10-K 1 a10kfinancials63002.txt JUNE 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: June 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to _____________ Commission file number: 000-24913 SWISSRAY INTERNATIONAL, INC. (Name of small business issuer in its charter) Delaware (State or other jurisdiction of incorporation or 16-0950 organization) (I.R.S. Employer Identification No.) 100 Grasslands Road, Elmsford, N.Y. 10523 (Address of principal executive offices) (Zip Code) Issuer's telephone number in the United States: (914) 345-3700 Issuer's telephone number in Switzerland: 011-41 41 914 1200 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.0001 PER SHARE (Title of class) Check whether the issuer (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (ii) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The number of shares outstanding of each of the Registrant's classes of common stock, as of October 1, 2002 is 41,654,747 shares(1), all of $.01 class, par value. Of this number 26,808,147 shares have an aggregate market value of $2,278,692, based on the closing price of Registrant's common stock of $.085 on October 10, 2002 as quoted on the Electronic Over-the-Counter Bulletin Board ("OTCBB") were held by non-affiliates of the Registrant. *Affiliates for the purpose of this item refers to the Registrant's officers and directors and/or any persons or firms (excluding those brokerage firms and/or clearing houses and/or depository companies holding Registrant's securities as record holders only for their respective clienteles' beneficial interest) owning 5% or more of the Registrant's common stock, both or record and beneficially. -------- 1 The Company's transfer agent records, as of October 1, 2002 indicate 91,704,747 shares of common stock outstanding. Stockholder information contained herein gives retroactive effect to (a) the cancellation of 52,442,347 shares previously owned by Hillcrest Avenue LLC ("Hillcrest") and the subsequent issuance of 2,442,347 shares to Hillcrest thereby reducing outstanding shares by 50,000,000 to 41,704,747; and (b) the further cancellation of an additional 725,000 shares issued in October 1999 and the re-issuance of 675,000 shares thereby further reducing outstanding shares by 50,000 to the number currently outstanding of 41,654,747. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference, and the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). NONE. Except for the incorporation by reference of the Company's Form S-1 Registration Statement (under File Number 333-55898 as declared effective March 9, 2001) and in particular, those sections therein entitled "Risk Factors" (which is herewith incorporated by reference to Part 1, Item 1, of this Form 10-K) and "Market Prices and Dividend Polciy" subsection entitled "Nasdaq Delisting" (which is herewith incorporated by reference into Park II, Item 5, of this Form 10-K). TABLE OF CONTENTS PART I .................................................................1 Item 1. Business.........................................................1 Item 2. Properties......................................................24 Item 3. Legal Proceedings...............................................24 Item 4. Submission Of Matters To A Vote Of Security Holders.............25 PART II ................................................................25 Item 5. Market For Registrant's Common Equity And Related Stockholder Matters.........................................................25 Item 6. Selected Financial Data.........................................27 Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations...........................................28 Item 7A. Quantitative And Qualitative Disclosures About Market Risk......34 Item 8. Financial Statements And Supplementary Data ....................34 Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Matters...............................................35 PART III ................................................................35 Item 10. Directors And Executive Officers Of The Registrant..............35 Item 11. Executive Compensation..........................................37 Item 12. Security Ownership of Certain Beneficial Owners and Management..44 Item 13. Certain Relationships And Related Transactions..................46 Part IV .................................................................47 Item 14. Exhibits, Financial Schedules and Reports on Form 8-K...........47 SIGNATURES....................................................................48 Supplemental Information......................................................49 CERTIFICATIONS................................................................50 PART I Item 1. Business Background Summary The Registrant was incorporated under the laws of the State of New York on January 2, 1968 under the name CGS Units Incorporated. On June 15, 1994, the Registrant merged with Direct Marketing Services, Inc. and changed its name to DMS Industries, Inc. In May of 1995 the Registrant 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 Registrant changed its name to Swissray International, Inc. The Registrant's operations are being conducted principally through its wholly owned subsidiaries, Swissray Medical AG (formerly known as SR Medical Holding AG and SR Medical AG) a Swiss corporation and its wholly owned subsidiaries Swissray GmbH (formerly known as Swissray (Deutschland) Rontgentechnik GmbH and SR Medical GmbH), a German limited liability company and Swissray Romania SRL as well as through the Company's other wholly owned Delaware subsidiaries, Swissray America, Inc. and Swissray Information Solutions, Inc. Swissray Medical AG acquired all assets and liabilities, effective July 1998, of its wholly owned subsidiaries, SR Medical AG (known as Teleray AG until renamed in February 1998, a Swiss corporation and Teleray Research and Development AG, a Swiss corporation. Swissray Medical AG also absorbed all assets and liabilities of the Company's other wholly owned subsidiary SR Management AG (formerly SR Finance AG), a Swiss corporation. Effective as of September 10, 2001 Swissray Medical Systems, Inc., a Delaware corporation (formerly Swissray America Corporation), Swissray Healthcare, Inc. and Empower Inc., a New York corporation, merged into Swissray America Inc., a Delaware corporation. In accordance with Stockholder approval obtained at the January 25, 2002 Annual Meeting, the Registrant changed its State of Incorporation from New York to Delaware effective May 13, 2002. Unless otherwise specifically indicated, all references hereinafter to the "Company" refer to the Registrant and its subsidiaries. The Company and its predecessors have been in the business of manufacturing and selling X-ray equipment in Switzerland and Germany since 1988. Beginning in 1991, the Company's predecessors began to expand into other markets in Europe, the Middle East and Asia. In 1992, SR Medical AG entered into a first Original Equipment Manufacturing ("OEM") Agreement with Philips Medical Systems GmbH ("Philips Medical Systems") providing for the manufacturing of a multi- radiography system ("MRS"). In 1996, this agreement was replaced with a new OEM Agreement ("Philips OEM Agreement") which provides for the manufacturing of the Bucky Diagnost TS bucky table in addition to the MRS System. Simultaneously, the Company developed the first SwissVision(R) post-processing system which was able to convert analog images obtained in fluoroscopy into digital information. Beginning in 1993, the Company began the development of direct digital X-ray technology for medical diagnostic purposes. This is currently the Company's primary focus (as opposed to the further development and/or sale of conventional X-ray equipment). 1 With respect to information regarding the Company acquisition of Empower Inc. on April 1, 1997 and subsequent litigation resulting therefrom, reference is herewith made to Item 1 subsection entitled "Sale of Substantially All of the Assets of Empower, Inc." as well as to Item 3 "Legal Proceedings" In October 1999 the Company was awarded a purchase order for 32 of its direct digital Radiography Systems from the Romanian Ministry of Health for its multifunctional ddRMulti, valued at over US$13,800,000. Installation was made in various hospitals throughout Romania. The initial payment aggregating 15% of the aforesaid total proceeds (i.e., $2,070,000) was received by the Company in early March 2000. The Company sold 25 of the 32 ddRMulti through close of its fiscal year ended June 30, 2000 while the balance of 7 Systems were sold through August 2000 with the Company receiving the full balance of $11,730,000 by such date. In October, 2000 the Romanian Ministry of Health ordered 30 ddR Chest valued at more than $7,000,000 which were all subsequently sold. By virtue of the extent and nature of these contracts, the Romanian Ministry of Health was then the Company's single largest customer. The Company's primary focus is currently on direct digital radiography ("ddR") as opposed to conventional X-ray equipment. In that regard the Company's German subsidiary (Swissray GmbH, Wiesbaden, Germany) and Swissray Medical AG sold their conventional X-ray business divisions in March 2000 and June 2000 respectively to an unaffiliated third party in order to more extensively focus upon sales and marketing of ddR equipment. The March 2000 transaction principally consisted of the sale of inventory and equipment (at costs approximating $53,000) and the purchaser's agreement to assume certain fixed costs (approximating an additional $32,000) while the June 2000 transaction resulted in the sale of customer base for approximately $200,000. There was no gain or loss to the Company as a result of this transaction. Notwithstanding the above-referenced March 2000 sale of the conventional X-ray division, management of the Company does not have any current plans to sell its conventional OEM business. The dollar amount of sales from conventional X-ray Systems for the fiscal years ended June 30, 2002, June 30, 2001 and June 30, 2000 were $553,685, $268,842 and $1,803,716 respectively. The dollar amount of sales from conventional OEM business for the fiscal years ended June 30, 2002, June 30, 2001 and June 30, 2000 were $350,595, $1,054,172 and $3,883,257 respectively. Overview The Company is active in the markets for diagnostic imaging devices for the health care industry. Diagnostic imaging devices include X-ray equipment, computer tomography ("CT") systems and magnetic resonance imaging ("MRI") systems for three dimensional projections, nuclear medicine ("NM") imaging devices and ultrasound devices. The Company is primarily engaged in the business of manufacturing and selling diagnostic X-ray equipment for all radiological applications other than mammography and dentistry. In addition, the Company is in the business of selling imaging systems and components and accessories for X-ray equipment manufactured by third parties and providing services related to diagnostic imaging. 2 X-rays were discovered in 1895 by Wilhelm Konrad Rontgen. Shortly thereafter, X-ray imaging found numerous applications for medical diagnostic and non-medical purposes. Today, medical X-ray imaging is a fundamental tool in bone and soft tissue diagnosis. X-ray diagnosis is primarily used in orthopedics, traumatology, gastro-enterology, angiography, urology, ulmology, mammography and dentistry. The principal elements of a diagnostic X-ray system are the X-ray generator, the X-ray tube and the bucky device. The generator produces high tension, which is converted into X-rays in the X-ray tube. The X-rays so created then penetrate a patient's body and subsequently expose a film contained in the bucky device. Following exposure, the film is chemically processed and dried in a dark room. A typical room used for general X-ray examinations (bucky room) contains an X-ray system which includes a table with a bucky device for examinations of recumbent patients (bucky table) and a wall stand with a second bucky device for examinations of sitting and standing patients (bucky wall stand). The film used in conventional X-ray systems has certain inherent disadvantages, including the significant amount of time and operating expenses associated with the handling, processing and storage thereof, the need for chemicals to develop films and the environmental concerns related to their disposal. Additional expenses and inconveniences arise in connection with the storage, duplication and transportation of conventional films. The following X-ray systems have been developed to overcome these disadvantages: scanning devices, phosphor plate or Computed Radiography(TM) ("CR") Systems and ddR Systems. Scanning devices are used to convert existing X-ray images into a digital form. While the use of scanning devices permits the electronic storage, retrieval and transmission of X-ray images, they do not eliminate the other inconveniences of conventional film and add time and expenses associated with the scanning process. In a CR system the film cassette is replaced with a phosphor plate which is electrically charged by X-rays. The electrical charges on this phosphor plate are then converted into digital information by a laser scanner. Although this system has the advantage that the phosphor plates are reusable and the inconveniences related to the development of X-ray films are eliminated, it does not achieve instant images and a significant amount of time and operating expenses are required in connection with the handling and scanning of the phosphor plates. Additional expenses arise due to the fact that phosphor plates have a limited lifespan. ddR technology is designed to eliminate the disadvantages and significant operating costs associated with conventional X-ray systems and CR systems. With ddR technology digital information can be made available for diagnostic purposes within a few seconds after an X-ray image is taken without any additional steps, thereby reducing processing time and related operating expenses. Direct digital X-ray technology uses either charge coupled devices ("CCD") arrays, amorphous silicon/selenium panels or selenium drums to convert X-rays into digital information. Products The Company's marketing strategy is to offer its customers a complete package of products and services in the field of radiology, including equipment, accessories and related services such as consulting and after-sales services. 3 The Company's products include conventional X-ray equipment for diagnostic purposes other than mammography and dentistry, a full line of ddR Systems for any application in direct digital Radiography as well as the SwissVision(R) line of DICOM 3.0/IHE compatible post-processing work stations operating on a Windows NT/2000 platform. Currently, most of the Company's X-ray equipment is manufactured and developed in Switzerland. On March 8, 1999 Swissray Medical AG, the Company's Swiss research and development, production and marketing subsidiary became ISO 9001 and EN 46001 certified. Appendix II for CE-Certification was completed in December 1999 thus allowing the Company to use the CE-Label, including the medical device numbers for all products manufactured and/or sold through the Company. See also "Products - Distribution of Agfa Products", "New Products" and "Regulatory Matters". Direct Digital Systems (ddR)/SwissVision The ddR line of products (which includes the ddRMulti, ddRCombi, ddRModulaire and ddRChest) and a SwissVision(R) workstation for the postprocessing of digital image data and the transfer of such data through central networks or via telecommunications systems, are complete multi-functional direct digital X-ray systems. All ddR Systems use the Company's AddOn Bucky(R) as the digital detector. The AddOn Bucky(R) is able to make available an X-ray image in a direct digital way for diagnostic study within seconds. As a consequence, the efficiency and the throughput of the bucky room can be increased. The Company believes that a significant advantage of the Company's ddR Systems is the fact that a variety of X-ray examinations can be made with the use of only one digital detector, the most expensive part of an X-ray system using direct digital technology. See also "New Products" hereinafter. During the 100 years in which X-ray imaging has been used for medical purposes, there has been a continuous trend to improve image quality, to reduce the radiation dose and to improve the ergonomic features of X-ray equipment. Management believes that the ddR technology developed by the Company will take this development to the next level because the ergonomically advanced ddR Systems provide excellent image quality with minimal radiation doses and at the same time reduce operating expenses through the elimination of films, cassettes or phosphor plates and the handling, development and storage thereof. The Company's line of SwissVision(R) post-processing workstations permits the post-processing of digital X-ray images, including section, zooming, enlargement, soft tissue and bone structure imaging, accentuation of the limitation of the joints, noise suppression, presentation of different fields of interest within an area and archiving and transferring the data through central networks and telecommunication systems. In addition, the SwissVision(R) post-processing workstations are able to analyze data stored with respect to a particular patient. As a result, consistent image quality of different images of the same patient can be achieved. The workstations operate on a Windows NT/2000 platform and are DICOM 3.0/IHE compatible. The Company is also offering products and services related to networking and electronic distribution of digital X-ray images. Conventional X-Ray Equipment, Imaging Systems, Components and Accessories The Company manufactures and sells conventional diagnostic X-ray equipment for radiological applications other than mammography and dentistry. In addition, the Company sells components and accessories for X-ray systems. In general, the components and accessories for X-ray equipment sold by the Company are manufactured by third parties. 4 Original Equipment Manufacturing (OEM) On June 11, 1996, the Company entered into the Philips OEM Agreement which replaced the previous OEM Agreement with Philips Medical Systems, dated July 29, 1992. The Philips OEM Agreement provides for the production of two conventional X-ray systems, the Bucky Diagnost TS bucky table and a MRS, which is approved by the World Health Organization ("WHO") as a World Health Imaging System for Radiology ("WHIS-RAD"). As a result, the Company's MRS may be tendered in projects financed by the World Bank. Under the Philips OEM agreement these two products are marketed worldwide by Philips Medical Systems through its existing distribution network. The initial term of the Philips OEM Agreement which would have expired December 31, 2000 has been automatically extended (from year to year). Since entry into the initial OEM Agreement the parties have maintained a mutually satisfactory relationship. The Company continues to deal directly with Philips with respect to its MRS. Services The services offered by the Company include the installation and after-sales servicing of imaging equipment sold by the Company, consulting services, application training of radiographers, second line support for the Company's distributors as well as technical training on the different Systems. Distribution of Agfa Products In April of 1998 the Company entered into an OEM Agreement with Agfa for the distribution of the latter's laser imagers, dry printers and computed radiography systems. By virtue of having entered into such distribution agreement, the Company is able to offer a complete solution for a total digital radiology department. Both Company products and Agfa products are DICOM 3.0 compatible and can be used on a network or for point-to-point connections. Agfa, a leading worldwide manufacturer of imaging products and systems, is part of the Agfa-Gevaert Group, with Agfa-Gevaert being a wholly owned subsidiary of Bayer AG. The software license with Agfa is a worldwide, non-exclusive, non-transferable license to use and distribute the Agfa software in combination with the AddOn Bucky and is based upon certain purchase order requirements. New Products 1999 Introduction of ddRChest and ddRCombi To compliment its ddRMulti, the Company developed two new ddR Systems, each of which were initially introduced at the Radiological Society of North America ("RSNA") annual assembly held in Chicago in November 1999 and subsequently exhibited at the European Congress of Radiology ("ECR-2000") in March 2000 in Vienna, Austria. The Systems are known as the (a) ddRChest and (b) ddRCombi. Both Systems are based upon the patented technology of the AddOn Bucky. The ddRChest is a dedicated chest unit capable of taking all chest examinations in a direct digital format. The ddRCombi is a multi-functional system able to perform examinations on the seated, upright and recumbent patient, can be coupled with an automated or manual ceiling suspension or may be combined with an existing ceiling suspension unit. It is designed and suited for trauma and emergency room applications. Retail pricing on the ddrChest approximates 80% and on the ddRCombi approximates 104% of retail pricing for the Company's ddRMulti. 5 The initial installation of a ddRCombi occurred in November 2000. An additional 21 ddRCombi were subsequently ordered with 15 having been installed through August 2002. 2000 Introduction of Five Additional New Products To further complete its ddRMulti and add to the two new ddR Systems referred to in the previous subsection, Swissray announced the introduction of five new products that were exhibited at RSNA 2000 held in Chicago during the last week of November 2000. These new products may be briefly summarized as follows: o ddRModulaire - a new system intended to lower the ddR price barrier which incorporates Swissray's patented, overlapping Quad-CCD detector into a new stand with a price comparable with detector-only retrofits offered by competitors while providing a complete entry level, multifunctional system for those within the medical/healthcare community with limited space and investment capital. o ddRFluoroscopy (work in progress) - designed to extend the clinical utility ddR by adding full motion imaging to complement the high resolution radiographic images already provided. o in order to meet special patient positioning needs of efficient, single detector ddR Systems, Swissray introduced two new tables. The IGS2000 (work in progress) - pedestal based table designed to provide positioning flexibility allows for head-to-toe horizontal coverage, tilts 90 degrees for upright imaging, pivots 90 degrees for decubitus exams and swings out of the way for chest radiography and the IGS1000 - a table that combines the convenience of a 4- way floating top with the flexibility of a portable table; and o the OrthoVision - a package of clinical software tools optimized to meet special requirements of orthopedic radiology including image stitching to enable full length spine imaging for scoliosis studies. Introduction of Additional New And/Or Improved Products During 2001-2002 The Registrant introduced several new performance enhancements for its direct digital Radiography ddR product line in November, 2001 at the Radiology Society of North America (RSNA) Exhibition. o The new expert (TM) 4000 drew the most attention. The control system increases patient throughput while also providing an efficient communication link to Swissray's Expert-Center support services. The expert (TM) 4000 improves technologist productivity by automating many procedure tasks while enabling Swissray experts to remotely monitor, service and upgrade ddR system performance in real time. 6 o Patient dose is substantially reduced and image quality improved with the new dOd-HP High Performance detector. The modular design of Swissray's digital Optical detector dOd allows continuous performance improvement. o The new ddR Modulaire provides a space efficient and cost-effective solution for healthcare providers with smaller procedure volumes. Now, thanks to the lower price point, the many advantages of ddR are available to an even larger radiography market segment. o The improved SwissVision II workstation provides several new options for technologists. Radiographic images can now be acquired from CR plate and analog film scanners as well as Swissray ddR systems. This multi-media integration feature allows technologists to combine images from multiple sources into a single patient file. SwissVision II also features several new software processing additions that were previously only available in separate workstations. These features include: image combination for full-length spine scoliosis imaging, leg length studies and Computer Aided Detection (CAD). o Swissray also showcased Real-Time Radiograph (high resolution full motion imaging) as a work-in-progress. This capability, analogous to adding video imaging to a photographic camera, adds important clinical utility to Swissray's radiograph systems including joint motion studies for orthopedics as an example. Swissray also introduced the expert (TM) 4000 control system to European buyers at the European Congress of Radiology (ECR) Exhibit in Vienna during March 2002. ECR marked the first time that the expert (TM) 4000 has been exhibited outside of North America. Awards and Milestones o For the fourth time Swissray was recognized by Deloitte & Touche as one of the 50 fastest growing technology companies in New York, Westchester and Rockland counties. o Frost & Sullivan presented Swissray with a Market Penetration Leadership Award for capturing an impressive 47.7% share of the new and rapidly growing direct digital Radiography ddR equipment market. For further information relating both to the award and Foster & Sullivan, reference is hereby made to Swissray's February 13, 2002 Press Release. o In June 2002, Swissray was recognized by the Business Marketing Association's Chicago Chapter, BMA Chicago, earning a Gold BMA Tower Award for its "Back to the Future" exhibition at RSNA 2001. The BMA Tower Awards are Chicago's most prestigious business-to-business marketing awards competition. Swissray won the Gold BMA Tower Award for "Tradeshow Marketing Program", the highest award in this category, in a year when a record number of entries were received. This award recognizes excellence in a complete communication program's objectives, strategy and results. Swissray was the only company to win an award in this category. 7 o In April 2002 Swissray announced the achievement of having installed its 100th U.S. direct digital Radiography ddR system. To date, Swissray has also installed 97 systems outside of the United States. Markets Product Markets The Company estimates that the global market for X-ray equipment and accessories is approximately $10 billion, 45% of which is in the United States, 26% in Western Europe, 19% in Japan and 10% in the rest of the world (Sources: National Electrical Manufacturers Association; Market Line). The Company's principal markets for its X-ray equipment, components and accessories by country are Switzerland, the United States and Germany accounting for approximately 68.8%, 29.8% and 1.4% respectively of total sales during the fiscal year ended June 30, 2000. Included in the 68.8% indicated in business conducted in Switzerland is monies received as a result of contracts entered into with the Romanian Ministry of Finance due to the fact that the down payment received of approximately $2,070,000 was guaranteed by the Swiss Export Risk Guaranty ("ERG") with funding coming from ABN AMRO Bank, which financed the agreement. Business conducted in Switzerland, the United States and Germany accounted for approximately 53.3%, 45.3% and 1.4% respectively of total sales during fiscal year ended June 30, 2001 and 9.15%, 86.07% and 4.37% respectively, of total sales during fiscal year ended June 30, 2002. The Company believes that because of the need to bring medical services to Western standards, Eastern Europe continues to offer interesting opportunities as a market for the Company's conventional X-ray equipment and accessories. The Company has also been able to gain access to markets in Asia, the Middle East and Africa. See "-- Sales and Marketing." The Company believes that the principal markets for its direct digital X-ray equipment are located in North America and Western Europe, where the first sales of ddR Systems have been made. The Company submitted both its AddOn Bucky(R) and ddR Systems to the FDA for Section 510(k) clearance. On November 21, 1997, the Company's AddOn Bucky(R), the direct digital detector of the ddRMulti-System, received FDA clearance and on December 18, 1997 the Company's ddRMulti-System received FDA clearance; the Company thus receiving authorization to market the ddRMulti-System in the United States. The Company's ddRCombi, ddRChest and ddRModulaire received FDA clearance in January 2001. Having obtained the required clearance from the FDA, the Company now sells all the Systems in the United States through its subsidiaries and other channels including its U.S. distributors, Hitachi Medical Systems, Inc. and Philips Health Care Products (Philips HCP). See "Business - Regulatory Matters" and "Distribution Agreements - The Hitachi Agreement" and "The Marconi Agreement" hereinafter. The percentage of revenues for fiscal year ended June 30, 2000, June 30, 2001 and June 30, 2002 attributed to product markets amounted to 91.97%, 95.62% and 97.77% respectively. 8 Service Markets The Company estimates that the worldwide market for services related to X-ray equipment, including maintenance management is approximately $44 billion, of which approximately $40.5 billion (or 92%) relate to after-sales services. The markets for maintenance management and capital planning amount to $3.4 billion or 8% of the total market for services related to X-ray equipment. The principal markets for after-sales services are the United States (45%), Western Europe (26%) and Japan (19%). The Company expects that as the installed base of X-ray equipment grows, the market for after-sales services will also expand. Additional growth may result from a general increase in the demand for such services. To date, a significant market for maintenance management and capital planning has only developed in the United States as a result of the impact of managed care plans and health maintenance organizations ("HMOs") on the health care industry. The Company expects that in the future there will be a similar trend in Europe, which may lead to the development of a market for such services in Europe. See "-- Products" and "-- Sales and Marketing." The Company currently intends to continue to concentrate its marketing efforts within Switzerland and the U.S. wherein approximately 98.6% of all Company sales were concluded during fiscal year ended June 30, 2000, with Switzerland accounting for 68.8% of all sales and the U.S. accounting for 29.8% of such sales (with the balance of 1.4% of sales being conducted in Germany). For the year ended June 30, 2001, 98.6% of all Company sales were from Switzerland and the United States; 53.3% from Switzerland, 45.3% from the United States and 1.4% from Germany and elsewhere, as compared to 9.15%, 86.07% and 4.37% for Switzerland, the United States and Germany respectively, for fiscal year ended June 30, 2002 (with Romania accounting for the balance of .41%). See also Note 14 to audited financial statements. The percentage of revenues for fiscal year ended June 30, 2000, June 30, 2001 and June 30, 2002 attributed to services amounted to 8.03%, 4.38% and 7.23% respectively. Sales and Marketing The Company's customers are universities, hospitals, clinics and imaging centers. The Company markets its products and services primarily through its own sales force in the United States, Switzerland, Germany and Eastern Europe and through resellers in these and other markets in Europe, Middle East, Africa, Asia, and Latin America. See also "Distribution Agreements - The Hitachi Agreement" as relates to Hitachi's distribution of SRMI's ddR Systems to end users within certain defined territories within the U.S. and "The Marconi Agreement". The Company also offers products and services related to networking and electronic distribution. Two of the Company's products, the MRS System and the Bucky Diagnost TS system, are distributed worldwide through Philips Medical Systems; the latter pursuant to a License Agreement. The Company believes that in the foreseeable future there will be a continuous world-wide growth in the markets for complete X-ray systems, components, accessories and related services because of the improvement of health care services in developing countries and Eastern Europe and the necessity to meet increasingly stricter regulations with respect to radiation dosage and other safety features and environmental hazards in many jurisdictions. With the transition from conventional to digital X-ray systems, the demand for products and services related to networking, archiving and electronic distribution of digital X-ray images will grow in industrialized countries. In these markets the demand for conventional X-ray equipment, accessories and related services will decrease over time. See "-- Markets." 9 Contract with Department of Veteran Affairs In May 1998 Swissray Medical Systems, Inc., was awarded a contract from the Department of Veterans Affairs ("VA") for the ddRMulti-System, with the VA extending the contract until March 31, 2003. With the official contract award in hand, management has actively pursued sales to various VA hospitals, medical centers and outpatient community and outreach clinics throughout the United States. Since receipt of such award the Company has contracted for the sale of 7 ddR Systems (through June 30, 2002) to different government institutions. Distribution Agreements In April of 1999 the Company entered into distribution agreements with (a) Linear Medical Systems, Inc. ("Linear") for the territory of Arizona and (b) Capital X-Ray, Inc. ("Capital") for the territories of Alabama and Mississippi. The Linear agreement expired in February 2000 and the Company is conducting its own distribution within the territory indicated while the Capital agreement was to have expired December 31, 1999, was initially renewed through July 31, 2000, further renewed through July 31, 2001 and continues to date on a month for month basis. Additional Distribution Agreements The following additional summarized information relates to certain exclusive or non-exclusive Distribution Agreements and indicates the name of distributor, country of distribution and both commencement and expiration date.
Genre of Commencement Expiration Non- Name Country Agreement Date Date Exclusive Exclusive ---- --------- --------- ---- ---- --------- --------- Cross Medical Ltd., London Great Britain Distribution 08-01 12-02 x ImaXperts Digital Imaging BV, Benelux Distrubition 11-01 11-02 x Almere/NL Panou S.A., Athens Greece Distribution 07-01 06-03 x Scanex Medical Systems AB, Sweden, Distribution 04-00 04-03 x Helsingborg Norway, x Finland x Global Medical Consultants Inc., Moscow Russia Distribution 04-02 04-03 x CIS Co ZAO Schiller Russia, Moscow Russia Distribution 04-02 04-03 x Gisvis Management and Russia Distribution 04-02 04-03 x Techmology Consultants, Ltd., Moscow Dover Medical & Scientific Equipment Israel Representation 01-01 01-04 x Ltd., Herzliya Agreement TechnoWave S.A.E., Cairo Egypt Distribution 01-01 01-04 x Schmidt BioMedTech Asia Ltd., Indonesia, Distribution 11-01 unlimited x Petaling Jaya Hong Kong, x Singapore, x Malaysia, x Vietnam, x Schmidt BioMedTech, Hong Kong China Distribution 11-01 unlimited x
10 Representative sales of ddRMulti In July of 1998 the Company sold its ddRMulti-System, to the largest Diagnostic Out Patient Center in Warsaw, Poland, the Diagnostic Center Luxmed. This order represented Swissray's first sale within the Eastern European Market, complementing sales previously made in both Western Europe and the United States. In February of 1999 the Company announced the sale of three of its ddRMulti-Systems, to Houston, Texas - based Kelsey-Seybold Clinic and to the Federal Maximum Security Facility in Florence, Colorado. The two Kelsey-Seybold systems were viewed in clinical use by attendees of the annual Society for Computer Applications (SCAR) meeting in Houston in May 1999 while the Colorado sale was made through the above indicated contract with the Department of Veterans Affairs. In October 1999 the Company was awarded a purchase order for 32 of its ddR Systems from the Romanian Ministry of Health for its multifunctional ddRMulti-System, valued at over $13,800,000 U.S. dollars. Installation was made in various hospitals throughout Romania. The initial payment aggregating 15% of the aforesaid total proceeds (i.e., approximately $2,070,000) was received by the Company in early March 2000. The Company sold 25 of the 32 dRMulti-Systems through close of its fiscal year ended June 30, 2000 while the balance of 7 Systems were sold through August 2000 with the Company receiving the full balance of $11,730,000 by such date. In October 2000 Swissray entered into a further agreement with the Romanian Ministry of Health (Romania) for the latter's purchase of 30 ddRChest-Systems in an agreement valued at more than $7,000,000 and guaranteed by the Swiss Export Risk Guaranty. Financing of the agreement was provided by ABN AMRO Bank. All 30 ddRChest-Systems were subsequently sold. There have not been any further significant sales to Romania during fiscal year ended June 30, 2002. The Hitachi Agreements In August of 1999 the Company signed a one year exclusive sales, marketing and service agreement with Hitachi Medical Systems America, Inc. (HMSA), a subsidiary of Hitachi Medical Corporation. Under the terms of the agreement HMSA provided sales, marketing, and service for the distribution of Swissray's ddRMulti-System to end users within certain defined territories within the United States. The defined territories referred to consisted of the entire U.S. except for: (i) the states of Alabama, Arizona, Connecticut, Mississippi, Maine, Massachusetts, New York, Rhode Island, Vermont and New Hampshire; (ii) a portion of New Jersey that includes the Atlantic City Expressway and north; (iii) certain designated counties within the state of Pennsylvania; (iv) the counties Orange and San Diego within the state of California; and (v) the Panhandle of Florida -Tallahassee West. Additionally, the Agreement contained provisions whereby additional exclusions existed with respect to various identified customers reserved to the Company principally due to the Company's prior contact with and/or dealings with such clientele. 11 In addition HMSA utilized and promoted Swissray Information Solutions services and products consisting of consulting and product solutions for medical imaging informatics. In accordance with such agreement, the Company is required to provide and provided HMSA with service training, installation, technical support and spare parts. The Company also warranted to the End-User that its product (exclusive of product software) would be free from defects in material and workmanship at time of delivery to End-User and for a period of 12 months from date of completion of product installation. The initial term of the Agreement expired in August 2000 without either party seeking cancellation thereof and remained in effect subject to all of the terms and conditions as set forth therein during the period of time that the parties actively negotiated and subsequently entered into a new two (2) year sales, marketing and service agreement (Agreement) effective February 1, 2001. The new Agreement, in a manner similar to the terminated Agreement, contains provisions regarding: (i) defined territories in the U.S. to which HMSA would market Company products; (ii) certain additional exclusions with respect to various identified customers reserved to the Company; and (iii) service training, installation, technical support and spare parts provisions as well as a Company warranty to End-User - the latter in the same manner as indicated above with respect to the initial Agreement. The new Agreement (which expires February 1, 2003) also contained certain provisions (since excluded by way of amendment dated June 12, 2001 when the Company entered into a separate Distribution Agreement with the Health Care Products (HCP) Division of Philips Medical Systems, Inc., see the Marconi Agreement, below. The aforesaid June 12, 2001 amendment also contained, in exchange for such exclusions, HMSA's waiver of the Company's prohibition from selling its products to certain U.S. customers with the exception of certain reserved accounts which did not exist in the prior Agreement, primarily relating to the fact that (a) the Company was to receive a "marketing fee" of $100,000 per annum payable in equal quarterly payments during the first year of the Agreement and (b) HMSA was obligated to purchase a minimum of 25 units during the first year of the Agreement. Product pricing for the second year of the Agreement is subject to adjustment based upon mutual agreement between the parties. The Marconi Agreement (Now Known As Philips HCP) The principal reason for the Company entering into the above referenced modification to its ongoing HMSA agreement (see "The Hitachi Agreements", above) was to permit the Company to enter into a separate Distributor Agreement with the Health Care Products Division of Marconi Medical Systems, Inc. ("HCP"), which latter agreement required, as a condition to its effectiveness, that the Company terminate or amend certain existing Distributor Agreements to the extent necessary so as to permit the new Marconi HCP agreement to become effective. The Marconi HCP Distributor Agreement dated June 1, 2001 became effective as of June 15, 2001 and expires March 31, 2004 - the date the Company's notification to Marconi HCP of its having concluded necessary amendments to existing Distributor Agreement(s). 12 The HCP Distributor Agreement is to run for a period of three years during which period of time HCP is to act as a non-exclusive distributor of Company products in the U.S. HCP sells and services a wide variety of products in medical imaging and is considered to maintain a high quality sales and service work force which calls upon hospitals, medical facilities and imaging centers (i.e., potential end users of the Company's ddR products). HCP has agreed that during the term of the Distributor Agreement it will not market other ddR or competing digital radiography systems and has agreed to develop marketing and sales programs to maximize awareness of the benefits of ddR over CR in the target markets. Additional New Agreements During fiscal year ended June 30, 2002, the Registrant also entered into distribution agreements with (i) MTM - a non-exclusive agreement for Canadian distribution which expires January 1, 2003; and (ii) TESA, an exclusive agreement for Mexican distribution which expires September 15, 2003. Percentage of ddRMulti Sold Directly by Company as Compared To Its Distributors With respect to a total of 64 ddRMulti-Systems contracted for sale during fiscal year ended June 30, 2000, 47 (73%) of same were made directly through the efforts of the Company's internal staff and sales team while the balance of 17 (27%) were made through the efforts of Company distributors. HMSA was responsible for 10 of such 17 contracted for distributor sales with no other Company distributor being responsible for more than two of such contracts. During fiscal year ended June 30, 2001 Swissray contracted for the sale of 66 ddR Systems (inclusive of its October 2000 contract for the sale of 30 ddRChest-Systems to the Government of Romania which was its single largest customer) with 90% of such sales being made directly by Swissray's internal staff and sales team. During fiscal year end June 30, 2002 the Registrant contracted for the sale of 73 ddR Systems with approximately 14% (10 Systems) of such sales being made by Swissray's internal staff and approximately 86% of such sales (63 Systems) being made by distributors - principally Hitachi and HCP. Additional Sales Information In the past, the Company has made a significant amount of sales of its X-ray equipment to a few large customers. For the fiscal year ended, June 30, 2000, June 30, 2001 and June 30, 2002, sales to the Company's single largest customer accounted for approximately 49.14%, 34.49% and 35.7% of all revenues. The single largest customer for both fiscal years ended June 30, 2000 and June 30, 2001 was the Government of Romania, while the Company's single largest customer(s) for fiscal year ended June 30, 2002 was Hitachi Medical Systems America. The Company considers the relationship with its largest customers to be satisfactory. Historically, the identity of the Company's largest customers and the volumes purchased by them has varied. The loss of the Company's current single largest customer or a reduction of the volume purchased by it would have an adverse effect upon the Company's sales until such time, if ever, as significant sales to other customers can be made. The Company expects that as sales of its ddR Systems increase, the Company's revenue will be less dependent on a few large customers. 13 In August 1998 the Company entered into a global distributorship agreement for its ddRMulti-System with Elscint Ltd. of Haifa to sell and service such product in 14 countries in Europe, Canada, South America and Africa. Thereafter, almost all of the assets of Elscint Ltd. were sold to Picker International and GE Medical Systems respectively. Neither Picker International nor GE Medical Systems have executed or honored the distributorship agreement as of the date hereof and therefore the Company was unable to sell the anticipated 75 ddRMulti-Systems (partially anticipated to be sold through Elscint Ltd.) within the fiscal year 98/99 as originally planned. See Item 3 "Legal Proceedings" regarding litigation which the Company instituted against Elscint Ltd. in March 2002. Research and Development During fiscal year ended June 30, 2002 research and development expenses amounted to $2,549,384; a 10.6% increase over 2001. The increase of the Company's research and development expenses from the fiscal year ended June 30, 2001 to the fiscal year ended June 30, 2002 resulted primarily from costs associated with development of the new products heretofore described under Item 1 "Business - New Products". During fiscal year ended June 30, 2001 research and development expenses amounted to $2,305,165. During the fiscal year ended June 30, 2000 the Company incurred expenses regarding research and development of $1,914,065 (accounting for 11% of the Company's operating expenses). The increase of the Company's research and development expenses by 20% from the fiscal year ended June 30, 2000 to the fiscal year ended June 30, 2001 resulted primarily from costs associated with development of the new products heretofore described under Item 1 "Business - New Products". It is currently anticipated that the Company will continue to incur significant research and development expenses associated with the further development of new products (including diagnostic hardware and software products and new digital X-ray products) and improvements to existing products manufactured by the Company. As of June 30, 2002, the Company employed 18 people in research and development. The number of people employed in research and development has increased by 20% since June 30, 2001. The Company is outsourcing certain research and development activities and intends to continue this policy in the future. The Company has established a scientific advisory board to support its research and development projects and to enable the Company to develop technologically advanced products. The Company believes that the integration of academic institutions and hospitals will allow the Company to save research and development expenses and will provide it with access to clinical and scientific experience and know-how. 14 Raw Materials and Suppliers The Company has a policy of outsourcing the manufacturing of components for its X-ray equipment whenever such outsourcing is more efficient and cost effective than in-house production. In particular, components for which serial production is available are produced by third-party manufacturers according to Company specifications. Generally, the X-ray accessories sold by the Company are manufactured by third parties. There is virtually no stock of finished X-ray equipment on the Company's premises for any extended period of time since X-ray equipment is generally manufactured at a customer's request. At June 30, 2002 finished products accounted for approximately 7% of inventory while raw material, parts and supplies accounted for approximately 84% of inventory and work in process for approximately 9%. The percentage of Company revenues derived from products which included components then only currently available from a single source supplier amounted to 86.14% as of June 30, 2001 as compared to 64.2% as of June 30, 2000 (all of which related to both single source supplier of certain camera electronics and single source supplier of optics since both items are included in the same product). See below with respect to in-house production of camera electronics. A. Information With Respect to In-house Production of Camera Electronics The agreement with the single source supplier of certain camera electronics terminated December 31, 1999 due to the fact that its manufacturing plant where the camera electronics had been manufactured permanently closed on such date and Company management was not satisfied with proposals submitted to it by such supplier regarding the latter's intentions of establishing a new manufacturing plant. Company agreement with its then new supplier of camera electronics provided for availability of such camera electronics to the Company commencing January 1, 2000. In January of 2000 the Company entered into a new arms- length agreement with its CCD camera supplier Laboratories d'Electronique Philips S.A.S. whereby the Company has purchased, from available working capital, the production facility (including necessary tools equipment, diagrams and related know-how) for approximately 250,000 Swiss Francs (US$161,290) and it is management's ongoing intention through such purchase) to have a sufficient number of CCD cameras on hand (four per system) to cover in excess of those immediately required to cover orders. Through in-house production of key camera components the Company has eliminated its reliance upon its former supplier, reduced camera costs because at a minimum the Company is no longer funding its former suppliers profit margin and has not incurred any material business interruptions regarding CCD camera availability in a timely manner. Further, such in-house production has not had any adverse effect upon quality of its ddR Systems. B. Agreement With Single Source Supplier of Optics The agreement with the single source supplier of optics expires in August 2003, may not be terminated by either party without cause and is subject to renegotiations which are expected to occur assuming contract fulfillment continues to be concluded in a timely and satisfactory manner with price and 15 payment terms being comparable to those currently being utilized and meeting Company capacity requirements. The percentage of revenues from this single source supplier of optics amounted to approximately 64.2% at fiscal year ended June 30, 2000, 86.14% at fiscal year ended June 30, 2001 and 87.67% for fiscal year ended June 30, 2002. While management has no current expectation or need to replace this supplier it does not envision encountering any material difficulties in replacing such supplier (with a different optics manufacturer having the ability to timely deliver comparable optic quality) if necessary in the event of any unforeseen circumstances which may require replacement. Backlog As of October 4, 2002, backlog amounted to $7,086,228 with digital unit backlog constituting $6,769,602 and the balance being conventional X-ray equipment and services. At fiscal year ended June 30, 2001 total order backlog amounted to approximately $8,013,600 of which approximately $6,131,200 represented digital with the balance representing conventional X-ray equipment and services. As of the end of fiscal year ended June 30, 2000 the Company had an order backlog of $8,800,000 which consisted of $2,080,000 in conventional X-ray equipment and $6,720,000 in digital (i.e. ddRMulti and information solutions). While the Company expects to continue to have an order backlog for conventional X-ray equipment in the future because of the Philips OEM Agreement, the order backlog for digital X-ray equipment is anticipated to increase due to the Company's sales focus. Competition X-Ray Equipment Market The markets in which the Company operates are highly competitive and are characterized by rapid and significant technological change. Most of the Company's competitors are significantly larger than the Company and have access to greater financial and other resources than the Company. The principal competitors for the Company's conventional X-ray equipment are General Electric, Siemens, Toshiba, Hologic, Shimatsu and Philips. In general, it is the Company's strategy to compete primarily based on the quality of its products. In the market for conventional X-ray equipment, the Company's strategy is to focus on niche products and niche markets. To the Company's knowledge the only direct digital X-ray systems for medical diagnostic purposes other than the ddR Systems of the Company currently available are chest examination systems and mammography systems offered by Philips, IMIX, Odelft and General Electric. In addition, there are several direct digital X-ray systems available for dental purposes. None of these systems is able to perform bone examinations on extremities. Furthermore, there are two companies, Hologic and Canon, offering multifunctional direct digital Radiography systems competing with the Company's ddR Systems. The Company has succeeded to gain the leadership position in the market of multifunctional direct digital Radiography systems with currently 197 of such systems installed. 16 Service Market In the markets for services related to imaging equipment the Company's competitors are equipment manufacturers (including certain of the Company's competitors in the X-ray equipment market) and independent service organizations. In the service markets, it is the Company's strategy to build a market position based on the confidence of its customers in the quality of its products and service personnel. See "-- Products," "-- Markets". Intellectual Property and Patents The Company has obtained patent protection for certain aspects of its conventional X-ray technology. The Company has filed patent applications covering certain aspects of its direct digital technology in key markets in Europe, North America and Asia, including the United States, Canada, Switzerland and Germany. Although the Company believes that its products do not infringe patents or violate proprietary rights of others, it is possible that infringement of proprietary rights of others has occurred, may occur or may be claimed. In the event the Company's products infringe patents or proprietary rights of others, the Company may be required to modify the design of its products or obtain a license. There can be no assurance that the Company will be able to do so in a timely manner, upon acceptable terms and conditions or at all. The failure to do any of the foregoing could have a material adverse effect upon the Company. In addition, there can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement action and the Company could, under certain circumstances, become liable for damages, which also could have a material adverse effect on the Company. The Company also relies on proprietary know-how and employs various methods to protect its concepts, ideas and technology. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such technology or obtain access to the Company's proprietary know-how or ideas. Furthermore, although the Company has generally entered into confidentiality agreements with its employees, consultants and other parties, there can be no assurance that such arrangements will adequately protect the Company. The Company has obtained licenses to use certain technology which is essential for certain of the Company's products, including certain software used for its line of SwissVision(R) post-processing systems. The software license is a worldwide, non-exclusive, non-transferable license to use and distribute the Agfa software in combination with the AddOn Bucky and is based upon certain purchase orders. The Company considers the Swissray name as material to its business and has obtained trademark protection in key markets. The Company is not aware of any claims or infringement or other challenges to the Company's rights to use this or any other trademarks used by the Company which it considers to have any merit whatsoever. The Company has patented certain aspects of its proprietary technology in certain markets and has filed patent applications for its direct digital technology in key markets, including the United States. The European patent as well as the U.S. patent for the AddOn Bucky have been granted and expire December 2015. The duration of other patents range from 2000 to 2016. In many instances where patents are filed the "applicant" is listed as a specific individual (such as the Company's President) while the patent ownership is listed in the Company's name thereby assuring that the exclusive patent holder is the Company. 17 In March of 1999 the European Patent Office issued patent No. EP 0 804 853 and and in July of 1999 the U.S. Patent Office issued patent No. 5,920,604 - both for the Company's Radiography (ddR) detector, the AddOn-Bucky (R) which patent relates to the optical arrangement and process for transmitting and converting primary X-ray images, which is the first of two inventions for the AddOn Bucky(R). The second patent application for optical arrangement and method for electronically detecting an X-ray image was granted in March 2000 (Patent No. 6,038,286) in the U.S., while the European patent was granted in April 2001. The AddOn Bucky(R) is incorporated in Swissray's unique ddR Systems. The U.S. patent was awarded to Swissray pursuant to application submitted by inventors R.G. Laupper, Chairman, President and Chief Executive Officer of Swissray International, Inc. and Peter Waegli (Bremgarten, Switzerland), for the optical arrangement and process for transmitting and converting primary X-ray images generated on a two dimensional primary image array. The Company had previously been awarded, in March 1999 the European patent for the technology indicated herein. The second patent application for the optical arrangement and method for electronically detecting an X-ray image was granted (in Europe) in April 2001 while the U.S. patent therefore was granted to the Company (Patent No. 6,038,286) in March 2000. Regulatory Matters The Company's X-ray equipment, components and related accessories are subject to regulation by national or regional authorities in the markets in which the Company operates. Pursuant to the Federal Food, Drug and Cosmetic Act, X-ray equipment is a class IIb medical device which may not be marketed in the United States without prior approval from the FDA and EWG. The FDA review process typically requires extended proceedings pertaining to the safety and efficacy of new products. A 510(k) application is required in order to market a new or modified medical device. If specifically required by the FDA, a pre-market approval ("PMA") may be necessary. The Company submitted both its AddOn Bucky(R) and the ddRMulti for Section 510(k) clearance with the FDA. On November 21, 1997, the Company's AddOn Bucky(R), the direct digital detector of the ddRMulti, received FDA approval and on December 18, 1997 the Company's ddRMulti received FDA approval; the Company thus receiving authorization to market the ddRMulti in the U.S. The FDA also regulates the content of advertising and marketing materials relating to medical devices. There can be no assurance that the Company's advertising and marketing materials regarding its products are and will be in compliance with such regulations. The Company is also subject to other federal, state, local and foreign laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices. The electrical components of the Company's products are subject to electrical safety standards in many jurisdictions, including Switzerland, EU and the United States. The Company believes that it is in compliance in all material respects with applicable regulations. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspensions of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. The effect of government regulation may be to delay for a considerable period of time or to prevent the 18 marketing and full commercialization of future products or services that the Company may develop and/or to impose costly requirements on the Company. There can also be no assurance that additional regulations will not be adopted or current regulations amended in such a manner as will materially adversely affect the Company. Company product certifications may be briefly summarized as follows: On March 8, 1999 Swissray Medical AG, the Company's Swiss research and development, production and marketing subsidiary became ISO 9001 and EN 46001 certified. Appendix II for CE - Certification was completed in December 1999 thus allowing the Company to use the CE-Label, including the medical device numbers for all products manufactured and/or sold through the Company. Environmental Matters The Company is subject to various environmental laws and regulations in the jurisdictions in which it operates, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. The Company owns or leases properties and manufacturing facilities in Switzerland, the United States, Germany, Czech Republic and Romania. The Company, like its competitors, has incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations in both the United States and abroad as may specifically apply to it. The Company does not believe that it has been involved in utilization of any types of substances and/or wastes which it considers to be hazardous and the operation of its business (or former business), accordingly, is not believed to have created any potential liability involving environmental matters. Although the Company believes that it is in substantial compliance with applicable environmental requirements and the Company to date has not incurred material expenditures in connection with environmental matters, it is possible that the Company could become subject to additional or changing environmental laws or liabilities in the future that could result in an adverse effect on the Company's financial condition or results of operations. Sale of Substantially All of the Assets of Empower, Inc. On April 1, 1997, the Company acquired Empower, Inc. ("Empower") which since incorporation in 1985, had been engaged in distributing and servicing diagnostic X-ray equipment and accessories in the New York, New Jersey and Connecticut area. Certain details with respect to such acquisition were reported in a Form 8-K and Form 8-K/A1 with date of report of April 1, 1997. In February 1998 the Company entered into a letter of intent with E.M. Parker Co., Inc., a Massachusetts corporation ("Parker") with respect to the sale of Empower's film and X-ray accessories business. Thereafter, the Company and its wholly owned subsidiary, Empower, Inc. ("Empower") entered into an Asset Purchase Agreement with Parker pursuant to which the Company and Empower sold and Parker purchased substantially all of the assets of Empower (excluding certain excluded assets as defined in the Agreement) in consideration of: (i) the assumption by Parker of certain liabilities of Empower; (ii) the cash purchase price of $250,000; and (iii) the payment by Parker of approximately $376,000 to a banking institution in satisfaction of certain outstanding indebtedness of Empower. Empower remains a wholly owned (but currently inactive) subsidiary of the Company. Empower has been merged into Swissray America, Inc. effective September 10, 2001. The Company is currently engaged in litigation with the former CEO of Empower, to wit: J. Douglas Maxwell. For information regarding such litigation reference is made to Item 3 "Legal Proceedings". 19 Both the original purchase and subsequent sale referred to in the preceding paragraph were contracted on an arms-length basis. The sale of Empower's assets less than one year after acquisition of Empower related primarily to the sale of film, chemical and certain servicing of conventional X-ray equipment since these areas no longer constituted the Company's "core" business which revolves around its ddRMulti and filmless digital technology. The original purchase of Empower was for $120,000 and the subsequent sale referred to resulted in a gain of $55,000. Counsel representing the Company with respect to this transaction determined that such transaction was not material, did not require stockholder approval and advised management which acted upon reliance of such legal advice. Sale of Conventional X-Ray Division in Germany and Switzerland The Company's primary focus is currently on ddR as opposed to conventional X-ray equipment. In that regard the Company's German subsidiary (Swissray GmbH) and Swissray Medical AG (Switzerland) sold their conventional X-ray business divisions in March 2000 and June 2000 respectively to an unaffiliated third party in order to more extensively focus upon sales and marketing of ddR equipment. Employees At fiscal year ended June 30, 2002, 18 individuals were employed by subsidiaries in the United States, 90 persons in Switzerland and 18 persons in European countries other than Switzerland. The Company believes that its relationship with employees is satisfactory. The Company has not suffered any significant labor problems during the last five years. Consulting Agreements Entered Into With (a) Liviakis Financial Communications, Inc. ("LFC") dated March 29, 1999 and March 29, 2000; and (b) Rolcan Finance Ltd. ("Rolcan") dated March 29, 1999 Certain pertinent terms and conditions contained in the Agreements entered into by the Company and LFC and Rolcan were summarized in the Registrants Form 10-K for fiscal year ended June 30, 2001 to which reference is made, but did not purport to be complete summaries of either of such Agreements. Copies of such Agreements are filed with the SEC in a Company Form S-1 Registration Statement under SEC file number 333-59829. Accordingly, further information may be obtained through the Commission's World Wide Web site utilized for issuers (such as the Company) that file electronically with the Commission. The address of such site is http:\\www.sec.gov. Recent Developments Hitachi and Marconi Agreements See Item 1 - "Business - Sales and Marketing - Distribution Agreements - The Hitachi Agreement and The Marconi Agreement" with respect to the current status of each of such Agreements entered into during fiscal year ended June 30, 2001. 20 The Hillcrest Agreement The Company, principally during December of 2000, entered into various negotiations with those persons and/or firms with whom it had entered into prior financing agreements, which persons and/or firms were then the holders of outstanding: (i) convertible debentures; (ii) Series A Preferred Stock; and/or (iii) promissory notes. For specific information with respect to such prior financings, reference is herewith made to Registration Statement under Sec File No. 333-59829 as declared effective on August 14, 2000 and in particular, but not limited to, those sections entitled "History of Past Financings", " Selling Holders ", "Plan of Distribution" and "Description of Capital Stock - Promissory Notes Subsequently Converted into Debentures" and "Registration Rights" as well as to those Risk Factors in such Registration Statement which similarly dealt with matters specifically relating to such financings and are entitled "Potential Adverse Effect Upon Stock Price and Regulation D", "Inability to Currently Determine Number of Shares in Outstanding Shares" and "Requirements for the Issuance of Additional Shares Financing Agreements". With respect to the above, 13 of the Selling Holders named in the section entitled "Selling Holders" assigned all of their rights and interests to an entity known as Hillcrest Avenue LLC ("Hillcrest"), a corporation incorporated under the laws of the Cayman Islands. The Selling Holders who assigned their rights to Hillcrest are as follows: Dominion Capital Fund, Sovereign Partners LP, Dominion Investment Fund LLC., Aberdeen Avenue LLC, Parkdale LLC, Canadian Advantage Limited Partnership, Atlantis Capital Fund Ltd., Striker Capital, Southridge Capital Management LLC, Fetu Holding, Greenfield Investment Consultants, LLC, Dundurn Street LLC and Southshore Capital Fund Ltd. Of such group of 13 the following "Selling Holders" were principal stockholders prior to such assignment - Dominion Capital Fund Limited, Sovereign Partners LP and Parkdale LLC. Hillcrest thereafter and in accordance with negotiations with the Company entered into written agreements, each dated as of December 29, 2000, pursuant to which all of those rights acquired by Hillcrest in accordance with the aforesaid assignments were exchanged for the issuance to Hillcrest of 52,442,347 restrictive shares of Company common stock thereby extinguishing those convertible debentures, Preferred Shares and promissory notes heretofore assigned to Hillcrest by Selling Holders. At the time of assignment the debt instruments indicated had a valuation of $16,907,573 (inclusive of interest and penalties), all of which was extinguished in exchange for issuance of the aforesaid 52,442,347 Company shares to Hillcrest. As a direct result of the above referenced transaction Hillcrest became and remains the single largest stockholder of the Company owning approximately 61.88% of all issued and outstanding common stock of the Company as of August 15, 2001. Notwithstanding such ownership, Hillcrest has given Ruedi G. Laupper the Company's President, sole voting rights over such shares as were owned by Hillcrest so that Ruedi G. Laupper could vote such shares in such manner as he may choose (including in his favor to continue to maintain his current positions with the Company) and in his sole discretion at all Company shareholder meetings; such rights being limited, to an extent, by certain exceptions thereto as are enumerated in Shareholder Agreement hereinafter referred to at Section 2.2b(a) through (j) inclusive thereto. The Shareholders Agreement (absent voluntary agreement to terminate or receivership, bankruptcy or matters of a similar nature) was to terminate on such date as Hillcrest's record and beneficial ownership is equal to 9.9% or less of all then issued and outstanding Common Stock of the Company (although certain provisions of the Shareholders Agreement as relate to the "Anti-Dilution" provisions as were contained therein survived such termination). Notwithstanding Ruedi G. Laupper's voting rights (as outlined above), Hillcrest had retained sole investment power over the Company shares heretofore referred to. Additionally, effective July 1, 2002, the Shareholders Agreement (dated December 20, 2000) which contained the above-referenced voting rights was terminated. See also "Subsequent Event" below. 21 The written agreements dated December 29, 2000 as entered into between Hillcrest, the Company and others are entitled (a) Exchange Agreement, (b) Shareholders Agreement and (c) Registration Rights Agreement (the latter of which required that the Company file a Registration Statement with the SEC within 60 days from closing of the Exchange Agreement so as to register the aforesaid 52,442,347 shares notwithstanding the fact that Hillcrest agreed that it may not sell all or any portion of such shares for a period of no less than 6 months and 1 day from closing the Exchange Agreement. Each of the agreements referred to (i.e., Exchange Agreement, Shareholders Agreement and Registration Rights Agreement) were filed with the SEC as Item 7(c) Exhibits to Form 8-K with date of report of December 29, 2000. The required Registration Statement to register the 52,442,347 Company shares issued to Hillcrest was filed with the SEC on February 20, 2001 (File No. 333-55898) and declared effective on March 9, 2001. See "Subsequent Event" hereinafter for current status of this Agreement. The DIANAssociates Agreement In December 2000 the Company announced that it received an order for 10 ddR Systems from DIANAssociates, Inc., a telemedicine service provider based in Maryland (so as to provide TB screening services at 10 geographically diverse locations in the U.S.). The Redington Agreement In March 2001 the Company engaged Redington, Inc. ("Redington"), a Fairfield, Connecticut based firm specializing in working with emerging technology companies, to perform various investor relations services in order to improve shareholder relations and increase corporate awareness in the financial community. It is intended that Redington's work on behalf of Swissray will include national awareness programs designed to articulate the unique advantages of Swissray's ddR Systems, and to help investors better understand the potential market opportunities for this technology. The initial term of the contract is for a one year period ending February 28, 2002 and was not renewed. In addition to an agreed to monetary fee (paid for approximately 68% in cash with the balance being paid in shares of Swissray common stock) the Company is obligated to issue Warrants (over a period of up to 5 years) to purchase up to 500,000 shares of Company common stock at various exercise prices equal to market price on date of grant. The specific number of Warrants to be issued will be determined based upon certain defined trading price goals being achieved and, accordingly, may be considered as a form of incentive compensation. To date 100,000 Warrants exercisable through March 15, 2006 (at the closing bid price on the March 15, 2001 date of issuance) have been issued and remain unexercised. 22 Subsequent Event On July 12, 2002, the Company entered into a Securities Purchase Agreement with Kew Court, LLC (hereinafter "Kew Court") pursuant to which Kew Court agreed to purchase Convertible Promissory Notes (bearing interest at five (5%) percent per annum and convertible into shares of Company Common Stock at ninety (90%) percent of the average closing bid price for the Five (5) trading days immediately preceding conversion) The initial purchase is Two Hundred Fifty Thousand ($250,000) Dollars out of a total offering of not more than Three Million ($3,000,000) Dollars. The Company is required to register the shares of Company Common Stock issued pursuant to note conversion. The purchase of additional notes past the initial $250,000 is conditioned upon the Company (i) shipping a minimum number of radiography units during the previous month; (ii) achieving certain cost savings goals over the next two (2) quarters; and (iii) having an aggregate dollar trading volume in its common stock over certain defined periods. In addition, on August 14, 2002 the Company entered into a separate Exchange Agreement with Kew Court LLC ("Kew Court") pursuant to which Kew Court agreed to exchange Convertible Series B Preferred Shares previously issued to it (and having a face value approximating Three Million Eight Hundred Thousand ($3,800,000) Dollars with Kew Court then having the right to convert such Series B Preferred Shares into Eighteen Million Seven Hundred Fifty Thousand (18,750,000) Company Common Shares). In return for cancellation of the Series B Preferred Kew Court is to receive Three Hundred Seventy (370) shares of the Company's Series C Convertible Preferred Stock (convertible into shares of Company Common Stock in accordance with the terms and conditions set forth in the Company's "Certificate of Designations of Rights and Preferences of the Series C Convertible Preferred Stock" which permits conversion until March 31, 2003, absent any change of control, at the greater of One ($1.00) Dollar and a defined variable conversion price with conversions subsequent to March 31, 2003 being at Ninety (90%) Percent of the average closing bid price for the 5 day period preceding conversion). On August 14, 2002 the Company entered into a separate Exchange Agreement with its single largest shareholder, Hillcrest Avenue LLC (hereinafter "Hillcrest") pursuant to which Hillcrest agreed to exchange Fifty Million (50,000,000) shares of Company Common Stock owned by it for Two Thousand Eight Hundred and Thirty (2,830) shares of the Company's Series C Convertible Preferred Stock with conversion terms identical to those described above. Hillcrest and Kew Court have identical registration rights for the shares of Company Common Stock issuable upon Series C Preferred Conversion in accordance with the terms and conditions of a Registration Rights Agreement. The foregoing is intended solely as a summary of certain material terms and provisions contained in the above-referenced Agreements, and does not purport to summarize all pertinent and/or relevant additional information including various warranties and representations of the parties to such agreements, the various obligations assumed thereunder and their respective remedies in the event of any defaults. CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 As heretofore indicated on the cover page of this Form 10-K under the heading "Documents Incorporated by Reference" certain portions of the Company's recently declared effective (February 20, 2001) Registration Statement and in particular, but not limited to, the section therein entitled "Risk Factors" have been incorporated by reference. As a result thereof the following "Cautionary Statement" should be taken into careful consideration. 23 Investment in the securities of the Company involves a high degree of risk. In evaluating an investment in the Company's Common Stock, Company stockholders and prospective investors should carefully consider the information contained in this Form 10-K for the fiscal year ended June 30, 2002 including, without limitation, Item 1 "Business" and Item 6 "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as information incorporated by reference from the Company's aforesaid Registration Statement. This Form 10-K includes forward-looking statements that reflect the Company's current views with respect to future events and financial performance, including capital expenditures, strategic plans and future cash sources and requirements. These forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results of those anticipated. The words, "believe", "expect", "anticipate", "estimate" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Item 2. Properties On May 15, 1997, the Company purchased a new office and production facility of approximately 43,000 square feet and moved its entire production to this facility and has since moved the offices and other facilities formerly located in its Hitzkirch facility to the new Hochdorf facility. The Company believes that its Hochdorf facility provides it with sufficient production and office space to meet its current demand in Switzerland for the foreseeable future. In September 2000 the Company purchased an additional approximate 21,000 square feet (adjacent to its facilities) for production expansion purposes, if and when advisable. The Company also leases office space in Elmsford, New York, Brno, Czech Republic, Wiesbaden, Germany and Bucharest, Romania. Item 3. Legal Proceedings A. Dispute with J. Douglas Maxwell. On or about July 1, 1999 an action was commenced in the Supreme Court, State of New York, County of New York (Index No. 113099/99) entitled J. Douglas Maxwell ("Maxwell") against Swissray International, Inc. ("Swissray"), whereby Maxwell is seeking judgment in the sum of $380,000 based upon his interpretation of various terms and conditions contained in an Exchange Agreement between the parties dated July 22, 1996 and a subsequent Mutual Release and Settlement Agreement between the parties dated June 1, 1998. Swissray has denied the material allegations of Maxwell's complaint and has asserted three affirmative defenses and two separate counterclaims seeking dismissal of the complaint and rescission of the settlement agreement. It is Swissray's management's intention to contest this matter vigorously. An Order has been made on July 24, 2000 granting Maxwell partial summary judgment on portion of his claim for approximately $320,000 plus interest. Maxwell's application for judgment on the balance of his claim was dismissed, and thereafter (August 22, 2002) reversed on appeal by the Appellate Division of the State of New York. 24 B. Dispute with Elscint Ltd. In August 1998 the Company entered into a global distributorship agreement for its ddRMulti with Elscint Ltd. of Haifa to sell and service such product in 14 countries in Europe, Canada, South America and Africa. Soon thereafter almost all of the assets of Elscint Ltd. were sold to Picker International and GE Medical Systems respectively. Neither Picker International nor GE Medical Systems have executed or honored the distributorship agreement as of the date hereof and therefore the Company was unable to sell the anticipated 75 ddRMulti (partially anticipated to be sold through Elscint Ltd.) within the fiscal year 98/99 as originally planned. The Company instituted legal proceedings against Elscint Ltd. in March 2002 in The Supreme Court of New York, County of New York, Index No. 01144/02, alleging fraud, breach of contract, and other claims in connection with two distribution agreements executed in August of 1998. The suit alleges that Elscint breached agreements to distribute Swissray ddR technology internationally and for Swissray to distribute Elscint imaging equipment in Switzerland. The complaint alleges various improprieties in Elscint's negotiation tactics, its fraudulent concealment of the impending sale of its imaging business, and the inevitable breaches of the distribution agreements that followed the sale. C. Commencement of a Patent Infringement suit in March 2000: Swissray filed (before the Tribunal de Grande Instance de Marseille) a patent infringement suit against a firm known as Apelem alleging that the French part of its European patent number EP 862 748 was infringed by virtue of the production/offer/sale of x-ray equipment by Apelem. Apelem filed its answer in January 2002 and the Company filed its reply in June 2002. Item 4. Submission Of Matters To A Vote Of Security Holders The Company held its Annual Meeting of Stockholders for fiscal year ended June 30, 2001 on January 25, 2002 at its Elmsford, New York offices. With proxies being received for approximately 94% of all shares entitled to vote, stockholders' elected each of the 5 nominees to the Company's Board of Directors by an overwhelming majority (approximately 99%) of all votes cast. Stockholders also approved the appointment of Feldman Sherb & Co., P.C. as independent auditors for fiscal year ended June 30, 2002 as well as the proposals (i) to increase authorized shares of Company common stock to 150,000,000; and (ii) to re-incorporate in Delaware. The Company expects to hold its Annual Meeting of Stockholders for fiscal year ended June 30, 2002 in late 2002. Specific plans as to exact date, location and agenda have not yet been finalized but once a definitive time frame and agenda have been arrived at all stockholders of record, as of the chosen record date, shall be properly notified. PART II Item 5. Market For Registrant's Common Equity And Related Stockholder Matters. 25 Market Information The Registrant's common stock, $.01 par value (the "Common Stock") was listed on the Nasdaq SmallCap Market and traded under the symbol SRMI until October 26, 1998 delisting(1). Since January 1999 the Company's common stock has been trading on the Electronic Over-the-Counter Bulletin Board under the same symbol. The following table sets forth, for the periods indicated, the range of high and low bid prices on the dates indicated for the Registrant's securities indicated below for each full quarterly period within the three most recent fiscal years (if applicable) and any subsequent interim period for which financial statements are included and/or required to be included. Fiscal Year Ended June 30, 2000 Quarterly Common Stock By Quarter Price Ranges Quarter Date High Low ------- ---- ---- --- 1st September 30, 1999 $ 4.062 $ 1.875 2nd December 31, 1999 $ 7.40625 $ 2.71875 3rd March 31, 2000 $ 9.937 $ 3.375 4th June 30, 2000 $ 4.05 $ 2.187 Fiscal Year Ended June 30, 2001 Quarterly Common Stock By Quarter Price Ranges(2) Quarter Date High Low ------- ---- ---- --- 1st September 30, 2000 $ 2.81 $ 1.47 2nd December 31, 2000 $ 1.75 $ 0.30 3rd March 31, 2001 $ 1.00 $ 0.36 4th June 30, 20001 $ 1.03 $ 0.35 Fiscal Year Ended June 30, 2002 Quarterly Common Stock By Quarter Price Ranges Quarter Date High Low ------- ---- ---- --- 1st September 30, 2001 $ 1.24 $ .40 2nd December 31, 2001 $ .82 $ .49 3rd March, 31, 2002 $ .61 $ .40 4th June 30, 2002 $ .47 $ .30 ------------------------- (1) The Registrant's Common Stock began trading on the Nasdaq SmallCap market on March 20, 1996 with an opening bid of $4.75. The following statement specifically refers to the Common Stock activity, if any, prior to March 20, 1996 and subsequent to October 26, 1998 NASDAQ delisting. The existence of limited or sporadic quotations should not of itself be deemed to constitute an "established public trading market." To the extent that limited trading in the Registrants's Common Stock took place, such transactions have been limited to the over-the- counter market. Until March 20, 1996 and since October 26, 1998, all prices indicated are as reported to the Registrant by broker-dealer(s) making a market in its common stock in the National Quotation Data Service ("pink sheets") and in the Electronic Over-the-Counter Bulletin Board. During such dates the Registrant's Common Stock was not traded or quoted on any automated quotation system other than as indicated herein. The over-the-counter market and other quotes indicated reflect inter-dealer prices without retail mark-up, mark-down or commission and do not necessarily represent actual transactions. (2) On the date of NASDAQ's delisting (October 26, 1998) the common stock price was $.97 per share. Holders As of the close of business on October 1, 2002 there were 427 stockholders of record of the Registrant's Common Stock and 41,654,747 shares issued and outstanding after giving retroactive effect to information appearing on page 2 of this Form 10-K in footnote number 1. Dividends The payment by the Registrant 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 Registrant has not paid or declared any dividends upon its Common Stock since its inception 26 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. Nasdaq Delisting On October 26, 1998 Nasdaq determined to delist Company's securities from The Nasdaq Stock Market effective with the close of business October 26, 1998.The Nasdaq Listing and Hearing and Review Council ("Council") on its own motion on December 9, 1998 determined to review the Nasdaq Listing Qualifications Panel("Panel") delisting decision. The Company, on its own initiative also timely perfected its appeal. On April 1, 1999 the Council issued a decision hereby it reversed and remanded the decision of the Nasdaq Panel with certain instructions. The Panel, in a November 5, 1999 decision, opined that the Company failed to evidence compliance with all requirements for continued listing on the Nasdaq SmallCap Market and on June 1, 2000 the Council affirmed the decision of the Panel indicating that it agreed with the Panel's various conclusions. Thereafter and pursuant to NASD Rule 4850(a), the NASD Board of Governors declined to call this decision for review and the Company was so notified on July 28, 2000. For detailed summarized information regarding certain pertinent findings of both the Panel and Council from initial delisting through conclusion of the Nasdaq appeal process, reference is herewith made to the Company's Form S-1 Registration Statement (under File No. 333-55898) as declared effective March 9, 2001 and in particular to that portion thereof entitled "Market Prices and Dividend Policy" subheading "Continued Nasdaq Delisting". See also cover page to this Form 10-K under the heading "Documents Incorporated by Reference". Item 6. Selected Financial Data Swissray International SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) The selected consolidated financial data presented below should be read in conjunction with "Management's Discussion Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included elsewhere in this document. The selected consolidated financial data as of and for the fiscal years ended June 30, 1998, June 30, 1999, June 30, 2000, June 30, 2001 and June 30, 2002 are derived from the consolidated financial statements of the Company. Year Ended June 30, --------------------------------------------- 2002 2001 2000 1999* 1998 ------ ------ ------ ------ ------- STATEMENT OF OPERATIONS DATA: Net sales 19,304 22,161 22,030 17,296 22,893 Cost of goods sold 14,407 15,859 16,500 13,529 18,082 ------ ------ ------ ------ ------- Gross profit 4,897 6,302 5,530 3,767 4,811 Gross profit margin (%) 25% 28% 25% 22% 21% Selling, general and administrative expenses 12,419 13,785 17,011 19,346 18,748 ------ ------ ------ ------ ------- Operating loss (7,522) (7,483) (11,481) (15,579) (13,937) Other expenses (income) 1,111 147 (190) (40) 281 Interest expense 689 1,723 10,347 5,639 8,590 ------ ------ ------ ------ ------- Loss from continuing operations (9,322) (9,353) (21,638) (21,178) (22,808) Loss from continuing operations per common share (0.14) (0.17) (1.14) (3.24) (8.48) BALANCE SHEET DATA: Total assets 19,435 19,806 25,383 23,511 25,915 Long-term liabilities 22 11 14,150 15,501 7,771 Common stock subject to put 320 320 320 1,820 1,820 (1) On October 1, 1998 the Company declared a 1 for 10 reverse stock split. The financial statements for all periods present have been retroactively adjusted for the split. * Restated 27 Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations All References Herein To The "Registrant" Refer To Swissray International Inc. All References Herein To The "Company" Refer To Swissray International, Inc. And Its Subsidiaries. General Throughout fiscal year ended June 30, 2002 the Company took a number of important steps to strengthen its position in the field of radiology with specific emphasis upon its ddR line of products and additions thereto so as to expand its dedicated systems and so as to offer solutions to important aspects of digital radiography. Market penetration of the Company's flag ship product, the ddR Systems, continued to increase as a result of the sales efforts of the Company's internal sales staff as well as the sales and distribution efforts of HMSA and Philips HCP, the Company's two principal distributors. Furthermore the Company has been able to sell its ddR Systems into new markets including Canada, Russia, Malaysia and Greece. While initial market penetration resulted in the sale of 8 ddR Systems during fiscal year ended June 30, 1999, fiscal year ended June 30, 2000 saw substantial and significant further market penetration in that the Company contracted for the sale of 64 ddR Systems (29 of which were contracted for sale in the U.S. with the balance being contracted for sale outside the U.S., inclusive of 32 ddR Systems contracted for sale to the Government of Romania). Fiscal year ended June 30, 2001 saw further continued success with the Company having contracted for the sale of 66 additional ddR Systems (inclusive 30 systems sold to the Government of Romania, 10 Systems sold to DIANAssociates and 10 Systems sold to Israel). During Fiscal Year ended June 30, 2002 the Company contracted for 73 ddR Systems (52 were contracted for sale in the U.S., 2 in Canada and 19 in Europe and rest of world). The 73 ddR Systems contracted in Fiscal Year ended June 30, 2002 all have been sold in structured markets versus 16 units of the 66 Systems sold during Fiscal Year Ended June 30, 2001 and 32 units of the 64 Systems sold during Fiscal Year ended June 30, 2000. With the introduction of several new performance enhancements for its direct digital Radiography ddR product line the Company has succeeded in further positioning itself with a high tech image and has entered the new millennium with a substantial list of potential ddR and informatics business opportunities. The new products are principally based upon the patented technology of the AddOn Bucky. See also Item 1 - "Business - New Products" for further information. The Company's efforts were again recognized for the fourth consecutive year (by unaffiliated third parties) as evidenced by its having been chosen (in August of 2002) as one of the 50 fastest growing technology companies in the New York City/Westchester/Rockland County areas. This program was sponsored by Deloitte & Touche. Ongoing efforts in the Company's research and development department have recently led to the Company being issued patents in both the U.S. and in Europe for the ddR detector, the AddOn Bucky. These patents relate to the optical arrangement and process for transmitting and converting primary X-ray images generated on a two dimensional primary image array. Furthermore, the patent for the mirror optics has been approved in the U.S. for the optical arrangement and method for electronically detecting an X-ray image while a similar patent has been approved in Europe in April 2001. For the aforesaid ddRCombi and ddRChest the Company was granted a design protection in Switzerland. Additional patent applications for the design protection for both Systems have been submitted in Sweden, Germany, Benelux, France, Canada and the U.S. and are currently pending approval. See Item 1 "Business - Intellectual Property and Patents" for information regarding patent numbers and dates of issuance. The Company received its UL (July 1999) and CE (December 1999) label for its ddR Systems. This certification is a public statement of compliance with a known standard and an extremely stringent approval process involving assessment and documentation of a product sample by an independent third party organization followed by on-going periodic product inspections at the manufacturing site. The Company was also challenged within the changing financial market environment. Due to lack of liquidity the Company has not been able to deliver all of its backlog during fiscal year ended June 30, 2002 and also had to finance its backlog by giving away prepayment interest to its distributors of $452,046 which resulted in an impact of decreased gross margin of 2.71% for the twelve month period. Management of the Company hopes that its effort to attract new capital to strengthen its liquidity will have a positive result in the foreseeable future. 28 Management of the Company believes that its unique technology and vision for the future have set the stage for continued growth in the years to come and anticipate a continued increase in demand for the Company's ddR solutions, which belief is based upon results of clinical successes in the U.S. as well as in Europe. Year Ended June 30, 2002 Compared To Year Ended June 30, 2001 Results Of Operations Net sales amounted to $19,303,840 for the year ended June 30, 2002, compared to $22,161,014 for the year ended June 30, 2001 a decrease of $2,857,174 or 12.89% from the year ended June 30, 2001. The 12.89% decrease in net sales was mainly due to the decrease in sales of ddR units by 11.34% or $2,164,537, ddR related information solutions decreasing by 89.78% or $699,533 and the decrease in conventional OEM-Business by 66.74% or 703,577. This decrease was slightly offset by a increase in conventional X-ray of 105.95% ($284,843) and service of 43.89% ($425,631). The Company's overall sales and marketing strategy includes the use of a direct sales force, distribution agreements with other medical imaging companies, local distributors and OEM agreements. The decrease in sales of ddR units is due to the lower sell prices for sales through distribution agreements vs. direct sales (direct sales of 16 units during fiscal year ended June 30, 2002 vs. 57 units during fiscal year ended June 30, 2001) and the prepayment discount of $452,046 due to tight liquidity. The decrease in Information Solution is due to the Companies focus in the USA, the single largest market for the Company, to sell its ddR-products mainly through distribution agreements who are providing similar services to the End User whereas the decease in conventional OEM-Business is due to the Company's conscious effort of promoting sales of ddR-Systems with a corresponding decline of interest in sales of conventional x-ray and conventional OEM-Business. The increase in conventional X-ray is due to executed conventional projects. The increase in service is going in line with an increase installed base of ddR units. Gross profit decreased by $1,404,584 or 22.28% to $4.897.010 for the year ended June 30, 2002, from $6,301,594 for the year ended June 30, 2001. Gross profit as a percentage of net revenues decreased to 25.37% for the year ended June 30, 2002 from 28.44% for the year ended June 30, 2001. The decrease in gross profit as a percentage of net revenues is attributable to the prepayment interest which accounts for 2.71% itself and a fraction of higher units sales and a lower average selling price due to the concentration on strong ddR-distribution agreements. Operating expenses decreased by $1,365,713 or 9.9% to $12,419,116 or 64.33% of net revenues, for the year ended June 30, 2002, from $13,784,828, or 66.2% of net revenues for the year ended June 30, 2001. The principal items were officers and directors compensation of $643,987 or 3.34% of net sales for the year ended June 30, 2002 compared to $618,038 or 2.8% of net sales for the year ended June 30, 2001, salaries (net of officers and directors compensation) of $3,439,919 or 17.82% of net sales for the year ended June 30, 2002 compared to $4,239,179 or 19.1% of net sales for the year ended June 30, 2001 and selling expenses of $3,155,340 or 16.35% of net sales for the year ended June 30, 2002 compared to $3,961,148 or 17.9% of net sales for the year ended June 30, 2001. Research and development expenses were $2,549,384 or 13.21% of net sales for the year ended June 30, 2002 compared to $2,305,165 or 10.4% of net sales for the year ended June 30, 2001. The slight increase is primarily due to the development of new performance enhancements for its direct digital Radiopgraphy ddR product line. General and administrative expenses decreased by $126,995 or 14.7% to $ 736,900 or 3.82% of net sales for the year ended June 30, 2002 from $863,895 or 3.9% of net sales for the year ended June 30, 2001. The decrease in selling and general administrative expenses is due to overall savings, primarily on professional fees and services. Other operating expenses decreased by $102,317 or 18.13% to $462,013 of net sales for the year ended June 30, 2002 from $564,330 or 2.6% of net sales for the year ended June 30, 2001. This decrease is due to the overall savings. 29 Interest expenses decreased to $688,457 for the year ended June 30, 2002 compared to $1,723,259 for the year ended June 30, 2001. This decrease is primarily due to the decrease in amortization of Debenture issuance cost and Conversion Benefit. Financial Condition June 30, 2002 compared to June 30, 2001 Total assets of the Company on June 30, 2002 decreased by $371,687 to $19,434,548 from $19,806,235 on June 30, 2001, primarily due to the decrease of other assets. Current assets increased by $2,074,948 to $10,832,608 on June 30, 2002 from $8,757,660 on June 30, 2001. The increase in current assets is attributable to the increase of cash and cash equivalents of $1,570,370, the increase of accounts receivable of $470,987, the increase in inventory of $76,156 and in prepaid expenses and sundry receivables of $42,566. Other assets decreased $2,205,950 to $2,424,872 on June 30, 2002 from $4,630,822 on June 30, 2001. The decrease is primarily attributable to the amortization of the licensing agreement, patents and trademark, software development cost and the change in accounting practice in respect to goodwill. On June 30, 2002, the Company had total liabilities of $ 20,613,953 compared to $13,855,792 on June 30, 2001. On June 30, 2002, current liabilities were $20,591,756 compared to $13,845,281 on June 30, 2001. Working capital at June 30, 2002 was $(9,759,148) compared to $(5,087,621) at June 30, 2001. The increase in liabilities and the decrease in working capital was due to increased borrowings from a bank. Cash Flow And Capital Expenditures Year Ended June 30, 2002 Compared To Year Ended June 30, 2001. Cash used for operating activities for the years ended June 30, 2002, June 30, 2001 and June 30, 2000 was $3,029,353, $2,265,666 and $4,360,009 respectively. Cash used for investing activities for years ended June 30, 2002, June 30, 2001 and June 30, 2000 was $1,232,737, $743,170, and $639,778 respectively. Cash flow from financing activities for years ended June 30, 2002, June 30, 2001 and June 30, 2000 was $ 6,663,397, $1,646,817and $6,215,558 respectively. Liquidity On November 27, 2001, the Company negotiated a revolving line of credit agreement with Credit Suisse for up to $3,000,000. Interest on the loan is 8.5% per annum and the loan is collateralized by certain accounts receivable. The Company is currently in default of certain financial covenant and has until November 1, 2002 to cure such deficiency. The Company anticipates that its use of cash will remain 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 dependent to a significant extent on additional debt or equity financing. There can be no assurance whether or not such financing will be available on terms satisfactory to management, if and when needed. Reference is made to the Company's current report on Form 8-K filed November 12, 3003. As stated therein, the Company and its major shareholders have entered an advanced stage of negotiation for the acquisition by a U.S.-based private equity firm of a majority of the capital stock of the Company, pursuant to discussions begun under a non-binding letter of intent executed in October. The Company believes that the transaction may be completed as soon as the end of November and, if completed, would provide a substantial infusion of capital, sufficient to permit the Company to fund its day-to-day operations for the near future. A transaction such as this would allow the Company to continue in operation and would preserve for the Company's common shareholders a residual interest, however modest, in the Company's equity value. But it is likely that the shareholders, who currently are subordinated in right of payment upon liquidation to $32,000,000 face amount of preferred shares, would as a result of the proposed transaction be subordinated to a much greater amount of preferred stock, and could not expect to recover any substantial value in the foreseeable future if at all. The planned transaction will go far toward resolving the Company's liquidity problems, which have been approaching a critical stage. The Company's operations are not providing and have not provided in the past positive cash flow and, as it has indicated in its public announcements to date, the Company will need additional financing to survive. If the planned transaction, or an alternative new financing, is not secured within the coming weeks, the Company's would not be able to continue as a going concern. 30 June 30, 2001 compared to June 30, 2000 Cash Flow And Capital Expenditures Year Ended June 30, 2001 Compared To Year Ended June 30, 2000. Cash used for operating activities for the years ended June 30, 2001, June 30, 2000 and June 30, 1999 was $2,265,666, $4,360,009 and $9,788,606 respectively. Cash used for investing activities for years ended June 30, 2001, June 30, 2000 and June 30, 1999 was $743,170, $639,778 and $879,303 respectively. Cash flow from financing activities for years ended June 30, 2001, June 30, 2000 and June 30, 1999 was $1,646,817, $6,215,558 and $11,068,406 respectively. Year Ended June 30, 2001 Compared to Year Ended June 30, 2000 Results of Operations Net sales amounted to $22,161,014 for the year ended June 30, 2001, compared to $22,030,124 for the year ended June 30, 2000 an increase of $130,890 or .6% from the year ended June 30, 2000. The .6% increase in net sales was mainly due to the sales of ddRMulti increasing by 35.01% or $4,949,944 and ddR related information solutions increasing by 79.55% or $344,752. This significant increase was slightly offset by a decrease in conventional X-ray of 85.10% ($1,534,874) and conventional OEM-Business of 72.85% ($2,829,084) and service of 45.20% ($799,828). The decrease in conventional X-ray and conventional OEM-Business is due to the Company's conscious effort of promoting sales of ddR Systems with a corresponding decline of interest in sales of conventional X-ray and conventional OEM-Business, whereas service is going in line with an increase in ddR related service and a decrease in conventional and conventional OEM-Business related service. In the past the Company has been substantially reliant upon Philips Medical Systems ("Philips") but at this stage of the Company's maturation process and as same continues to develop, reliance upon Philips has correspondingly decreased. Additionally, the Company's agreement with Philips relates to conventional X-ray equipment which has been a low profit margin item. More and more this type of sale is being replaced by (a) Company sale of conventional X-ray equipment directly to purchasing country and/or hospital and/or to the ultimate user thereof and (b) more significantly and importantly by Company's sales of its ddR Systems - its flagship product. Gross profit increased by $771,466 or 14% to $6,301,594 for the year ended June 30, 2001, from $5,530,128 for the year ended June 30, 2000. Gross profit as a percentage of net revenues increased to 28.4% for the year ended June 30, 2001 from 25.1% for the year ended June 30, 2000. The increase in gross profit as a percentage of net revenues is attributable to the fact that the percentage of sales of ddRMulti to total sales increased to 86.14% of total sales for the year ended June 30, 2001 from 64.2% for the year ended June 30, 2000. Operating expenses decreased by $3,226,269 or 19% to $13,784,828, or 66.2% of net revenues, for the year ended June 30, 2001, from $17,011,097 or 77.2% of net revenues for the year ended June 30, 2000. The principal items were officers and directors compensation of $618,038 or 2.8% of net sales for the year ended June 30, 2001 compared to $2,831,662 or 12.9% of net sales for the year ended June 30, 2000, salaries (net of officers and directors compensation) of $4,239,179 or 19.1% of net sales for the year ended June 30, 2001 compared to $3,762,009 or 17.1% of net sales for the year ended June 30, 2000 and selling expenses of $3,961,148 or 17.9% of net sales for the year ended June 30, 2001 compared to 31 $4,352,016 or 19.8% of net sales for the year ended June 30, 2000. Research and development expenses were $2,305,165 or 10.4% of net sales for the year ended June 30, 2001 compared to $1,914,065 or 8.7% of net sales for the year ended June 30, 2000. The increase is primarily due to the development of the ddR-Combis and the ddRChest unit as well as introduction (during calendar year 2000) of five additional new products. General and administrative expenses decreased by $952,933 or 52.5% to $863,895 or 3.9% of net sales for the year ended June 30, 2001 from $1,816,828 or 8.2% of net sales for the year ended June 30, 2000. The decrease in officers and directors compensation of $2,213,624 or 78.2% is due to the fact that such officers received, during fiscal year ended June 30, 2000, common stock for services rendered which was valued at $2,165,625 while no shares for services rendered were issued during the succeeding fiscal year. The decrease in selling and general administrative expenses is due to overall savings, primarily on professional fees and services. Other operating expenses decreased by $319,505 or 36.1% to $564,330 or 2.6% of net sales for the year ended June 30, 2001 from $883,835 or 4% of net sales for the year ended June 30, 2000. This decrease is due to the overall savings, primarily in rent and insurance costs. Interest expenses decreased to $1,723,259 for the year ended June 30, 2001 compared to $10,347,427 for the year ended June 30, 2000. This decrease is primarily due to the decrease of interest expense for accrual of penalty interest on periodic payments required by terms of financing agreements and an increase in amortization of Debenture issuance cost and Conversion Benefit. Financial Condition June 30, 2001 compared to June 30, 2000 Total assets of the Company on June 30, 2001 decreased by $5,576,779 to $19,806,235 from $25,383,014 on June 30, 2000, primarily due to the decrease of current assets. Current assets decreased $5,073,841 to $8,757,660 on June 30, 2001 from $13,98313501on June 30, 2000. The decrease in current assets is attributable to the decrease of cash and cash equivalents of $1,422,693, restricted cash of $1,385,600, the decrease of accounts receivable of $1,081,014 of which approximately $1,840,250 arises from the receipt of cash from the sale of ddRMulti to Romania, the decrease in inventory of $358,792 and the decrease in prepaid expenses and sundry receivables of $525,742. Other assets decreased $620,075 to $4,630,822 on June 30, 2001 from $5,250,897 on June 30, 2000. The decrease is primarily attributable to the amortization of the licensing agreement, patents & trademark, software development cost and the goodwill. On June 30, 2001, the Company had total liabilities of $13,855,792 compared to $35,384,045 on June 30, 2000. On June 30, 2001, current liabilities were $13,845,281 compared to $21,233,649 on June 30, 2000. Working capital at June 30, 2001 was $(5,087,621) compared to $(7,402,148) at June 30, 2000. Cash Flow And Capital Expenditures Year Ended June 30, 2001 Compared To Year Ended June 30, 2000. Cash used for operating activities for the years ended June 30, 2001, June 30, 2000 and June 30, 1999 was $2,265,666, $4,360,009 and $9,788,606 respectively. Cash used for investing activities for years ended June 30, 2001, June 30, 2000 and June 30, 1999 was $743,170, $639,778 and $879,303 respectively. Cash flow from financing activities for years ended June 30, 2001, June 30, 2000 and June 30, 1999 was $1,646,817, $6,215,558 and $11,068,406 respectively. 32 Effect Of Currency On Results Of Operations The results of operations and the financial position of the Company's subsidiaries outside of the United States are reported in the relevant foreign currency (primarily in Swiss Francs) and then translated into US dollars at the applicable foreign exchange rate for inclusion in the Company's consolidated financial statements. Accordingly, the results of operations of such subsidiaries as reported in US dollars can vary significantly as a result of changes in currency exchange rates (in particular the exchange rate between the Swiss Franc and the US dollar). 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 fiscal year ended June 30, 2001the Company had an order backlog of $8,013,600 which consisted of $1,882,400 in conventional X-ray equipment and services and $6,131,200 in digital (i,e., ddRMulti and information solutions) as compared to an order backlog of $8,800,000 which consisted of $2,080,000 in conventional X-ray equipment and $6,720,000 in ddRMulti as of the fiscal year ended June 30, 2000. Order backlog as of October 4, 2002 amounted to $7,086,228 of which digital backlog accounted for $6,769,602. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. Upon adoption of FASB No. 142, the Company recorded a one-time, non-cash charge of approximately $1,120,000 to write off the carrying value of its goodwill. Such charge is non-operational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. This statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived 33 assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this standard will have a material impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. 1 This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. The Company does not believe the adoption of these standards will have a material impact on the Company's financial statements. In July 2002, the FASB issued Statement No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." This Standard supercedes the accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" (including "Certain Costs Incurred in a Restructuring"). SFAS No. 146 requires companies to recognize costs associated with exit activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating this Standard. Item 7A. Quantitative And Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements And Supplementary Data The following financial statements have been prepared in accordance with the requirements of Regulation S-X and supplementary financial information included herein, if any, has been prepared in accordance with Item 301 of Regulation S-K. INDEX TO FINANCIAL STATEMENTS Page Audited Financial Statements for Fiscal Years Ended June 30, 2002, 2001 and 2000 Independent Auditors' Report F 1 Consolidated Balance Sheets at June 30, 2002 and 2001 F 2-3 Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000 F 4 Consolidated Statements of Stockholders Equity for the years ended June 30, 2002, 2001 and 2000 F 5 Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000 F 6-7 Notes to Consolidated Financial Statements F 8-24 34 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors Swissray International, Inc. New York, New York We have audited the accompanying consolidated balance sheets of Swissray International, Inc. and subsidiaries as of June 30, 2002 and 2001 and the related consolidated statements of operations, stockholders' deficit and cash flows for the fiscal years ended June 30, 2002, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Swissray International International, Inc. and subsidiaries as of June 30, 2002 and 2001 and the results of their operations and their cash flows for each of the three years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred losses of $10,441,442, has a working capital deficiency of $9,759,149 and is currently in default on its revolving credit agreement at June 30, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are also described in Note 1 to the financial statements. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. /s/Sherb & Co., LLP ---------------- Certified Public Accountants New York, New York August 9, 2002 except for Noye 19(b) which is as of November 19, 2002 F 1 SWISSRAY INTERNATIONAL INC. CONSOLIDATED BALANCE SHEET ASSETS June 30, June 30, 2002 2001 -------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 3,158,861 $ 1,588,490 Accounts receivable, net of allowance for doubtful accounts of $ 151,887 and $ 134,700 2,575,372 2,104,385 Inventories 4,354,516 4,278,360 Prepaid expenses and sundry receivables 743,859 786,425 -------------- ------------- Total Current Assets 10,832,608 8,757,660 -------------- ------------- PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation of $ 1,746,858 and $ 1,705,622 6,177,068 6,417,753 -------------- ------------- OTHER ASSETS Loan receivable affiliiates - 963,249 Licensing agreement, net of accumulated amortization of $ 3,352,439 and $ 2,855,781 1,614,136 2,110,794 Patents and trademarks, net of accumulated amortization of $ 194,884 and $ 167,548 118,445 145,782 Software develompent costs, net of accumulated amortization of $ 163,523 and $ 436,674 638,991 161,099 Security deposits 53,300 33,546 Goodwill, net of accumulated amortization of $ 716,923 in 2001 - 1,216,352 ------------- ------------- TOTAL OTHER ASSETS 2,424,873 4,630,822 ------------- ------------- Total Assets $ 19,434,549 $ 19,806,235 ============= ============= The accompanying notes are an integral part of these financial statements F 2 SWISSRAY INTERNATIONAL INC. CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' DEFICIT June 30, June 30, 2002 2001 -------------- ------------- CURRENT LIABILITIES Current maturities of long-term debt $ 10,511 $ 40,495 Notes payable - banks 8,630,637 2,262,481 Notes payable - short-term - 3,045,226 Loan payable 134,260 110,634 Accounts payable 7,610,211 4,995,528 Accrued expenses 1,768,977 1,885,586 Customer deposits 2,437,160 1,505,333 ------------- ------------- TOTAL CURRENT LIABILITIES 20,591,757 13,845,283 ------------- ------------- LONG-TERM DEBT, less current maturities 22,197 10,511 ------------- ------------- COMMON STOCK SUBJECT TO PUT 319,985 319,985 ------------- ------------- STOCKHOLDERS' DEFICIT Convertible preferred shares - Series B 3,791,100 - Common stock 909,549 843,809 Additional paid-in capital 114,941,328 112,088,028 Treasury stock (2,040,000) (2,040,000) Deferred compensation - (16,291) Accumulated deficit (116,616,243) (103,590,902) Accumulated other comprehensive loss (2,165,139) (1,334,203) Common stock subject to put (319,985) (319,985) ------------- ------------- TOTAL STOCKHOLDERS' DEFICIT (1,499,390) 5,630,456 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 19,434,549 $ 19,806,235 ============= ============= The accompanying notes are an integral part of these financial statements F 3 SWISSRAY INTERNATIONAL INC. CONSOLIDATED STATEMENT OF OPERATIONS Year Ended June 30, ------------------------------------------ 2002 2001 2000 ------------- ------------ ------------- NET SALES $ 19,303,840 $22,161,014 $22,030,124 COST OF SALES 14,406,830 15,859,420 16,499,996 ------------- ------------ ------------- GROSS PROFIT 4,897,010 6,301,594 5,530,128 ------------- ------------ ------------- OPERATING EXPENSES Officers and directors compensation 643,987 618,038 2,831,662 Salaries 3,439,919 4,239,179 3,762,009 Selling 3,155,340 3,961,148 4,352,016 Research and development 2,549,384 2,305,165 1,914,065 General and administrative 736,900 863,895 1,816,828 Other operating expenses 462,012 564,330 883,835 Bad debts 2,092 (104,813) 93,570 Depreciation and amortization 1,429,481 1,337,887 1,357,112 ------------ ------------ ------------- TOTAL OPERATING EXPENSES 12,419,116 13,784,829 17,011,097 ------------ ------------ ------------- LOSS BEFORE OTHER INCOME (EXPENSES) (7,522,106) (7,483,235) (11,480,969) Other income (expenses) (1,111,193) (146,415) 190,316 Interest expense (688,457) (1,723,259) (10,347,427) ------------ ------------ ------------- OTHER (EXPENSES) (1,799,650) (1,869,674) (10,157,111) ------------ ------------ ------------- LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (9,321,755) (9,352,909) (21,638,080) Cummulative effect of change in accounting principle (1,119,686) - - ------------ ------------ ------------- NET LOSS (10,441,442) (9,352,909) (21,638,080) Imputed Preferred Stock Dividend (2,583,900) (107,450) - ------------ ------------ ------------- Loss available to common shareholders $(13,025,342) $ (9,460,359) $ (21,638,080) ============ ============ ============= BASIC AND DILUTED LOSS PER COMMON SHARE Loss from operations $ (0.14) $ (0.17) $ (1.14) Cumulative effect of accounting change (0.01) 0.00 0.00 ------------ ------------ ------------- NET LOSS $ (0.15) $ (0.17) $ (1.15) ============ ============ ============= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 84,289,621 57,100,074 18,927,303 ============ ============ ============= The accompanying notes are an integral part of these financial statements F 4 SWISSRAY INTERNATIONAL, INC. CONSOLITATED STATEMENT OF STOCKHOLDERS' DEFICIT YEARS ENDED JUNE 30, 2002, 2001 and 2000
Conv. Preferred Stock Common Stock Additional --------------------- -------------------- Paid-in Treasury Deferred Shares Amount Shares Amount Capital Stock Compensation --------------------------------------------------------------------------------- BALANCE - JUNE 30, 1999 - $ - 14,006,239 $ 140,062 $ 69,028,013 $ (540,000)$(1,282,500) COMPREHENSIVE LOSS: Net loss - - - - - - - Foreign currency translation gain net of taxes $ -0- - - - - - - TOTAL COMPREHENSIVE LOSS - - - - - - - Issuance of common stock for cash - - 6,269,700 62,697 9,781,276 - - Stock options exercised for cash - - 1,125,500 11,255 2,124,894 - - Issuance of common stock in lieu of interest payment - 165,400 1,654 277,946 - Issuance of common stock "Settelment" - - 150,000 1,500 673,500 - Amortization of shares issued for services - - - - - - 1,282,500 Shares issued to officers/employees for services - - 1,157,065 11,571 2,798,365 - - Shares issued for services - - 526,000 5,260 1,325,941 (998,399) Purchase of 33,333 shares subject to put - - - - - (1,500,000) - Beneficial conversion feature of convertible debentures - - - 1,131,061 - - Interest expense on option value per black scholes - - - - 1,066,536 - - -------------------------------------------------------------------------------- BALANCE - JUNE 30, 2000 - - 23,399,904 233,999 88,207,532 (2,040,000) (998,399) COMPREHENSIVE LOSS: Net loss - - - - - - - Foreign currency translation gain net of taxes $ -0- - - - - - - TOTAL COMPREHENSIVE LOSS - - - - - - - Issuance of convertible preferred shares "Penalty" 7,000 7,000,000 - - - - - Conversion of convertible preferred into common (7,000) (7,000,000) 21,515,035 215,150 6,784,850 Conversion of convertible debentures, notes payable and accrued interest into common - - 39,289,293 392,893 16,913,288 - - Stock options exercised for cash - - 150,000 1,500 148,500 - - Amortization of shares issued for services - - - - - - 998,399 Shares issued for services - - 26,700 267 59,733 Cost related to refinancing - - - - (175,000) - - Imputed preferred stock dividend - - - - 107,450 Interest expense on option value per black scholes - - - - 41,675 - (16,291) -------------------------------------------------------------------------------- BALANCE - JUNE 30, 2001 - - 84,380,932 843,809 112,088,028 (2,040,000) (16,291) COMPREHENSIVE LOSS: Net loss - - - - - - - Foreign currency translation gain net of taxes-$ -0- - - - - - - TOTAL COMPREHENSIVE LOSS - - - - - - - Issuance of convertible preferred shares 3,791 3,791,100 - - - - - Issuance of common stock for cash - - 200,000 2,000 58,000 - - Stock options exercised for cash - - 666,000 6,660 268,480 - - Cancellation of common stock "Settelment" - - (526,000) (5,260) 5,260 - - Amortization of shares issued for services - - - - - - 16,291 Imputed preferred stock dividend - - - - 2,583,900 - - Issusance of anti-dilution shares - Hillcrest - - 6,234,029 62,340 (62,340) - - -------------------------------------------------------------------------------- BALANCE - JUNE 30, 2002 3,791 $3,791,100 90,954,961 $ 909,549 $114,941,328 $(2,040,000) $ - ================================================================================ The accompanying notes are an integral part of these financial statements F 5 SWISSRAY INTERNATIONAL, INC. CONSOLITATED STATEMENT OF STOCKHOLDERS' DEFICIT YEARS ENDED JUNE 30, 2002, 2001 and 2000 Other Accumulated Comprehensive Common Stock Deficit Loss Subject to Total Put --------------------------------------------------- BALANCE - JUNE 30, 1999 $ (72,492,463)$ (1,787,735)$(1,819,985) $(8,754,608) COMPREHENSIVE LOSS: Net loss (21,638,080) - - (21,638,080) Foreign currency translation gain net of taxes $ -0- - 514,115 514,115 -------------- TOTAL COMPREHENSIVE LOSS (21,123,965) -------------- Issuance of common stock for cash - - - 9,843,973 Stock options exercised for cash - - - 2,136,149 Issuance of common stock in lieu of interest payment - - - 279,600 Issuance of common stock "Settelment" - - - 675,000 Amortization of shares issued for services - - - 1,282,500 Shares issued to officers/employees for services - - - 2,809,936 Shares issued for services - - - 332,802 Purchase of 33,333 shares subject to put 1,500,000 - - 1,500,000 - Beneficial conversion feature of convertible debentures - - - 1,131,061 Interest expense on option value per black scholes - - - 1,066,536 ---------------------------------------------------- BALANCE - JUNE 30, 2000 (94,130,543) (1,273,620) (319,985) (10,321,016) COMPREHENSIVE LOSS: Net loss (9,352,909) - - (9,352,909) Foreign currency translation gain net of taxes $ -0- - (60,583) - (60,583) ------------- TOTAL COMPREHENSIVE LOSS - - - (9,413,492) ------------- - - - 7,000,000 Issuance of convertible preferred shares "Penalty" - - - - Conversion of convertible preferred into common Conversion of convertible debentures, notes payable and accrued interest into common - - - 17,306,181 Stock options exercised for cash - - - 150,000 Amortization of shares issued for services - - - 998,399 Shares issued for services 60,000 Cost related to refinancing - - - (175,000) Imputed preferred stock dividend (107,450) - - - Interest expense on option value per black scholes - - - 25,384 --------------------------------------------------- BALANCE - JUNE 30, 2001 (103,590,902) (1,334,203) (319,985) 5,630,456 COMPREHENSIVE LOSS: Net loss (10,441,441) - - (10,441,441) Foreign currency translation gain net of taxes $ -0- - (830,936) - (830,936) ------------- TOTAL COMPREHENSIVE LOSS (11,272,377) ------------- Issuance of convertible preferred shares - - - 3,791,100 Issuance of common stock for cash - - - 60,000 Stock options exercised for cash - - - 275,140 Cancellation of common stock "Settelment" - - - - Amortization of shares issued for services - - - 16,291 Imputed preferred stock dividend (2,583,900) - - - Issusance of anti-dilution shares - Hillcrest - - - - --------------------------------------------------- BALANCE - JUNE 30, 2002 $(116,616,243 $(2,165,139) $(319,985)$(1,499,390) ===================================================
The accompanying notes are an integral part of these financial statements F 5 SWISSRAY INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30, ---------------------------------------- 2002 2001 2000 ---------------------------------------- CASH FLOWS FROM OPERATING ACTIVITES Net loss $(10,441,441) $(9,352,909) $(21,638,080) Adjustment to reconcile net loss to net cash used by operating activities Depreciation and amortization 1,596,438 1,440,710 1,438,719 Provision for bad debts 17,187 (36,183) (49,110) Provision for non-operating loans 963,249 400,386 - Effect of change of accouning principle 1,119,686 - - Operating expenses through issuance of stock options and common stock to be issued - 78,765 2,809,936 Issuance of common stock in lieu of interest payments - 1,453,017 279,600 Interest expense on debt issuance cost and conversion benefit - - 1,131,061 Interest expense on promissory note converted into preferred shares 372,600 - - Interest expense on option value per black scholes - - 1,066,536 Settelment expense paid through issuance of common stock - - 675,000 Amortization of deferred compensation 16,291 1,005,109 1,615,302 (Increase) decrease in operating assets: Accounts receivable (488,174) 1,086,811 (687,410) Inventories (76,156) 358,792 2,695,249 Prepaid expenses and sundry receivables 42,566 455,742 (445,363) Increase (decrease) in operating liabilities: Accounts payable 2,614,683 655,495 (1,082,288) Accrued expenses 301,891 (431,210) 7,723,732 Restructuring - (100,000) (400,000) Customers deposits 931,827 719,719 507,107 ---------------------------------------- NET CASH USED BY OPERATING ACTIVITIES (3,029,353) (2,265,756) (4,360,009) ---------------------------------------- CASH FLOW FROM INVESTING ACTIVITIES Acquisition of property and equipment (487,051) (740,922) (633,419) Other intangibles (725,932) (5,575) (13,469) Security deposits (19,754) 3,327 (8,838) Increase in loan receivable - - 15,948 ---------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (1,232,737) (743,170) (639,778) ---------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings 6,368,156 378,410 (459,767) Proceeds related to debentures - - (1,238,558) Principal payment of short-term borrowings (51,585) - - Principal payment of long-term borrowings 11,686 (72,591) (111,993) Decrease (increase) in restricted cash - 1,385,600 (1,385,600) Note receivable - short-term - - (300,000) Loan receivable affiliates - (194,602) (768,647) Issuance of common stock for cash 60,000 - 9,843,974 Issuance of stock options for cash 275,140 150,000 2,136,149 Purchase of treasury stock - - (1,500,000) ---------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES 6,663,397 1,646,817 6,215,558 ---------------------------------------- EFFECT OF EXCHANGE RATE ON CASH (830,936) (60,584) 514,115 ---------------------------------------- NET INCREASE (DECREASE) IN CASH 1,570,371 (1,422,693) 1,729,886 CASH AND CASH EQUIVALENT - beginning of year 1,588,490 3,011,183 1,281,297 ---------------------------------------- CASH AND CASH EQUIVALENTS - end of year $ 3,158,861 $ 1,588,490 $ 3,011,183 ======================================== The accompanying notes are an integral part of these financial statements F 6 SWISSRAY INTERNATIONAL INC. Year Ended June 30, ---------------------------------------- 2002 2001 2000 ---------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 370,561 $ 164,223 $ 154,157 Shares issued in lieu of notes and interest payments 3,791,100 1,294,200 279,600 Beneficial conversion feature recorded as additional paid-in capital - - 1,131,061 Convertible debentures converted to common stock - 14,067,294 1,238,558 The accompanying notes are an integral part of these financial statements F 7 SWISSRAY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 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 of DMS Industries, Inc. and acquired all of the outstanding stock 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 conducted principally through its wholly owned subsidiaries. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced losses of $10,441,442, has a working capital deficit of $9,759,149 and is currently in default on its revolving credit agreement. There is substantial doubt that it will be able to continue as a going concern without additional funding. Management intends to continue to seek additional financing to fund its operations, although there can be no assurances that any such financing will be available. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. REVENUE RECOGNITION The Company follows the guidelines of SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". Revenues from direct sales of products to end-users are recorded when the products are shipped, installed, collection of the purchase price is probable and the Company has no significant further obligations to the customer. Revenues from direct sales of products to distributors are recorded when the products are shipped, collection of the purchase price is probable and the Company has no significant further obligations to the F 8 customer. Costs of remaining insignificant Company obligations, if any, are accrued as costs of revenue at the time of revenue recognition. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting 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 company's 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, inventories, prepaid expenses and sundry receivables, current maturities of long-term debt, notes payable - banks, loan payable, accounts payable, accrued expenses and customer deposits 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 carried at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements, or the term of the facility lease. F 9 IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets to assess recoverability from future operations using undiscounted cash flows. When necessary, charges for impairments of long-lived assets are recorded for the amount by which the present value of future cash flows exceeds the carrying value of these assets. INTANGIBLE ASSETS Intangible assets are stated at cost and are being amortized using the straight line method over the estimated useful lives of the respective assets. SOFTWARE DEVELOPMENT COSTS 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. ADVERTISING AND PROMOTION Advertising and promotion costs are expensed as incurred and included in "Selling" expenses. Advertising and promotion expense for the years ended June 30, 2002, 2001 and 2000 were $ 1,866,674, $ 3,034,235 and $ 2,601,410, respectively. RESEARCH AND DEVELOPMENT Costs associated with research, new product development, and product cost improvements are treated as expenses when incurred. 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 10 NET LOSS PER COMMON 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 as their effect would be anti-dilutive. ACCOUNTING FOR STOCK OPTIONS The Company accounts for stock-based compensation using the intrinsic value method as prescribed under Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. 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. SHIPPING AND HANDLING COSTS The Company accounts for shipping and handling costs as a component of "Cost of Sales". NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. Upon adoption of FASB No. 142, the Company recorded a one-time, non-cash charge of approximately $1,120,000 to write off the carrying value of its goodwill. Such charge is non-operational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. This statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived F 11 assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this standard will have a material impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. 1 This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. The Company does not believe the adoption of these standards will have a material impact on the Company's financial statements. In July 2002, the FASB issued Statement No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." This Standard supercedes the accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" (including "Certain Costs Incurred in a Restructuring"). SFAS No. 146 requires companies to recognize costs associated with exit activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating this Standard. NOTE 2 - INVENTORIES Inventories are summarized by major classification as follows: June 30, ----------------------------------------- 2002 2001 ------------------ ------------------- Raw materials, parts and supplies $ 3,643,866 $ 2,750,510 Work in process 394,479 749,938 Finished goods 316,171 777,912 ------------------ ------------------- $ 4,354,516 $ 4,278,360 ================== =================== NOTE 3 - PREPAID EXPENSES AND SUNDRY RECEIVABLES Prepaid expenses and sundry receivables consist of the following: June 30, ---------------------------------------- 2002 2001 ------------------- ----------------- Prepaid expenses and advance payments $ 354,362 $ 402,686 Prepaid and refundable taxes 383,806 378,882 Employee loans 5,691 9,857 ------------------- ----------------- $ 743,859 $ 786,425 =================== ================= F 12 NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consist of the following: June 30, Estimated ------------------------------ Useful Lives (years) 2002 2001 ------------ ----------- ------------- Land - $ 785,792 $ 785,792 Building 30 5,080,087 5,030,096 Equipment 5 1,614,226 1,670,267 Office furniture and equipment 3-5 275,593 473,421 Leasehold Improvements 10 168,228 163,799 ------------- ------------ 7,923,926 8,123,375 Less: Accumulated depreciation 1,746,858 1,705,622 ------------- ------------ $ 6,177,068 $ 6,417,753 ============= ============ Depreciation and amortization expense, for property and equipment, for the years ended June 30, 2002, 2001 and 2000 were $668,604 , $623,641 and $615,873 respectively. NOTE 5 - INTANGIBLE ASSETS Identifiable intangible assets at June 30, 2002 and 2001 consisted of the following June 30, Estimated --------------------------- Useful Lives 2002 2001 (Years) ------------ ----------- ------------ Excess of cost over fair 10 $ - $ 1,933,275 value of net assets acquired (a) Licensing (b) 10 4,966,575 4,966,575 Software development cost 5 802,514 597,773 Patents and Trademarks 10 313,330 313,330 ----------- ------------ 6,082,419 7,810,953 Less: Accumulated amortization 3,710,847 4,176,926 ----------- ------------ $ 2,371,572 $ 3,634,027 =========== ============ Amortization expense, for intangible assets, for the years ended June 30, 2002, 2001 and 2000 were $ 927,834, $ 817,069 and $ 822,876, respectively. Estimated amortization expense over the next five years is as follows: 2003-$652,000, 2004-$652,000, 2005-$625,000, 2006-$625,000, 2007-$600,000. F 13 The following table provides pro forma disclosure of net earnings and earnings per common share for the years ended June 30, 2001 and June 2000, as if goodwill had not been amortized. June 30, 2001 June 30, 2000 ------------- ------------- Net loss $9,352,909 $21,638,080 Amortization, net of tax (1) 193,328 193,328 ------------- ------------- Adjusted net earnings 9,159,581 21,444,752 Basic and diluted loss per share $ (0.17) $ (1.14) Amortization, net of tax (1) 0.00 0.01 ------------- ------------- Adjusted basic and diluted loss per share $ (0.17) $ (1.13) ============= ============= (a) Upon adoption of FASB No. 142 (see Note 1), the Company recorded a one-time, non-cash charge of approximately $1,120,000 to write off the carrying value of its goodwill. Such charge is non-operational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. (b) 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 total cost of the license was $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. NOTE 6 - NOTES PAYABLE - BANKS The Company has negotiated an agreement with Migros Bank for up to $1,343,800 for the issuance of guarantees and letters of credit, both with a commission of 15% per $1,000,000, quarterly while outstanding. There were $1,259,445 in outstanding guarantees as of June 30, 2002. The Company also negotiated a fixed line of credit for up to $2,217,270 with an agreed repayment of $67,190 per 180 days. All lines of credit are based on the Exchange rate in effect on June 30, 2002. On November 27, 2001, the Company negotiated a revolving line of credit agreement with Credit Suisse for up to $3,000,000. Interest on the loan is 8.5% per annum and the loan is collateralized by certain accounts receivable. The Company is currently in default of certain financial covenant and has until November 1, 2002 to cure such deficiency. Notes payable are summarized as follows: F 14 June 30, 2001 2000 --------------- ------------- Migros Bank, on demand with six week notice, with interest as of June 30, 2002 and 2001 at 4% and 4.75% per annum, collateralized by land and building $ 2,217,270 $ 1,950,900 Migros Bank, on demand with interest at 4.75%. Cash balances on deposit at June 30, 2002 was $45. 113,993 43,614 Credit Suisse, on demand, collateralized by certain accounts receivable, with interest at 8.5% per annum. Cash balance at Credit Suisse was $3,033,530 at June 30, 2002. 6,274,964 - Other 24,410 267,967 --------------- ------------- $ 8,630,637 $ 2,262,481 =============== ============= NOTE 7 - LOAN PAYABLE The Company has negotiated a 4% demand loan from a private foundation fund. The loan balance payable at June 30, 2002 and 2001 was $ 134,260 and $ 110,634 respectively. NOTE 8 - CONVERTIBLE DEBENTURES Through December 29, 2000, the Company converted all outstanding convertible debentures and notes payable into 39,289,293 restrictive shares of Company common stock thereby extinguishing those convertible debentures, and promissory notes previously outstanding. NOTE 9 - NOTES PAYABLE - SHORT-TERM June 30, ------------------------------------ 2002 2001 ------------ ----------- Promissory note $ - $ 45,226 Promissory note, dated December 29, 2000 with interest payable at 2.025% per month due December 29, 2001. - 3,000,000 ------------ ----------- $ - $ 3,045,226 ============ ============ On December 29, 2000 the Company borrowed $3,000,000 from Kew Court LLC ("Kew Court") in accordance with a promissory note bearing interest at the rate of 2.025% per month and due and payable on or before December 29, 2001. The promissory note and related security F 15 agreement were collateralized by the Company's inventory and accounts receivable and further provided (amongst other matters) that in the event of default the principal sum due on the note shall bear interest (commencing December 29, 2001) at the rate of 5% per 30 calendar day period as liquidated damages. Shortly prior to the December 29, 2001 due date on the promissory note (and with no portion of the principal or interest thereon having been paid) the Company entered into negotiations with Kew Court in an effort to resolve this matter through means other than cash repayment. Such negotiations concluded with Kew Court agreeing to cancel the aforesaid indebtedness evidenced by the promissory note inclusive of all interest due thereunder and further agreed to release the security interests which served as collateral thereunder in exchange for the Company issuing to Kew Court convertible preferred shares having a face value approximating $3,800,000 with the right to convert same into 18,750,000 restrictive shares of Company common stock. The convertible preferred shares do not bear any interest nor does the Company have any obligation to file a Registration Statement to register either the convertible preferred shares or the underlying shares of Company common stock heretofore referred to. The Company has the right to repurchase the aforesaid underlying shares of common stock through September 30, 2002 at an agreed upon price of $0.80 per share. NOTE 10 - LONG-TERM DEBT Long-term debt consists of the following: June 30, 2002 2001 ------------------- -------------------- Note payable - Other $ 10,511 $ 50,518 Capitalized leases 22,197 488 ------------------- -------------------- 32,708 51,006 Less: Current portion (10,511) (40,495) ------------------- -------------------- $ 22,197 $ 10,511 =================== ==================== The aggregate long-term debt principal payments are as follows: Year Ending June 30, 2003 $ 10,511 2004 22,197 NOTE 11- 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 F 16 number of authorized common shares from 30,000,000 to 50,000,000 of $.01 par value common shares. On July 20, 2000, the Company amended its certificate of incorporation to change the number of authorized common shares from 50,000,000 to 100,000,000 of $.01 par value common shares. Preferred Stock In July 1999, the Company amended its Certificate of Incorporation to authorize the issuance of 1,000,000 shares of preferred stock, $.01 par value per share. Prior to the December 29, 2001 due date on a promissory note (see Note 9), the Company entered into negotiations with Kew Court. Such negotiations concluded with Kew Court agreeing to cancel the aforesaid indebtedness evidenced by the promissory note inclusive of all interest due thereunder and further agreed to release the security interests which served as collateral thereunder in exchange for the Company issuing to Kew Court convertible preferred shares having a face value approximating $3,800,000 with the right to convert same into 18,750,000 restrictive shares of Company common stock. The convertible preferred shares do not bear any interest nor does the Company have any obligation to file a Registration Statement to register either the convertible preferred shares or the underlying shares of Company common stock heretofore referred to. The Company has the right to repurchase the aforesaid underlying shares of common stock through September 30, 2002 at an agreed upon price of $0.80 per share. Michael - we need to discuss Imputed Dividend. Stock Option The Stock Option Plans ("Plans") provide for the grant of options to officers, directors, employees, consultants, attorneys and advisors to the Company. Options may be either incentive stock options or non-qualified stock options, except that only employees may be granted incentive stock options. Options vest at the discretion of the Board of Directors. All options granted in the plans vest immediately. The maximum term of an option is ten years. The remaining options available for grant under the plans were 3,060,556 at June 30, 2002. In Fiscal 2002 and 2001, 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, the Company's net loss and net loss per share would have increased to the pro forma amounts indicated below: Fiscal 2002 Fiscal 2001 ----------------------------- ------------------------- As Pro As Pro Reported Forma Reported Forma ---------------- ------------ --------------- --------- Net loss (in thousands) $10,441 $10,441 $9,353 $9,679 Basic and diluted net loss per share $0.14 $0.14 $0.17 $0.17 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 in 2002 F 17 and 2001; dividend yield 0%, expected volatility 50%, risk-free interest rate 5.7%and 7%, expected lives in years-1 year. The weighted average fair value of stock options granted during the year ended June 30, 2002 and 2001 was $.46 and $ .35, respectively. A summary of the status of the Stock Option Plans at June 30, 2002, 2001 and 2000 and the changes during the years then ended is presented below:
2002 2001 2000 ------------------------------- ------------------------------ -------------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average Underlying Exercise Underlying Exercise Underlying Exercise Options Price Options Price Options Price -------------- ------------- -------------- ------------ --------------- ------------- Outstanding at beginning of year 4,493,500 $ 1.52 2,051,000 $ 4.60 194,500 $ 23.40 Granted 363,944 .46 2,649,000 .35 2,987,000 2.36 Cancelled/Expired (227,250) 5.43 (201,500) 18.47 - - Exercised (665,944) .41 - - (1,130,500) 1.93 -------------- ------------- -------------- ------------ --------------- ------------- Outstanding At end of year 3,964,250 $ 1.38 4,493,500 $ 1.52 2,051,000 $ 4.60 ============== ============= ============== ============ =============== ============= Exercisable at end of year 3,964,250 $ 1.38 4,493,500 $ 1.52 2,051,000 $ 4.60 ============== ============= ============== ============ =============== =============
The following table summarizes information about stock options under the Stock Option Plans at June 30, 2002 Options Outstanding and Exercisable ------------------------------------------------------- Weighted Average Weighted Average Number Remaining ----------------- Range of Exercise Pr Outstanding Contractual Life Exercise Price ---------------------- ---------------- ---------------- ------------------ $.35 - $.37 2,165,250 1.2 $0.352 $2.625 - $2.625 1,799,000 .3 $2.625 ---------------- 3,964,250 ================ Stock Warrants The following table summarizes information about stock warrants at June 30, 2002: F 18 Options Outstanding and Exercisable --------------------------------------------------------- Range of Number Remaining Average Exercise Exercise Price Outstanding Contractual Life Price ------------------- ------------------- ---------------- ---------------- $.438 - $9.38 387,500 1.00-3.75 $.85 NOTE 12 - 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, 2002, 2001 and 2000, were $682,236 $654,837 and $475,176, respectively. NOTE 13 - INCOME TAXES Deferred income tax assets as of June 30, 2002 of $27,000,000 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. Reconciliation between the statutory United States corporate income tax rate (34%) and the effective income tax rates based on continuing operations is as follows: Year Ended June 30, ------------------------------------------------ 2002 2001 2000 ------------- -------------- -------------- Statutory federal income tax (benefit) $ (3,500,000) $ (3,200,000) $ (7,400,000) Foreign income tax (benefit) in excess of domestic rate 300,000 400,000 77,000 Benefit not recognized on operating loss 3,000,000 2,300,000 4,973,000 Permanent and other differences 200,000 500,000 2,350,000 ------------- -------------- -------------- $ - $ - $ - ============= ============== ============== Net operating loss carryforwards at June 30, 2002 were approximately as follows: United States (expiring through June 30, 2017) $ 45,000,000 Switzerland (expiring through June 30, 2012) 45,000,000 ------------------ $ 90,000,000 ================== F 19 These carryforwards are subject to limitations on annual utilization because there are "equity structure shifts" or "owner shifts" involving 5% stockholders (as these are defined in Section 382 of the Internal Revenue Code), which have resulted in a more than 50% change in ownership. NOTE 14 -OTHER INCOME (LOSS) During the year ended June 30, 2002, the Company wrote of a receivable from an affiliate of approximately $1.1 million. NOTE 15 - SIGNIFICANT CUSTOMER AND CONCENTRATION OF CREDIT RISK The Company sells its products to various customers primarily in Europe and the 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. 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, 2002, 2001 and 2000 there were sales to customers that exceeded 10% of net consolidated sales. Sales to these customers were: 2002 customer D $ 6,890,485 (36.7%) and customer E $5,801,663 (30.1%), 2001 customer B, $ 3,031,000 (14%) customer C $ 7,200,000 (32%), 2000 customer A, $8,180,866 (23%),and customer B $ 10,825,000 (49%). 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, 2002, 2001 and 2000 were as follows: 2002 2001 2000 --------------- --------------- ------------------ United States $ 16,614,430 $ 10,043,047 $ 6,561,669 Switzerland 1,766,971 11,802,827 15,164,707 Germany 844,168 312,072 303,748 Other export sales 78,271 3,068 - --------------- ---------------- ------------------ $ 19,303,840 $ 22,161,014 $ 22,030,124 =============== ================ ================== The following summarizes identifiable assets by geographic area: 2002 2001 ------------------- ------------------- United States $ 3,895,136 $ 6,918,589 Switzerland 15,212,368 12,316,508 Germany 212,671 203,605 Romania 114,336 102,646 Venezuela 38 264,887 ------------------- ------------------- $ 19,434,549 $ 19,806,235 =================== =================== F 20 The following summarizes operating losses before provision for income tax: 2002 2001 2000 ------------- ---------------- ------------------- United States $ (2,336,119) $ (2,995,063) $ (16,801,696) Switzerland (7,914,719) (5,600,280) (4,277,240) Germany 397,471 (46,190) (409,272) Romania (347,813) (391,719) - Venezuela (240,262) (319,657) - ------------- ---------------- ------------------- $(10,441,442) $ 21,638,080) $ (20,177,901) ============= ================ =================== NOTE 16 - COMMITMENTS The Company leases various facilities under operating lease agreements expiring through September 2003. The facilities lease agreements provide for a base monthly payment of $22,285 per month. Rent expense for the years ended June 30, 2002, 2001 and 2000 was $ 413,762, $ 245,165 and $ 361,757 respectively. Future minimum annual lease payments, based on the exchange rate in effect on June 30, 2002 under all lease agreements are as follows: 2003 $ 337,998, 2004 $ 252,714, 2005 $ 252,714, 2006 $ 264,695, thereafter $0. The Company has employment agreements with three of its executives. Minimum compensation under these agreements are as follows: Year Ended June 30, 2003 $ 646,129 June 30, 2004 646,129 June 30, 2005 493,543 June 30, 2006 182,738 ---------------- $ 1,968,539 ================ NOTE 17-VALUATION AND QUALIFYING ACCOUNTS Balance at Additions Balance Beginning Charged to at End of Year Expenses Deductions of Year --------- ---------- ---------- ---------- Allowance for doubtful accounts: Year ended June 30, 2002 $ 134,700 $ 17,187 $ -0- $ 151,887 Year ended June 30, 2001 $ 170,883 $ 102,755 $ 138,938 $ 134,700 Year ended June 30, 2000 $ 219,993 $ 93,570 $ 142,680 $ 170,883 F 21 NOTE 18-INTERIM FINANCIAL INFORMATION The Company's unaudited quarterly financial data for the last two fiscal years is as follows:
Sep-31 Dec-02 Mar-02 Jun-02 2001 2001 2002 2002 ---------- ---------- ---------- ---------- Net Sales $ 4,168,325 $ 4,033,523 $ 6,341,307 $ 4,760,685 Cost of Sales $ 2,977,315 $ 3,144,746 $ 4,580,212 $ 3,704,557 Operating expenses $ 2,932,280 $ 4,615,824 $ 2,581,185 $ 2,289,827 Operating Income (Loss) $(1,741,270) $(3,727,047) $ (820,090) $(1,233,699) Cummulative effect of change in accounting principle - - - $(1,119,686) Net Income (Loss) $(1,662,264) $(4,010,153) $ (925,048) $(3,843,977) Income (Loss) available to common sharesholders $(1,662,264) $(6,594,053) $ (925,048) $(3,843,977) Basic and Diluted Loss per Common Share Loss from operations $ (0.02) $ (0.08) $ (0.01) $ (0.03) Cumulative effect of accounting change - - - (0.01) ---------- ---------- ---------- ---------- Net Loss $ (0.02) $ (0.08) $ (0.01) $ (0.04) Sep-31 Dec-02 Mar-02 Jun-02 2000 2000 2001 2002 ---------- ---------- ---------- ---------- Net Sales $ 4,928,825 $ 4,711,929 $ 4,737,664 $ 7,782,596 Cost of Sales $ 3,738,514 $ 3,537,091 $ 3,159,808 $ 5,424,007 Operating expenses $ 3,182,703 $ 3,944,794 $ 3,005,058 $ 3,652,274 Operating Income (Loss) $(1,992,392) $(2,769,956) $(1,427,202) $(1,293,685) Cummulative effect of change in accounting principle Net Income (Loss) $(3,060,699) $(2,949,337) $(1,680,208) $(1,662,665) Income (Loss) available to commone sharesholders $(3,168,149) $(6,594,053) $(1,680,208) $(1,662,665) Basic and Diluted Loss per Common Share Loss from operations $ (0.12) $ (0.09) $ (0.02) $ (0.02) Cumulative effect of accounting change Net Loss $ (0.12) $ (0.09) $ (0.02) $ (0.02)
NOTE 19-SUBSEQUENT EVENTS (a) On July 12, 2002, the Company entered into a Securities Purchase Agreement with Kew Court, LLC (hereinafter "Kew Court") pursuant to which Kew Court agreed to purchase Convertible Promissory Notes (bearing interest at five (5%) percent per annum and convertible into shares of Company Common Stock at ninety (90%) percent of the average closing bid price for the Five (5) trading days immediately preceding conversion) The initial purchase is Two Hundred Fifty Thousand ($250,000) Dollars out of a total offering of not more than Three Million ($3,000,000) Dollars. The Company is required to register the shares of Company Common Stock issued pursuant to note conversion. The purchase of additional notes past the initial $250,000 is conditioned upon the Company (i) shipping a minimum number of radiography units during the previous month; (ii) achieving certain cost savings goals over the next two (2) quarters; and (iii) having an aggregate dollar trading volume in its common stock over certain defined periods. F 22 In addition, on August 14, 2002 the Company entered into a separate Exchange Agreement with Kew Court LLC ("Kew Court") pursuant to which Kew Court agreed to exchange Convertible Series B Preferred Shares previously issued to it (and having a face value approximating Three Million Eight Hundred Thousand ($3,800,000) Dollars with Kew Court then having the right to convert such Series B Preferred Shares into Eighteen Million Seven Hundred Fifty Thousand (18,750,000) Company Common Shares). In return for cancellation of the Series B Preferred Kew Court is to receive Three Hundred Seventy (370) shares of the Company's Series C Convertible Preferred Stock (convertible into shares of Company Common Stock in accordance with the terms and conditions set forth in the Company's "Certificate of Designations of Rights and Preferences of the Series C Convertible Preferred Stock" which permits conversion until March 31, 2003, absent any change of control, at the greater of One ($1.00) Dollar and a defined variable conversion price with conversions subsequent to March 31, 2003 being at Ninety (90%) Percent of the average closing bid price for the 5 day period preceding conversion). On August 14, 2002 the Company entered into a separate Exchange Agreement with its single largest shareholder, Hillcrest Avenue LLC (hereinafter "Hillcrest") pursuant to which Hillcrest agreed to exchange Fifty Million (50,000,000) shares of Company Common Stock owned by it for Two Thousand Eight Hundred and Thirty (2,830) shares of the Company's Series C Convertible Preferred Stock with conversion terms identical to those described above. Hillcrest and Kew Court have identical registration rights for the shares of Company Common Stock issuable upon Series C Preferred Conversion in accordance with the terms and conditions of a Registration Rights Agreement. The foregoing is intended solely as a summary of certain material terms and provisions contained in the above-referenced Agreements, and does not purport to summarize all pertinent and/or relevant additional information including various warranties and representations of the parties to such agreements, the various obligations assumed thereunder and their respective remedies in the event of any defaults. (b) On November 15, 2002, the Company entered into a Securities Purchase Agreement, providing for the issue and sale by the Company to SWR Investments, LLC, a Delaware limited liability company, of 12,000 shares of newly designated Series E Convertible Participating Preferred Stock, for a purchase price of $12,000,000. The purchaser has the option to purchase up to an additional 28,000 shares of newly-designated Series F Preferred Stock, for a price of $1,000 per share, at any time until December 1, 2007. The Series E Preferred Stock and the Series F Preferred Stock are senior in right of payment upon liquidation to all other equity securities of the Company and bear a dividend, which if not paid in cash is compounded quarterly, equal to 10% per annum of the liquidation value of $1,000 per share. Upon a liquidation or upon certain extraordinary transactions that are deemed liquidations, each share of the Series E Preferred Stock is entitled to receive a liquidation preference, pari passu with the Series I Preferred Stock but before any payment is made in respect of any other equity security of the Company, equal to the sum of the liquidation value of $1,000 per share and an additional preferential payment equal to 1 1/2 times the liquidation value if the payment is made prior to the first anniversary of the issuance of such share, two times the liquidation value if the payment is made after the first and prior to the second anniversary of issuance, and 2 1/2 times the liquidation value if the payment is made on or after the second anniversary of the initial issuance (in each case subject to the pari passu claim of the Series D Preferred Stock, the Series F Preferred Stock and certain management employees of the Company in respect of shares of the preferred stock of the Company to be held by them). Each share of the Series E Preferred Stock is convertible at the option of the holder into a unit consisting of a share of Series F Preferred Stock and a number of shares of Common Stock such that the aggregate of all shares of Common Stock into which all the Series E Preferred Stock is issuable equals 57 1/2% of the fully diluted Common Stock as of the initial issuance of the Series E Preferred Stock. Whenever any matter is put to the holders of the Common Stock for their vote, the holders of the Series E Preferred Stock have the right to vote together with the holders of the Common Stock in a single class, the holder of each such share having a number of votes equal to the number of shares of Common Stock into which such share is then convertible. The Series F Preferred Stock has the same terms as the Series E Preferred Stock as to seniority, the liquidation preferences and the dividend. The holdersof such Series have no voting rights (except as required by law)and no conversion right and, accordingly, do not have the common equity component of the Series E Preferred Stock. F 23 The Securities Purchase Agreement provides that concurrently with the closing of the issuance and sale of the Series E Preferred Stock, pursuant to an Exchange Agreement with the existing holders of the Company's Series C Preferred Stock, such holders will surrender their shares of the Common Stock, all of their shares of the Series C Preferred Stock, promissory notes of the Company with an aggregate principal amount of $750,000 and a claim for reimbursement of expenses in the amount of approximately $175,000. In exchange, such holders will receive 7,000 shares of newly designated Series D Preferred Stock and shares of newly designated Series H Preferred Stock. The Series D Preferred Stock is pari passu with the Series G Preferred Stock and the Series I Preferred Stock and junior in right of payment to the Series E Preferred Stock and the Series F Preferred Stock, and senior to the Common Stock, and bears a dividend, which if not paid in cash is compounded quarterly, equal to 10% per annum of the liquidation value of $1,000 per share, for an aggregate liquidation preference of $7,000,000. The Series D Preferred Stock has no regular voting right and is not convertible. The Series D Preferred Stock is redeemable at any time at the option of the Company for a redemption price equal to the liquidation value of $1,000 per share plus accrued and unpaid dividends. The Series H Preferred Stock ranks on a parity with the Common Stock and is entitled to no dividend except it's pro rata share of any dividend paid on the Common Stock. Each share of the Series H Preferred Stock is convertible at any time by the holders into a number of shares of the Common Stock such that the conversion of all the shares of Series H Preferred Stock would result in the holders thereof holding approximately 88% of the shares of Common Stock not held by WR Investments, LLC and affiliates, provided that the Company has at the time sufficient authorized but unissued shares of the Common Stock to carry out such conversion. Whenever any matter is put to the holders of the Common Stock for their vote, the holders of the Series H Preferred Stock have the right to vote together with the holders of the Common Stock in a single class, the holder of each such share having a number of votes equal to the number of shares of Common Stock into which such shares is then convertible. The Company is working diligently toward fulfilling the conditions to closing the transactions described herein, and while there can be no assurance that an early closing will occur, the Company expects the consummation of the transactions described herein to occur prior to the end of November, 2002. F 24 Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Matters Feldman Sherb & Co., P.C., a professional corporation of certified public accountants ("Feldman") was the independent accounting firm for Swissray International, Inc., a Delaware corporation (the "Company"), for the fiscal years ended June 30, 2001 and 2000 and the ten month ten day period ended May 10, 2002. The report of Feldman on the 2001 and 2000 consolidated financial statements of Registrant contained no adverse opinion, disclaimer of opinion or modification of the opinion. Feldman was merged into Grassi & Co., CPA's, P.C., ("Grassi") and the principal accountants who had been responsible for the Company's audit during the years ended December 31, 2001 and 2000 left and started their own firm called Sherb & Co., LLP ("Sherb"). As a result, on May 11, 2002, the Company dismissed Grassi and selected Sherb to serve as independent public accountants for the fiscal year 2002. During the two most recent fiscal years and through May 10, 2002, Registrant has not consulted with Sherb regarding the application of accounting principles to a specific or contemplated transaction. Neither the Company nor anyone on its behalf consulted with Sherb regarding the type of audit opinion that might be rendered on the Company's financial statements or any matter that was the subject of a disagreement or event as defined at Item 304(a)(2) of Regulation S-X. The decision to change accountants was recommended and approved by the board of directors of the Company. During the period from July 1, 1999 to October 21, 2002, there were no disagreements with Feldman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Feldman, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the Company's financial statements as described on Item 304(a)(1)(iv)(A). In addition, there were no such events as described under Item 304(a)(1)(iv)(B) of Regulation S-X during such periods. PART III Item 10. Directors And Executive Officers Of The Registrant Set forth below is certain information concerning each current director and executive officer of the Registrant, including age, position(s) with the Registrant, present principal occupation and business experience during the past five years. 35 Name Age Position(s) Held Ruedi G. Laupper 52 Chairman of the Board of Directors, President and Chief Executive Officer Josef Laupper 57 Secretary, Treasurer and Director Ueli Laupper 32 Vice President and Director Dr. Erwin Zimmerli 55 Director and Member of the Independent Audit Committee Dr. Sc. Dov Maor 55 Director and Member of the Independent Audit Committee Michael Laupper 29 Chief Financial Officer Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and have qualified. Ruedi G. Laupper has been President, Chief Executive Officer and a director of the Registrant since May 1995 and Chairman of the Board of Directors since March 1997. In addition, he is Chairman of the Board of Directors and President of the Company's principal operating subsidiaries. Ruedi G. Laupper is the founder of the predecessors of the Company and was Chief Executive Officer of SR Medical AG from its inception in June 1988 until May 1995. He has approximately 23 years of experience in the field of radiology. Ruedi G. Laupper is the brother of Josef Laupper and the father of Ueli and Michael Laupper. Josef Laupper has been Secretary, Treasurer (until January 1998 and recommencing January 1999) and a director of the Registrant since May 1995 (with the exception of not having served as Secretary from December 23, 1997 to February 23, 1998). He has held comparable positions with SR Medical Holding AG, SR Medical AG, and their respective predecessors since 1990. He is principally in charge of the Company's administration. Josef Laupper has approximately 19 years of experience within the medical device business. Ueli Laupper has overall Company responsibilities in the area of international marketing and sales with approximately eight years of experience within the international X-ray market. He has been a Vice President of the Company since March 1997 and a director of the Registrant since March 1997. He was Chief Executive Officer of SR Medical AG from July 1995 until June 30, 1997 having previously been employed by the Company from January 1993 to July 1995 as Export Manager. Since the beginning of July 1998 he has been in charge of the Company's U.S. operations and currently serves as CEO of both Swissray America Inc. since its formation in September 1998 and Swissray Healthcare, Inc. Dr. Erwin Zimmerli has been a director of the Registrant since May 1995 and, since March 1998, a member of the Registrant's Independent Audit Committee. Since receiving his Ph.D. degree in law and economics from the University of St. Gall, Switzerland in 1979, Dr. Zimmerli has served as head of the White Collar Crime Department of the Zurich State Police (1980-86), as an expert of a Swiss Parliamentary Commission for penal law and Lecturer at the Universities of St. Gall and Zurich (1980-87), Vice President of an accounting firm (1987-1990) and Executive Vice President of a multinational aviation company (1990-92). Since 1992 he has been actively engaged in various independent consulting capacities primarily within the Swiss legal community. 36 Dr. Sc. Dov Maor was appointed as a member of the Registrant's Board of Directors and a member of its Independent Audit Committee effective March 26, 1998. Dr. Sc. Dov Maor currently holds the position of Vice President for Technology with ELBIT Medical Imaging, Haifa. Dr. Sc. Dov Maor is well experienced in the field of Nuclear Medicine and medical imaging and has been employed for over 10 years in a leading position in Research & Development. Additionally, he was working in conjunction with the Max Planck Institute for Nuclear Physics in Heidelberg within his field of experience. In addition to his technical knowledge, Dr. Sc. Dov Maor is experienced in the commercial sector of the industry. Michael Laupper assumed the position of Interim Chief Financial Officer of the Company effective January 1, 1999, having previously worked in conjunction with the Company's former CFO and has been the Company's CFO since August 1999. Michael Laupper completed his commercial education in the chemical industry in 1991 in Switzerland and has additionally completed studies in finance and accounting (in the United States during 1996-97). He has served the Company in various management positions at SR Management AG and SR Medical AG, Company subsidiaries since 1999 and prior to assuming his current position. Key Personnel In April 2002, Swissray employed Mr. Andreas Gisler, 39, lic. Oec. HSG as a General Manager and Chief Executive Officer of Swissray Medical AG. Mr. Gisler is an internationally experienced Manager from the fields of company organization, financing and controlling. In his most recent position he was a vice president at Grapha-Holding AG and was the head of the controlling of a company active world-wide with over 4000 employees. The Board of Directors The Board of Directors has responsibility for establishing broad corporate policies and for overseeing the performance of the Registrant. Members of the Board of Directors are kept informed of the Registrant's business by various reports and/or documents sent to them in anticipation of Board meetings as well as by operating and financial reports presented at Board meetings. The Registrant pays its directors fees or compensation for services rendered in their capacity as directors. The current Board of Directors was elected and assumed office as of December 23, 1997 with the exception that Dr. Sc. Dov Maor assumed his position on March 26, 1998. The Board does not currently have a standing nominating or compensation committee or any committee or committees performing similar functions, but acts, as a whole, in performing the functions of such committees. At a meeting of the Board of Directors held on March 26, 1998, an Independent Audit Committee was established. Item 11. Executive Compensation Employment Agreements Ruedi G. Laupper entered into a five-year employment agreement with Swissray Management AG, a wholly owned subsidiary of the Registrant, on December 18, 1997, which agreement provided for automatic renewal for another five years unless terminated by either party no later than December 31, 2001. Such agreement also provided for: (i) an annual salary of 299,000 Swiss francs (or $194,121); (ii) an annual bonus of 12,000 Swiss francs (or $8,377); and (iii) a performance based bonus, based on the audited consolidated financial statements of the Company as of the end of the fiscal year. The bonus was calculated at 25% of EBIT (earnings before interest and taxes) payable in stock of Swissray 37 International, Inc. valued at the average of the closing prices during the five business days following the filing of the 10-K. In addition, the agreement entitles Mr. Laupper to a car allowance, five weeks of vacation, $698 per month for expenses and a "Bel Etage" insurance which provides certain pension benefits not mandated by Swiss law. If such employment agreement is terminated for reasons beyond the employee's control, Ruedi Laupper will receive 2 million Swiss francs (or $1,396,258 at June 30, 2000) including any bonus. The Registrant guarantees the obligation of Swissray Management AG in the event of a default. Pursuant to June 30, 1999 Board meeting (attended by the Company's President, Ruedi G. Laupper, who absented himself from the meeting prior to vote upon and adoption of resolutions) the EBIT bonus provisions referred to above were extinguished in exchange for (a) extending the duration of the employment agreement to December 18, 2007 and (b) issuance to Ruedi G. Laupper of 2,000,000 fully vested, and non- forfeitable shares of restrictive Company common stock in exchange for and in consideration of his agreeing to cancel the above referenced EBIT provisions in his employment contract which otherwise would have entitled him to receive 25% of all Company earnings before interest and taxes ("EBIT") payable in shares of Company Common Stock during each year of such employment contract, which contract expires December, 2007 EBIT, in thousands, for the years ended June 30, 1997, 1998, 1999 and 2000 was $(12,425), $(14,218), $(15,539), $(10,294) and $(11,291) respectively. Accordingly, no bonus was payable. Valuation assigned to the aforesaid 2,000,000 fully vested, and non-forfeitable shares was based upon Board members agreement that such price would be based upon 75% of bid price at the time proposal was initially made and agreed to on March 12, 1999, i.e. 75% of $0.50 bid price on March 12, 1999. The Board resolution approving the above referenced transaction (and utilizing the aforesaid agreed to valuation date) occurred on June 30, 1999, at which time the bid price of the common stock was $2.625 and at which time the above referenced shares were issued to Mr. Laupper. In accordance with SEC guidelines (and notwithstanding the percentage discount from bid price discussed above) the Company's financial statements reflect a 10% (as opposed to 25%) discount from bid price with respect to this transaction at date of issuance. At such June 30, 1999 Board meeting members expressed their consensus that while the Company had not, as yet, had any earnings, that its business (after significant and ongoing infusions of capital) had now reached the point where it was expected that "breakeven" (earnings before interest and taxes ("EBIT") being $0) was reasonably foreseeable within the current fiscal year and that it was further expected that in both the near term (i.e., within the next two fiscal years) and long term (i.e., the period of time commencing subsequent to the close of fiscal year ended June 30, 2002) that substantial and significant earnings would be forthcoming as a result of its development of its ddRMulti (and related products) and the industry's acceptance of same as reflected by substantial sales increases and the then anticipated sale of a significant number of its ddRMulti to the Government of Romania. The contract for sale of ddRMulti was entered into in October 1999 as a result of the Romanian Bidding Commission having accepted the Company's tender (in September 1999) as made to the Ministry of Health of the Government of Romania. As a result thereof the Company entered into the aforesaid contract for the sale of 32 of its ddRMulti with a valuation of in excess of $13,800,000. An initial payment aggregating 15% of the aforesaid total gross proceeds (i.e. a sum approximating $2,070,000) due under such contract was made to the Company in early March 2000. The Company installed and sold 25 of the 32 ddRMulti through close of its fiscal year ended June 30, 2000 while the balance of 7 Systems were installed and sold through August 2000 with the Company receiving the full balance aggregating $11,730,000 by such latter date. 38 Based upon the above, Board members reaffirmed their aforesaid March 12, 1999 agreement that it would be in the best interests of all parties concerned (and especially Company stockholders) to eliminate the above referenced EBIT provisions so that what might otherwise amount to significant earnings being paid to the Company's President in stock (pursuant to the 25% of EBIT bonus provisions) be replaced with a permanent one time solution. It was then resolved and subsequently accepted by the Company's President that 2,000,000 restrictive shares of the Company's Common Stock be issued to him in exchange for cancellation of the above referenced 25% of EBIT bonus provisions and in accordance with March 12, 1999 original agreement. The above referenced proposal was initially orally made to the Company's President by its Board of Directors on March 12, 1999 and the key meeting with respect to discussion thereon occurred on such date, and such agreement was subsequently finalized (i.e. reduced to writing) at the Company's June 30, 1999 Board meeting wherein discussions were basically limited to those set forth above and at which the only persons present were Board members and at which time Board members again agreed that valuation assigned to shares issued would reflect price at time of initial proposal as previously agreed to. There were no offers or counter-offers between the Company and its President but rather directors agreed to and voted in favor of issuance of the above referenced 2,000,000 restrictive shares and the Company's President (abstaining himself from such vote) agreed to such resolution. All material factors considered by the Board consisted of those referred to above and were what it considered to be "positive" factors without any negative factors or implications being discussed. The Company has quantified all material factors to the extent practicable. Management obtained stockholder ratification regarding this matter on July 12, 2000 after advising stockholders that even absent ratification the Board, in all likelihood, would leave the agreement in effect, as is. Such ratification was sought and received in an effort to comply with NASDAQ Marketplace Rule 4310(c)(25)(H)(i)(a). Notwithstanding ratification the NASD Board of Governors on July 28, 2000 advised the Company that it had declined to review the June 1, 2000 decision of the Nasdaq Council. See also Items 5(d). The above referenced Rule provides in part that "Each Issuer shall require shareholder approval". (A) when a stock option or purchase plan is to be established or other arrangements made pursuant to which stock may be acquired by officers or directors, except for warrants or rights issued generally to security holders of Swissray or broadly based plans and arrangement including other employees (e.g., ESPOS). In a case where the shares are issued to a person not previously employed by Swissray, as an inducement essential to the individual's entering into an employment contract with Swissray shareholder approval will generally not be required. The establishment of a plan or arrangement under which the amount of securities which may be issued does not exceed the lesser of 1 percent of the number of shares of Common Stock, 1 percent of the voting power outstanding, or 25,000 shares, will not generally require shareholder approval". Swissray is not currently on NASDAQ but nevertheless wished to obtain stockholder ratification regarding issuance of restrictive shares of common stock in amounts greater than 25,000 shares per person since NASDAQ may consider this issue for companies who are reapplying for listing on a case by case basis. 39 Swissray has entered into four (4) year employment agreements with Michael Laupper its Chief Financial Officer and Ueli Laupper its Vice President. Each of such agreements will automatically renew for an additional 4 years unless notice is given six (6) months prior to the initial expiration date. Ueli Laupper's employment agreement commenced July 1, 2000 while the employment agreement of Michael Laupper commenced November 1, 2000. The employment agreements of Michael Laupper and Ueli Laupper provide for annual compensation of CHF182,000 and US$104,000 per annum respectively. In accordance with the terms of each of the two (2) agreements each employee is entitled to certain cost of living adjustments, the use of a Swissray automobile and compensation in the sum of $500,000 in the event that the employment agreement is dissolved prior to expiration date on grounds for which employee is not responsible. The agreements further provide for non-accountable monthly expense allowances to Michael Laupper - CHF1,000 and Ueli Laupper - $1,500. Notwithstanding certain information contained above with respect to the Company's President, the Company also entered into new employment agreements with both its Chairman, President and Chief Executive Officer, Ruedi G. Laupper, and its Secretary/Treasurer and director, Josef Laupper. Each of these agreements commenced April 1, 2001 and each replaced agreements entered into in December of 1997. The Company's President's agreement is for a term of five (5) years while the Secretary/Treasurer's agreement is for a term of four (4) years. In both instances the agreements will automatically renew for an additional two (2) years unless notice of termination is given within 6 months prior to the end of its initial term. Ruedi G. Laupper's agreement provides for annual compensation of CHF370,500 while Josef Laupper's agreement provides for annual compensation of CHF162,500 with both of such agreements having provisions relating to cost of living adjustments, use of Company automobile and non-accountable expense allowances of CHF1,500 per month for the Company's President and CHF1,000 per month for its Secretary/Treasurer. The agreements further provide for compensation in the sums of US$2,000,000 for Ruedi G. Laupper and $500,000 for Josef Laupper in the event that the employment agreements is dissolved prior to its expiration date on grounds for which the employee is not responsible. The foregoing is intended to summarize certain pertinent information with respect to current employment agreements between the Company and each of its officers and does not purport to be a complete summary of such agreements. All of these employment agreements are covered by Swiss law. The following table indicates certain significant summarized current information as relates to those officers and/or directors who have Special Employment Agreements with the Company. 40 Expiration Annual Other Date of Date of Base Compen Name Contract Contract Salary(1) sation Car ---- -------------- -------- --------- ------ --- Ruedi G. Laupper April 5, 2001 March 31, 2006 $225,671 $11,877 X Josef Laupper April 5, 2001 March 31, 2005 $ 98,978 $ 7,918 X Ueli Laupper August 15, 2000 June 30, 2004 $104,000 $19,500 X Michael Laupper November 1, 2000 October 31, 2004 $110,858 $ 7,918 X ------------------- (1) Dollar amounts are based upon Exchange Rate of 0.6091 Summary Compensation Table The following Summary Compensation Table sets forth certain information for the years ended June 30, 2000, 2001and 2002 concerning the cash and non-cash compensation earned by or awarded to the Chief Executive Officer of the Registrant and the three other most highly compensated executive officers of the Registrant as of June 30, 2002 (the "Named Executive Officers").
Annual Compensation 1 Long - Term Compensation ---------------------- ------------------------ Fiscal Other Annual Stock All Other Name and Principal Position Year Salary Bonus Compensation Options Compensation --------------------------- ---- ------ ----- ------------ ------- ------------ Ruedi G. Laupper 2002 $213,188 -- $ 15,000 ------ President 2001 $228,109 -- $ 15,000 45,220 5 ------ Chief Executive Officer, 2000 $200,878 $695,625 2/3/6 181,250 4 ------ Chairman of the Board of Directors Josef Laupper 2002 $106,897 -- $ 12,000 ------ Secretary, Treasurer 2001 $102,693 -- $ 12,000 12,920 5 ------ 2000 $109,468 $383,250 2/3/6 200,000 4 ------ Ueli Laupper 2002 $124,052 -- $ 10,000 46,848 Vice President International Sales 2001 $120,401 -- $ 10,000 32,300 5 ------ 2000 $114,494 $628,750 2/3/6 218,750 4 ------ Michael Laupper 2002 $118,779 -- --- ------ Chief Financial Officer 2001 $113,991 -- --- 32,300 5 ------ 2000 $ 80,600 $371,250 3/5/6 125,000 4 ------
1 Excludes 3,060,556 stock options the Board of Directors has resolved to grant during the fiscal year beginning July 1, 2002 to the named executive officers (among others) at exercise prices equal to 50% of the market price calculated in accordance with the relevant stock option plan at the date of grant, in respect of services to be rendered by such executive officers during such period. 2 Fees for service on the Board of Directors 3 Includes 275,000, 150,000 250,000 and 150,000 shares of common stock issued to Ruedi G. Laupper, Josef Laupper, Ueli Laupper and Michael Laupper respectively, all of which shares were valued at $2.475 per share. 4 See "Stock Option Grants in Fiscal Year Ended June 20, 2000 5 See "Stock Option Grants in Fiscal Year Ended June 20, 2001 6 The shares issued to Ruedi G. Laupper, Josef Laupper and Michael Laupper were subsequently cancelled subsequent to October 1, 2002. See Item 13 herein. Stock Options And Stock Appreciation Rights The following sets forth certain information concerning the grant of options to purchase shares of the Common Stock to each of the executive officers of the Registrant, as well as certain information concerning the exercise and value of such stock options for each of such individuals. Options generally become exercisable upon issuance and expire no later than ten years from the date of grant. Stock Options Granted In Fiscal Year Ended June 30, 2000 With respect to the named Executive Officers there were no granting of stock options under either the Company's 1996, 1997. 1999 or 2000 Stock Option Plans (the "Plans") during fiscal year ended June 30, 2000 excepting for options granted (October 27, 1999 when the bid price was $2.625) from the 1999 Plan as follows: Ruedi G. Laupper, Josef Laupper, Ueli Laupper and Michael Laupper 181,250,200,000, 218,750 and 125,000 options respectively. All of such options are exercisable at $2.625 per share for a period of three years. 41 Aggregated Option Exercises In Fiscal Year Ended June 30, 1999 And Year-End Option Values1 Number of Securities Value of Unexercised Underlying Unexercised In-The-Money Options Options At Fiscal Year End At Fiscal Year End (Dollars) (Number) Exercisable/ Exercisable/ Name Unexercisable Unexercisable Ruedi G. Laupper 12,000/0 (3) $1.79/0 Josef Laupper 4 0/0 0/0 Ueli Laupper 4 0/0 0/0 Herbert Laubscher 4 0/0 0/0 Ulrich R. Ernst 4/5 0/0 0/0 1 No options were exercised by a Named Executive Officer during the fiscal year ended June 30, 1997, 1998 and 1999. 2 Options are in-the-money if the fair market value of the underlying securities exceeds the exercise price of the option. 3 Includes 12,000 options which are owned indirectly by Mr. Laupper through SR Medical Equipment Ltd., a corporation which is wholly owned by Mr. Laupper. 4 These individuals own no stock options of the Registrant. 5 Mr. Ernst was Chairman of the Board of Directors from May 1995 until March 18, 1997. Stock Options Granted In Fiscal Year Ended June 30, 2000 Name Options Granted a Exercised b Balance ---------------- ----------------- -------- ---------- Ruedi G. Laupper 181,250 25,000 156,250 Josef Laupper 200,000 25,000 175,000 Ueli Laupper 218,750 25,000 193,750 Michael Laupper 125,000 0 125,000 Erwin Zimmerli 93,750 0 93,750 Dov Maor 31,250 0 31,250 ------- ------ --------- Totals 850,000 75,000 775,000 ======= ====== ========= Stock Options Granted In Fiscal Year Ended June 30, 2001 42 Name Options Granted c Exercised d Balance ---------------- ----------------- -------- ---------- Ruedi G. Laupper 350,000 0 350,000 Josef Laupper 100,000 100,000 0 Ueli Laupper 250,000 0 250,000 Michael Laupper 250,000 0 250,000 Erwin Zimmerli 30,000 30,000 0 Dov Maor 20,000 0 20,000 --------- -------- -------- Totals 1,000,000 130,000 870,000 ========= ======== ========= ------------------------- a All granted on October 27, 1999. b All exercised on January 19, 2000. c All options granted on December 27, 2000 and are exercisable at $0.35 per share for a period of 2-1/2 years from date of grant. d Exercised in July 2001, i.e., after close of June 30, 2001 fiscal year. Stock Options Granted In Fiscal Year Ended June 30, 2002 There were no stock options granted to named executive officers during fiscal year ended June 30, 2002. On May 30, 2002 acting as administrator of the 2000 and 2001 Non-Statutory Stock Option Plans, the Board of Directors resolved to grant an aggregate of 3,060,556 to the Registrant's officers and directors, in respect of services to be rendered by them during the fiscal year beginning July 1, 2002. The options are to be granted during the fiscal year at a time to be determined by the Board of Directors, but not later than the last day of the fiscal year, at exercise prices equal to 50% of the market price of the common stock calculated in accordance with the stock option plans. See also footnote number 1 to Item 11 entitled Summary Compensation Table. Stock Option Plans Pursuant to February 1999 Board of Directors approval and subsequent July 23, 1999 stockholder approval, the Registrant adopted its 1999 Non Statutory Stock Option Plan, whereby it reserved for issuance up to 3,000,000 shares of its common stock. Thereafter in August 1999 the Registrant filed a Registration Statement on Form S-8 (File No. 0-26972) so as to register those shares of common stock underlying the aforesaid options. As of December 27, 2000, all of these options had been granted. Pursuant to October 1999 Board of Directors approval and subsequent July 12, 2000 stockholder approval, the Registrant adopted its 2000 Non Statutory Stock Option Plan, whereby it reserved for issuance up to 4,000,000 shares of its common stock. Thereafter in August 2000 the Registrant filed a Registration Statement on Form S-8 (File No. 0-26972) so as to register those shares of common stock underlying the aforesaid options. As of August 15, 2001, all 2,934,444 options had been granted. Pursuant to September 2000 Board of Directors approval and subsequent November 30, 2000 stockholder approval, Swissray adopted its 2001 Non-Statutory Stock Option Plan, whereby it reserved for issuance up to 2,000,000 shares of its common stock. Thereafter in January 29, 2001 the Company filed a Registration Statement on Form S-8 (File No. 0-26972) so as to register those shares of common stock underlying the options. As of October 1, 2002, none of these options have been granted. 43 Retirement and Long-Term Incentive Plans The Swiss and German Subsidiaries, mandated by government regulations, are required to contribute approximately five (5%) percent of 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, 2002, 2001 and 2000, were $1,114,294 $654,837 and $475,176 respectively. Director Compensation Directors of the Registrant receive $10,000 annually for serving as directors except for Josef Laupper, who receives $12,000 and Ruedi Laupper, the Chairman of the Board of Directors, who receives $15,000. Compensation Committee Interlocks and Insider Participation The Company had no Compensation Committee during the last completed fiscal year. The Corporation's executive compensation was supervised by all members of the Company's Board of Directors and the following directors were concurrently officers of the Company in the following capacities: Ruedi G. Laupper (Chairman of the Board of Directors, President and Chief Executive Officer); Josef Laupper (Secretary, Treasurer and director) and Ueli Laupper (Vice President and director). No executive officer of the Company served as a member of the Board of Directors or compensation committee of any entity which has one or more executive officers who serve on the Company's Board of Directors. The Company did not issue any shares of its Common Stock to any of its officers during fiscal year ended June 30, 1999 excepting for the issuance of 2,000,000 restrictive shares to Ruedi G. Laupper in exchange for and in consideration of cancellation of certain bonus provisions contained in employment contract. See Item 11 - "Employment Agreements". With respect to shares of common stock issued to officers and directors during fiscal years ended June 30, 2000, 2001 and 2002. See Item 13. Item 12. Security Ownership Of Certain Beneficial Owners And Management The following table sets forth certain information regarding beneficial ownership of the Common Stock as of October 1, 2002 (except where otherwise noted) with respect to: (i) each person known by the Registrant to be the beneficial owner of more than five percent of the outstanding shares of Common Stock, (ii) each director of the Registrant; (iii) the Registrant's executive officers and (d) all officers and directors of the Registrant as a group. Except as indicated in the footnotes to the table, of the outstanding shares of Common Stock, (b) each director of the Registrant, (c) the Registrant's executive officers; and (iv) all officers and directors of the Registrant as a group. Except as indicated in the footnotes to the table, all of such shares of Common Stock are owned with sole voting and investment power. The title of class of all securities indicated below is Common Stock with $.0001 par value per share. See also footnote number 1 on page 2 of this Form 10-K 44 Number of Shares Percentage of Beneficially Beneficially Owned Shares Name and Address of Beneficial Owner 1/10 Owned 1/10 ------------------------------------ ---- ------------- Ruedi G. Laupper 2 3,016,074 7.15% c/o Swissray International, Inc. Turbistrasse 25-27 CH 6280 Hochdorf Switzerland Josef Laupper 3 275,000 *% c/o Swissray International, Inc. Turbistrasse 25-27 CH 6280 Hochdorf Switzerland Erwin Zimmerli 4 118,750 *% c/o Swissray International, Inc. Turbistrasse 25-27 CH 6280 Hochdorf Switzerland Ueli Laupper 5 1,368,750 3.25% c/o Swissray International, Inc. 100 Grasslands Road Elmsford, New York 10523 Dov Maor 6 51,250 *% c/o Swissray International, Inc. Turbistrasse 25-27 CH 6280 Hochdorf Switzerland Michael Laupper 7 400,000 *% c/o Swissray International, Inc. Turbistrasse 25-27 CH 6280 Hochdorf Switzerland Hillcrest Avenue LLC 8,676,376 20.83% c/o Citco Trustees (Cayman) Limited Corporate Centre Windward One West Bay Road P.O. Box 31106 SMB Grand Cayman, Cayman Islands Liviakis Financial Communications, Inc. 8 2,597,400 6.24% 495 Miller Avenue, 3rd Fl. Mill Valley, CA 94941 All directors and officers as 5,229,824 12.07% a group (six persons) * Represents less than 1% of the 41,654,747 shares outstanding as of October 1, 2002. 1 Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of the Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date indicated above upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the date indicated above, have been exercised. 45 2 Includes (i) 37,500 shares owned indirectly by Ruedi G. Laupper through SR Medical Equipment Ltd., a corporation which is wholly owned by him; (ii) 460,324 shares owned indirectly by Ruedi G. Laupper through Tomlinson Holding Inc., a corporation which is wholly owned by him, (iii) 12,000 shares which may be acquired upon exercise of immediately exercisable options, which options are owned indirectly by Ruedi G. Laupper through SR Medical Equipment Ltd., a corporation which is wholly owned by him and (iv) an additional 156,250 shares which may be acquired upon exercise of balance of immediately exercisable options issued in October 1999 as well as (v) an additional 350,000 options issued December 27, 2000. 3 Includes 175,000 shares which may be acquired upon exercise of balance of immediately exercisable options issued in October 1999. 4 Includes 93,750 shares which may be acquired upon exercise of balance of immediately exercisable options. 5 Includes 193,750 shares which may be acquired upon exercise of balance of immediately exercisable options issued in October 1999 as well as an additional 250,000 options issued December 27, 2000. 6 Includes 31,250 shares which may be acquired upon exercise of immediately exercisable options issued in October 1999 as well as an additional 20,000 options issued December 27, 2000. 7 Includes 125,000 shares which may be acquired upon exercise of balance of immediately exercisable options issued in October 1999 as well as an additional 250,000 options issued December 27, 2000. 8 Includes 526,000 shares which are to be cancelled as per written agreement, but remain outstanding. 9 Includes 1,657,000 shares issuable upon option exercise. 10 The number of shares, and the calculation of the total number of shares beneficially owned for purposes of determining the percentages, excludes 3,060,556 stock options the Board of Directors has resolved to grant during the fiscal year beginning July 1, 2002 to the named executive officers (among others), at exercise prices equal to 50% of the market price calculated in accordance with the relevant stock option plan at the date of grant in respect of services to be rendered by such executive officers during such period. Item 13. Certain Relationships And Related Transactions Reference is herewith made to Compensation Committee Interlock, regarding 2,000,000 restrictive shares issued to the Company's President during fiscal year ended June 30, 1999. For further information with respect to this transaction reference is herewith made to "Management - Employment Agreements", second paragraph. With respect to such transaction the Company's Board determined same to be as fair to the Company as could have been made with unaffiliated parties and such transaction was unanimously approved by its Board with the Company's President abstaining from voting. Subsequent to June 30, 1999 year end, 497,824 restrictive shares of Company common stock were issued to corporations controlled by the Company's President in consideration of his pledging as collateral (and subsequently forfeiting) shares of Company common stock owned by corporations controlled by him in order to enable the Company to obtain financing. During October of 1999 and in accordance with unanimous Board approval the Company issued an aggregate of 875,000 shares to certain of its officers and/or directors as consideration for services rendered as per Board resolution. Such shares were issued as follows: 46 Name Position(s) Held No of Shares ---- ---------------- ------------ Ruedi G. Laupper Chairman of the Board of Directors, 275,000 a President and Chief Executive Officer Josef Laupper Secretary, Treasurer and Director 150,000 a Michael Laupper Chief Financial Officer 150,000 a Ueli Laupper Vice President and Director 250,000 b Dr. Erwin Zimmerli Director and Member of the Independent Audit Committee 50,000 a a These shares have since been cancelled. b. Ueli Laupper was issued an additional 675,000 in October 2002. During January 2000 and July 2001 the follow officers and/or directors exercised options and were issued shares as follows: Name January 2000 July 2001 ---- ------------ --------- Ruedi G. Laupper 25,000 0 Josef Laupper 25,000 100,000 Michael Laupper 0 0 Ueli Laupper 25,000 0 Erwin Zimmerli 0 30,000 ----------- -------- Totals 75,000 130,000 Part IV Item 14. Exhibits, Financial Schedules and Reports on Form 8-K a. Reference is herewith made to the consolidated financial statements and notes thereto included in this Form 10-K. b. 99.1 Certification of CEO 99.2 Certification of CFO c. During the last quarter of the Company's fiscal year ended June 30, 2002, the following Forms 8-K were filed. None, however, subsequent to June 30, 2002, the Company filed: (i) on August 15, 2002, a Form 8-K with date of report of August 14, 2002; and (ii) on September 26, 2002, a Form 8-K with date of report of September 24, 2002. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SWISSRAY INTERNATIONAL, INC. By: /Ruedi G. Laupper/ -------------------- Name: Ruedi G. Laupper Title: Chairman of the Board of the Directors, President and Principal Executive Officer Dated: November 19, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /Ruedi G. Laupper/ Chairman of the --------------------- Board of Directors, President and November 19, 2002 Ruedi G. Laupper Chief Executive Officer /Josef Laupper/ Secretary, Treasurer and Director November 19, 2002 --------------------- Josef Laupper /Michael Laupper/ Chief Financial Officer November 19, 2002 --------------------- Michael Laupper /Ueli Laupper/ Vice President and Director November 19, 2002 --------------------- Ueli Laupper /Dr. Erwin Zimmerli/ Director November 19, 2002 --------------------- Dr. Erwin Zimmerli /Dr. Sc. Dov Maor/ Director November 19, 2002 --------------------- Dr. Sc. Dov Maor Supplemental Information Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act. Not Applicable. 48 CERTIFICATIONS Certifications pursuant to Securities and Exchange Act of 1934 Rule 13a-14 as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002: I, Ruedi G. Laupper, Chief Executive Officer of Swissray International, Inc. (the Company") certify that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; an 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report. /s/ Ruedi G. Laupper ------------------------------ Swissray International, Inc. Chief Executive Officer November 19, 2002 I, Michael Laupper, Chief Financial Officer of Swissray International, Inc. (the "Company") certify that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report. /s/ Michael Laupper ------------------------------ Swissray International, Inc. Chief Financial Officer November 19, 2002