UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
Commission file number 0-24624
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
(Exact name of registrant as specified in its charter.)
NEW YORK 13-3097642
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7201 Wisconsin Avenue, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(301) 215-7777
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest
practicable date:
The number of shares outstanding of each of the issuer's classes of common
equity, as of November 12, 1996, was 4,390,000 shares of Common Stock and
2,000,000 of Common Stock Class B.
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PART 1. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
___________ ____________
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 4,055,000 $ 3,599,000
Accounts receivable, less allowance 3,926,000 3,725,000
Commissions receivable 468,000 962,000
Inventories, net 1,830,000 1,215,000
Current portion-long term
accounts receivable, net 1,471,000 2,396,000
Other current assets 1,172,000 690,000
__________ __________
Total current assets 12,922,000 12,587,000
Property & equipment, net 482,000 406,000
Long term accounts receivable, net 3,750,000 2,348,000
Other 872,000 93,000
__________ __________
Total assets $ 18,026,000 $15,434,000
=========== ===========
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<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 5,326,000 $ 4,139,000
Accrued contract training 798,000 683,000
Current portion-long term accounts
payable, net 217,000 984,000
Income taxes payable 546,000 186,000
__________ __________
Total current liabilities 6,887,000 5,992,000
Long term accounts payable, net 1,893,000 933,000
_________ _________
Total liabilities 8,780,000 6,925,000
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized - 5,000,000 shares,
none issued
Common stock, $.01 par value
Authorized - 30,000,000 shares
(including 2,000,000 designated class B);
Common stock - 1,840,000 shares issued
and outstanding 18,000 18,000
Common stock-Class B - 2,000,000 shares
issued and outstanding 20,000 20,000
Additional paid in capital 7,477,000 7,477,000
Foreign currency equity translation
adjustment (8,000) (8,000)
Retained earnings 1,739,000 1,002,000
__________ __________
Total shareholders' equity 9,246,000 8,509,000
__________ __________
Total liabilities and shareholders' equity $18,026,000 $15,434,000
=========== ===========
<FN>
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<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $4,254,000 $3,272,000 $16,832,000 $7,697,000
Cost of goods sold 3,327,000 2,551,000 11,821,000 6,020,000
_________ _________ __________ _________
Gross profit on sales 927,000 721,000 5,011,000 1,677,000
Net commission income 408,000 807,000 712,000 1,368,000
_________ _________ __________ _________
Total gross profit on sales
and net commission income 1,335,000 1,528,000 5,723,000 3,045,000
Selling, general and administrative
Salaries and payroll taxes 921,000 712,000 2,514,000 1,957,000
Travel and entertainment 458,000 288,000 1,081,000 927,000
Other 448,000 510,000 1,752,000 1,569,000
_________ _________ __________ _________
(492,000) 18,000 376,000 (1,408,000)
Other Income and Expenses
Interest Expense (5,000) (22,000) (12,000) (63,000)
Interest Income 75,000 99,000 269,000 340,000
Miscellaneous Income 204,000 (8,000) 547,000 (5,000)
_________ _________ __________ _________
Total Other Income/Expenses 274,000 69,000 804,000 272,000
Income/(loss) before provision
for taxes (218,000) 87,000 1,180,000 (1,136,000)
(Provision)/benefit for income taxes 82,000 (33,000) (443,000) 399,000
_________ _________ __________ _________
Net income/(loss) $ (136,000) $ 54,000 $ 737,000 $ (737,000)
========== ========== =========== ==========
Net income/(loss) per share $ (0.04) $ 0.02 $ 0.22 $ (0.22)
========== ========== =========== ==========
Weighted average shares outstanding 3,390,000 3,390,000 3,390,000 3,390,000
========== ========== =========== ==========
<FN>
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<PAGE>
<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended September 30,
1996 1995
<S> <C> <C>
Operating activities
Net income/(loss) $ 737,000 $ (737,000)
Adjustments to reconcile net income/(loss)
to net cash used in operating activities:
Depreciation & amortization 83,000 97,000
Provision for doubtful accounts 15,000 15,000
Provision for deferred taxes - (22,000)
Inventory write-down 98,000 67,000
Amortization of discount from investment
security - (91,000)
Changes in operating assets and liabilities:
Accounts receivable (693,000) (1,129,000)
Commissions receivable 494,000 (59,000)
Inventories (713,000) (625,000)
Other current assets (482,000) 34,000
Other assets (189,000) 170,000
Accounts payable and accrued expenses 1,495,000 1,172,000
Income taxes payable 360,000 (407,000)
_________ __________
Net cash provided by/(used in) operating
activities 1,205,000 (1,515,000)
Investing activities
Sale of investment security - 2,635,000
Increase in other assets (590,000) -
Purchase of property and equipment (159,000) (152,000)
_________ _________
Net cash provided by/(used in) investing
activities (749,000) 2,483,000
Effect of foreign exchange rate changes
on cash and cash equivalents - (9,000)
_________ _________
Net increase/(decrease) in cash and
cash equivalents 456,000 959,000
Cash and cash equivalents at beginning of
period 3,599,000 3,139,000
_________ _________
Cash and cash equivalents at end of period $4,055,000 $4,098,000
========== ==========
<FN>
</TABLE>
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have
been prepared in accordance with form 10-QSB instructions and in the opinion
of management contain all adjustments and normal or recurring accruals as
necessary to present fairly the financial position as September 30, 1996, the
results of operations for the quarter and nine months ended September 30, 1996
and 1995 and the cash flows for the nine months ended September 30, 1996 and
1995. These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in
the preparation of the Company's Form 10-KSB.
Certain information and footnote disclosure normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the accompanying consolidated financial statements be read in conjunction
with the financial statements and notes thereto incorporated in the
Company's Form 10-KSB.
Note 2. Concentrations of Credit Risk
The Company currently has a $1,720,000 credit facility for short
term working capital needs, standby letters of credit, and spot and forward
foreign exchange transactions.
On March 22, 1996 the Company issued a standby letter of credit in
the amount of $420,000 in connection with its obligation for shipment of
$8.4 million in Export-Import Bank financed goods. This obligation expires
April 30, 1997.
On August 19, 1996, the Company increased its existing credit
facility with First National Bank of Maryland from $900,000 to $1,300,000 for
short-term working capital needs, standby letters of credit, and spot and
forward foreign exchange transactions. In addition, First National Bank of
Maryland has provided a $420,000 standby letter of credit as a separate
credit facility apart from the increased line of credit resulting in a total
credit facility of $1,720,000. The $1,300,000 credit facility and the
$420,000 standby letter of credit are payable on demand, fully secured and
collateralized by government securities acceptable to the Bank having an
aggregate fair market value of not less than $1,911,112.
Note 3. Changes in equity
On October 28, 1996, the shareholders of the Company voted to
increase the number of authorized shares of common stock from 18,000,000
to 28,000,000 (excluding common stock-Class B).
On November 8, 1996, the Company closed a second public offering
of 10,000 units (at a purchase price of $1000 per unit), each consisting of
255 units (identical to those sold in the Company's initial public offering
in August 1994), each consisting of one share of common stock, one redeemable
class A warrant and one redeemable class B warrant, generating approximately
$8,890,000 of net proceeds.
Note 4. Provision for taxes
The provisions for income taxes for the nine months ended
September 30, 1995 and 1996 were computed using the estimated annual tax
rates expected to be applicable for the full year.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
Results of Operation
The Company's revenues are derived in two principal ways: net sales
by the Company for its own account and net commission income consisting of
commissions on sales made by manufacturers that are represented by the
Company. The Company often elects the form of each transaction based on
the circumstances of the transaction, including the nature of the products
and parties involved. Consequently, the Company does not believe that the
changes over periods in the mix comprising total gross profit on sales and
net commission income necessarily reflect any trends.
Three months ended September 30, 1996 compared to three months ended
September 30, 1995
The Company's net sales for the three months ended September 30,
1996 increased $982,000 or 30.0% and net commission income decreased
$399,000 or 49.4% over the three months ended September 30, 1995. The
total gross profit on sales and net commission income decreased $193,000
or 12.6%.
The Company believes that the total gross profit on sales and net
commission income has been negatively impacted during the quarters by
restrictions imposed by the Chinese government on the availability of
credit from the Chinese banking system to the Company's customers. The
Company believes the restrictions on the availability of credit will
continue to impact operations for the immediate future.
The Company's gross profit on sales as a percentage of net sales
for the three months ended September 30, 1996 was 21.8% as compared to
22.0% for the three months ended September 30, 1995.
The Company anticipates making a bulk sale of certain inventory that
had been purchased from a manufacturer no longer represented by the Company.
It is anticipated that the sale would occur at a discount of no more than 20%
off the Company's cost and, accordingly, the Company recorded a one-time
inventory write-down in the amount of $84,000 in the three month period ended
September 30, 1996.
Selling, general and administrative expenses for the three months
ended September 30, 1996 and 1995 were $1,827,000 and $1,510,000
respectively, representing an increase of 21.0%. This increase is related
to an increase in the number of Company employees, increased staff bonuses
as a result of higher sales and increased rent expense related to the new
building leased to house the proposed Beijing United Family Health Center.
As a percentage of net sales and net commission income, the selling, general
and administrative expenses increased slightly from 37.0% in the three
months ended September 30, 1995 to 39.2% in the three months ended
September 30, 1996.
Interest income for the three months ended September 30, 1996
and 1995 was $75,000 and $99,000 respectively. Miscellaneous income of
$204,000 was due to the Company's three year sub-lease of a portion of the
building leased to house the proposed Beijing United facility.
Nine months ended September 30, 1996 compared to nine months ended
September 30, 1995
The Company's net sales for the nine months ended September 30, 1996
increased $9,135,000 or 118.7% and net commission income decreased $656,000
or 48.0% over the nine months ended September 30, 1995. The total gross
profit on sales and net commission income increased $2,678,000 or 87.9%.
During 1996, the Company shipped $8.4 million of goods financed by
the Export-Import Bank tied aid credits to certain identified Chinese
organizations for the purchase of equipment sold by the Company. Tied aid
credits were made available to development projects in specific geographic
areas of China to match offers being made by European suppliers for the sale
of similar equipment on below market loan terms. While the Company
continues to explore additional financing opportunities, including with the
Export-Import Bank, there can be no assurances that any such financing will
be available in the future.
The Company believes that the total gross profit on sales and net
commission income has been negatively impacted during the periods by
restrictions imposed by the Chinese government on the availability of
credit from the Chinese banking system to the Company's customers. The
Company believes the restrictions on the availability of credit will
continue to impact operations for the immediate future.
The Company anticipates making a bulk sale of certain inventory that
had been purchased from a manufacturer no longer represented by the Company.
It is anticipated that the sale would occur at a discount of no more than 20%
off the Company's cost and, accordingly, the Company recorded a one-time
inventory write-down in the amount of $84,000 in the nine month period ended
September 30, 1996.
The Company's gross profit on sales as a percentage of net sales
for the nine months ended September 30, 1996 was 29.8% as compared to 21.8%
for the nine months ended September 30, 1995. The improved gross profit
margin is attributable primarily to improved pricing achieved on the
Export-Import Bank financed sales as well as decreased freight and training
costs for the nine months ended September 30, 1996.
Selling, general and administrative expenses for the nine months
ended September 30, 1996 and 1995 were $5,347,000 and $4,453,000,
respectively, representing an increase of 20.1%. These expenses represent
costs associated with an increase in the number of Company employees,
increased staff bonuses as a result of higher sales, and increased rent
expense related to the new building leased to house the proposed Beijing
United facility. As a percentage of net sales and net commission income,
the selling, general and administrative expenses decreased from 49.1% in the
nine months ended September 30, 1995 to 30.5% in the nine months ended
September 30, 1996. The reduction in percentage was due principally to
shipment of the Export-Import financed $8.4 million sale and to the fact
that substantially all of the related selling and administrative expenses
were incurred in prior periods.
As set forth above, the Company's net sales, total gross profit
on net sales and net commission income, and gross profit were in each case
significantly and positively impacted during the nine months ended
September 30, 1996 as a result of the shipment of goods financed by the
Export-Import Bank. The Company does not expect such positive 1results to
continue in the fourth quarter or to be indicative of the results of
operations for the fiscal year ending December 31, 1996. This financing
arrangement from the Export-Import Bank was the first of its kind for the
Company and, the Company believes, was the first of its kind for purchasers
in China. The Company has not received any further Export-Import Bank financing
commitments and there can be no assurance that any such commitments will be
obtained in the future.
Interest income for the nine months ended September 30, 1996
and 1995 was $269,000 and $340,000 respectively. The decrease principally
was due to a reduction over the periods in the amount of proceeds remaining
from the Company's initial public offering. Most interest income was earned
on these proceeds. Miscellaneous income of $547,000 during the nine months
ended September 30, 1996 principally was due to the Company's three year
sub-lease of a portion of the building leased to house the proposed Beijing
United facility.
Liquidity and Capital Resources
During 1996, the Company expects to enter into commitments for
capital expenditures in the approximate aggregate amount of $2,500,000
for equipment and renovations in connection with the Beijing United facility.
The Company believes that the Beijing United facility, which currently is
expected to open in early 1997, will provide much-needed Western standard
health care services, including maternity and birthing services as well as
neonatal and pediatric care, to specified target markets in China, including
the expatriate business and diplomatic community in Beijing. The Company
intends to finance these capital expenditures principally from its cash and
cash equivalents available as of September 30, 1996. As of September 30, 1996
the Company has spent less than $600,000 in connection with developing the
Beijing United facility. The Company may use a portion of the net proceeds
of its second public offering (completed November 1996) to fund a portion of
the start-up expenses of the Beijing United facility and intends to use a
portion of such net proceeds to finance the clinic during the initial period
of operations following its opening.
The Company believes that the net proceeds of its second public
offering completed in November 1996, available sources and cash flow from
operations will satisfy the Company's cash requirements for at least the next
24 months, including those in connection with the Company's proposed health
care services operations and expansion. The Company, however, may be required
to obtain additional funds thereafter. There can be no assurance that such
funds will be available to the Company on favorable terms, if at all.
By the end of July 1996, the Company received all of the cash receipts
from sales financed by the $8.4 million Export-Import Bank financing
arrangement and used such cash receipts to reduce related accounts payable.
As of September 30, 1996 the Company had cash and cash equivalents of
$4.1 million.
In light of the uncertainty of available financing to the
Company's markets, the Company continues to search for alternate financing
programs. The recent tied aid credits from the Export-Import Bank for the
purchasers of the Company's products provides an attractive financing
alternative. The Company has not received any further Export-Import Bank
financing commitments and there can be no assurance that any commitments
will be obtained in the future. Other efforts include the provision of
extended payment terms to certain customers, applications for additional
loan or loan guarantees from the Export-Import Bank and the consideration
of other alternative financing arrangements.
Recent increases in sales, which were substantially due to the
Company's offering of extended payment terms, resulted in $693,000
increase in accounts receivable from December 31, 1995 to
September 30, 1996, offset by a $1,495,000 increase in accounts payable
and a decrease of $494,000 due to collections of commission receivable
over the period.
On August 19, 1996, the Company increased its existing credit
facility with the First National Bank of Maryland from $900,000 to
$1,300,000 for short term working capital needs, standby letters of credit,
and spot and forward foreign exchange transactions. In addition, First
National Bank of Maryland has provided a $420,000 standby letter of credit
as a separate credit facility apart from the increased line of credit. The
$1,300,000 credit facility and the $420,000 standby letter of credit are
payable on demand, fully secured and collateralized by government securities
acceptable to the Bank having an aggregate fair market value of not less than
$1,911,112. As of September 30, 1996, the Company had available approximately
$900,000 under the credit facility. Generally, since the Company's assets
principally are located in China, the Company has experienced difficulties
in obtaining asset-based financing.
Inventory increased to $1,830,000 as of September 30, 1996
from $1,215,000 at December 31, 1995 as the Company built up inventories
in anticipation of sales by its newly formed subsidiary, Chindex Tianjin.
Although the Company formerly sold products almost exclusively on a
'to-order' basis, Chindex Tianjin now sells products on a cash basis, thus
requiring maintenance of higher levels of inventory. In addition, inventory
growth resulted from internal delays in Chindex Tianjin's marketing efforts
and sales, which did not commence until late 1995 and which, as a result of
various other factors typical for a new business, have been relatively
slow to develop. The delays related to start-up issues, principally the
time involved in organizing and developing a sales force for the
subsidiary's goods as well as establishing relationships with local Chinese
distribution companies. Although management is addressing these
difficulties, there can be no assurance that they will be favorably
resolved or not recur.
The Company anticipates making a bulk sale of certain inventory that
had been purchased from a manufacturer no longer represented by the Company.
It is anticipated that the sale would occur at a discount of no more than 20%
off the Company's cost and, accordingly, the Company recorded a one-time
inventory write-down in the amount of $84,000 in the nine month period ended
September 30, 1996.
In order to meet increased competition and difficult marketing
conditions caused by a restriction of credit available to domestic Chinese
organizations and to continue to expand its markets, the Company has
increased the number of sales in which it has offered certain customers
extended payment terms. In addition, although the Company currently
intends to continue to use letters of credit in the conduct of its
business, the percentage of sales backed by letters of credit has declined
over the past several years and is expected to decline in the future. To
the extent that the Company continues to extend credit or otherwise makes
sales on supported by letters of credit, the Company will experience
greater risk of non-payment and consequential impact on liquidity. In many
cases the Company has the choice to arrange to have a letter of credit
opened by the Chinese customer directly to the manufacturers or to the
Company. In the former case, the manufacturer processes the letter of
credit, retains the agreed amount for the cost of the goods and provides
the remainder to the Company, which classifies it as a commission payment.
If the Company arranges to have the letter of credit opened to the Company,
it is classified as a sale by the Company. In either case, the Company
receives the same net economic benefits from the sale.
In August 1994, the Company completed its initial public offering.
The Company received net proceeds of approximately $7.25 million from the
offering and subsequent sale of additional securities pursuant to an
over-allotment option held by the underwriter. Portions of the net
proceeds already have been applied to the Company's planned expansion of
personnel and to the provision of financing terms to increase product
sales. In addition, the Company has financed the development, including
capital expenditures, of the Beijing United facility principally from a
portion of the net proceeds from the initial public offering.
On November 8, 1996, the Company closed its second public offering.
The Company has received proceeds of $8.89 million from the offering and
may generate additional proceeds should additional securities pursuant to
an over-allotment option held by the underwriter be exercised. None of the
proceeds have been utilized.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. 27.1 Financial Data Schedule
b. Reports on Form 8-K
None
<PAGE>
US-CHINA INDUSTRIAL EXCHANGE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
November 14, 1996 S/Lawrence Pemble
Date Lawrence Pemble
Executive Vice President Finance and
Director
November 14, 1996 S/Ronald Zilkowski
Date Ronald Zilkowski
Vice President Finance and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4055000
<SECURITIES> 0
<RECEIVABLES> 9725000
<ALLOWANCES> (110000)
<INVENTORY> 1830000
<CURRENT-ASSETS> 12922000
<PP&E> 940000
<DEPRECIATION> (458000)
<TOTAL-ASSETS> 18026000
<CURRENT-LIABILITIES> 6887000
<BONDS> 0
0
0
<COMMON> 38000
<OTHER-SE> 9209000
<TOTAL-LIABILITY-AND-EQUITY> 18026000
<SALES> 16832000
<TOTAL-REVENUES> 17544000
<CGS> 11821000
<TOTAL-COSTS> 17168000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12000)
<INCOME-PRETAX> 1180000
<INCOME-TAX> (443000)
<INCOME-CONTINUING> 737000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737000
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
