BENEFIT) - 110,223 (364,648)
----------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEMS (22,808,032) (13,297,674) (8,685,580)
Extraordinary income (expenses) net of
taxes 304,923 (387,514) 419,500
----------------------------------------------
NET LOSS $(22,503,109) $(13,685,188) $ (8,266,080)
==============================================
LOSS PER COMMON SHARE BASIC
Loss from continuing operations (8.48) (8.41) (6.69)
Extraordinary items 0.11 (0.24) 0.32
----------------------------------------------
NET LOSS (8.37) (8.65) (6.37)
==============================================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,690,695 1,581,757 1,297,475
==============================================
</TABLE>
F 3
The accompanying notes are an integral part of these financial statements
<PAGE>
SWISSRAY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
(Restated) (Restated)
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(22,503,109) $(13,685,188) $ (8,266,080)
Adjustment to reconcile net loss to net
cash used by operating activities
Depreciation and amortization 1,874,206 770,294 526,138
Provision for bad debts (38,803) 552,725 336,706
Write-off of affiliate receivable - 166,384 -
Interest expense on Debt issuance cost and
conversion benefit 7,905,225 511,125 -
Operating expenses through issuance of stock
options and common stock to be issued 449,376 2,442,385 6,374,468
Early extinguishment of Debt (gain) (304,923) - -
Gain on Sale of marketable securities - - (762,500)
(Increase) decrease in operating assets:
Accounts receivable 2,887,427 (1,857,662) (1,870,866)
Accounts receivable - affiliates - 31,533 (31,533)
Accounts receivable - long-term 163,680 283,603 22,138
Inventories (3,790,038) (998,271) (1,420,393)
Prepaid expenses and sundry receivables 434,229 (860,457) (976,664)
Increase (decrease) in operating liabilities:
Accounts payable (306,300) 1,601,074 1,514,465
Accounts payable-affiliates - (1,541) 1,541
Accrued expenses 1,463,512 266,245 855,041
Customers deposits 6,147 92,763 38,874
----------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (11,759,371) (10,684,988) (3,658,665)
----------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of property and equipmen (2,849,205) (3,431,375) (932,066)
Capitalized Computer Software (225,174) (352,036) -
Purchase of marketable securities - - (200,000)
Patents and trademarks (52,386) (12,925) (45,309)
Goodwill (802,107) (299,837) -
Organization costs - - (8,385)
Asset Purchase net of cash received (591,108) - -
Collection of note receivable - 448,857 -
Security deposits 5,448 (23,776) (19,952)
(Repayment of) loan receivable (2,608) 2,896 -
Repayments from (advances to) affiliates - - 34,592
----------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (4,517,140) (3,668,196) (1,171,120)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 10,342,060 9,198,821 2,069,828
Proceeds from long-term borrowings - 248,987 -
Principal payment of short-term borrowings (3,852,075) (2,093,074) (2,711,086)
Principal payment of long-term borrowings (21,748) (442,681) (281,004)
Principal payment of long-term borrowings with stock (62,267) - -
Issuance of common stock for cash 8,461,262 7,753,222 7,250,000
Repayment from (payment to) stockholders and officers (68,032) 87,653 141,054
Public offering expenses - - (680,098)
----------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 14,799,200 14,752,928 5,788,694
----------------------------------------------
EFFECT OF EXCHANGE RATE ON CASH (332,444) (561,122) (383,050)
----------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,809,755) (161,378) 575,859
CASH AND CASH EQUIVALENT - beginning of period 3,091,307 3,252,685 2,676,826
----------------------------------------------
CASH AND CASH EQUIVALENTS - end of period $ 1,281,552 $ 3,091,307 $ 3,252,685
==============================================
</TABLE>
F 4
The accompanying notes are an integral part of these financial statements
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the years ended June 30, 1998, 1997 and 1996,
include interest of $161,093, 122,427 and $193,930, respectively. Cash payments
for the years ended June 30, 1997 and June 30, 1996 included income taxes of
$56,562 and $-0-, respectively. No income taxes had to be paid in the fiscal
year ended June 30, 1998
NON-CASH OPERATING ACTIVITIES
In April of 1997, the Company issued options to an officer under
the 1996 non-statutory stock option plan. The excess of the then quoted market
price over the option price has been recorded as additional compensation
amounting to $25,000.
For the years ended June 30, 1997 and 1996, the Company issued
options to various individuals and companies for services rendered under the
1996 non-qualified stock option plan. The excess of the fair value over the
option price has been charged to operations in the amounts of $1,161,462 and
$6,374,468, for the years ended June 30, 1997 and 1996, respectively. No options
have been issued during the fiscal year ended June 30, 1998.
For the years ended June 30, 1998 and June 30, 1997, the Company
issued 60,999 shares of common stock in the amount of $449,376 in lieu of
interest payments due on convertible debentures and 7,061 shares of common stock
in the amount of $132,950 in lieu of interest payments due on convertible
debentures respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES
For the year ended June 30, 1996 the Company received a note
receivable for $962,500 from the sale of marketable securities. No cash was
received.
On April 1, 1997, the Company acquired a subsidiary through the
issuance of 8,000 shares of common stock at the then quoted market price of
$120,000 ($15 per share). This transaction was accounted for as a purchase.
On May 15, 1997 and June 13, 1997, the Company issued convertible
debentures which were convertible into common shares at a price equal to eighty
(80%) of the average closing bid price for the five (5) trading days preceding
the date of the conversion. A beneficial conversion feature of $1,000,000 was
charged to additional paid-in capital and is being amortized over the period
from the date of issuance to the first available conversion date of the
respective debenture.
During 1997, pursuant to agreements with an officer of the Company,
dated December 1996 and June 1997 (as described in Note 16), the Company was
required to issue 48,259 shares of common stock with a fair value of $1,122,973
in lieu of cash compensation.
On July 31, 1997, the Company issued convertible debentures in
exchange for $4,262,500 (including interest of $262,500) of 6% convertible
debentures dated May 15, 1997 and June 13, 1997. The Company did not receive any
cash proceeds from this transaction. The debentures, due July 31, 2000, are
convertible into common shares at a price equal to eighty (80%) of the average
closing bid price for the five (5) trading days preceding the date of
conversion.
On August 19, 1997, the Company issued $5,000,000 of 6% convertible
Debentures which were convertible into common shares at a price equal to
eighty (80%) of the average closing bid price for the five (5) trading days
preceding the date of conversion. A beneficial conversion feature of $1,250,000
was charged to additional paid-in capital and is being amortized over the
period from the date of issuance to the first available conversion date of the
respective debenture.
<PAGE>
On October 17, 1997, the Company acquired substantially all of the
assets of Service Support Group LLC ("SSG") located in Gig Harbor, Washington,
in exchange for the payment of approximately $621,892 in cash and issuance of
33,333 shares of its Common.
Between November 26, 1997 and December 11, 1997, the Company issued
$2,158,285 of convertible debentures including a 15% premium and accrued
interest, convertible into Common shares at a price equal to 75% of the average
closing bid price for the five (5) trading days preceding the date of
conversion. The registrant did not receive any cash proceeds from the offering
of the Convertible Debentures. An amount of $2,158,285 was paid by investors to
holders of the Company's Convertible Debentures issued on August 19,1997 holding
$1,850,000 of such Convertible Debentures as repayment in full of the Company's
obligations under such Convertible Debentures. During the same period the
Company issued $3,690,000 aggregate principal amount of convertible debentures,
convertible into Common shares at a price equal to 75% of the average closing
bid price for the five (5) trading days preceding the date of conversion A
beneficial conversion feature of $1,949,426 was charged to additional paid-in
capital and is being amortized over the period from the date of issuance to the
first available conversion date of the respective debenture.
On March 16, 1998, the Company issued $5,500,000 convertible
debentures convertible into Common shares at a price equal to 80% of the average
closing bid price for the ten (10) trading days preceding the date of
conversion. A beneficial conversion feature of $875,500 was charged to
additional paid-in capital and is being amortized over the period from the date
of issuance to the first available conversion date of the respective debenture.
On June 15, 1998, the Company issued $2,000,000 convertible
debentures convertible into Common shares at a price equal to 80% of the average
closing bid price for the ten (10) trading days preceding the date of
conversion. A beneficial conversion feature of $420,436 was charged to
additional paid-in capital and is being amortized over the period from the date
of issuance to the first available conversion date of the respective debenture.
F-6
<PAGE>
SWISSRAY INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional Stock
Paid-in to be
Common Stock Capital issued
Shares Amount (Restated) (Restated)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - July, 1, 1995 1,203,506 $ 12,035 $ 12,828,314 $ -
COMPREHENSIVE LOSS:
Net loss of the year - - - -
Foreign currency translation losses net of taxes $ -0- - - - -
TOTAL COMPREHENSIVE LOSS - - - -
Issuance of common stock for cash 110,000 1,100 5,198,900 -
Stock options exercised for cash 105,000 1,050 2,048,950 -
Stock options granted for services 6,374,468 - - -
Public offering expenses (680,098) - - -
--------------------------------------------------------------
BALANCE - June 30, 1996 1,418,506 14,185 25,770,534 -
COMPREHENSIVE LOSS:
Net loss of the year - - - -
Foreign currency translation losses net of taxes $ -0- - - - -
TOTAL COMPREHENSIVE LOSS - - - -
Issuance of common stock for cash 519,776 5,197 7,630,495 -
Stock options exercised for cash 16,100 161 117,369 -
Issuance of common stock in lieu of interest payment 7,061 71 132,879 -
Beneficial conversion feature of convertible debentures - - 1,000,000 -
Stock options granted as compensation - - 25,000 -
Stock options granted for services - - 1,161,462 -
Shares to be issued to officers for services - - - 1,122,973
Purchase of subsidiary for stock 8,000 80 119,920 -
Common stock subject to put - - - -
- --------------------------------------------------------------
BALANCE - JUNE 30, 1997 1,969,443 19,694 35,957,659 1,122,973
COMPREHENSIVE LOSS:
Net loss of the year - - - -
Foreign currency translation losses net of taxes $ -0- - - - -
TOTAL COMPREHENSIVE LOSS - - - -
Issuance of common stock for cash 2,013,688 20,137 13,581,739 -
Stock options exercised for cash 16,900 169 123,201 -
Shares issued to officers for services 48,259 483 1,122,490 (1,122,973)
Issuance of common stock in lieu of interest payment 60,999 610 448,766 -
Beneficial conversion feature of convertible debentures - - 5,738,149 -
Early extinguishment of Debt - - (396,875) -
Issuance of common stock for asset purchase 33,333 333 1,499,664 -
Common Stock subject to put - - - -
--------------------------------------------------------------
BALANCE - JUNE 30, 1998 4,142,622 $ 41,426 $ 58,074,793 $ -
==============================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated Other
Deficit Comprehensive Common Stock Total
(Restated) Loss Subject to Put (Restated)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - July, 1, 1995 $ (6,027,336) $ (436,180) $ - $ 6,376,833
COMPREHENSIVE LOSS:
Net loss of the year (8,266,080) - - (8,266,080)
Foreign currency transaction losses net of taxes $ -0- - (399,867) - (399,867)
TOTAL COMPREHENSIVE LOSS - - - (8,665,947)
Issuance of common stock for cash - - - 5,200,000
Stock options exercised for cash - - - 2,050,000
Stock options granted for services - - - 6,374,468
Public offering expenses - - - (680,098)
---------------------------------------------------------------
BALANCE - June 30, 1996 (14,293,416) (836,047) - 10,655,256
COMPREHENSIVE LOSS:
Net loss of the year (13,685,188) - - (13,685,188)
Foreign currency transaction losses net of taxes $ -0- - (592,487) - (592,487)
TOTAL COMPREHENSIVE LOSS - - - (14,277,675)
Issuance of common stock for cash - - - 7,635,692
Stock options exercised for cash - - - 117,530
Issuance of common stock in lieu of interest payment - - - 132,950
Beneficial conversion feature of convertible debentures - - - 1,000,000
Stock options granted as compensation - - - 25,000
Stock options granted for services - - - 1,161,462
Shares to be issued to officers for services - - - 1,122,973
Purchase of subsidiary for stock - - - 120,000
Common Stock subject to put - - (320,000) (320,000)
---------------------------------------------------------------
BALANCE - JUNE 30, 1997 (27,978,604) (1,428,534) (320,000) 7,373,188
COMPREHENSIVE LOSS:
Net loss of the year (22,503,109) - - (22,503,109)
Foreign currency transaction losses net of taxes $ -0- - (47,245) - (47,245)
TOTAL COMPREHENSIVE LOSS - - - (22,550,354)
Issuance of common stock for cash - - - 13,601,876
Stock options exercised for cash - - - 123,370
Shares issued to officers for services - - - -
Issuance of common stock in lieu of interest payment - - - 449,376
Beneficial conversion feature of convertible debentures - - - 5,738,149
Early extinguishment of Debt - - - (396,875)
Issuance of common stock for asset purchase - - - 1,499,997
Common Stock subject to put - - (1,499,983) (1,819,985)
---------------------------------------------------------------
BALANCE - JUNE 30, 1998 $(50,481,713) $(1,475,779) $ (1,819,985) $ 4,338,742
================================================================
</TABLE>
F 7
The accompanying notes are an integral part of these financial statements
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Company was incorporated under the laws of the State of New York on January
2, 1968 under the name CGS Units Incorporated. On June 6, 1994, the Company
merged with Direct Marketing Services, Inc. and changed its name to DMS
Industries, Inc. In May of 1995 the Company discontinued the operations then
being conducted by DMS Industries, Inc. and acquired all of the outstanding
securities of SR Medical AG, a Swiss corporation engaged in the business of
manufacturing and selling X-ray equipment, components and accessories. On June
5, 1995 the Company changed its name to Swissray International, Inc. The
Company's operations are being conducted principally through its wholly owned
subsidiaries, SR Medical Holding AG (known as SR Medical AG until renamed in
February 1998), the latter's wholly owned subsidiaries, SR Medical AG (known as
Teleray AG until renamed in February 1998), a Swiss corporation, Swissray
(Deutschland) Roentgentechnik GmbH (formerly known as SR Medical GmbH), a German
limited liability company and Teleray Research and Development AG (a Swiss
corporation), as well as through the Company's other wholly owned subsidiaries,
SR Management AG (formerly SR Finance AG), a Swiss corporation, Swissray Medical
Systems, Inc. (formerly Swissray Corporation), a Delaware corporation, Swissray
Healthcare, Inc., a Delaware corporation, and Swissray Information Solutions,
Inc., a Delaware corporation and Empower, Inc. (whose assets were substantially
sold in June 1998), a New York Corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Investments which are recorded on an equity
method and have operated at a loss in excess of equity are carried at a zero
value. See Note 9 Investments
BUSINESS ACQUISITION
On April 1, 1997, Swissray International, Inc. exchanged 8,000 shares of common
stock at the then quoted market price of $120,000 ($15 per share) for all the
outstanding shares of Empower, Inc. The consolidated financial statements
presented include the accounts of Empower, Inc.(whose assets were substantially
sold in June 1998), from April 1, 1997 (date of acquisition) to June 30, 1998.
The acquisition has been accounted under the purchase accounting method. The
contract requires the Company to repurchase the 8,000 shares of common stock at
$40 per share for a period of one year commencing two years from the date of the
contract at the option of the former owner of Empower, Inc. On October 17, 1997,
the Company acquired substantially all of the assets and assumed certain
liabilities of Service Support Group, LLC (SSG) located in Gig Harbor,
Washington pursuant to an asset purchase agreement. The acquisition has been
accounted under the purchase accounting method. SSG is in the business of
selling diagnostic imaging equipment and related services in markets on the West
Coast of the United States. The purchase price consisted of (1) cash in the
amount of $621,892, (2) 33,333 shares of the Company's common stock, (3) an
amount equal to fifty percent of certain accounts receivable net of certain
accounts payable and (4) the assumptions of certain other liabilities. As a
result of these transactions, the Company recorded goodwill of $1,933,275. The
contract requires the Company to repurchase the 33,333 common shares at $45 per
share during the period June 30, 1998 to April 17, 1999 at the option of the
former owners of SSG.
REVENUE AND INCOME RECOGNITION POLICIES
The Company maintains its records on the accrual basis of accounting. Revenues
from the sale of products is recorded when the products are shipped, collection
of the purchase price is probable and the Company has no significant further
obligations to the customer. Cost of remaining insignificant company
obligations, if any, are accrued as costs of revenue at the time of revenue
recognition.
F-9
<PAGE>
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles require management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during this period. Actual results
could differ from those estimates.
WARRANTY
The company accrues a warranty allowance at the time of sale. The warranty
allowance is based upon the companies experience and varies between 0.5 and 2%
of the net sales amount.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107 "Disclosures about Fair Value
of Financial Instruments" (SFAS 107) requires the disclosure of fair value
information about financial instruments whether or not recognized on the balance
sheet, for which it is practicable to estimate the value. Where quoted market
prices are not readily available, fair values are based on quoted market prices
of comparable instruments. The carrying amount of cash and equivalents, accounts
receivable and accounts payable approximates fair value because of the short
maturity of those instruments.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on the first-in, first-out (FIFO) method. Inventory costs include
material, labor, and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which are three years for Computers and Telecommunication Equipment, five to ten
years for Equipment, Office furniture and Equipment and Office and leasehold
improvements and thirty years for Buildings. Leasehold improvements are
amortized over the shorter of the estimated useful lives of the improvements, or
the term of the facility lease.
Expenditures for repairs and maintenance are charged to expense as incurred. The
cost of major renewals and betterment's are capitalized and depreciated over
their useful lives. Upon disposition, the cost and related accumulated
depreciation of property and equipment are removed from the accounts and any
resulting gain or loss is reflected in operations.
The Company is required to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, in accordance with the provisions of Statement of
Financial Accounting Standards No.121, "Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"). Accordingly, when
indicators of impairment are present, the Company evaluates the carrying value
of property, plant, and equipment and intangibles using projected undiscounted
future cash flows and operating income for each subsidiary to determined whether
material impairment of these assets exists.
F-10
<PAGE>
INTANGIBLE ASSETS
Excess of cost over fair value of net assets acquired ("goodwill") resulted from
the acquisition of Empower and SSG and is being amortized over ten years from
the date of acquisition using the straight-line method. Patents and Trademarks
are capitalized and are amortized using the straight-line method over their
estimated useful lives (10 year).Debt issuance costs are amortized using the
straight-line method over the term of the related debts, which range from two to
six months. Periods of amortization are evaluated periodically to determine
whether later events and circumstances warrant revised estimates of useful
lives. At each balance sheet date, the Company evaluates the recoverability of
unamortized goodwill based upon expectations of nondiscounted cash flows and
operating income. Impairments, if any, would be recognized in operating results
if a permanent diminution in value were to occur.
Capitalization of software development costs begins upon the establishment of
technological feasibility of new or enhanced software products. Technological
feasibility of a computer software product is established when the Company has
completed all planning, designing, coding and testing that is necessary to
establish that the software product can be produced to meet design
specifications including functions, features and technical performance
requirements. All costs incurred prior to establishing technological feasibility
of a software product are charged to research and development as incurred. The
Company amortizes capitalized software development costs over the related sales
on a product-by-product basis at the greater of the amount computed using (a)
the ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
estimated remaining economic life of the software products, generally five to
eight years.
All cost incurred by the Company in connection with incorporation of
subsidiaries have been capitalized and are being amortized over a period up to
60 months.
ADVERTISING AND PROMOTION
Advertising and promotion cost are expensed as incurred and included in "Selling
Expenses". Advertising and promotion expense for the years ended June 30, 1998,
1997 and 1996 were $ 1,737,935, $ 781,189 and $ 740,044, respectively.
RESEARCH AND DEVELOPMENT
Costs associated with research, new product development, and product cost
improvements are treated as expenses when incurred.
CONVERTIBLE DEBT
Convertible debt is recorded as a liability until converted into common stock,
at which time it is recorded as equity.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
EXPENSES RELATED TO SALES AND ISSUANCE OF SECURITIES
All costs incurred in connection with the sale of the Company's common stock
have been capitalized and charged to additional paid-in capital.
F-11
<PAGE>
NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share",
which established new standards for computation of earnings per share. SFAS No.
128 requires the presentation on the face of the income statement of "basic"
earnings per share and "diluted" earnings per share.
Basic earnings per share is computed by dividing the net income (loss) available
to common shareholders by the weighted average number of outstanding common
shares. The calculation of diluted earnings per share is similar to basic
earnings per share except the denominator includes dilutive common stock
equivalents such as stock options and convertible debentures. Common stock
options and the common shares underlying the convertible debentures are not
included for the years ended June 30, 1998 ("Fiscal 1998"), June 30, 1997
("Fiscal 1997") and June 30, 1996 (`Fiscal 1996') as their effect would be
anti-dilutive.
ACCOUNTING FOR STOCK OPTIONS
As permitted by Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock Based Compensation", the Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for the Swissray International, Inc. 1996
Non-Statutory Stock Option Plan and the 1997 Stock Option Plan (the "Stock
Option Plans"). Accordingly, no compensation cost has been recognized for
options granted under the Stock Option Plans except for $1,186,462 for Fiscal
1997, and $6,374,468 for Fiscal 1996 related to the fair value of services
rendered in exchange for options granted to consultants. However, the Company
has disclosed in Note 16, Shareholders' Equity the pro forma effects had
compensation cost been determined based on the fair value of the options, not
including the options for which expense has been previously recognized, at the
grant date.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's financial statements to
conform to the June 30, 1998 presentation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries operating in foreign countries are
translated into U.S. dollars using both the exchange rate in effect at the
balance sheet date or historical rate, as applicable. Results of operations are
translated using the average exchange rates prevailing throughout the year. The
effects of exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are included in stockholders equity (Accumulated
other comprehensive loss), while gains and losses resulting from foreign
currency transactions are included in operations.
NEW ACCOUNTING PRONOUNCMENTS
The Company will adopt Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") for the year ended June 30, 1999. SFAS No. 131 requires the Company to
report selected information about operating segments in its financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The application of the new
pronouncement is not expected to have a material impact on the Company's
disclosures.
F-12
<PAGE>
The Company will adopt Statement of Financial Accounting Standards No. 132
("SFAS No. 132"),"Employers' Disclosures about Pensions and Other Postretirement
Benefits" for the year ended June 30, 1999. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. The
application of the new pronouncement is not expected to have a material impact
on the Company's financial statements.
The Company will adopt Statement of Financial Accounting Standard No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities"
for the year ended June 30, 2000. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. The application of the new pronouncement is not
expected to have a material impact on the Company's financial statements.
STOCK SPLIT
On October 1, 1998 the Company declared a 1 for 10 reverse stock split. The
financial statements for all periods presented have been retroactively adjusted
for the stock split.
NOTE 2 - NOTE RECEIVABLE
On June 20, 1996 the Company sold marketable securities for a 5% promissory note
in the amount of $962,500 originally due on October 20, 1996 of which $100,000
was paid on December 10, 1996. On January 15, 1997, the Company renegotiated the
terms of the unpaid balance. A new note in the amount of $862,500 was
renegotiated, with interest at 6% cumulative and payable when the note matures
on January 1, 2000. At June 30, 1997, principal payments of $348,857 were
received leaving a balance due of $513,643. Interest payments were also paid to
June 30, 1997. At June 30, 1998 no payments were received.
NOTE 3 - INVENTORIES
Inventories are summarized by major classification as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Raw materials, parts and supplies $7,047,001 $2,632,256
Work in process 160,064 468,204
Finished goods 494,080 810,647
---------- ----------
$7,701,145 $3,911,107
========== ==========
</TABLE>
NOTE 4 - PREPAID EXPENSES AND SUNDRY RECEIVABLES
Prepaid expenses and sundry receivables consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Prepaid expenses, deposits and advance payments $ 616,183 $ 681,742
Insurance claim for fire damage 165,655 352,996
Prepaid and refundable taxes 708,246 888,169
Employee loans 11,825 13,231
---------- ----------
$1,501,909 $1,936,138
========== ==========
</TABLE>
F-13
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Land and building $4,956,328 $3,022,772
Equipment 1,305,092 1,223,572
Office furniture and equipment 328,258 161,223
Office and leasehold improvements 1,777 249,160
---------- ----------
6,591,455 4,656,727
Less: Accumulated depreciation and amortization 581,077 320,110
---------- ----------
$6,010,378 $4,336,617
========== ==========
</TABLE>
Depreciation and amortization expense, for property and equipment, for the years
ended June 30, 1998, 1997 and 1996 were $1,077,074, $233,040 and $ 103,176,
respectively.
NOTE 6 INTANGIBLE ASSETS
Intangible Assets at June 30, 1998 and 1997 consisted of the following
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Excess of cost over fair value of net assets
acquired $1,933,275 $ 419,837
Licensing 4,966,575 4,966.575
Software development cost 577,210 352,036
Patents and Trademarks 313,330 260,944
Other 8,385 8,385
---------- -----------
7,798,775 6,007,777
Less: Accumulated amortization 1,715,741 970,091
---------- -----------
$6,083,034 $5,037,686
========== ===========
</TABLE>
Amortization expense, for Intangible Assets, for the years ended June 30, 1998,
1997 and 1996 were $1,227,719, $ 537,254, and $ 401,472, respectively.
NOTE 7 - ACCOUNTS RECEIVABLE - LONG-TERM
The Company sold merchandise to a customer in 1995. In June 1996,the Company
renegotiated payment terms with the customer and agreed that the customer would
pay the Company approximately $5,000 to $30,000 per month based on usage of the
merchandise for a period of 5 years. The amount due the Company at June 30, 1997
was $240,912 after a provision for doubtful collection in the total amount of
$814,178. The balance of the account receivable, totaling $ 124,697 was written
during Fiscal 1998.
F-14
<PAGE>
NOTE 8 - LICENSING AGREEMENT
The Company entered into a licensing agreement in June of 1995 with an
unaffiliated individual. The agreement is for an exclusive field-of-use license
within the United States and Canada to use the proprietary information,
including the patent rights, for certain technology regarding the integration of
computer technology with diagnostic x-ray and radiology medical equipment
through digital imaging systems. The agreement required a fee of $5,000,000
consisting of $1,200,000 in cash and 66,000 shares of the Company's common
stock. The cash payment requirement consisted of $900,000 upon the signing of
the agreement and the $300,000 balance due on December 31, 1996. The fee has
been discounted at 7.5% for imputed interest of $33,425 resulting in a net
capitalized cost of $4,966,575. This agreement is for an indefinite term or
until all of the proprietary information becomes public knowledge and the patent
rights expire.
The Licensing Agreement is amortized over the related sales on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
estimated remaining economic life, generally ten years. At each balance sheet
date, the Company evaluates the recoverability of the unamortized License Fee
based upon expectations of nondiscounted cash flows and operating income of its
US-Operation. Impairments, if any, would be recognized in operating results if a
permanent diminution in value were to occur.
NOTE 9 - INVESTMENTS
The Company has made various investments which are recorded on the equity
method. These entities have operated at a loss in excess of equity, and
therefore, the Company is carrying these investments as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------- -------------------------------
Ownership Carrying Carrying
% Cost Value Cost Value
--------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Swissray SR Medical GmbH, Willich 34% $ 16,892 $ - $ 16,892 $ -
Swissray Medical, s.r.o., Bratislava 34% 6,757 - 6,757 -
Swissray Medical, s.r.o., Brno 34% 6,757 - 6,757 -
Teleray s.r.o., Willich 49% 38,403 - 38,403 -
Teleray s.r.o., Brno 34% 6,757 - 6,757 -
Digitec GmbH, Neuss 20% 59,641 - 59,641 -
------- --------- ------- --------
Total $135,207 $ - $135,207 $ -
======= ========= ======= ========
</TABLE>
NOTE 10 - NOTES PAYABLE - BANKS
The Company has negotiated a revolving line-of-credit agreement with Migros Bank
of Switzerland, dated March 23, 1998, for up to $1,314,924. The company has also
negotiated an agreement for up to $1,314,924 for the issuance of guarantees and
letter of credit, both with a commission of 15 % per $ 1,000,000, quarterly
while outstanding. There were $ 971,644 outstanding guarantees and $ -0- of
letter of credits as of June 30, 1998 The Company also negotiated a fixed line
of credit for up to $2,630,000. All lines of credit are based on the Exchange
rate in effect on June 30, 1998. The Company had negotiated a line-of-credit
agreement with the Union Bank of Switzerland dated July 16, 1996 for borrowing
availability up to $ 376,310 in excess of cash balances on deposit with the
bank, based on the exchange rate in effect on June 30, 1997. As of October 31,
F-15
<PAGE>
1997, the bank reduced the line of credit to the cash balances on deposit with
the bank.
The Company had negotiated a line-of-credit agreement with the Swiss Bank.
Corporation for up to $1,505,240, based on the exchange rate in effect on June
30, 1997. This line of credit was terminated during Fiscal 1998.
The Company had negotiated a line-of-credit agreement with Cantonal Bank of
Lucerne for up to $ 1,368,400, based on the exchange rate in effect on June 30,
1997. The line of credit was terminated during Fiscal 1998.
Empower, Inc., a subsidiary, had negotiated a line-of-credit agreement with the
State Bank of Long Island dated October 21, 1996 with a maximum borrowing base
of $450,000 as of June 30, 1997. The maximum borrowing base was reduced by
$25,000 per quarter beginning January 1, 1997. The full line of credit was
terminated during Fiscal 1998.
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Migros Bank revolving line of credit, due on
demand, with interest at 4.75% per
annum, collateralized by certain accounts
receivable $ 408,786 $ -
Migros Bank, on demand with six week notice,
with interest at 4 % per annum,
collateralized by land and building 2,630,000 -
Union Bank of Switzerland, due on demand,
with interest at 8% per annum,
collateralized by the cash on deposit at
Union Bank of Switzerland and certain
accounts receivable. Cash balances on
deposit at Union Bank of Switzerland at
June 30, 1998 and 1997 were $627,625 and
$2,805,747, respectively 512,305 1,421,075
Swiss Bank Corporation, due on demand, with
interest at 5.25% per annum, collaterized by
the cash on deposit at Swiss Bank Corporation
and accounts receivable of $ -0- and $ 853,065
as of June 30, 1998 and 1997, respectively.
Cash balances on deposit at Swiss Bank
Corporation at June 30, 1997 were $106,007 - 695,231
State Bank of Long Island, due on demand,
with interest at prime plus 2.25%, (prime
rate as June 30, 1997 was 8.5.%) collateralized
by the assets of Empower, Inc. and guaranteed by
the Company Total assets of Empower, Inc. were
$1,983,502 at June 30, 1997 - 350,000
Cantonal Bank of Lucerne, on demand with three
months notice, with interest at 5.25% payable
quarterly, collateralized by land and building - 1,368,400
---------- ----------
$3,551,091 $ 3,834,706
========== ==========
</TABLE>
F-16
<PAGE>
NOTE 11 - LOAN PAYABLE
The Company has negotiated a 5% demand loan from a private foundation fund. The
loan balance payable at June 30, 1998 and 1997 was $125,029 and $133,008
respectively. Interest expenses for the years ended June 30, 1998, 1997 and 1996
were $3,223, $16,258 and $ -0-, respectively.
NOTE 12 - DUE FROM STOCKHOLDERS
The Company made unsecured advances to its former Chairman of the Board of
Directors (a principal stockholder) during the year ended June 30, 1997
requiring interest at 6% per annum. The balance at June 30, 1997 was $69,587 and
by June 30, 1998 had been repaid. Interest charged to the stockholder for the
year ended June 30, 1997 was $3,460. No interest had been charged to the
stockholder for the year ended June 30, 1998 because repayment took place on
July 1, 1997.
NOTE 13 - DUE TO STOCKHOLDERS AND OFFICERS
In June 1997, the President of the Company (a principal stockholder) made
non-interest bearing advances to the Company in the amount of $5,862. The amount
of the non-interest-bearing advance for June 30, 1998 was $2,207. Prior to the
acquisition of Empower, Inc., the president of Empower, Inc. advanced that
company funds for operating expenses at 8.25% interest. As part of the
acquisition, the Company agreed to continue to pay this obligation. The balance
due the stockholder of the Company at June 30, 1997 was $112,013 including
unpaid interest of $25,695. Interest payable to the stockholder for the period
from April 1, 1997 (date of acquisition) to June 30, 1997 was $2,315. The whole
amount was repaid during Fiscal 1998. The balance at June 30, 1998 was $0.
An officer of Swissray Corporation made non-interest bearing advances to the
subsidiary for operating expenses during 1997. The balance due at June 30, 1997
was $21,951. The amount was repaid and the balance was $0 at June 30, 1998.
Pursuant to agreements between the President of the Company and the Company,
dated as of December 1996 and June 1997, the Company incurred additional
compensation to the officer payable as 48,259 shares with a fair value of
$1,122,973. The compensation was in consideration of the officer's agreement for
the cancellation of 1,608,633 shares of common stock held by the officer or
companies controlled by him which allowed the Company to maintain a sufficient
number of shares of common stock to meet certain obligations of the Company to
issue common stock and to permit certain financings prior to the increase in the
number of authorized shares of common stock from 15,000,000 to 30,000,000
shares. The shares were issued by the Company on July 22, 1997 and at June 30.
1997 are recorded as "Common Stock to be Issued to Officer" in the equity
section of the balance sheet.
F-17
<PAGE>
NOTE 14 - CONVERTIBLE DEBENTURES
Convertible debentures consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Convertible debenture dated April 28, 1997
and due April 28, 1998 with interest at 6%
per annum. The principle shall be convertible
into common shares one year from the issue
date of the note at the greater of eighty
(80%) percent of bid price or $2.50 per share
on the date of conversion. Interest due on the
note shall similarly be paid in common stock
at the time of conversion $ 0 $ 2,000,000
Convertible debenture dated May 15, 1997
and due May 15, 2000 with interest at 6% per
annum. The debentures are convertible into
common shares at a price equal to eighty
(80%) of the average closing bid price for
the five (5) trading days preceding the date
of conversion. One-half of the debentures
are convertible at the earlier of a
registration effective date or August 7, 1997. 0 2,000,000
The remainder are convertible 30 days
thereafter. Any debenture not so converted is
subject to mandatory conversion on May 15,
2000 Debt issuance cost was $327,310,
beneficial conversion feature was $500,000 0 2,000,000
Convertible debenture dated June 13, 1997 and
due June 13, 2000 with interest at 6% per
annum. The debentures are convertible into
common shares at a price equal to eighty
(80%) of the average closing bid price for
the five (5) trading days preceding the date
of conversion. One-half of the debentures
are convertible at the earlier of a
registration effective date or September 13,
1997. The remainder are convertible 30 days
thereafter. Any debenture not so converted is
subject to mandatory conversion on June 13,
2000. Debt issuance cost was $308,575,
beneficial conversion feature was $500,000 0 2,000,000
Convertible debenture dated December 11, 1997
and due December 11, 1999 with interest at 8%
per annum. The debentures are convertible into
common shares at a price equal to seventy five
(75%) of the average closing bid price for
the five (5) trading days preceding the date of
conversion. Twenty five percent (25%) of the
debentures are convertible at the earlier of a
registration effective date or March 21, 1998.
Additionally twenty five percent (25%) of the
debentures are convertible at the earlier
of 30 days after the effective date of the
Registration Statement or April 20, 1998.
Additionally twenty five percent (25%) of the
F-18
<PAGE>
debentures are convertible at the earlier of
60 days after the effective date of the
Registration Statement or May 20, 1998. The
remaining twenty five percent (25%) are
convertible at the earlier of 90 days after the
effective date of the Registration Statement or
June 20, 1998. Any debenture not so converted
is subject to mandatory conversion on December
11, 1999. Debt issuance cost was $690,000,
beneficial conversion feature was $1,949,428 145,969 0
Convertible debenture dated March 14, 1998 and
due March 14, 2000 with interest at 6% per
annum. The debentures are convertible into
common shares at a price equal to eighty (80%)
of the average closing bid price for the ten
(10) trading days preceding the date of
conversion. All of the debentures are
convertible at the earlier of a registration
effective date or May 14, 1998. Any debenture
not so converted is subject to mandatory
conversion on March 14, 2000 On July 21, 1998
and August 13, 1998 a total of $1,500,000
was converted into 484,254 shares. On August
31, 1998 the amount of $3,000,000 was
refinanced (See Note 25 - Subsequent Events)
Debt issuance cost was $615,000, beneficial
conversion feature was $857,500 5,500,000 0
Convertible debenture dated June 15, 1998 and
due June 15, 2000 with interest at 6% per annum.
The debentures are convertible into common
shares at a price equal to eighty (80%) of the
average closing bid price for the ten (10)
trading days preceding the date of conversion.
All of the debentures are convertible at the
earlier of a registration effective date or
August 15, 1998 Any debenture not so converted
is subject to mandatory conversion on June 15,
2000. Debt issuance cost was $240,000,
beneficial conversion feature was $420,436 2,000,000 0
----------- -----------
7,645,969 6,000,000
Less discount due to beneficial conversion
features, net of accumulated amortization
of $105,109 and $310,559 respectively (315,327) (689,441)
----------- -----------
$7,330,642 $ 5,310,559
=========== ===========
</TABLE>
The Company is currently in violation of certain covenants in their debenture
agreements. Such covenants have been waived by the holders.
F-19
<PAGE>
NOTE 15 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
--------- ----------
<S> <C> <C>
Note payable - Edward Coyne, in weekly
installments of $817, including principal
and interest at 8% per annum, maturing on
October 9, 2002 $153,603 $182,617
Note payable - Thatcher Company of New York,
in monthly installments of $855, including
interest at 10.25% per annum, maturing on
October 3, 2001, collateralized by various
x-ray chemical mixing machines. The full note
was assumed by the purchaser of Empower during
Fiscal 1998 - 35,623
Note payable - Union Bank of Switzerland,
related to the acquisition of equipment sold to
a customer (see Accounts Receivable-Long-Term),
in monthly installments of $12,589 With imputed
interest at 6.0% per annum, maturing on
September 30, 2000 335,062 450,417
Capitalized leases related to the acquisition of
various computer and office equipment in payable
monthly installments over periods ranging up to
June 4, 2001 with interest imputed at rates
ranging from 9.1% to 28.3%. These leases are
collaterlized by the specific equipment 13,377 30,747
Note payable - Dr. Zeman-Wiegand Helga, due on
demand, requires interest only payments at 7% per
annum with no current amortization required. The
note was repaid during Fiscal 1998 - 68,420
Capitalized leases related to the acquisition of
various computer and office equipment in monthly
installments over periods ranging up to April
2001 with interest imputed at rates ranging from
18% - 21%. These leases are collaterlized by the
specific equipment 172,378 -
--------- ----------
674,420 767,824
Less: Current portion (233,746) (243,135)
--------- ----------
$440,674 $524,689
========= ==========
</TABLE>
The aggregate long-term debt principal payment are as follows:
<TABLE>
<CAPTION>
Years Ending
June 30,
------------
<S> <C>
1999 $233,746
2000 247,275
2001 142,154
2002 40,006
2003 11,239
--------
$674,420
========
</TABLE>
F-20
<PAGE>
NOTE 16 - SHAREHOLDERS' EQUITY
Authorized Shares
On March 12, 1997, the Company amended its certificate of incorporation to
change the number of authorized common shares from 15,000,000 to 30,000,000 of
$.01 par value common shares. On December 26, 1997, the Company amended its
certificate of incorporation to change the number of authorized common shares
from 30,000,000 to 50,000,000 of $.01 par value common shares.
The Company's outstanding shares of common stock of $.01 par value at June 30,
1998 and 1997 were 4,142,622 and 1,969,443, respectively.
Common Stock
The Company issued 2,030,588 shares for $13,725,246 for the year ended June 30,
1998 (including 16,900 shares for $123,370 issued under stock option plan) and
535,876 shares for $7,753,222 (including 16,100 shares for $117,530 issued under
stock option plan) for the year ended June 30, 1997 and 215,000 shares for
$7,250,000 (includes 105,000 shares for $2,050,000 issued under stock option
plan) for the year ended June 30, 1996.
Stock Option
The Stock Option Plans provide for the grant of options to officers, directors,
employees and consultants. Options may be either incentive stock options or
non-qualified stock options, except that only employees may be granted incentive
stock options. The maximum number of shares of Common Stock with respect to
which options may be granted under the Stock Option Plans is 500,000 shares.
Options vest at the discretion of the Board of Directors. All options granted in
1997 and 1996 vested immediately. The maximum term of an option is ten years.
The 1996 Stock Option Plan will terminate in January, 2006, though options
granted prior to termination may expire after that date. The 1997 Stock Option
Plan will terminate at the discretion of the Board of Directors. In Fiscal 1998,
there were no grants or vesting of stock options. In Fiscal 1997 and 1996, had
compensation cost for the Stock Option Plans been determined based on the fair
value at the grant dates for awards under the Stock Option Plans, except for
grants to consultants for which compensation expense has been recognized
consistent with the method of SFAS No. 123, as discussed in Note 1, the
Company's net loss and net loss per share would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
----------------------- ------------------------
As Pro As Pro
Reported Forma Reported Forma
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss (in thousands) $ (13,685) $ (13,959) $ (8,266) $ (8,365)
Basic and diluted
net loss per share $ 8.65) $ (8.82) $ (6.37) $ (6.45)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing method with the following weighted average
assumptions used for grants.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 61.6% 23.1%
Risk-free interest rate 6.25% 6.25%
Expected lives, in years 1 1
</TABLE>
F-21
<PAGE>
A summary of the weighted-average fair market values and weighted-average
exercise prices, both as of the date of grant, is presented below. No options
were granted in Fiscal year 1998.
<TABLE>
<CAPTION>
1997 1996
--------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Fair Exercise Fair Exercise
Value Price Value Price
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Options granted above fair value $ - $ - $ 7.20 $48.90
Options granted below fair value $ 22.80 $ 7.60 $29.20 $21.60
</TABLE>
A summary of the status of the Stock Option Plans at June 30, 1998, 1997 and
1996 and the changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ---------------------- -----------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Price Options Price Options Price
---------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 318,000 $ 23.40 238,500 $ 25.20 0 $ -
Granted - $ - 79,500 $ 17.80 238,500 $ 25.20
Exercised (16,900) $ 7.30 - $ - - $ -
Outstanding at end of year 301,100 $ 24.30 318,000 $ 23.40 238,500 $ 25.20
======= ====== ======= ====== ======= =====
Exercisable at end of year 301,100 $ 24.30 318,000 $ 23.40 238,500 $ 25.20
======= ======= ======= ====== ======= =====
</TABLE>
The following table summarizes information about stock options under the Stock
Option Plans at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercisable
Exercise Price Outstanding Life Price Exercisable Price
- ---------------- ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 7.30 - $ 10.00 40,100 8.4 $ 8.00 40,100 $ 8.00
$20.00 - $ 40.00 227,500 7.8 $ 22.10 227,500 $ 22.10
$47.50 - $ 65.00 33,500 7.5 $ 58.70 33,500 $ 58.70
------- -------
301,100 301,100
======= =======
</TABLE>
F-22
<PAGE>
NOTE 17 - DEFINED CONTRIBUTION PLANS
The Swiss and German Subsidiaries, mandated by government regulations, are
required to contribute approximately five (5%) percent of all eligible, as
defined, employees' salaries into a government pension plan. The subsidiaries
also contribute approximately five (5%) percent of eligible employee salaries
into a private pension plan. Total contributions charged to operations for the
years ended June 30, 1998, 1997 and 1996, were $ 347,854, $274,009 and $198,722,
respectively.
Effective March 1, 1992, Empower, Inc., a U.S. subsidiary, adopted a qualified
401(k) retirement plan for the benefit of all its employees. Under the plan,
employees can contribute and defer taxes on compensation contributed. The
subsidiary matches, within prescribed limits, the contributions of the
employees. The subsidiary also has the option to make an additional contribution
to the plan. The subsidiary's contribution to the plan for the period April 1,
1997 (date of acquisition) to June 30, 1998 and 1997 was $ 10,260 and $4,185,
respectively.
Effective April 3, 1992, Empower, Inc., a U.S. subsidiary, adopted a "Section
125" employee benefits plan, which is also referred to as a "Cafeteria" plan.
The subsidiary pays for approximately 85% of the employees' health coverage and
the employee pays approximately 15% of the cost of coverage. With the
implementation of the Cafeteria plan, the employees' payments for coverage are
on a pre-tax basis. A new employee has only a ninety (90) day waiting period
before he or she becomes eligible to participate in the group insurance plan and
the Cafeteria plan.
NOTE 18 - OTHER INCOME (EXPENSES)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 58,902 $ 68,950 $ 131,166
Interest income - stockholder and officer - 4,351 12,530
Foreign currency income (87,148) 484,846 377,587
Miscellaneous income 60,648 6,833 512
Loss from investments - (246,217) -
Loss on sale of certain asset and Liabilities 313,629 - -
Licensing income - - 482,138
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSES) $ (281,227) $ 318,763 $1,003,933
========== ========== ==========
</TABLE>
NOTE 19 - INCOME TAXES
Deferred income tax assets as of June 30, 1998 of $9,500,000 as a result of net
operating losses, have been fully offset by valuation allowances. The valuation
allowances have been established equal to the full amounts of the deferred tax
assets, as the Company is not assured that it is more likely than not that these
benefits will be realized.
F-23
<PAGE>
A reconciliation between the statutory United States corporate income tax rate
(34%) and the effective income tax rates based on continuing operations is as
follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax (benefit) $(7,754,000) $(4,101,913) $(3,077,078)
Foreign income tax (benefit) in
excess of domestic rate 543,000 509,203 (325,715)
Benefit not recognized on operating loss 5,111,000 2,816,057 3,038,145
Permanent, timing and other differences 2,100,000 886,886 -
----------- ----------- -----------
$ 0 $ 110,223 $ (364,648)
=========== =========== ===========
</TABLE>
Net operating loss carryforwards at June 30, 1998 were approximately as follows:
<TABLE>
<S> <C>
United States (expiring through June 30, 2013) $15,200,000
Switzerland (expiring through June 30, 2008) 15,600,000
-----------
$30,800,000
===========
</TABLE>
The income tax related to the extraordinary gain on sale of marketable
securities was approximately $343,000 for the year ended June 30, 1996.
No income tax benefit has been recognized related to the extraordinary loss
incurred as a result of fire damage or the year ended June 30, 1997.
NOTE 20 - EXTRAORDINARY ITEMS
In June of 1996, the Company sold marketable securities for $962,500, at a cost
of $200,000, resulting in an extraordinary gain of $419,500 ($ 0.32 per share),
net of income taxes of approximately $343,000.
On April 12, 1997, the Company sustained significant fire damage at a leased
production and office facility in Hochdorf, Switzerland, resulting in an
extraordinary loss, net of insurance proceeds, of $387,514 ($ 0.24) per share),
net of income taxes of $-0-.
On July 31, 1997 the Company refinanced Convertible debentures issued in May and
June 1997. A gain on extinguishment of debt of $154,212 resulted from that
transaction net of income taxes of $-0-.
In December, 1997 the Company refinanced part of the Convertible debentures
issued in August 1997. A gain on extinguishment of debt of $150,711 resulted
from that transaction net of income taxes of $-0-.
Note 21 SIGNIFICANT CUSTOMER AND CONCENTRATION OF CREDIT RISK
The company sells its products to various customers primarily in Europe and USA.
The company performs ongoing credit evaluations on its customers and generally
does not require collateral. Export sales are usually made under letter of
credit agreements. The company establishes reserves for expected credit losses
and such losses, in the aggregate, have not exceeded management's expectations.
F-24
<PAGE>
The company maintains its cash balances with major Swiss, United States and
German financial institutions. Funds on deposit with financial institutions in
the United States are insured by the Federal Deposits Insurance Corporation
("FDIC) up to $ 100,000.
During the years ended June 30, 1998. 1997 and 1996 there were sales to four
customers that exceeded 10% of net consolidated sales. Sales to these customers
were: 1998 customer A, $ 0 (0%), customer B $7,647,354 (33%), customer C $0 (0%)
and customer D $1,209,390 (5%); 1997 customer A , $0 (0%), customer B $1,899,084
(14%) customer C $0 (0%) and customer D $2,389,613 (18%); 1996 customer A
$1,603,631 (15%), customer B $1,505,954 (14%), customer C $1,390,308 (13%) and
customer D $0 (0%) The company operates in a single industry segment, providing
x-ray medical equipment.
The Company derives all of its revenues from its subsidiaries located in the
United States, Switzerland and Germany. Sales by geographic areas for the years
ended June 30, 1998, 1997 and 1996 were as follows:.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
United States $ 9,127,569 $ 2,000,608 $ 0
Switzerland 12,851,115 2,184,161 2,002,374
Germany 914,294 1,393,072 4,976,503
Other export sales - 7,573,860 3,920,345
----------- ------------ ------------
Total $22,892,978 $13,151,701 $10,899,222
=========== ============ ============
</TABLE>
The following summarizes identifiable assets by geographic area:
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
United States $ 8,075,151 $ 2,008,307 $ -
Switzerland 17,454,379 22,031,388 18,129,362
Germany 385,067 748,539 664,076
------------ ------------- -----------
$ 25,914,597 $ 24,788,234 $18,793,438
============ ========== ===========
</TABLE>
The following summarizes operating losses before provision for income tax:
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
United States $(13,962,842) $ (175,254) $ -
Switzerland (8,803,842) (12,678,800) (8,986,555)
Germany (42,184) (333,397) (63,673)
------------ ----------- ------------
$(22,808,032) $(13,187,451) $(9,050,228)
=========== ========== ============
</TABLE>
F-25
<PAGE>
NOTE 22 - COMMITMENTS
The Company leases various facilities and vehicles under operating lease
agreements expiring through September 2003. The company has excluded all vehicle
leases in its presentation because they are deemed to be immaterial. The
facilities lease agreements provide for a base monthly payment of $22,285 per
month. Rent expense for the years ended June 30, 1998, 1997 and 1996 was
$324,726, $ 297,926 and $ 242,658 respectively Future minimum annual lease
payments, based on the exchange rate in effect on June 30, 1998, under the
facilities lease agreements are as follows: 1999 $267,422, 2000 $173,549, 2001
$162,526, 2002 $166,995, 2003 $137,994, Thereafter $0
On January 1, 1996, the Company entered into a long term purchase agreement with
a major vendor to supply the camera module for a product the Company sells. At
June 30, 1998, future minimum payments under this contract, which is cancelable
with four months notice, are as follows: 1999 $ 7,717,921. The Company's total
purchases under this agreement was for the year ended June 30, 1998 $1,685,611
respectively for the year ended June 30, 1997 $ 1,534,646.--. Due to a change of
the production plant of its vendor from Europe to the USA this contract is
presently in process to be renegotiated. The company believes that the outcome
of this renegotiations will have a positive impact to lower the existing
commitments into the future.
The Company has employment agreements with six of its executives. Minimum
compensation under these agreements are as follows:
Year Ended
----------
June 30, 1999 $ 963,000
June 30, 2000 843,000
June 30, 2001 500,000
June 30, 2002 273,000
June 30, 2003 147,000
----------
$ 2,726,000
==========
NOTE 23 - LITIGATION
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 for $60,000 in July
1998.
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.
F-26
<PAGE>
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 $ 45.00 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 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 arbitration 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 Messres 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.
NOTE 24 - RESTRUCTURING
During the year ended June 30, 1998 the Company recorded restructuring charges
of $500,000, as a result of its decision to relocate two facilities. The charges
consist primarily of the present value of the remaining lease obligations of
those facilities.
NOTE 25 - SUBSEQUENT EVENTS
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
F-27
<PAGE>
shares of Common Stock of the Company commencing March 1, 1998 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.
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 class of Preferred
Stock).
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.
NOTE 26 - RESTATEMENT
The accompanying financial statements have been restated to properly record the
accounting treatment of certain beneficial conversion features and debt issuance
costs of convertible debentures issued during the year ended June 30, 1997, the
accounting for the value of stock options granted during the years ended June
30, 1997 and 1996, and the accounting for the value of common stock to be issued
to an officer as additional compensation during the year ended June 30, 1997.
The effect of such restatements on the Company's 1997 and 1996 financial
statements follow:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- -------------------------------------
As As As As
Reported Adjustments Restated Reported Adjustments Restated
---------- ------------- --------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Adjustments
Assets $24,352,915 $ 435,319 $24,788,234 $18,793,438 $ - $18,793,438
Liabilities 17,784,487 (689,441) 17,095,046 8,138,182 - 8,138,182
Stockholders' equity 6,568,428 1,124,760 7,693,188 10,655,256 - 10,655,256
Statement of Operations
Adjustments
Operating expenses $15,165,898 $2,284,435 $17,450,333 $ 8,591,679 $6,374,468 $14,966,147
Other income (expenses) 67,720 (511,125) (443,405) 810,003 - 810,003
Loss from operations (10,502,114) (2,795,560) (13,297,674) (2,311,112) (6,374,468) (8,685,580)
Net loss (10,889,628) (2,795,560) (13,685,188) (1,891,612) (6,374,468) (8,266,080)
Net loss per common share basic $ (.69) $ (.17) $ (.86) $ (.15) $ (.49) $ (.64)
</TABLE>
F-28
<PAGE>
Stockholders' equity has been restated to reflect the following:
<TABLE>
<CAPTION>
Additional Accumulated
Paid-in Capital Deficit
--------------- --------------
<S> <C> <C>
As originally reported, June 30, 1996 $19,268,400 $ (7,918,948)
Value of stock options granted 6,374,468 (6,374,468)
-------------- --------------
As restated, June 30, 1996 $25,642,868 $(14,293,416)
============== ==============
As originally reported, June 30, 1997 $26,608,594 $(18,808,576)
Effect of 1996 restatement 6,374,468 (6,374,468)
-------------- --------------
32,983,062 (25,183,044)
Beneficial conversion feature 1,000,000 (310,559)
Debt issuance cost 635,885 (200,566)
Value of stock options granted 1,161,462 (1,161,462)
Value of common stock to be issued - (1,122,973)
-------------- --------------
$35,780,409 $(27,978,604)
============== ==============
</TABLE>
NOTE 27 - UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
The following unaudited proforma condensed combined statements of operations for
the years ended June 30, 1998 and 1997 give retroactive effect of the
acquisition of Empower, Inc. on April 1, 1997 and SSG on October 17, 1997, which
has been accounted for as a purchase. The unaudited proforma condensed combined
statements of operations give retroactive effect to the foregoing transaction as
if it had occurred at the beginning of each year presented. The proforma
statements do not purport to represent what the Company's results of operations
would actually have been if the foregoing transactions had actually been
consummated on such dates or project the Company's results of operations for any
future period or date.
The proforma statements should be read in conjunction with the historical
financial statements and notes thereto.
SWISSRAY INTERNATIONAL, INC
UNAUDITED PROFORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF
OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998 AND JUNE 30, 1997
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 23,837,000 $ 21,223,000
Loss before extraordinary items (21,963,000) (13,568,000)
Net loss (22,403,000) (13,956,000)
Loss per share (8.33) (8.79)
Weighted average number of shares outstanding 2,690,695 1,587,757
</TABLE>
It was not practicable to include information for SSG for the year ended June
30, 1997.
F-29
