FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 0-24624
----------------------------
U.S.-CHINA INDUSTRIAL EXCHANGE
(Name of small business issuer 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, Maryland, 20814
(301) 215-7777
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Class A Warrants
Class B Warrants
Check whether the issuer (1) has 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
(2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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 issuer's revenue for its most recent fiscal year was $24,381,000.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, the average bid and asked
prices of such stock, as of March 26, 1998 was approximately $13,124,000.
The number of shares outstanding of each of the issuer's class of common equity,
as of March 26, 1998, was 4,772,500 shares of Common Stock and 2,000,000 shares
of Class B Common Stock.
Documents Incorporated by Reference: Part III: Proxy Statement
<PAGE>
PART I
Item 1. Business
General
The Company, founded in 1981, is an established independent marketing and
sales organization in China for certain Western products. The Company provides
United States, European and other manufacturers with access to the Chinese
marketplace and offers a wide range of marketing, sales and technical services
for its products. The Company conducts its marketing and sales and provides its
services exclusively to buyers located in China, Hong Kong and Macau. The
Company principally serves as the exclusive sales representative for several
major manufacturers of high-technology diagnostic medical equipment and
consumable medical supplies. The Company also sells certain products
on a non-exclusive basis. The Company's national sales and technical support
staff operates from its office in Beijing and regional offices in Shanghai,
Guangzhou, Tianjin and Hong Kong. The Company also operates a private hospital
in Beijing, China, which began seeing patients on a limited basis in 1997. In
addition to its sales and health services activities, the Company also provides
marketing research and consulting services to its manufacturers for a variety
of business activities in China.
During 1997, the Company continued its business of selling Western products
to the China market and expanded its activities through the initiation of its
health services business, Beijing United Family Hospital, providing Western
style primary care health services including a family practice clinic,
obstetrics, gynecology, birthing services and executive health care. The
Company also expanded its offerings in 1997 in the area of consumable products.
It also hired additional staff and continued extending financing terms to
selected buyers of capital medical equipment.
In order to concentrate and consolidate its efforts and eliminate
unprofitable and low growth product areas the Company has decided to undertake
a significant restructuring of its operations. During 1998 the Company intends
to phase out its sale of construction, mining and other industrial machinery
and scientific research instrumentation, as well as some less profitable medical
equipment lines and will concentrate its efforts on the health care sector,
including both sales of medical equipment and consumables and provision of
health services.
In order to meet increased competition and difficult market conditions
caused by a restriction of credit available to domestic Chinese organizations
and to continue to expand its markets, the Company continued to offer certain
customers extended payment terms on purchases. These sales were to familiar and
qualified purchasers and were structured to reduce the Company's risk of non-
payment. In most cases the Company's suppliers participate in extending
reciprocal payment terms to the Company for a significant portion of these
extended payment arrangements. The Company believes that its decision to
undertake this financing initiative contributed to the overall increase in sales
in 1997 and 1996, although there can be no assurance that this financial
initiative will continue to offset or reduce the continuing impact of credit
restrictions.
In 1997, the Company's subsidiary in Hong Kong, Chindex Hong Kong Limited,
continued its business in the sale of medical products into the Hong Kong
market. This subsidiary initially has focused on the sale of Acuson ultrasound
machines to end-users in Hong Kong. In 1997 the subsidiary began to sell
medical consumable products in Hong Kong as well. Chindex Hong Kong Limited
currently has five employees.
In 1997, the Company's wholly foreign-owned subsidiary, Chindex Holdings
International Trade (Tianjin) Ltd., which is registered in the special economic
Tianjin Free Trade Zone and which was established in 1995, continued its planned
expansion in the import, warehousing and distribution of products. This
subsidiary supplies certain medical products and consumables directly to
hospitals in China for domestic currency and is serving as a platform for the
Company's growing distribution activities.
In 1997, the Company's distribution activities, principally involving the
sale of medical consumable products and off-the-shelf medical equipment,
continued to expand. The Company has established a dedicated team of sales
professionals located in Beijing, Shanghai, Guangzhou and Hong Kong. Sales of
products by this team in mainland China are denominated in local currency, the
Renminbi, via a network of value-added sub-distributors who cover city-based
territories. For the most part, the Company requires payment in advance for
the consumable products which it sells. The Company has established such sub-
distributor relationships in the majority of the market and anticipates
achieving nationwide coverage in 1998. The Company intends to establish an
additional foreign-owned subsidiary in a Foreign Trade Zone in Shanghai in 1998.
To date, the Company's distribution activities have involved sales to hospitals.
In 1998, the Company intends to initiate distribution into the retail market.
In 1997, the Company began distribution of pharmaceutical products in
China. The initial pharmaceutical product distributed by the Company is a
contrast agent used in diagnostic ultrasound studies. The Company plans to add
additional pharmaceuticals to its portfolio in 1998, concentrating on family
health care related product offerings.
In 1995, the Company began work on bringing much needed western standard
health care services to specific, targeted segments of China by establishing the
Beijing United Family Hospital (Beijing United) a 90/10 joint venture between
the Company and the Chinese Academy of Medical Sciences Union Medical &
Pharmaceutical General Corporation (Chinese Academy of Medical Sciences).
Beijing United opened for outpatient services in September of 1997 and has
opened for inpatient services in March of 1998. Beijing United has begun
providing the expatriate business and diplomatic community in Beijing, as well
as the growing affluent segment of the local population, with complete western
standard primary care hospital services including family practice, obstetrics,
gynecology, neonatology and men's health. The facility treats both medical and
surgical outpatients and in-patients. The Company will consider establishing a
series of similar hospitals in other major metropolitan centers in China over
the next several years and has undertaken the initial evaluation and planning
process for that undertaking. The Company also has plans to establish satellite
clinics which will serve as referral sites for the hospital as well as draw
upon the resources of the hospital for treating patients.
The Company believes that Beijing United is the first foreign managed joint
venture hospital in operation with the full necessary authorizations to operate
in Beijing by China's ministry of health and other relevant governmental
offices. There can be no assurances that the requisite approvals will be
forthcoming for additional facilities and the hospital must pass periodic
inspections and review for the requisite approvals to be continued in effect as
necessary for hospital operations.
The provision of health care services entails the risk of potential medical
malpractice and similar claims which may be asserted against Beijing United
and/or against the Company in the event that services rendered by Beijing United
or procedures performed at the Beijing United facility are alleged to have
resulted in injury or other adverse effects. Although the Company has obtained
liability insurance for itself and Beijing United that it believes will be
adequate as to both risk and amounts, there can be no assurance that successful
malpractice claims will not exceed the limits of the Company's insurance and
thus have a material adverse effect on the Company's business, financial
condition or operating results.
Marketing
China, with more than one billion people, contains approximately one-fifth
of the world's population. It is the third largest economy in the world
according to the International Monetary Fund's (IMF) calculation methods for
Gross Domestic Product (GDP). Using the IMF's Purchasing Power Parity method of
calculation, China's GDP is over $3 trillion, behind only the United States and
Japan. China has expanding trade relations with the United States and,
according to the World Bank is now the tenth largest trading nation in the
world. From 1992 to 1996 disposable income per capita in China has more than
doubled nationally, with urban income growth levels exceeding even these
increases. The Company believes that there exists a substantial and expanding
market for its products in the China marketplace and the further integration of
the Chinese foreign trade system into the established global economy through its
application to the World Trade Organization and other initiatives to further
open the Chinese economy to foreign participation will further enhance the
market for the Company's products.
The Company has decided to focus its efforts exclusively in the health
sector. The size of the market for medical equipment in China has been
estimated to be in the range of $800 million to $1 billion U.S. dollars per
year. The market is growing at a fast rate. China's imports of medical
equipment from all sources has been in the range of $400 to $500 million
annually over the past few years.
The medical equipment products which the Company sells are marketed to
hospitals, through hospital administrators and the doctors who are the ultimate
users of the products. There is virtually no private practice of medicine in
China and all physicians are affiliated with hospitals or similar institutions.
Each hospital also has various economic and administrative forces at work
determining hospital policy and practice. A hospital's decision to purchase the
Company's products depends on those economic and administrative forces. The
Company's marketing is addressed to all relevant participants in the purchasing
decision, including the doctors and hospital administrators.
Most purchases of the Company's equipment products (as opposed to its off-
the-shelf medical products and consumable products), regardless of the nature
of the end-user, are made through foreign trade corporations (FTCs). Although
the purchasing decision is made by the end-user, which may be an individual or
a group having the required approvals from their administrative organizations,
the Company enters into formal purchase contracts with FTCs. The FTCs make
purchases on behalf of the end-users and are legally authorized by the Chinese
government to conduct import business. These organizations are chartered and
regulated by the government and are formed to facilitate foreign trade. The
Company markets its products directly to end-users, but in consummating a sale
the Company also must interact with the particular FTC representing the end-
user. For this reason, the Company seeks to maintain ongoing relationships with
the FTCs in its industries. By virtue of its direct contractual relationship
with the FTC, rather than the end-user, the Company is to some extent dependent
upon the continuing existence of and contractual compliance by the FTC until the
particular transaction has been completed.
Although the Company remains optimistic about the marketplace, there
continues to be uncertainties as to the direction of China's on-going political
and economic reforms, the possibility for future devaluation of the Chinese or
Hong Kong currencies as well as China's relationship with the United States.
This uncertainty may influence the budgeting and purchasing process in China.
Any of the foregoing circumstances may impede trade with China, thus impairing
the ability of the Company's customers to purchase the Company's products.
Events in Asia could further impact the Company in 1998. While China has
not been impacted directly, there are aspects of the Asian economic situation
which can impact China and thus the Company's business. Although Chinese
leaders have consistently denied any plan to have a currency devaluation during
1998, such a devaluation, if it happened, could serve to make the products which
the Company sells in China more expensive. Other impacts could include
decreased funds available to Chinese end users as a result of a general economic
slowdown and increased competition from other American and European companies
attempting to deal with the declining markets for their products in other Asian
countries by increasing efforts in China.
Manufacturers and Products
Acuson Corporation (Acuson), which manufactures only ultrasound imaging
devices, is the Company's largest supplier. Sales by the Company of Acuson
products represented over half of total revenues during 1997 and 1996. The
Company has an exclusive distribution agreement for China and Hong Kong with
Acuson.
Other medical products which the Company sells in China include machines
and consumables manufactured by Johnson & Johnson Clinical Diagnostics that
utilize "dry slide" clinical chemistry technology, products manufactured by
Leibinger GmbH (a Pfizer company), a leading German manufacturer of
radiosurgical treatment planning and stereotactic systems, medical laboratory
analysis equipment manufactured by Nova Biomedical, Inc., sterilizers and other
medical equipment such as special lights and tables for operating rooms
manufactured by Steris Corporation, systems and equipment for stereotactical
operations manufactured by Carl Zeiss Far East Company Limited, and bone
densitometry systems manufactured by Lunar Corporation.
During 1997, the Company initiated marketing of the products of three new
medical manufacturers. The first of these, Kendall Healthcare Products Company,
is a major worldwide producer of disposable medical supplies and Chindex is
marketing select Kendall products through the Chindex distribution network for
consumable products. The second new medical manufacturer is Medex, Inc., a
major producer of medical equipment and supplies used primarily in critical
care environments. The Medex products are also being marketed through the
Chindex distribution network. The third new medical manufacturer for 1997 is
Schering Limited Hong Kong, a wholly-owned subsidiary of Schering AG, for which
Chindex will be engaged in the distribution of pharmaceutical products.
Distribution Arrangements
Where the Company functions as the exclusive sales representative of a
manufacturer, the contracts between the Company and each of its manufacturers do
not represent long-term obligations of the manufacturer and there can be no
assurance that the Company's manufacturers will not elect to change their method
of distribution into the China marketplace to a format that does not utilize the
services of the Company.
Acuson Corporation
The Company commenced its contractual relationship with Acuson in 1987.
Under the terms of its current agreements, the Company is the authorized
distributor of Acuson diagnostic ultrasound equipment in China and Hong Kong.
In addition, the Company's responsibilities include the training of all
customers, the maintenance and servicing of Acuson products and various
promotional activities within China and Hong Kong. Acuson provides customers of
the Company with a parts warranty of up to thirteen months from the date of
product shipment from the United States. In accordance with such guarantee,
Acuson will replace or repair any parts defective as a result of original
materials used or workmanship. Servicing this warranty is the responsibility of
the Company. The agreement with Acuson has been renewed regularly since 1987.
The current agreement with Acuson is automatically renewed for successive one
year periods from each January 1st, unless either party gives timely notice of
intent not to renew.
Competition
In the sale of products, the Company competes with other independent
distributors in China that market similar products. Although the Company
believes that it is one of the largest independent distributors in its markets,
there may be other distributors with greater resources or other competitive
advantages over the Company.
In addition to other independent distributors, the Company faces more
significant competition from direct distribution of established manufacturers.
In the medical products field, for example, the Company competes with Hewlett-
Packard, which maintains its own direct sales force in China. In addition,
since certain manufacturers, such as Hewlett-Packard, market under one brand
name a wide variety of products in China to different market sectors, those
manufacturers may be better able than the Company to establish name recognition
across industry lines. For example, Hewlett-Packard also manufactures and
markets computers in China as well as other medical instruments not sold by the
Company. The Company believes that Hewlett-Packard, ATL, and Siemens
Corporation are the largest such direct competitors in the medical products
field. The Company believes that its products incorporate technologies that are
more advanced than those available in products currently available from domestic
Chinese manufacturers.
In the sales and distribution of off-the-shelf medical products,
consumables and pharmaceuticals, the Company's sales, marketing and logistical
distribution networks also compete with similar distribution operations of other
independent distributors, both foreign and Chinese, joint ventures and foreign
manufacturers. In addition, the products themselves supplied by the Company to
the China market compete with similar products of foreign, joint venture and
domestic manufacturers.
The Company's competitive position for product sales depends in part upon
its ability to attract and retain qualified personnel in sales, technical and
administrative capacities. In addition, many of the Company's various
competitors have greater resources, financial or otherwise, than does the
Company.
In response to increased competition, and, in an effort to expand its
business, the Company has entered into agreements with certain customers to
provide extended payment terms for purchase of goods. These arrangements,
limited to selected purchasers qualified by the Company, have assisted the
Company in competing with financing offered by competing manufacturers and
governments. See "Management's Discussion and Analysis or Plan of Operations-
Liquidity and Capital Resources" below.
The Company's subsidiary, Chindex Holdings International Trade (Tianjin)
Ltd., sells goods and receives payment in local Chinese currency and uses the
currency to pay for local expenses. Payments are generally required to be made
in advance for consumable products. The Company recognizes that any devaluation
in the local currency may have a negative impact on the results of operations
but does not believe any loss would be significant.
The Company has no direct competition for its hospital, Beijing United
Family Hospital, in catering to the expatriate and diplomatic market. One other
Western owned hospital venture has been approved but construction has not yet
started.
Employees
At December 31, 1997, the Company had 237 full-time salaried employees, 222
of whom are in China and Hong Kong. Of the full-time personnel in China and
Hong Kong, 20 are expatriates and 202 are Chinese or third country nationals.
Of the Company's non-USA based employees, 91 are considered administrative
personnel, 27 are engineering, 58 are employed by Beijing United, and the
remainder are sales personnel. No employee of the Company currently is
represented by a labor union. Management considers its employee relations to
be good.
Forward-Looking Statements
With the exception of historical information, the matters discussed or
incorporated by reference in this Report on Form 10-KSB and, if any, in the
Company's 1997 Annual Report to Shareholders are forward-looking statements that
involve risks and uncertainties. These forward-looking statements include, but
are not limited to, statements about the Company's (i) performance goals, (ii)
future revenues and earnings, (iii) markets and (iv) proposed new operations.
Actual results could differ materially from such forward-looking statements
because of, among other things, the following factors: developments relating to
conducting business in China (including political, economic and legal matters),
the timing of the Company's revenues, risks relating to commencement and early
operation of healthcare services, dependence on certain suppliers, and
extension of credit terms.
Item 2. Facilities
The Company's representative headquarters in China are located at a 12,000
square foot facility in Beijing pursuant to a lease expiring June 30, 2001. The
Company also leases regional offices in the Chinese cities of Shanghai,
Guangzhou and Tianjin comprised of approximately 2,400, 810 and 700 square feet,
respectively, each lease expiring yearly. The Company's executive and
administrative offices are located in Bethesda, Maryland, which provides access
to nearby Washington, D.C. The lease for the Bethesda office, which consists of
approximately 3,800 square feet, expires on July 31, 2001.
On November 8, 1995, the Company entered into a lease of a four story
building of approximately 43,500 square feet in Beijing. On November 26, 1996
this lease was extended to 15 years, expiring on December 24, 2010. The Company
renovated the first two floors of the building for the Beijing United Family
Hospital, a family health center with birthing, pediatric and family medicine
capabilities. The Hospital is a joint venture formed by the Company and the
Chinese Academy of Medical Sciences. The Company has subleased the remaining
two floors. The sublease expires on January 31, 1999, with the tenant having an
option to extend the term of the sublease for an additional two years.
On November 1, 1997, Chindex Hong Kong Limited entered into a two year
lease, expanding the Hong Kong office space to approximately 1,100 square feet.
This lease replaced the previous lease entered into in 1996.
The Company believes that these facilities will be sufficient to satisfy
the Company's current requirements. The Company believes that, in the event
any of the existing leases that expire within five years are not renewed,
adequate alternative space will be available in the same areas at comparable
rates.
Item 3. Legal Proceedings
There are no pending material legal proceedings to which the Company or any
of its properties is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Units (one share of Common Stock, one Class A Warrant and one
Class B Warrant), Common Stock, Class A Warrants and Class B Warrants have been
listed on the National Association of Securities Dealers Automated Quotation
Market ("NASDAQ") under the symbols CHDXU, CHDX, CHDXW, CHDXZ, respectively.
The following table shows the high and low common stock bid quotations in the
over-the-counter market, as quoted by NASDAQ. Such quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Quarter Ended High Bid Low Bid
March 31, 1996 5-1/2 4
June 30, 1996 4-15/16 3-1/4
September 30, 1996 5-1/8 3-7/8
December 31, 1996 5-1/4 3-1/8
March 31, 1997 5-1/2 3-1/8
June 30, 1997 4-3/4 2
September 30, 1997 5 3-1/2
December 31, 1997 5-1/4 1-1/4
The Company's Common Stock is listed on The NASDAQ National Market, while
its Units, Class A Warrants and Class B Warrants trade on the NASDAQ SmallCap
Market.
As of March 27, 1998, there were 13 record holders and there is estimated
to be approximately 1,000 beneficial owners of the Company's Common Stock, and
three owners of the Company's Class B Common Stock.
The Company has not paid any cash dividends on its Common Stock since
inception, and it does not anticipate paying any cash dividends in the
foreseeable future. The Company expects to retain earnings for use in its
business.
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Fiscal year 1997 compared to 1996
The Company's revenues are derived in two 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 the periods in
the mix comprising total gross profit on sales and net commission income
necessarily reflect any trends.
The Company's net sales for the year ended December 31, 1997 increased
$1,789,000 or 8%, and net commission income for 1997 decreased $309,000 or 37%
over the year ended December 31, 1996. The increase in net sales over the
period was due to increased marketing efforts and continued offering of
extended payment terms to customers. In 1996 sales benefited from an
$8.4 million loan facilitated by the Export-Import Bank financing to certain
Chinese organizations for the purchase of equipment sold by the Company.
Revenues from Beijing United began in late 1997 but were minimal.
The Company's gross profit on sales as a percentage of net sales for 1997
was 27% compared to 32% for 1996. This decrease is attributable primarily to
the fact that the 1996 results reflected improved pricing achieved on the
Export-Import Bank financed sales and, to a lesser extent, to pricing pressures
in the recent year, which are anticipated to continue for the foreseeable
future. The Company's total gross profit on sales and net commission income
was $6,894,000 for 1997. Of that amount $6,362,000 or 92% consisted of gross
profit on sales and $532,000 or 8% consisted of net commission income. The
Company's total gross profit on sales and net commission income was $7,823,000
for 1996. Of that amount $6,982,000 or 89% consisted of gross profit on sales
and $841,000 or 11% consisted of net commission income. Since the Company
often elects the form of each transactions it 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.
The Company believes that total gross profit on sales and net commission
income continued to be negatively impacted during the year 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 1996 financing arrangement from the Export-Import
Bank was the first of its kind for the Company and, the Company believes, for
purchasers in China. While the Company continues to explore additional
financing opportunities, the Company has not received any further Export-Import
Bank financing commitments and there can be no assurance that any similar
financing will be obtained in the future.
Selling, general and administrative expenses for 1997 and 1996 were
$12,592,000 ($11,120,000 without restructuring) and $7,896,000 respectively,
representing an increase of $4,696,000 ($1,472,000 of which related to a
restructuring charge) or 59% (41% without the restructuring charge). These
expenses represent costs associated with increased personnel hirings, increased
startup expenses related to the opening of the Beijing United facility and
increased travel and entertainment related to expanded selling efforts.
The Company recorded a restructuring expense during 1997 of $1,472,000
related to a realignment of its business representations of unprofitable and
low growth products and to concentrate and consolidate all efforts on health
care industries. Approximately 30 people, mostly from the industrial group will
be phased out over the current year.
Miscellaneous income of $554,000 for the year 1997 represents principally
the net sub-lease income received from sub-lease of a portion of the building
leased to house the Beijing United facility, net of proportionate rent expense.
The Company experienced a significant loss in 1997. This was due
principally to the Company's personnel increases and related expense in its
growth program combined with increased pricing pressure in its core business
operations. The Company also incurred significant expense in connection with
Beijing United Family Hospital and the expansion of its consumable healthcare
products distribution business. The Company did not anticipate and did not
realize significant revenues in 1997 to offset these expenses from the hospital
or consumable healthcare product sales. With respect to the Company's core
business operations, additional staffing and related expenses did not result in
comparable increases in revenues due to competitive pressures and credit
restrictions for Chinese purchasers.
In addition, the Company had anticipated raising additional funding in
early 1998 in order to continue with its expansion plans at a rapid pace.
However, the Asian financial crisis has created an atmosphere of uncertainty
with respect to raising capital for companies operating in Asia.
In light of the foregoing, to address the problems and in an effort to bring
operating expenses in line with current and projected revenues, the Company has
undertaken a restructuring charge, eliminating all non-health care related lines
of business as well as several of our less profitable medical equipment lines
and reducing the number of China based non-hospital employees by approximately
18%. This results in a concentration and consolidation of efforts on health
care industries. In addition, the Company has increased its cost controls in
order to further reduce operating expenses. The Company may have to make
further adjustments to the organization to bring operating costs in line with
anticipated revenues in the future.
Liquidity and Capital Resources
As of December 31, 1997, the Company had working capital of $8,711,000,
including cash and cash equivalents of $6,228,000, as compared to working
capital of $15,950,000 with cash and cash equivalents of $13,374,000 as of
December 31, 1996. During 1997, the Company spent approximately $2.7 million
toward equipment and building improvements for the Beijing United Family
Hospital (Beijing United) for a total investment of approximately $4.0 million.
Trade receivables increased $2,194,000 over prior year. This principally
relates to sales with extended payment terms. These extended payment terms have
been provided to select customers in the Company's more familiar markets and
under circumstances designed to reduce risk. These terms have involved the
extension to a later date or dates of the payment in full on product purchases.
A substantial payment is required at the time of delivery, on a prepayment or
letter of credit basis. Later payments are subject to each user's availability
of funds. The Company has experienced delays in receiving timely payments. As
a result of these delays the Company has increased the reserve for doubtful
accounts. The extension of payment terms has the effect of postponing the
receipt of cash by the Company, thereby negatively impacting cash flow and
liquidity in the short term.
The availability of capital resources and liquidity continues to be
important as a result of continuing restrictions by the Chinese government on
the availability of credit from the Chinese banking system to the Company's
customers. These restrictions, which were implemented in 1993 in response to
inflationary concerns and other economic factors, continue to negatively impact
the Company's operations. Although the Company believes that its offering of
extended payment terms contributed to its results of operations during 1996 and
1997 there can be no assurances that the extended payment terms will continue
to offset or reduce the continued impact of the restrictions on credit in China.
The Company continues to pursue alternative financing sources for its
customers, including Export-Import Bank financing programs and private lenders.
There can be no assurances that these efforts will be successful.
Accounts payable increased $1,618,000 over the prior year as a result of
the Company's ability to negotiate its extended term sales with its suppliers
and receiving reciprocal payment terms. During 1995, the Company developed a
unique escrow agreement with one supplier to help provide a future payment
guarantee without burdening current working capital, allowing the Company to
continue to expand the extended payment term program. There can be no
assurance, however, that the Company's suppliers will continue to so participate
in the future, which would have a negative impact on the Company's short-term
cash flow.
Inventories rose by $681,000 during the year as the Company continued to
build up inventories in response to recently announced agreements to market
medical consumables.
On June 26, 1997, the Company increased its existing credit facility with
First National Bank of Maryland from $1,300,000 to $1,750,000 for short-term
working capital needs, standby letters of credit, and spot and forward foreign
exchange transactions. This facility is payable on demand, fully secured and
collateralized by government securities acceptable to the Bank having an
aggregate fair market value of not less than $1,945,000. As of December 31,
1997, the Company had available approximately $1,247,000 under the credit
facility. Generally, since the Company's assets principally are located in
China, the Company may not readily be able to obtain asset-based financing.
The Company has financed its recent operations from the net proceeds of
its 1996 public offering, cash flow from operations, and its credit facility.
Timing of Revenues
The timing of the Company's revenues is affected by several significant
factors. Many end-users of the products sold by the Company depend to a certain
extent upon the allocation of funds in the budgeting processes of the Chinese
government and the availability of credit from the Chinese banking system. These
processes and the availability of credit are based on policy determinations by
the Chinese government and are not necessarily subject to fixed time schedules.
In addition, the sales of certain products often require protracted sales
efforts, long lead times and other time-consuming steps. Further, in light of
the dependence by purchasers on the availability of credit, the timing of sales
may depend upon the timing of the Company's or its purchasers' abilities to
arrange for credit sources. As a result, the Company's operating results have
varied and are expected to continue to vary significantly from period to
period and year to year. In addition, a relatively limited number of orders and
shipments may constitute a meaningful percentage of the Company's revenue in any
one period. Correspondingly, a relatively small reduction in the number of
orders can have a material impact on the Company's revenues in any year.
Further, because the Company recognizes revenues and expenses relating to
certain contracts as products are shipped, the timing of shipments could affect
the Company's operating results for a particular period.
The Company cash flow is impacted by various issues related to the Company
growth program of granting extended payment terms to customers. (Please refer
to accounts receivable and accounts payable discussions under Liquidity and
Capital Resources).
During 1996, the Company recognized $8.4 million in sales as a result of
the shipment of goods sold to end-users under an Export-Import Bank financing
arrangement. This financing arrangement was the first of its kind for the
Company and, the Company believes, was the first of its kind for purchasers in
China. The increase in the Company's sales in 1996 was facilitated by this
financing. Accordingly, the Company's results of operations for the twelve
months ended December 31, 1996 were significantly and positively impacted by the
timing of the payments from the financing. 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 by the Company or the
end-users of its products.
In addition, the short-term cash flow implications on the Company were
also minimized by obtaining reciprocal payment terms from the Company's
suppliers. There can be no assurance, however, that the Company's suppliers will
continue to so participate in the future, which would have a negative impact on
the Company's short-term cash flow.
Foreign Currency Exchange and Impact of Inflation
The results of operations of the Company for the periods discussed have
not been significantly affected by inflation or foreign currency fluctuation. To
date, substantially all of the Company's purchases and sales have been made in
U.S. dollars. Thus, the Company has not had extensive foreign currency risk.
However, changes in the valuation of the Chinese Renminbi or Hong Kong Dollar
may have an impact on the Company's results of operations in the future. The
Company's subsidiaries, Chindex Tianjin and Beijing United, sells products and
services in Renminbi. The Renminbi is not a freely convertible currency and
accordingly exchange risks cannot be hedged.
Also, the Company has purchased and will continue to purchase some products
in currencies other than U.S. dollars and has sold and will continue to sell
such products in China for U.S. dollars. To the extent that the value of the
U.S. dollar declines against such a currency, the Company could experience a
negative impact on profitability. The Company anticipates hedging transactions
wherever possible to minimize such negative impacts.
Item 7. Consolidated Financial Statements
The consolidated financial statements are shown after this page
numbered as follows:
Pages
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated financial statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Consolidated Statements of Shareholders' Equity F-5
Notes to Consolidated Financial Statements F-6 to F-13
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board Of Directors and Shareholders
U.S.-China Industrial Exchange, Inc.
We have audited the accompanying consolidated balance sheets of U.S.-China
Industrial Exchange, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of U.S.-China
Industrial Exchange, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.
Ernst & Young, LLP
Vienna, Virginia
March 11, 1998
F-1
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash & cash equivalents........................ $ 13,374,000 $ 6,228,000
Receivables:
Trade accounts, less allowance for doubtful
accounts of $115,000(1996) and $604,000(1997) 4,626,000 5,796,000
Current portion -- long term trade accounts.. 3,612,000 4,123,000
Commissions receivable....................... 449,000 84,000
Inventories.................................... 2,188,000 2,761,000
Other current assets........................... 623,000 794,000
------------ -------------
Total current assets...................... 24,872,000 19,786,000
Property & equipment, net ..................... 1,783,000 3,824,000
Trade accounts receivable, long term........... 2,068,000 2,092,000
Other.......................................... 241,000 878,000
------------ -------------
Total assets.............................. $ 28,964,000 $26,580,000
============ =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses.......... $ 6,118,000 $ 6,836,000
Accrued contract training...................... 724,000 924,000
Current portion-long term accounts payable, net 1,615,000 2,171,000
Short term loan payable ....................... 0 467,000
Income taxes payable........................... 465,000 208,000
Accrued restructuring.......................... 0 469,000
------------ -------------
Total current liabilities................. 8,922,000 11,075,000
Long term accounts payable, net................ 1,126,000 1,270,000
------------ -------------
Total liabilities......................... 10,048,000 12,345,000
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 shares issued and outstanding; 1995 -
1,840,000 shares, 1996 - 4,772,500 shares... 48,000 48,000
Class B -- 2,000,000 shares issued and
outstanding in each year.................... 20,000 20,000
Additional capital............................ 17,278,000 17,235,000
Foreign currency equity translation adjustment (8,000) 2,000
Retained earnings............................. 1,578,000 (3,070,000)
------------ -------------
Total shareholders' equity.................. 18,916,000 14,235,000
------------ -------------
Total liabilities and shareholders' equity.. $ 28,964,000 $26,580,000
============ =============
</TABLE>
See accompanying notes
F-2
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997
----------- ------------
<S> <C> <C>
Net sales....................................... $22,060,000 $23,849,000
Cost of goods sold.............................. 15,078,000 17,487,000
----------- -----------
Gross profit on sales........................... 6,982,000 6,362,000
Net commission income........................... 841,000 532,000
----------- -----------
TOTAL GROSS PROFIT ON SALES AND
NET COMMISSION INCOME......................... 7,823,000 6,894,000
Selling, general and administrative
Salaries and payroll taxes...................... 3,536,000 4,726,000
Travel and entertainment........................ 1,796,000 2,214,000
Other........................................... 2,564,000 4,180,000
Restructuring................................... -- 1,472,000
----------- -----------
(73,000) (5,698,000)
Other income and expenses
Interest expense................................ (119,000) (31,000)
Interest income................................. 408,000 452,000
Miscellaneous income - net...................... 501,000 554,000
----------- -----------
Income/(loss) before (provision for)/
benefit from income taxes..................... 717,000 (4,723,000)
(Provision for)/benefit from income taxes....... (141,000) 75,000
----------- -----------
NET INCOME/(LOSS)............................... $ 576,000 $(4,648,000)
=========== ===========
NET INCOME/(LOSS) PER COMMON SHARE.............. $ 0.15 $ (0.74)
=========== ===========
Weighted average shares outstanding............. 3,809,078 6,322,500
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $ 576,000 $(4,648,000)
Adjustments to reconcile net income (loss) to
net cash provide by (used in) operating
activities:
Depreciation................................ 130,000 262,000
Provision for doubtful accounts............. 20,000 489,000
Provision for deferred taxes................ (161,000) 46,000
Inventory write-down........................ 134,000 106,000
Changes in operating assets and liabilities:
Trade receivable............................ (1,857,000) (2,194,000)
Commissions receivable...................... 513,000 365,000
Inventories................................. (1,107,000) (679,000)
Other current assets........................ 133,000 (217,000)
Other assets................................ (52,000) (637,000)
Accounts payable and accrued expenses....... 2,844,000 1,618,000
Income taxes payable........................ 279,000 (257,000)
Restructuring............................... -- 469,000
----------- -----------
Net cash provided by / (used in)
operating activities........................ 1,452,000 (5,275,000)
INVESTING ACTIVITIES
Purchase of property and equipment.......... (1,508,000) (2,303,000)
----------- -----------
Net cash (used in) investing activities....... (1,508,000) (2,303,000)
FINANCING ACTIVITIES
Proceeds(fees) from issuance of common stock 9,831,000 (43,000)
Proceeds from short term borrowings......... 0 467,000
----------- -----------
Net cash provided by financing activities..... 9,831,000 424,000
Effect of foreign exchange rate changes on cash
and cash equivalents........................ -- 10,000
----------- -----------
Net increase (decrease) in cash and
cash equivalents............................ 9,775,000 (7,146,000)
Cash and cash equivalents at beginning of period 3,599,000 13,374,000
----------- -----------
Cash and cash equivalents at end of period.... $13,374,000 $ 6,228,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest........................ $ 0 $ 23,000
=========== ===========
Cash paid for income taxes.................... $ 54,000 $ 174,000
=========== ===========
</TABLE>
See accompanying notes
F-4
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK -- CLASS B
------------------ ------------------------- ADDITIONAL RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
-------- -------- -------- --------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,840,000 18,000 2,000,000 20,000 7,477,000 1,002,000 (8,000) 8,509,000
Issuance of common stock 2,932,500 30,000 -- -- 9,801,000 -- -- 9,831,000
Net income for 1996 -- -- -- -- -- 576,000 -- 576,000
--------- ------- ---------- ---------- ---------- ---------- ------- ----------
Balance at December 31, 1996 4,772,500 48,000 2,000,000 20,000 17,278,000 1,578,000 (8,000) 18,916,000
Additional offering expense -- -- -- -- (43,000) -- -- (43,000)
Net loss for 1997 -- -- -- -- -- (4,648,000) 10,000 (4,638,000)
--------- ------- ---------- ---------- ---------- ---------- ------- ----------
Balance at December 31, 1997 4,772,500 $48,000 2,000,000 $ 20,000 $17,235,000 $(3,070,000) $ 2,000 $14,235,000
========= ====== ========= ========== ========== ========= ======== ===========
</TABLE>
See accompanying notes
F-5
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Organization and Description of Business
U.S.-China Industrial Exchange, Inc. (the Company) is a sales representative
in China and Hong Kong for several major U.S., European, and other manufacturers
of high-technology medical equipment, construction, mining and other industrial
machinery and scientific research instrumentation. The Company markets and sells
these products in China and Hong Kong, and provides marketing, sales and
technical services for the products. Substantially all sales, commissions and
purchases are denominated in U.S. dollars.
In 1996 the Company established the Beijing United Family Hospital, a 90%
- -owned contractual joint venture between the Company and a company controlled
by the Chinese Academy of Medical Sciences. This Hospital provides much-
needed Western primary family care health services including maternity,
birthing services as well as pediatric and executive health care. There were
no operations of the clinic in 1996. Operations commenced late 1997.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Chindex, Inc., Chindex Holdings International Trade
(Tianjin), Chindex Hong Kong and its 90% interest in the Beijing United Family
Hospital. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition
Sales and most commissions are recognized upon product shipment. Costs
associated with installation, after-sale servicing and warranty are not
significant and are recognized in cost of sales as they are incurred.
Inventories
Inventory purchased to fill signed sales contracts and purchase orders that
remain undelivered at year-end (merchandise inventory), service parts and
inventory of peripheral components are stated at the lower of cost or market
using the specific identification method. Certain items are purchased for
demonstration purposes and subsequent sale (Demonstration inventory). Management
monitors the salability of such demonstration inventory and reduces the carrying
amount to net realizable value when there is any impairment in value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight line method over the estimated useful lives of the related assets.
Useful lives for office equipment, vehicles and furniture and fixtures range
from 5 to 7 years. Leasehold improvements are amortized by the straight-line
method over the shorter of the estimated useful lives of the improvements or the
lease term. Certain medical equipment is depreciated over three years.
Long Term Receivables and Payables
Long term receivables and payables are recorded at estimated present values
determined based on current rates of interest. Imputed interest is recognized
using the effective interest method.
Income Taxes
Provisions for income taxes are based upon earnings reported for financial
statement purposes and may differ from amounts currently payable or receivable
because certain amounts may be recognized for financial reporting purposes in
different periods than they are for income tax purposes. Deferred income taxes
result from temporary differences between the financial statement amounts of
assets and liabilities and their respective tax bases.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Fair value of Financial Instruments
The Company considers the recorded value of its financial instruments, which
consist of cash and cash equivalents, trade receivables, commissions receivable
and accounts payable, to approximate the fair value of the respective assets and
liabilities at December 31, 1996 and 1997.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement 128,
'Earnings per Share'. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
'Accounting for Stock-Based Compensation,' which was effective for the Company's
December 31, 1997 financial statements. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123 or
under the provisions of APB 25, but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
123 had been adopted.
Dividends
The Company has not paid dividends to the shareholders of its common stock and
any dividends that may be paid in the future will depend upon the financial
requirements of the Company and other relevant factors.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, 'Disclosure of Information about Capital Structure' (Statement 129), which
establishes standards for disclosing information about an entity's capital
structure. Statement 129 was effective for periods ending after December 15,
1997. The adoption of Statement 129 did not impact the Company's capital
structure disclosures as the Company was already in compliance with Statement
129.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
'Reporting Comprehensive Income' (Statement 130) which is effective for fiscal
years beginning after December 15, 1997. The Company will adopt Statement 130
with the fiscal year beginning January 1, 1998. Statement 130 will not have a
material impact on the financial results of financial condition of the Company,
but will result in certain changes in required disclosures. Management is
evaluating the additional disclosure requirements for the Company upon the
implementation of Statement 130.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, 'Disclosures about Segments of an
Enterprise and Related Information' (Statement 131), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Statement 131 is effective
for financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but does anticipate
the adoption of this statement will have significant effect on the Company's
reported segments. The anticipated changes include reporting additional segment
information regarding the Company's medical products business and hospital
services operation.
Reclassifications
Certain amounts for 1996 have been reclassified to conform to the 1997
presentation.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ------------------
<S> <C> <C>
Furniture and equipment.............. $1,358,000 $2,277,000
Vehicles............................. 124,000 124,000
Leasehold improvements............... 807,000 2,191,000
----------------- ----------------
2,289,000 4,592,000
Less: accumulated depreciation
and amortization................... 506,000 768,000
----------------- ----------------
$1,783,000 $3,824,000
================= ================
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C>
Merchandise inventory................ $ 467,000 $ 948,000
Demonstration inventory, net......... 769,000 698,000
Parts and peripheral inventory....... 952,000 1,115,000
----------------- ------------------
$ 2,188,000 $2,761,000
================= ==================
</TABLE>
4. EXTENDED PAYMENT TERM SALES ARRANGEMENTS
The Company has entered into agreements with certain customers to provide
extended payment terms related to the sale of high technology medical equipment.
In conjunction with these transactions the Company has negotiated agreements
with certain vendors to grant matching extended terms. Receivables and payables
under these arrangements were discounted at 6.39% and 6.76% for the years
ended December 31, 1996 and 1997, respectively.
At December 31, 1997, long-term receivables and payables under these
arrangements mature as follows:
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE ACCOUNTS PAYABLE
------------------- ----------------
<S> <C> <C>
1998................................. $4,225,000 $2,238,000
1999................................. 1,880,000 1,172,000
2000................................. 466,000 246,000
------------------- ----------------
6,571,000 3,656,000
Less: imputed interest............... 356,000 215,000
------------------- ----------------
6,215,000 3,441,000
Less: current portion................ 4,123,000 2,171,000
------------------- ----------------
$ 2,092,000 $1,270,000
=================== ================
</TABLE>
Amortization of imputed interest on long-term accounts receivable was $164,000
and $50,000 for the years ended December 31, 1996 and 1997, respectively.
Amortization of imputed interest on long-term accounts payable was $119,000 and
$7,000 for the years ended December 31, 1996 and 1997, respectively.
5. SHAREHOLDERS' EQUITY
Common Stock
The Class B common stock and the common stock are substantially identical
on a share-for-share basis, except that the holders of Class B common stock have
six votes per share on each matter considered by shareholders and the holders of
common stock have one vote per share on each matter considered by shareholders.
Each share of Class B common stock will convert at any time at the option of the
original holder thereof into one share of common stock and is automatically
converted into one share of common stock upon (i) the death of the original
holder thereof, or, if such shares are subject to a shareholders agreement or
voting trust granting the power to vote such shares to another original holder
of Class B common stock, then upon the death of such original holder, or (ii)
the sale or transfer to any person other than specified transferees.
The holders of the outstanding 2,000,000 shares of Class B common stock
have placed 450,000 shares in escrow. These shares will not be assignable or
transferable (but may be voted) until such time as they are released from escrow
based upon the Company meeting certain earnings levels or the common stock
attaining certain price levels. All reserved shares remaining in escrow on March
31, 1999 will be forfeited and contributed to the Company's capital. In the
event the Company attains any of the earnings thresholds or stock prices for the
release of the escrowed shares to the original shareholders, the Company will
recognize compensation expense at such time based on the fair market value of
the shares released.
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).
Public Offering, Common Stock, Warrants
On August 18, 1994 the Company completed its initial public offering selling
1,600,000 common stock units for net proceeds to the Company of approximately
$6,206,000. Additionally, on September 13, 1994 the underwriters exercised
their overallotment option purchasing an additional 240,000 common stock units
for net proceeds to the Company of approximately $1,044,000. Each unit
consisted of one common share, one Class A warrant and one Class B warrant.
Class A warrants entitle the holder to acquire one share of common stock and a
Class B warrant at an exercise price of $6.50. Each Class B warrant entitles
the holder to acquire one share of common stock at an exercise price of $8.75.
Warrants are exercisable through August 18, 1999. The underwriters and a
consultant have also been granted options to purchase an additional 144,000 and
16,000 units, respectively, at $6.75 per unit. These options are exercisable at
any time during the four year period beginning August 18, 1995.
On November 8, 1996 the Company completed a second underwritten public
offering of securities selling 2,550,000 common stock units and an November 21,
1996 the underwriters exercised their overallotment option purchasing an
additional 382,500 common stock units for net proceeds to the Company of
approximately $9,831,000. Each unit is exactly the same as the original
offering described above.
In April 1994 the Company issued 300,000 Class A and 300,000 Class B
warrants on a prorata basis to each shareholder of record. The exercise prices
of these warrants are the same as the warrants sold in the Company's initial
public offering. These warrants are exercisable at any time through August 18,
1999.
Stock Option Plan
In April 1994, the Board of Directors adopted and the shareholders approved
the Company's 1994 Stock Option Plan (the Plan). On January 9, 1997, the Board
of Directors amended the Plan in accordance with changes to the rules and
regulations of the Securities and Exchange Commission governing such plans. The
Plan provides for the grant, at the discretion of the Board of Directors, of (i)
options that are intended to qualify as incentive stock options (Incentive Stock
Options) within the meaning of Section 422A of the Internal Revenue Code to
certain employees, consultants and directors, and (ii) options not intended to
so qualify (Nonqualified Stock Options) to employees, consultants and directors.
The total number of shares of common stock for which options may be granted
under the Plan is 228,000 shares.
The Plan is administered by the Board of Directors, which determines the
terms of options, including the exercise price, the number of shares subject to
the options and the terms and conditions of exercise. No option granted under
the Plan is transferable by the optionee other than by will or the laws of
descent and distribution and each option is exercisable during the lifetime of
the optionee only by such optionee.
The exercise price of options granted under the Plan must be at least equal
to the fair market value of such shares on the date of grant. With respect to
any participant who owns stock possessing more than 10% of the voting rights of
the Company's outstanding capital stock, the exercise price of any Incentive
Stock Option may be not less than 110% of the fair market value on the date of
grant. With respect to any Incentive Stock Option granted to a participant who
owns stock possessing more than 10% of the total combined voting power of all
classes of the Company's outstanding capital stock, the maximum term is five
years.
The following is a summary of stock option activity during the years ended
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Exercise
1996 1997 Price
------ ------ --------
<S> <C> <C> <C>
Options outstanding, beginning of year: 97,060 168,060 $3.375 - $5.31
Granted 73,000 82,500 $3.375 - $5.31
Canceled (2,000) (10,000)
------- ------- --------------
Options outstanding, end of year 168,060 240,560 $3.375 - $5.31
======= ======= ==============
</TABLE>
The Company has not provided disclosures under FAS 123 for proforma net income
and proforma earnings per share, as such amounts are not materially different
from reported amounts. The weighted average exercise price of options
outstanding is $4.36 and $4.38 and the weighted average remaining contractual
life of such options is 8.6 years and 8.1 years respectively for the years
ended December 31, 1996 and 1997.
Shares of Common Stock Reserved
At December 31, 1997 the Company has reserved 12,378,000 shares of common
stock for issuance upon exercise of stock options and purchase warrants.
6. EARNINGS PER SHARE
The following is an illustration of the reconciliation of the numerators
and denominators of the basic and diluted EPS computations for "income before
extraordinary item and accounting change" and other related disclosures:
<TABLE>
<CAPTION
For the Year Ended 1997
-------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Loss available to common
stockholders $(4,648,000) 6,322,500 $(.74)
Effect of Dilutive Securities
Warrants and Options --
----------- --------- -----
Diluted EPS
Loss available to common
stockholders $(4,648,000) 6,322,500 $(.74)
=========== ========= =====
</TABLE>
Options to purchase 240,560 shares of common stock between $3.375 and $5.31
were outstanding during most of 1997 but were not included in the computation
of diluted EPS because the options would have been antidilutive. See note 5.
<TABLE>
<CAPTION
For the Year Ended 1996
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Income available to common
stockholders $ 576,000 3,809,078 $ .15
Effect of Dilutive Securities
Warrants --
Options 8,956 --
----------- --------- -----
Diluted EPS
Income available to common
stockholders $ 576,000 3,818,034 $ .15
=========== ========= =====
</TABLE>
7. INCOME TAXES
The benefit from/(provision for) income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
------------ -----------
<S> <C> <C>
Current:
Federal.................................$ (165,000) $ 367,000
Foreign................................. (94,000) (174,000)
State................................... (43,000) 43,000
------------ -----------
(302,000) 236,000
Deferred:
Federal................................. 133,000 (133,000)
State................................... 28,000 (28,000)
------------ -----------
161,000 (161,000)
------------ -----------
$ (141,000) 75,000
============ ============
</TABLE>
The net deferred tax asset is included in other current assets and consists
of the following as of December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Allowance for doubtful accounts............. $ 43,000 $ 150,000
Inventory write downs....................... 105,000 89,000
Restructuring costs......................... -- 283,000
Net operating loss carry forwards........... -- 1,273,000
Other....................................... 12,000 3,000
-------- ----------
161,000 1,798,000
Less valuation allowance.................... 0 (1,798,000)
-------- ----------
Net deferred tax asset...................... $161,000 $ 0
======== ==========
</TABLE>
The Company's effective income tax rate varied from the statutory federal
income tax rate for the year ended December 31 as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Statutory federal income tax rate....................... 34.0% (34.0%)
Adjustments:
State income taxes, net of federal tax benefit..... 4.0 (3.6)
Foreign tax rate differential ( 9.0) .4
Change in valuation allowance (14.0) 39.8
Other, including permanent differences............. 4.7 (4.2)
----- -----
Effective income tax rate............................... 19.7% (1.6%)
===== =====
</TABLE>
A valuation allowance has been recorded as of December 31, 1997 as the
realization of the Company's net deferred tax assets is not certain.
The Company and its subsidiaries file separate income tax returns; the
Company on a June 30 fiscal year and its subsidiaries on a December 31 fiscal
year.
The Company has U.S. Federal net operating losses of approximately $2.4
million that expires principally in 2012. The Company also has foreign losses
from China of approximately $1.0 million that expire in 2002.
8. COMMITMENTS
Employment Agreements
The Company has entered into three-year employment agreements with four key
executives which, as amended or revised to date, provide for annual base
salaries amounting to an aggregate of $621,000 per year until May 1998.
Leases
The Company leases office space and space for the Beijing United Family
Health Center under operating leases. Future minimum payments under these
noncancelable operating leases consist of the following:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- -----------------------
<S> <C>
1998............................................. $ 892,000
1999............................................. 814,000
2000............................................. 681,000
2001............................................. 604,000
2002............................................. 413,000
Thereafter....................................... 3,508,000
----------
6,912,000
Less total minimum sublease rentals............ . ( 617,000)
----------
Net minimum rental commitments................... $6,295,000
==========
</TABLE>
The above leases require the Company to pay certain pass through operating
expenses and rental increases based on inflation.
Included in miscellaneous (expenses)/income for the year ended December 31,
1996 and 1997 is net sublease income of $540,000.
Rental expense was approximately $929,000 and $689,000 for the years ended
December 31, 1996 and 1997, respectively.
9. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
trade receivables and commission receivables. Substantially all of the Company's
cash and cash equivalents at December 31, 1996 and 1997 were held by two U.S.
financial institutions. All of the Company's sales during the year were to end-
users located in China or Hong Kong. Most of the Company's sales are
accompanied by down payments of either cash or letters of credit with one
Chinese financial institution. Sales on extended payment terms usually have down
payments in the form of a letter of credit and additional payments are secured
through several methods. Before extended payment terms are provided, the Company
performs a thorough review of the local operation, secures a guarantee from
higher authorities than the end-user, and performs other steps as needed.
Extended payment term transactions are entered into in the context of the
Company's sales activities in China and, as such, the risks attendant to doing
business in China apply to such transactions as well. The absence of a
comprehensive and effective legal system in China, among other concerns,
requires alternative arrangements in order to reduce the Company's credit risks.
Guarantees from higher governmental authorities, for example, usually involve
requiring customers to have a provincial or municipal governmental organization
sign a statement that the payment obligations will be satisfied. This political
commitment is, in the Company's experience, an effective method in helping
ensure payment of obligations in China. These commitments, however, are
different from traditional commercial guarantees in the United States, which
guarantees are not available in China for transactions of the type engaged in by
the Company.
The Company has a $1,750,000 credit facility with First National Bank of
Maryland for short-term working capital needs, standby letters of credit, and
spot and forward foreign exchange transactions. Balances outstanding under the
facilities 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 $1,945,000. As of December 31, 1997 net borrowings outstanding under
the credit facility were $503,000. Use of the credit facility will bear
interest at 1% over three month London Interbank Offered Rate ("LIBOR").
The Company conducts its marketing and sales and provides its services
exclusively to buyers located in China, Hong Kong and Macau. The Company's
results of operations and its ability to obtain financing could be adversely
affected if there was a deterioration in trade relations between the United
States and China.
Of the Company's net assets at December 31, 1997, approximately $4,931,000
of such assets are located in China, consisting principally of inventories,
property improvements and equipment.
See also Note 10.
10. SIGNIFICANT CUSTOMERS/SUPPLIERS
Substantially all China purchases of the Company's products, regardless of
the end-user, are made through Chinese foreign trade corporations (FTCs).
Although the purchasing decision is made by the end-user, which may be an
individual or a group having the required approvals from their administrative
organizations, the Company enters into formal purchase contracts with FTCs. The
FTCs make purchases on behalf of the end-users and are authorized by the
Chinese government to conduct import business. FTCs are chartered and regulated
by the government and are formed to facilitate foreign trade. The Company
markets its products directly to end-users, but in consummating a sale the
Company must also interact with the particular FTC representing the end-user.
By virtue of its direct contractual relationship with the FTC, rather than the
end user, the Company is to some extent dependent on the continuing existence of
and contractual compliance by the FTC until a particular transaction has been
completed.
Purchases from one supplier totaled approximately $7,568,000 and $9,055,000
for the years ended December 31, 1996 and 1997, respectively. The Company has
entered into a security arrangement to ensure the payment of such supplier's
accounts payable.
11. RESTRUCTURING
At the end of 1997 the Company decided to end its relationship with
certain suppliers and to concentrate and consolidate all of its efforts on
the health care industry. The restructuring charge includes a write-down of
certain inventory and receivables associated with these suppliers. The portion
of the $1,472,000 charge related to this write down of assets amounted to
$1,003,000. In addition, the company has set up a reserve of $469,000 for the
phase out of approximately 30 people associated with these products and their
related severance benefits and certain other future costs of close-out. The
Company expects this phase out to be completed by the end of 1998.
12. SEGMENT REPORTING
During 1997 the Company spent approximately $2.7 million toward equipment
and building improvements for the Beijing United Family Hospital for a total
investment of approximately $4.0 million. Revenues from Beijing United began
in late 1997 but were minimal.
All other assets and sales relate to the Company's investment in medical
product sales.
13. IMPLICATIONS OF YEAR 2000 (Unaudited)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
internal computer software that has time-sensitive programs may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. Also, since
the Company is dependent on many suppliers, their inability to provide normal
business activities due to Year 2000 difficulties could impact the Company's
revenue.
The Company began an assessment of the implications of the Year 2000 during
late 1997. At December 31, 1997, the process of evaluating the Company's
services, products and internal systems was underway and is to be completed in
1998. At this time, the actual impact of Year 2000 compliance on the Company's
future results of operations, capital spending, and business operations is not
known, but is not expected to be material.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
The information relating to the directors, executive officers, promoters
and control persons of the Company will be included in the Company's Proxy
Statement (the "Proxy Statement") relating to its 1997 Annual Meeting of
Shareholders, which the Company intends to file with the Securities and Exchange
Commission on or prior to April 30, 1997, and is incorporated herein by
reference.
Item 10. Executive Compensation
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
a. Exhibit listing:
3.1 Restated Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form SB-2 (No. 33-78446)(the "IPO
Registration Statement").
3.2 By-laws of the Company. Incorporated by reference to Exhibit
3.2 to the IPO Registration Statement.
4.1 Form of Warrant Agreement (including forms of Class A and Class
B Warrant Certificates). Incorporated by reference to Exhibit
4.1 to the IPO Registration Statement.
4.2 Form of Amendment to Warrant Agreement. Incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form SB-2 (No. 333-12861)(the "Secondary
Registration Statement").
4.3 Form of Specimen Certificate of the Company's Common Stock.
Incorporated by reference to Exhibit 4.2 to the IPO Registration
Statement.
4.4 Form of Specimen Certificate of Class B Common Stock
Certificate. Incorporated by reference to Exhibit 4.3 to the
IPO Registration Statement.
4.5 Form of Escrow Agreement. Incorporated by reference to Exhibit
4.6 to the IPO Registration Statement.
10.1 The Company's 1994 Stock Option Plan, as amended.
10.2 Lease Agreement, dated as of July 1, 1987, between the Company
and the Yiqing Hotel, relating to the Company's Beijing, China
Facility.*+ Incorporated by reference to Exhibit 10.3 to the
IPO Registration Statement.
10.3 Addendum to Lease Agreement between the Company and the Yiqing
Hotel, relating to the Company's Beijing, China Facility.*+
Incorporated by reference to Exhibit 10.3 to the IPO
Registration Statement.
10.4 Lease Agreement, dated as of March 1994, between the Company and
Central Properties Limited Partnership, relating to the
Company's Bethesda, Maryland facility. Incorporated by
reference to Exhibit 10.4 to the IPO Registration Statement.
10.5 First Amendment to Lease, dated as of June 26, 1996, between
the Company and Central Properties Limited Partnership, relating
to additional space at the Company's Bethesda, Maryland
facility.
10.6 Employment Agreement, dated as of May 1, 1994, between the
Company and Roberta Lipson. Incorporated by reference to
Exhibit 10.5 to the IPO Registration Statement.
10.7 Employment Agreement, dated as of May 1, 1994, between the
Company and Elyse Beth Silverberg. Incorporated by reference to
Exhibit 10.6 to the IPO Registration Statement.
10.8 Employment Agreement, dated as of May 1, 1994, between the
Company and Lawrence Pemble. Incorporated by reference to
Exhibit 10.7 to the IPO Registration Statement.
10.9 Employment Agreement, dated as of May 1, 1994, between the
Company and Robert C. Goodwin, Jr. Incorporated by reference to
Exhibit 10.8 to the IPO Registration Statement.
10.10 Employment Agreement, dated as of September 6, 1994, between
the Company and Ronald Zilkowski. Incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994.
10.11 Distribution Agreement dated as of January 1, 1998 between
Acuson Corporation and the Company.
10.12 Lease Agreement between the School of Posts and
Telecommunications and the Company dated November 8, 1995.
Incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995.
10.13 Amendments Numbers One, Two and Three to the Lease Agreement
between the School of Posts and Telecommunications and the
Company dated November 8, 1995, each such amendment dated
November 26, 1996.
10.14 Sublease Agreement between the Company and the Beijing
International School dated March 4, 1996. Incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
10.15 Contractual Joint Venture Contract between the Chinese
Academy of Medical Sciences Union Medical & Pharmaceutical
Group Beijing Union Medical & Pharmaceutical General
Corporation and the Company, dated September 27, 1995.
Incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995.
10.16 First Investment Loan Manager Demand Promissory Note dated
July 10, 1997 between First National Bank of Maryland and
Chindex, Inc.
21.1 List of subsidiaries. Incorporated by reference to Exhibit 21.1
to the Secondary Registration Statement.
27.1 Financial Data Schedules.
- -------------------
* Confidential treatment has been granted as to a portion of this Exhibit.
+ English translation of summary from Chinese original.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
Dated: March 30, 1998 By: /S/ Roberta Lipson
Roberta Lipson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Dated: March 30, 1998 By: /S/ Roberta Lipson
Roberta Lipson
Chairperson of the Board of Directors,
Chief Executive Officer and President
Dated: March 30, 1998 By: /S/ Elyse Beth Silverberg
Elyse Beth Silverberg
Executive Vice President, Secretary and Director
Dated: March 30, 1998 By: /S/ Lawrence Pemble
Lawrence Pemble
Executive Vice President-Finance and Director
Dated: March 30, 1998 By: /S/ Robert C. Goodwin, Jr.
Robert C. Goodwin, Jr.
Executive Vice President of Operations,
Treasurer, General Counsel and Director
Dated: March 30, 1998 By: /S/ Ronald Zilkowski
Ronald Zilkowski
Vice President Finance and Controller
<PAGE>
1994 STOCK OPTION PLAN
as amended as of January 9, 1997
of
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
1. PURPOSES OF THE PLAN. This stock option plan (the "Plan") is designed to
provide an incentive to key employees (including officers and directors who
are key employees), Outside Directors (as defined in Paragraph 19) and
consultants of U.S.-China Industrial Exchange, Inc., a New York corporation
(the "Company"), and its present and future subsidiary corporations, as
defined in Paragraph 19 ("Subsidiaries"), and to offer an additional
inducement in obtaining the services of such individuals. The Plan provides
for the grant of "incentive stock options" ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and nonqualified stock options ("NQSOs"), but the Company makes no warranty
as to the qualification of any option as an "incentive stock option" under
the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12, the
aggregate number of shares of Common Stock, $.0l par value per share, of the
Company ("Common Stock") for which options may be granted under the Plan
shall not exceed 228,000. Such shares of Common Stock may, in the
discretion of the Board of Directors of the Company (the "Board of
Directors"), consist either in whole or in part of authorized but unissued
shares of Common Stock or shares of Common Stock held in the treasury of the
Company. The Company shall at all times during the term of the Plan reserve
and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan. Subject to the
provisions of Paragraph 13, any shares of Common Stock subject to an option
which for any reason expires, is canceled or is terminated unexercised or
which ceases for any reason to be exercisable shall again become available
for the granting of options under the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Board of
Directors which, to the extent it shall determine, may delegate its powers
with respect to the administration of the Plan to a committee of the Board
of Directors (the "Committee") consisting of not less than two Directors
(or such greater number as required by law), each of whom shall be a "non-
employee director" within the meaning of Rule 16b-3 (or any successor rule
or regulation) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). References in the Plan to determinations or
actions by the Committee shall be deemed to include determinations and
actions by the Board of Directors. A majority of the members of the
Committee shall constitute a quorum, and the acts of a majority of the
members present at any meeting at which a quorum is present, and any acts
approved in writing by all members without a meeting, shall be the acts of
the Committee.
Subject to the express provisions of the Plan, the Committee shall have the
authority, in its sole discretion, to determine the key employees, Outside
Directors and consultants who shall receive options; the times when they
shall receive options; whether an option granted to an employee shall be an
ISO or a NQSO; the number of shares of Common Stock to be subject to each
option; the term of each option; the date each option shall become
exercisable; whether an option shall be exercisable in whole, in part or in
installments, and, if in installments, the number of shares of Common Stock
to be subject to each installment; whether the installments shall be
cumulative; the date each installment shall become exercisable and the term
of each installment; whether to accelerate the date of exercise of any
installment; whether shares of Common Stock may be issued on exercise of an
option as partly paid, and, if so, the dates when future installments of the
exercise price shall become due and the amounts of such installments; the
exercise price of each option; the form of payment of the exercise price;
the amount, if any, necessary to satisfy the Company's obligation to
withhold taxes; whether to restrict the sale or other disposition of the
shares of Common Stock acquired upon the exercise of an option and to waive
any such restriction; whether to subject the exercise of all or any portion
of an option to the fulfillment of contingencies as specified in the
Contract (as described in Paragraph 11), including without limitations,
contingencies relating to entering into a covenant not to compete with the
Company and its Parent and Subsidiaries, to financial objectives for the
Company, a Subsidiary, a division, a product line or other category, and/or
the period of continued employment of the optionee with the Company or its
Subsidiaries, and to determine whether such contingencies have been met; to
construe the respective Contracts and the Plan; with the consent of the
optionee, to cancel or modify an option, provided such option as modified
would be permitted to be granted on such date under the terms of the Plan;
to prescribe, amend and rescind rules and regulations relating to the Plan;
and to make all other determinations necessary or advisable for
administering the Plan. The determinations of the Committee on the matters
referred to in this Paragraph 3 shall be conclusive. No member or former
member of the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any option granted hereunder.
4. ELIGIBILITY; GRANTS. The Committee may, consistent with the purposes of the
Plan, grant options from time to time, to key employees (including officers
and directors who are key employees), Outside Directors and consultants of
the Company or any of its Subsidiaries. Options granted shall cover such
number of shares of Common Stock as the Committee may determine; provided,
however, that the maximum number of shares subject to options that may be
granted to any employee in any fiscal year of the Company under the Plan
(the "162(m) Maximum") may not exceed 100,000; and further, provided, that
the aggregate market value (determined at the time the option is granted)
of the shares of Common Stock for which any eligible employee may be granted
ISOs under the Plan or any other plan of the Company, or of a Parent or a
Subsidiary of the Company, which are exercisable for the first time by such
optionee during any calendar year shall not exceed $100,000. The $100,000
ISO limitation shall be applied by taking ISOs into account in the order in
which they were granted. Any option (or the portion thereof) granted in
excess of such amount shall be treated as a NQSO.
5. EXERCISE PRICE. The exercise price of the shares of Common Stock under each
option shall be determined by the Committee; provided, however, that the
exercise price shall not be less than 100% of the fair market value of the
Common Stock subject to such option on the date of grant; and further
provided, that if, at the time an ISO is granted, the optionee owns (or is
deemed to own under Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the
Company, of any of its Subsidiaries or of a Parent, the exercise price of
such ISO shall not be less than 110% of the fair market value of the Common
Stock subject to such ISO on the date of grant.
The fair market value of a share of Common Stock on any day shall be (a) if
the principal market for the Common Stock is a national securities exchange,
the average between the high and low sales prices per share of the Common
Stock on such day as reported by such exchange or on a consolidated tape
reflecting transactions on such exchange, (b) if the principal market for
the Common Stock is not a national securities exchange and the Common Stock
is quoted on the National Association of Securities Dealers Automated
Quotations System ("NASDAQ"), and (i) if actual sales price information is
available with respect to the Common Stock, the average between the high and
low sales prices per share of the Common Stock on such day on NASDAQ, or
(ii) if such information is not available, the average between the highest
bid and the lowest asked prices for the Common Stock on such day on NASDAQ,
or (c) if the principal market for the Common Stock is not a national
securities exchange and the Company Stock is not quoted on NASDAQ, the
average between the highest bid and lowest asked prices per share for the
Common Stock on such day as reported on the NASDAQ OTC Bulletin Board
Service, National Quotation Bureau, Incorporated or a comparable service;
provided that if clauses (a), (b) and (c) of this Paragraph are all
inapplicable, or if no trades have been made or no quotes are available for
such day, the fair market value of a share of Common Stock shall be
determined by the Committee by any method consistent with applicable
regulations adopted by the Treasury Department relating to stock options.
The determination of the Committee shall be conclusive in determining the
fair market value of the stock.
6. TERM. The term of each option granted pursuant to the Plan shall be such
term as is established by the Committee, in its sole discretion, at or
before the time such option is granted; provided, however, that the term of
each ISO granted pursuant to the Plan shall be for a period not exceeding
10 years from the date of grant thereof, and further, provided, that if, at
the time an ISO is granted, the optionee owns (or is deemed to own under
Section 424(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, of any of its
Subsidiaries or of a Parent, the term of the ISO shall be for a period not
exceeding five years from the date of grant. Options shall be subject to
earlier termination as hereinafter provided.
7. EXERCISE. An option (or any part or installment thereof), to the extent
then exercisable, shall be exercised by giving written notice to the
Company at its principal office (at present 7201 Wisconsin Avenue, Bethesda,
Maryland 20814, Attn: Chairman of the Board), stating which ISO or NQSO is
being exercised, specifying the number of shares of Common Stock as to which
such option is being exercised and accompanied by payment in full of the
aggregate exercise price therefor (or the amount due on exercise if the
Contract permits installment payments) (a) in cash or by certified check or
(b) if the Contract at the time of grant so permits, with the authorization
of the Committee, with previously acquired shares of Common Stock having an
aggregate fair market value, on the date of exercise, equal to the aggregate
exercise price of all options being exercised, or with any combination of
cash, certified check or shares of Common Stock.
The Committee may, in its discretion, permit payment of the exercise price
of an option by delivery by the optionee of a properly executed exercise
notice, together with a copy of his irrevocable instructions to a broker
acceptable to the Committee to deliver promptly to the Company the amount
of sale or loan proceeds sufficient to pay such exercise price. In
connection therewith, the Company may enter into agreements for coordinated
procedures with one or more brokerage firms.
A person entitled to receive Common Stock upon the exercise of an option
shall not have the rights of a shareholder with respect to such shares of
Common Stock until the date of issuance of a stock certificate to him for
such shares; provided, however, that until such stock certificate is issued,
any option holder using previously acquired shares of Common Stock in
payment of an option exercise price shall continue to have the rights of a
shareholder with respect to such previously acquired shares.
8. TERMINATION OF RELATIONSHIP. Any employee to whom an option was granted
under the Plan whose employment with the Company (and its Parent and
Subsidiaries) has terminated for any reason other than his death or
Disability (as defined in Paragraph 19) may exercise such option, to the
extent exercisable on the date of such termination, at any time within
three months after the date of termination, but not thereafter and in no
event after the date the option would otherwise have expired; provided,
however, that if his employment shall be terminated either (a) for cause,
or (b) without the consent of the Company, said option shall terminate
immediately. Options granted under the Plan shall not be affected by any
change in the status of the holder so long as he continues to be a full-time
employee of the Company, its Parent or any of the Subsidiaries (regardless
of having been transferred from one corporation to another).
For purposes of the Plan, an employment relationship shall be deemed to
exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation for
purposes of Section 422(a) of the Code. As a result, an individual on
military, sick leave or other bona fide leave of absence shall continue to
be considered an employee for purposes of the Plan during such leave if the
period of the leave does not exceed 90 days, or, if longer, so long as the
individual's right to reemployment with the Company (or a related
corporation) is guaranteed either by statute or by contract. If the period
of leave exceeds 90 days and the individual's right to reemployment is not
guaranteed by statute or by contract, the employment relationship shall be
deemed to have terminated on the 91st day of such leave. In addition, for
purposes of the Plan, an optionee's employment with a Subsidiary or Parent
of the Company shall be deemed to have termination the date such corporation
ceases to be a Subsidiary or Parent of the Company.
The termination of an optionee's relationship as a consultant or Outside
Director of the Company or of a Subsidiary of the Company shall not affect
the option except as may otherwise be provided in the Contract.
Nothing in the Plan or in any option granted under the Plan shall confer on
any individual any right to continue in the employ or as a consultant or
director of the Company, its Parent or any of its Subsidiaries, or
interfere in any way with the right of the Company, its Parent or any of
its Subsidiaries to terminate such relationship at any time for any reason
whatsoever without liability to the Company, its Parent or any of its
Subsidiaries.
9. DEATH OR DISABILITY OF AN OPTIONEE. If an optionee dies (a) while he is
employed by the Company, its Parent or any of its Subsidiaries, (b) within
three months after the termination of his employment (unless such
termination was for cause or without the consent of the Company) or (c)
within one year following the termination of his employment by reason of
Disability, the option may be exercised, to the extent exercisable on the
date of his death, by his executor, administrator or other person at the
time entitled by law to his rights under such option, at any time within
one year after death, but not thereafter and in no event after the date the
option would otherwise have expired.
Any optionee whose employment has terminated by reason of Disability may
exercise his option, to the extent exercisable upon the effective date of
such termination, at any time within one year after such date, but not
thereafter and in no event after the date the option would otherwise have
expired.
The death or Disability of a consultant or Outside Director to whom an
option has been granted under the Plan shall not affect the option, except
as may otherwise be provided in the Contract.
10. COMPLIANCE WITH SECURITIES LAW. It is a condition to the exercise of any
option that either (a) a Registration Statement under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the shares of
Common Stock to be issued upon such exercise shall be effective and current
at the time of exercise, or (b) there is an exemption from registration
under the Securities Act for the issuance of shares of Common Stock upon
such exercise. Nothing herein shall be construed as requiring the Company
to register shares subject to any option under the Securities Act.
The Committee may require the optionee to execute and deliver to the Company
his representations and warranties, in form and substance satisfactory to
the Committee, that (i) the shares of Common Stock to be issued upon the
exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or
distribution thereof, and (ii) any subsequent resale or distribution of
shares of Common Stock by such optionee will be made only pursuant to (a) a
Registration Statement under the Securities Act which is effective and
current with respect to the shares of Common Stock being sold, or (b) a
specific exemption from the registration requirements of the Securities Act,
but in claiming such exemption, the optionee shall prior to any offer of
sale or sale of such shares of Common Stock provide the Company with a
favorable written opinion of counsel, in form and substance satisfactory to
the Company, as to the applicability of such exemption to the proposed sale
or distribution.
In addition, if at any time the Committee shall determine in its discretion
that the listing or qualification of the shares of Common Stock subject to
such option on any securities exchange or under any applicable law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of an
option, or the issuance of shares of Common Stock thereunder, such option
may not be exercised in whole or in part unless such listing, qualification,
consent or approval shall have been effected or obtained free of any
conditions not acceptable to the Committee.
11. STOCK OPTION CONTRACTS. Each option shall be evidenced by an appropriate
Contract which shall be duly executed by the Company and the optionee, and
shall contain such terms and conditions not inconsistent herewith as may be
determined by the Committee.
12. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provisions of the Plan, in the event of any change in the outstanding
Common Stock by reason of a stock dividend, recapitalization, merger or
consolidation in which the Company is the surviving corporation, split-up,
spin-off, combination or exchange of shares or the like, the aggregate
number and kind of shares subject to the Plan, the aggregate number and
kind of shares subject to each outstanding option and the exercise price
thereof, and the number and kind of shares subject to the 162(m) Maximum
shall be appropriately adjusted by the Board of Directors, whose
determination shall be conclusive.
In the event of (a) the liquidation or dissolution of the Company, (b) a
merger or consolidation in which the Company is not the surviving
corporation, or (c) any other capital reorganization (other than a
recapitalization) in which more than 50% of the shares of Common Stock of
the Company entitled to vote are exchanged, any outstanding options shall
terminate, unless other provision is made therefor in the transaction.
13. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the Board
of Directors on April 27, 1994 and amended by the Board of Directors on July
29, 1994 and January 9, 1997. No option may be granted under the Plan after
April 26, 2004. The Board of Directors, without further approval of the
Company's shareholders, may at any time suspend or terminate the Plan, in
whole or in part, or amend it from time to time in such respects as it may
deem advisable, including, without limitation, in order that ISO granted
hereunder meet the requirements for "incentive stock options" under the
Code, to comply with the provisions of Rule 16b-3 promulgated under the
Exchange Act, Section 162(m) of the Code and to conform to any change in
applicable law or to regulations or rulings of administrative agencies;
provided, however, that no amendment shall be effective without the
requisite prior or subsequent shareholder approval which would (a) except
as contemplated in Paragraph 12, increase the maximum number of shares of
Common Stock for which options may be granted under the Plan or the 162(m)
Maximum, (b) materially increase the benefits to participants under the
Plan or (c) change the eligibility requirements for individuals entitled to
receive options hereunder. No termination, suspension or amendment of the
Plan shall, without the consent of the holder of an existing option affected
thereby, adversely affect his rights under such option. The power of the
Committee to construe and administer any options granted under the Plan
prior to the termination or suspension of the Plan nevertheless shall
continue after such termination or during such suspension.
14. NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be
transferable otherwise than by will or the laws of descent and distribution,
and options may be exercised, during the lifetime of the holder thereof,
only by him or his legal representatives. Except to the extent provided
above, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and shall
not be subject to execution, attachment or similar process.
15. WITHHOLDING TAXES. The Company may withhold cash and/or, with the
authorization of the Committee, shares of Common Stock to be issued with
respect thereto having an aggregate fair market value equal to the amount
which it determines is necessary to satisfy its obligation to withhold
Federal, state and local income taxes or other taxes incurred by reason of
the grant or exercise of an option, its disposition, or the disposition of
the underlying shares of Common Stock. Alternatively, the Company may
require the holder to pay to the Company such amount, in cash, promptly
upon demand. The Company shall not be required to issue any shares of
Common Stock pursuant to any such option until all required payments have
been made. Fair market value of the shares of Common Stock shall be
determined in accordance with Paragraph 5.
16. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or
legends upon the certificates for shares of Common Stock issued upon
exercise of an option under the Plan and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares as it
determines, in its discretion, to be necessary or appropriate to (a)
prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act, (b) implement the provisions of the
Plan or any agreement between the Company and the optionee with respect to
such shares of Common Stock, or (c) permit the Company to determine the
occurrence of a "disqualifying disposition," as described in Section 421(b)
of the Code, of the shares of Common Stock transferred upon the exercise of
an ISO granted under the Plan.
The Company shall pay all issuance taxes with respect to the issuance of
shares of Common Stock upon the exercise of an option granted under the
Plan, as well as all fees and expenses incurred by the Company in
connection with such issuance.
17. USE OF PROCEEDS. The cash proceeds from the sale of shares of Common Stock
pursuant to the exercise of options under the Plan shall be added to the
general funds of the Company and used for its general corporate purposes as
the Board of Directors may determine.
18. SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the
Board of Directors may, without further approval by the shareholders,
substitute new options for prior options of a Constituent Corporation (as
defined in Paragraph 19) or assume the prior options of such Constituent
Corporation.
19. DEFINITIONS.
(1) Subsidiary. The term "Subsidiary" shall have the same definition as
"subsidiary corporation" in Section 424(f) of the Code.
(2) Parent. The term "Parent" shall have the same definition as "parent
corporation" in Section 424(e) of the Code.
(3) Constituent Corporation. The term "Constituent Corporation" shall mean
any corporation which engages with the Company, its Parent or any Subsidiary
in a transaction to which Section 424(a) of the Code applies (or would apply
if the option assumed or substituted were an ISO), or any Parent or any
Subsidiary of such corporation.
(4) Disability. The term "Disability" shall mean a permanent and total
disability within the meaning of Section 22(e)(3) of the Code.
(5) Outside Director. The term "Outside Director" shall mean an individual who,
on the date of grant of a NQSO hereunder, is a director of the Company but is
not a common law employee of the Company or of any of its Subsidiaries or its
Parent.
20. GOVERNING LAW. The Plan, such options as may be granted hereunder and all
related matters shall be governed by, and construed in accordance with, the
laws of the State of New York.
21. PARTIAL INVALIDITY. The invalidity or illegality of any provision herein
shall not affect the validity of any other provision.
DISTRIBUTION AGREEMENT
This Agreement is entered into as of January 1, 1998 by and between Acuson
Corporation ("Acuson"), a Delaware corporation having its principal place of
business a 1220 Charleston Road, Mountain View, California U.S.A. 94039-7393
and U.S.-China Industrial Exchange, Inc. ("Distributor") having its principal
place of business at 7201 Wisconsin Avenue, Suite 703, Bethesda, Maryland 20814,
U.S.A.
In consideration of the mutual covenants herein, the parties hereby agree as
follows:
1. Products.
The products of Acuson subject to this Agreement ("Products") are those
delineated on Exhibit A. These Products may be changed from time to time by
Acuson giving Distributor not less than (30) days prior notice of any such
changes.
2. Territory.
The Territory covered by this Agreement ("Territory") is as set forth on
Exhibit A.
3. Distribution Appointment and Distributor's Responsibilities.
3.1 Authorized Distributor.
During the term of this Agreement, Distributor shall be Acuson's authorized
distributor solely within the Territory for the sale of Products to customers
for use in diagnostic and therapeutic applications ("customers"). Subject to
Section 5.4, Distributor acknowledges that Acuson may call on customers in the
Territory and may sell the Products in the Territory itself.
3.2 Sales.
Distributor shall use its best efforts fully and actively to promote,
maintain and increase sales of the Products in the Territory.
3.3 Training.
Distributor shall train all customers in the Territory in the use of the
Products. Such training shall be performed as soon as practicable following
installation to ensure that the customer is properly using the Products.
3.4 Promotional Activities.
Distributor shall (i) maintain a sales organization which in the opinion of
Acuson is adequately qualified and trained, and, unless Acuson otherwise agrees
in writing, which at a minimum must include the equivalent of two full-time
sales persons in the Territory and two full-time field application specialists;
(ii) maintain an active sales program for all potential and actual customers of
the Products; (iii) promote and advertise Products and participate in trade
shows; and (iv) prepare and distribute any and all sales aids, sales literature,
other promotional materials, training aids and literature as needed or as
reasonably requested by Acuson. Distributor agrees to provide additional sales
and field application support as may be required to support new Products.
3.5 Promotional Distributor Materials.
Distributor shall not give a customer any warranty for the Products other
than as set forth in Section 6, unless otherwise agreed by Acuson. Distributor
shall obtain prior written approval from Acuson prior to distribution of any
promotional material.
3.6 Service.
Distributor shall maintain a technically qualified service capability and
use its best efforts to service and maintain all Products in the Territory, and
shall maintain an adequate inventory of spare parts which shall be used for
repairs and replacements of Products whether under Acuson's standard warranty
or not. Acuson shall issue credit for or replace the part in Distributor's
inventory upon receipt of a complete report on the failure and, at Acuson's
reasonable request, return of the failed part. Distributor shall provide
Acuson reports of Distributor's service activities, in such form and at such
times as Acuson may reasonably request.
3.7 Customs and Freight Charges.
Distributor shall perform and be financially responsible for all functions
to clear Products through non-United States customs, and arrange and pay for
transportation of the Products from Acuson's facility in Mountain View,
California, U.S.A. to the customer.
3.8 Demonstration System.
Distributor agrees to keep at least one dedicated Demo system in the
Territory at all times. Accordingly, if Distributor sells its Demo system,
Distributor agrees immediately to purchase another Demo system, from Acuson on
mutually acceptable terms. Distributor may purchase a maximum of one Demo
system every two years.
3.9 Reports
At least 30 days prior to the beginning of each calendar quarter,
Distributor shall provide Acuson with forecasts by quarter of anticipated
customer sales and purchases from Acuson, by Product, for the next four
quarters; and provide Acuson with such other reports as Acuson may reasonably
request.
3.10 Records.
Distributor shall maintain a complete record of all sales of Products,
showing customer name, date of sale, instrument model and serial number, and
copies of all sales order acknowledgments and invoices for all Products.
Distributor shall also maintain a compete record of all service calls relating
to Products, showing customer name, date of call, instrument model and serial
number, nature of call, service work performed and other information as Acuson
may reasonably request. The records referred to in this Section, or copies
thereof, shall be supplied to Acuson upon its request.
3.11 Customer Complaints.
Distributor shall notify Acuson immediately of any complaints or problems
concerning the Products or any misuse of the Products.
3.12 Notification of Infringement.
Distributor shall notify Acuson immediately of any actual, suspected or
alleged infringement of Acuson patents, trademarks or copyrights that it
becomes aware of in the Territory.
3.13 Competitive Products.
Without Acuson's prior written consent. Distributor shall not distribute
or sell any products competitive with or similar to Products and/or services
relating thereto.
3.14 Confidential Information.
During the term of this Agreement and at all times thereafter, Distributor
shall acknowledge as proprietary and keep confidential (i) all confidential or
proprietary information covering Products and/or processes, including without
limitation, technical specifications, engineering data, diagnostic software and
printed circuit boards, price lists and customer lists, (ii) any information
disclosed to Acuson by any third party which Acuson is obligated to treat as
confidential or proprietary, or (iii) any information pertaining to the
business of Acuson or any of its customers, consultants or affiliates, acquired
or learned by Distributor during the term of this Agreement, or (iv) any other
information designated by Acuson as confidential or proprietary. Distributor
acknowledges that the information referred to in this Section 3.14 (Proprietary
Information") shall at all times remain the property of Acuson and shall be
deemed furnished to Distributor in confidence. Distributor shall use
Proprietary Information only in connection with its obligations under this
Agreement.
3.15 Government Authorizations.
Distributor shall obtain and continue to maintain in good standing all
licenses, permits and other governmental approvals and/or authorizations
required in connection with this Agreement and the sale of Products in the
Territory, including without limitation, import licenses and foreign exchange
permits. Distributor shall keep Acuson apprised of the status of such licenses,
permits and approvals/authorizations.
3.16 Expenses.
Except as otherwise specifically provided in this Agreement, Distributor
shall pay its own expenses I carrying out its obligations under this Agreement.
4 Acuson's Responsibilities
4.1 Assistance.
Acuson shall make available a reasonable supply of sales literature,
including catalogues, data sheets, brochures and similar material, all in
English language, or in a foreign language as far as it is available, and
furnish reasonable sales technical assistance from time to time, including
sales and service training of Distributor's employees. Payment of the costs
for such training shall be mutually agreed upon.
4.2 Inquiries.
Acuson shall promptly forward to Distributor all Product inquiries received
from customers within the Territory during the term of this Agreement.
5. Order Acceptance, Delivery terms and Payments
5.1 Orders.
Orders by Distributor are subject to acceptance by Acuson at Acuson's
facility in Mountain View, California U.S.A., or at such other facility as
Acuson may from time to time determine. All orders shall be accepted subject
to the terms and conditions of Acuson's then current terms and conditions of
sale (the current version of which is attached hereto as Exhibit C), unless
otherwise provided in this Agreement. Such order terms may be changed by
Acuson at any time, but no such change shall have any effect o orders already
accepted by Acuson.
Purchase orders must be addressed to Acuson at the address set forth on
the first page of this Agreement. The provisions of this Agreement shall
supersede any provisions contained in Distributor's purchase orders and any
other communications from Distributor and/or its customers. Purchase orders
may be declined or accepted, wholly or in part, at Acuson's sole discretion.
Acuson will not unreasonably withhold acceptance.
5.2 Price.
Acuson shall sell Products to Distributor at the prices listed in the then
current version of Exhibit A, less applicable discounts listed in then current
version of Exhibit B. Prices quoted are F.O.B. Acuson's facility in Mountain
View, California, U.S.A. Acuson may change prices and/or discounts from time
to time upon ninety (90) days written notice. No commission or other form of
compensation shall be payable by Acuson to Distributor. Distributor shall pay
(and shall indemnify Acuson against) all applicable taxes and fees, including
without limitation, a value added, personal property, use of similar taxes,
customs duties, import ant and similar charges incurred or payable with
respect to the import and sale of the Products in the Territory.
5.3 Title.
Subject to Section 8, title to and risk of loss of Products shall pass to
Distributor upon delivery of the Products to Distributor or Distributor's
customer, whichever occurs first.
5.4 Payments.
All payments for Products shall be due and paid in full within 30 days
from the date of Acuson's invoice by letter of credit acceptable to Acuson in
accordance with the payment terms set forth on Exhibit A.
In event that a customer located in the Territory orders directly form
Acuson, all payments for Products shall be due and paid in full by letter of
credit \acceptable to Acuson within thirty (30) days from the date of Acuson's
invoice. Acuson agrees to pay Distributor a sum equivalent to the discount
structure agreed upon in Exhibit B within thirty (30) days from receipt of
payment in full by the customer.
6. Warranty
Acuson warrants that the Products will be free from defects in materials
and workmanship for a period ending thirteen (13) months from date of shipment,
provided that options added after initial installation of the Acuson 128 or
the Acuson 128XP are covered by the foregoing warranty for a period of one (1)
year after the date of the installation of the option or until the end of the
13 month period referred to above, whichever is longer. The Products furnished
under this Agreement may contain components or parts that have been reprocessed
to assure compliance with performance and reliability specifications. Acuson's
sole liability under valid warranty claims will be limited, at Acuson's option,
to repair or replacement of defective parts of the Products during Acuson's
normal business hours. Upon replacement, any removed part shall become the
property of Acuson. All warranty replacement or repair of parts will be
limited to Product malfunctions which, in the reasonable opinion of Acuson,
are due and traceable to defects in original material and workmanship. In
order to enable Acuson to properly administer this warranty, Distributor will
notify Acuson promptly in writing of any claims and will provide Acuson with
the opportunity to inspect and test each Product claimed to be defective.
This warranty does not extend to Products or parts thereof that have been
subjected to misuse, abuse, improper application, alteration, accident,
negligence or incorrect repair or servicing not performed or authorized by
Acuson.
THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. ACUSON SHALL NOT BE LIABLE FOR ANY LOSS, DDMAGE OR EXPENSE OF ANY
KIND WHATSOVER CAUSED BY THE EQUIPMENT OR BY ANY DEFECT THEREIN. THE USE OR
MAINTENANCE THEREOF, OR ANY SERVICING OR ADJUSTMENT THERETO, NOT EXPRESSLY
COVERED BY THE WARRANTY CONTAINED HEREIN.
7. Limitation of Liability.
In no event whether in contract, tort (including negligence), strict
liability or otherwise will Acuson be liable (a) for special, indirect or
consequential damages or for any lost profits, or (b) to Distributor or any
other person for an amount greater than the purchase price actually paid to
Acuson for the Product with respect to which such liability relates.
8. Software License.
Acuson or its suppliers retain(s) ownership of and title to any computer
program supplied with or in connection with the Products, to any diagnostic,
remedial or installation software and printed circuit boards provided to
Distributor and to the trade secrets embodied in such computer programs,
software and boards. Subject to acceptance of the obligations in this Section
and to the fulfillment of these obligations, Acuson grants Distributor's
immediate customer a perpetual, non-exclusive license to use such computer
program, software and boards solely in the form and on the medium in which such
program, software or board is delivered for the purpose of operating the
Products in accordance with the instructions set forth in the Operator's
Manual supplied with the Product and for no other purposes whatsoever. Acuson
grants Distributor a non-exclusive license only during the term of this
Agreement to use such diagnostic, remedial and installation software and
printed circuit boards, solely in the form an don the medium in which such
software and boards are delivered, for the purpose of servicing Products sold
to customers pursuant to this Agreement in accordance with service instructions
supplied by Acuson and for no other purpose whatsoever. Neither Distributor
nor its customer may reverse assemble, reverse compile or otherwise reverse
engineer such computer programs, software or printed circuit boards, nor may it
make a copy thereof or apply any techniques to derive the trade secrets
embodied therein. Distributor agrees that it will forward to Acuson the
customer's written consent to comply with the terms of this Section. In event
of a failure by Distributor or Distributor's customer to comply with the terms
of this license, the license granted by this Section shall terminate. Further,
because unauthorized use of such computer programs, software and boards will
leave Acuson without an adequate remedy at law, injunctive or other equitable
relief will be appropriate to restrain such use, threatened or actual.
Distributor's customer may assign such customer's license hereunder to its
immediate purchaser by forwarding to Acuson the purchaser's written consent to
comply with the terms of this Section. Distributor further agrees that (I) any
of Acuson's suppliers of software is a direct and intended beneficiary of this
software license and may enforce it directly against Distributor's customers
with respect to software supplied by such Supplier, and (ii) NO SUPPLIER OF
ACUSON SHALL BE LIABLE TO DISTRIBUTOR ANY CUSTOMER FOR ANY GENERAL, SPECIAL,
DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR OTHER DAMAGES ARISING OUT OT
THE SUBLICENSE OF THE SOFTWARE AND COMPUTER PROGRAMS SUPPLIED WITH THE PRODUCTS.
9. Independence of Distributor; Reference to Acuson.
Distributor agrees to conduct business in its name as an independent
distributor and contractor. No employment, agency, joint venture, or similar
arrangement is created or intended between Acuson and Distributor. Distributor
has no right or authority to act for or bind Acuson in any respect or to make
any representations or warranties, express or implied, on behalf of Acuson.
However, so long as this Agreement remains in effect, Distributor may
indicate to the public that it is an authorized distributor of the Products and
may advertise such Products under Acuson trademarks, logos and symbols.
10. Compliance with United States Export Regulations.
Distributor acknowledges that Acuson has informed it that United States
law and the United States Export Administration Regulations ("EAR") govern an
may forbid the export, reexport or other disposition, without prior United
States government approval, of Products, spare parts and related technical data
received by Distributor or its customers in the Territory. Distributor
therefore warrants that it will adhere to all provisions of United States law
and the EAR and to the terms , conditions, required procedures and documentation
of any export license available or issued for delivery to Distributor or its
customers of Products, spare parts or technical data. Upon request,
Distributor shall provide Acuson all customer information and documentary
assistance required to maintain strict compliance with such law, the EAR and
such license(s). Distributor shall take all actions within its power which may
be reasonably necessary to assure that no customer contravenes any United States
law, the EAR or the provisions of any such license. Acuson shall be relieved of
all obligations to provide Products, spare parts or technical data to
Distributor or any customer, should Distributor or such customer violate
United States law, the EAR or the provisions of any export license(s), or
should such license(s) be suspended or revoked by the United States government.
11. Force Majeure.
If the performance of this Agreement or any obligation hereunder (except
payment of monies due) is prevented, restricted or interfered with by reason of
fire or other casualty or accident, strikes or labor disputes, problems in
procurement of raw materials, power or supplies, war or other violence, any
law, order, proclamation, regulation, ordinance, demand or requirement of
governmental agency or intergovernmental body, or any other act or condition
whatsoever beyond the reasonable control of a party hereto (an "Event of Force
Majeure"), the party so effected, upon giving notice to the other party, shall
be excused from such performance to the extent and throughout the duration of
such prevention, restriction or interference. Notwithstanding the foregoing,
should an Event of Force Majeure remain in effect for a period of six (6)
months, Acuson and Distributor hereby agree to promptly renegotiate the terms
of this Agreement, and if an agreement cannot be reached within sixty (60) days
of the end of such six (6) month period, the party not so effected by the Event
of Force Majeure shall have the option to terminate this Agreement and if such
party so elects, then this Agreement shall automatically terminate and be of no
further force or effect, subject to Sections 13.5, 13.6, 13.7, and 13.8.
12. Assignability, Distributor's Organization.
(a) This Agreement shall be binding on the parties hereto, their
successors, and permitted assigns. This Agreement may not be assigned by
Distributor in whole or in part, directly or indirectly, by operation of law,
or otherwise, without the prior written approval of Acuson. Any such purported
transfer shall be void and of no effect.
(b) This Agreement has been entered into by Acuson relying upon
Distributor's present organization and personnel. Distributor shall
immediately advise Acuson of any changes affecting Distributor's ability to
perform hereunder or any changes affecting the ownership or control of
Distributor.
13. Duration and Termination.
Except as otherwise provided in this Agreement, the term of this Agreement
shall be as set forth on Exhibit A.
13.1 Termination by Acuson on 60 Days Notice.
Acuson shall have the right upon 60 days notice to Distributor to terminate
this Agreement and to appoint other distributors or make any other arrangements
regarding sales of the Products in the Territory (I) if, during the term of
this Agreement, Distributor fails to dedicate the equivalent of two full-time
field sales persons and two full-time field application specialists to sell
and promote Products in accordance with Section 3.4 or (ii) if, during any
calendar year, Distributor fails to purchase any pay for Products in an amount
that at least equals the minimum quotas set forth in Exhibit D.
13.2 Termination by Either Party.
Should the following event occur, either party may terminate this
Agreement immediately by giving the other party notice of such termination:
If any proceeding in bankruptcy, reorganization or arrangement for the
appointment of an assignee, referee, receiver or trustee for Distributor or
any other proceeding under any law for the relief of creditors hall be
instituted by or against distributor or if Distributor admits in writing of its
inability to pay its debts as they mature.
13.3 Immediate Termination by Acuson.
Should any of the following events occur, Acuson may terminate this
Agreement immediately by giving Distributor notice of such termination:
(i) The material breach by Distributor of any of the provisions of this
Agreement, including failure to remit payments for Products as provided in
Section 5.4; (ii) Any sale, transfer or relinquishment by operation of law or
otherwise, of any substantial interest in the ownership of Distributor; (iii)
Any material or other substantial change in the management or organization of
Distributor, which in Acuson's opinion, significantly impairs Distributor's
ability to distribute and support Products in the Territory.
13.4 Termination by Distributor.
Distributor may terminate this Agreement immediately by giving Acuson
notice if there is a material breach by Acuson of any of the provisions of this
Agreement.
13.5 Effect of Termination.
All orders not shipped by the date of termination shall be deemed canceled
unless otherwise agreed by Acuson. Termination of this Agreement for any
reason whatsoever shall not relieve Distributor of its obligation to make
prompt payment in full of any and all amounts owed to Acuson which are accrued
and outstanding as of the date of termination and shall not relieve either
party from any other liability or obligation which has previously accrued as of
such date. Acuson's right of termination under Section 13.1(i) or 13.3 is in
addition to any other right or remedy Acuson may have as a result of
Distributor's breach of this Agreement. The provisions of Section 3.14 shall
survive termination of this Agreement.
13.6 No Damages Upon Termination.
It is expressly understood and agreed that the rights of termination as
provided in this Agreement are absolute and that both parties have considered
(i) making expenditures in preparing for performance of this Agreement and (ii)
possible losses and damages incident and resulting to them in the event of its
termination. Therefore, in agreeing to said terms of termination, it is with
full knowledge of such possibilities, and except as expressly provided herein,
neither party shall have any liability to the other for compensation, damages
or otherwise by reason of such termination in accordance with the terms of this
Agreement.
13.7 Return of Materials.
Upon termination of this Agreement for any reason, Distributor shall
immediately cease using any materials which indicates it is an authorized
distributor of Acuson and cease using any Acuson trademark, logo, symbol or any
mark or name confusingly similar thereto. In addition, upon such termination,
all rights to use Acuson's trademarks, logos and symbols shall terminate.
Distributor shall also deliver to Acuson (a) all records and copies thereof
relating to service and sales, including those referred to in Sections 3.6,
3.9, and 3.10, (b) all operator of service manuals and materials, diagnostic
software and printed circuit boards, sales aids, sales literature, other
promotional materials, training aids and literature in Distributor's possession
or under Distributor's control, and all copies thereof, and (c) all
documentation and copies thereof containing or concerning Proprietary
Information. Distributor shall make no further use of any of the materials
referred to in this Section 13.7.
13.8 Inventory.
The parties agree to use best efforts to reach a mutually acceptable
agreement on Products (including spare parts purchased from Acuson) which are
in Distributor's inventory as of the date of termination of this Agreement.
14. Sole Understanding/Modification.
14.1 Sole Understanding.
This Agreement is the entire and sole agreement and understanding of the
parties hereto with respect to the subject matter hereof and supersedes all
other prior agreements, understandings and communications related thereto,
whether oral or written.
14.2 Modification.
This Agreement can be modified or amended only with the written agreement
of an authorized signatory of the parties hereto.
15. Construction and Governing Law.
15.1 Governing Language.
In the event that this Agreement is translated into any language other
than English, the English language version of this Agreement shall be
controlling and govern.
15.2 No Waiver.
The failure by Acuson to enforce or take advantage of any of the provisions
of this Agreement shall not constitute nor be construed as a waiver of such
provisions or of the right subsequently to enforce or take advantage of each
and every such provision.
15.3 Notices.
Any notices made pursuant to this Agreement shall be in writing and shall
be deemed delivered upon receipt (or upon refusal of acceptance of delivery)
and shall be hand delivered, telexed or mailed, airmail, postage prepaid,
addressed to Distributor or Acuson, as the case may be, at the address shown
on page 1 of this Agreement or such other address as a party may designate by
notice in accordance with this Section.
15.4 Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California, U.S.A. applicable to contracts made and
wholly to be performed in California by residents of California.
15.5 Compliance with Law.
Distributor agrees to comply with all applicable laws, rules and
regulations of the Territory and to do nothing to cause Acuson to violate the
law, rules and regulations of the U.S.A. If this Agreement or the performance
hereof, is determined to be contrary of the laws, rules or regulations of the
Territory or of the U.S.A., this Agreement will automatically terminate subject
to Sections 13.5, 13.6, 13.7 and 13.8.
In Witness Whereof, the undersigned have executed and delivered this Agreement
by their duly authorized representatives as of the date first above written.
ACUSON CORPORATION U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
By: /s/ F. Steven Feinberg By: /s/ Robert C. Goodwin, Jr.
Name: F. Steven Feinberg Name: Robert C. Goodwin, Jr.
Title: VP, Asia-Pacific/Latin America Title: Executive Vice President and
General Counsel
[LOGO] FIRST NATIONAL BANK OF MARYLAND
FIRST INVESTMENT LOAN MANAGER
DEMAND PROMISSORY NOTE
* ONE MILLION SEVEN HUNDRED-FIFTY THOUSAND AND XX/100 DOLLARS
** $1,750,000.00
BALTIMORE, MARYLAND
JULY 10, 1997
FOR VALUE RECEIVED, the undersigned Chindex, Inc., a New York Corporation
(hereafter, the 'BORROWER'), promises to pay to the order of THE FIRST NATIONAL
BANK OF MARYLAND, and national banking association (hereafter, the 'BANK'), ON
DEMAND, at the BANK'S offices at 25 South Charles Street, Baltimore, Maryland
21201 or at such other place as the holder of this Promissory Note may from time
to time designate, the principal sum of * Dollars ($**),
or such other amount as may from time to time be advanced and
outstanding hereunder, together with interest at the rate hereafter specified.
The following terms shall apply to this Promissory Note:
Exhibit A attached hereto contains provisions essential to this Promissory
Note and such Exhibit A, and all terms, conditions and provisions thereof, are
incorporated herein and made a part hereof as if fully set forth. All terms used
in Exhibit A shall have the same meaning when used herein as given when used in
said Exhibit A. Periodic changes may be requested to the terms of Exhibit A by
either party. If changes to the terms of Exhibit A are agreed to by both parties
then a new Exhibit A will be executed by the BORROWER and the BANK and attached
to this Promissory Note by the BANK at which time such new Exhibit A will
replace the existing Exhibit A and be made a part of this Promissory Note.
1. Demand Nature. ALL SUMS DUE UNDER THIS PROMISSORY NOTE ARE IMMEDIATELY
DUE IN FULL UPON THE DEMAND OF THE HOLDER OF THIS PROMISSORY NOTE AT ANY TIME
AND FOR ANY REASON, IN THE SOLE AND ABSOLUTE DISCRETION OF THE HOLDER OF THIS
PROMISSORY NOTE.
2. Advances. This Promissory Note shall be used to evidence all advances
and payments of principal made hereunder and all interest due hereunder until it
is surrendered to the BORROWER, and it shall continue to be so used even though
there may be periods prior to such surrender when no amount of principal or
interest is owing hereunder. Until all sums due under this Promissory Note are
repaid in full and the credit accommodation evidenced by this Promissory Note is
terminated the BORROWER irrevocably authorizes the BANK to make advances and
receive payments under this Promissory Note in the following manner:
a. Form Of Advances. All advances made hereunder shall be made in the form
of a transfer of funds into the commercial checking account established by the
BORROWER at the BANK with the account number set forth on Exhibit A (hereafter
the "ACCOUNT"). The ACCOUNT is subject to restrictions of withdrawals imposed by
the BANK, from time to time, in its sole discretion.
b. Amount Of Advances. On each banking day after posting all credits
(subject to funds availability) to the ACCOUNT and repaying any principal sums
outstanding under this Promissory Note pursuant to subparagraph (c) below
(hereafter, the collected balance in the ACCOUNT after taking such actions shall
be referred to as the "INITIAL BALANCE"), the BANK shall calculate the aggregate
amount of properly payable debits to the ACCOUNT which have been presented for
payment (hereafter, "PRESENTED ITEMS"). In the event the INITIAL BALANCE is
greater than the aggregate amount of the PRESENTED ITEMS by an amount at least
equal to the Target Balance, the BANK shall post and pay all of the PRESENTED
ITEMS. In the event the INITIAL BALANCE is greater than the aggregate amount of
the PRESENTED ITEMS by an amount which is less than the Target Balance or in the
event the INITIAL BALANCE is less than the aggregate amount of the PRESENTED
ITEMS, the BANK shall make an advance under this Promissory Note by transferring
funds into the ACCOUNT in an amount equal to the greater of (i) the Minimum Loan
Sweep Amount or (ii) the amount which when aggregated with the INITIAL BALANCE
would be greater than the aggregate amount of the PRESENTED ITEMS by the amount
of the Target Balance. The contrary notwithstanding, the aggregate amount of
advances outstanding hereunder shall never exceed the Maximum Loan Amount.
Furthermore, if at any time the BORROWER does not have availability for
additional advances hereunder in an amount which when aggregated with the
INITIAL BALANCE would be in excess of the PRESENTED ITEMS by an amount at least
equal to the Target Balance, the Bank shall determine, in its sole discretion,
which PRESENTED ITEMS can be posted and paid based on the INITIAL BALANCE and
the availability for advances hereunder, and then (i) make an advance hereunder
in an amount which when aggregated with the INITIAL BALANCE is equal to those
PRESENTED ITEMS which the BANK has determined can be posted and paid without
giving effect to the Target Balance, and (ii) to the extent there is
availability for additional advances hereunder, make an advance hereunder in an
amount up to the Target Balance.
c. Repayments Of Advances. On each banking day after posting all credits to
the ACCOUNT but prior to posting any debits to the ACCOUNT, the BANK is hereby
irrevocably authorized to debit the ACCOUNT in an amount equal to the principal
amount outstanding under this Promissory Note.
3. Interest Rate. Until all sums due hereunder have been paid in full,
interest shall accrue on the disbursed and unpaid principal balance hereunder at
the annual rate of interest set forth on Exhibit A attached hereto. In the event
the rate of interest set forth on Exhibit A is based on the BANK's "Prime Rate",
the term "Prime Rate" shall mean that rate of interest equal to the higher of:
(a) the interest rate which the BANK from time to time announces and declares to
be its prime rate of interest (such rate being a guideline for, and a standard
in determining, actual interest rates, and not the lowest rate which the BANK
will make a loan to any particular class of borrowers); or (b) the average rate,
rounded to the nearest one-tenth of one percent (.1%), for ninety (90) day
maturity dealer placed Commercial Paper for the week most recently reported in
the Federal Reserve Statistical Release No. H-15(519), entitled "Selected
interest Rates") (or any succeeding publication). If the applicable interest
rate on this Promissory Note is based on the BANK's Prime Rate then changes in
such applicable interest rate shall be made as of, and immediately upon, the
occurrence of changes in the Prime Rate. Interest shall be calculated on the
basis of a three-hundred sixty (360) days per year factor applied to the actual
days on which there exists an unpaid disbursed principal balance.
<PAGE>
4. Interest Payments. Accrued interest at the above-described rate shall be
paid by the BORROWER to the BANK monthly, on a current basis, as billed by the
holder of this Promissory Note, until all sums due hereunder are paid in full
and the credit accommodation evidenced by this Promissory Note is terminated.
5. Application Of Payments. All payments made hereunder shall be applied
first to late penalties or other sums owing to the holder under this Promissory
Note, next to accrued interest, and then to principal or in such other order of
application as the holder hereof may elect from time to time.
6. Late Payment Penalty. Should any payment due hereunder be received by
the holder of this Promissory Note more than fifteen (15) days after its due
date, the BORROWER shall pay a late payment penalty equal to five percent (5%)
of the amount then due for each month or portion of a month until paid.
7. Confession Of Judgment. Upon a failure to make any payment when and as
due under this Promissory Note, the BORROWER authorizes any attorney admitted to
practice before any court of record in the United States to appear on behalf of
the BORROWER to confess judgment against the BORROWER in the full amount due on
this Promissory Note plus legal fees of fifteen percent (15%) of the amount due.
The BORROWER agrees that venue shall in such an action be proper in the Circuit
Court of any County of the State of Maryland or in the Circuit Court of
Baltimore City or in the United States District Court For The District Of
Maryland. The BORROWER waives the benefit of any and every statute, ordinance,
or rule of court which may be lawfully waived conferring upon the BORROWER any
right or privilege of exemption, stay of execution, or supplementary
proceedings, or other relief from the enforcement or immediate enforcement of a
judgment or related proceedings on a judgment. The authority and power to
appear for and enter judgment against the BORROWER shall not be exhausted by one
or more exercises thereof, or by any imperfect exercise thereof, and shall not
be extinguished by any judgment entered pursuant thereto; such authority and
power may be exercised on one or more occasions from time to time, in the same
or different jurisdictions, as often as the holder shall deem necessary or
advisable.
8. Default Interest Rate. Upon a failure to make any payment when and as
due under this Promissory Note, the holder may, without notice or demand, raise
the rate of interest accruing on the unpaid principal balance by two (2)
percentage points above the rate of interest otherwise applicable,
independent of whether the holder of this Promissory Note elects to demand the
unpaid principal balance of this Promissory Note as a result of such default.
ADDITIONAL IMPORTANT TERMS OF THIS AGREEMENT ARE ON THE REVERSE SIDE.
<PAGE>
CONTINUED FROM FRONT SIDE
9. Interest Rate After Judgment. If judgment is entered against the
BORROWER on this Promissory Note, the amount of the judgment entered (which may
include principal, interest, default interest late charges, fees, and costs)
shall bear interest at the highest rate authorized under this Promissory Note as
of the date of the judgment.
10. Expenses Of Collection. If this Promissory Note is referred to an
attorney for collection, whether or not judgment has been confessed or suit has
been filed, the BORROWER shall pay all of the holder's reasonable costs, fees
(including, but not limited to, reasonable legal fees) and expenses resulting
from such referral.
11. Subsequent Holders. In the event that any holder of this Promissory
Note transfers this Promissory Note for value, the BORROWER agrees that no
subsequent holder of this Promissory Note shall be subject to any claims or
defenses which the BORROWER may have against a prior holder, all of which are
waived as to the subsequent holder, and that all subsequent holders shall have
all of the rights of a holder in due course with respect to the BORROWER even
though the subsequent holder may not qualify, under applicable law, absent this
paragraph, as a holder in due course.
12. Waiver Of Protest. The BORROWER, and all parties to this Promissory
Note, whether maker, indorser, or guarantor, waive presentment notice of
dishonor and protest.
13. Extensions Of Maturity. All parties to this Promissory Note, whether
maker, indorser, or guarantor, agree that the maturity of this Promissory Note,
or any payment due hereunder, may be extended at any time or from time to time
without releasing, discharging, or affecting the liability of such party.
14. Commercial Loan. The BORROWER warrants that this Promissory Note is the
result of a commercial loan transaction within the meaning of Sections 12-101(c)
and 12-103(e), Commercial Law Article, Annotated Code of Maryland.
15. Binding Nature. This Promissory Note shall inure to the benefit of and
be enforceable by the BANK and the BANK'S successors and assigns and any other
person to whom the BANK may grant an interest in the BORROWER'S obligations to
the BANK, and shall be binding and enforceable against the BORROWER and the
BORROWER'S personal representative, successors and assigns.
16. Invalidity Of Any Part. If any provision or part of any provision of
this Promissory Note shall for any reason be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Promissory Note and this
Promissory Note shall be construed as if such invalid, illegal or unenforceable
provision or part thereof had never been contained herein, but only to the
extent of its invalidity, illegality or unenforceability.
17. Choice of Law. This Promissory Note shall be governed, construed,
interpreted, enforced and its validity and enforceability determined in
accordance with the laws of the State of Maryland. The BORROWER consents to the
jurisdiction and venue of the courts of the State of Maryland and, if diversity
of citizenship exists between the BORROWER and the holder and a sufficient
amount is in controversy or if some other basis exists for the jurisdiction of
the federal courts, to the jurisdiction and venue of the United States District
Court for the District of Maryland.
18. Actions Against Bank. Any action brought by the BORROWER against the
BANK which is based, directly or indirectly or in whole or in part on this
Promissory Note or any matter in or related to this Promissory Note, including
but not limited to the making of the loan or the administration or collection
thereof shall be brought only in the courts of the State of Maryland. The
BORROWER may not file a counterclaim against the BANK in a suit brought by the
BANK against the BORROWER in a state other than the State of Maryland unless
under the rules of procedure of the court in which the BANK brought the action
the counterclaim is mandatory and will be considered waived unless filed as a
counterclaim in the action instituted by the BANK.
19. Waiver Of Jury Trial. The BORROWER agrees that any suit, action, or
proceeding, whether claim or counterclaim, brought or instituted by the
BORROWER or any successor or assign of the BORROWER on or with respect to this
Promissory Note or which in any way relates, directly or indirectly, to the
obligations of the BORROWER to the BANK under this Promissory Note or any other
LOAN DOCUMENT, or the dealings of the parties with respect thereto, shall be
tried only by a court and not by a jury. The BORROWER hereby expressly waives
any right to a trial by jury in any such suit, action, or proceeding.
The BORROWER acknowledges and agrees that this provision is a specific and
material aspect of the agreement between the parties and that the BANK would
not enter into the transaction with the BORROWER if this provision were
not part of their agreement.
IN WITNESS WHEREOF, the BORROWER has executed this Promissory Note
specifically intending this Promissory Note to constitute an instrument under
seal.
Dated as of July 10, 1997
<TABLE>
<CAPTION>
WITNESS/ATTEST: BORROWER (If a corporation or partnership):
<S> <C>
Chindex, Inc.
/s/ By: /s/ ROBERT C. GOODWIN, JR. (SEAL)
--------------------------- --------------------------------------
Name: Robert C. Goodwin, Jr.
Title: Exec. Vice President &
Asst. Sec.
/s/ By: /s/ RONALD ZILKOWSKI (SEAL)
--------------------------- ----------------------------------
Name: Ronald Zilkowski,
Title: VP Finance & Controller
</TABLE>
<PAGE>
<TABLE>
<S> <C>
[logo] First National Bank of Maryland Exhibit 'A' to Film Promissory Note
Commercial Checking Account Number
------------------------------------
Target Balance $ .0
(The minimum collected balance that must be kept in the ------------------------------------
checking account).
Minimum Loan Sweep Amount $ .01
(The minimum amount that may be advanced at any one time ------------------------------------
under the Promissory Note).
Maximum Loan Amount $1,750,000.00
(The maximum aggregate amount which may be advanced and ------------------------------------
remain outstanding at any one time under the Promissory
Note).
Interest Rate See Schedule A
------------------------------------
WITNESS: BORROWER (If a corporation or partnership):
Chindex, Inc. ,
/s/ BY: /s/ ROBERT C. GOODWIN, JR.
- - -------------------------- ------------------------------ (SEAL)
Name: Robert C. Goodwin, Jr.
Title: Exec. Vice President & Asst. Sec.
/s/ BY: /s/ RONALD ZILKOWSKI
- - -------------------------- ------------------------------ (SEAL)
Name: Ronald Zilkowski,
VP Finance & Controller
Date: 7/10, 1997
The BANK is executing this Exhibit A solely to evidence its consent to the terms of this Exhibit A.
THE FIRST NATIONAL BANK OF MARYLAND,
A National Banking Association
BY:
------------------------------- (SEAL)
- ------------------------- Name: William N. Chalfant, Jr.
Title: Vice President
</TABLE>
<PAGE>
SCHEDULE A
1. Other(continued):
At a rate of interest adjusted on the last day of each calendar month which is
equal to the current month's average (based on actual days of the month) of the
daily average of the immediately preceding three (3) months' daily quotations
by the Bank for the three (3) month London Interbank Offered Rate ("LIBOR") plus
one hundred (100) basis points.
By: /s/ Ronald Zilkowski (SEAL)
Name/Title: Ronald Zilkowski,
Controller
By: /s/ Robert C. Goodwin, Jr. (SEAL)
Name/Title: Robert c. Goodwin, Jr.,
Executive V.P. & Asst.
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6228000
<SECURITIES> 0
<RECEIVABLES> 12699000
<ALLOWANCES> (604000)
<INVENTORY> 2761000
<CURRENT-ASSETS> 19786000
<PP&E> 4592000
<DEPRECIATION> (768000)
<TOTAL-ASSETS> 26580000
<CURRENT-LIABILITIES> 11075000
<BONDS> 0
0
0
<COMMON> 68000
<OTHER-SE> 14167000
<TOTAL-LIABILITY-AND-EQUITY> 26580000
<SALES> 23849000
<TOTAL-REVENUES> 24381000
<CGS> 17487000
<TOTAL-COSTS> 30079000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (31000)
<INCOME-PRETAX> (4723000)
<INCOME-TAX> 75000
<INCOME-CONTINUING> (4648000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4648000)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 13374000
<SECURITIES> 0
<RECEIVABLES> 10870000
<ALLOWANCES> (115000)
<INVENTORY> 2188000
<CURRENT-ASSETS> 24872000
<PP&E> 2289000
<DEPRECIATION> (506000)
<TOTAL-ASSETS> 28964000
<CURRENT-LIABILITIES> 8922000
<BONDS> 0
0
0
<COMMON> 68000
<OTHER-SE> 18848000
<TOTAL-LIABILITY-AND-EQUITY> 28964000
<SALES> 22060000
<TOTAL-REVENUES> 22901000
<CGS> 15078000
<TOTAL-COSTS> 22974000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (119000)
<INCOME-PRETAX> 717000
<INCOME-TAX> (141000)
<INCOME-CONTINUING> 576000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 576000
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
