UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
Commission file number 0-24624
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
(Exact name of registrant as specified in its charter.)
NEW YORK 13-3097642
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7201 Wisconsin Avenue, Bethesda, MD 20814
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code:
(301) 215-7777
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date:
The number of shares outstanding of each of the issuer's classes of common
equity, as of May 9, 1998, was 4,772,500 shares of Common Stock and
2,000,000 of Common Stock Class B.
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PART I. - FINANCIAL INFORMATION
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
March 31, December 31,
1998 1997
___________ ____________
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 5,241,000 $ 6,228,000
Receivables:
Trade accounts, less allowance 4,257,000 5,796,000
Current portion-long term trade accounts 4,053,000 4,123,000
Commissions receivable 20,000 84,000
Inventories, net 3,055,000 2,761,000
Other current assets 939,000 794,000
__________ __________
Total current assets 17,565,000 19,786,000
Property & equipment, net 3,764,000 3,824,000
Accounts receivable, long term 1,823,000 2,092,000
Other 933,000 878,000
__________ __________
Total assets $24,085,000 $26,580,000
=========== ===========
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<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 6,951,000 $ 6,836,000
Accrued contract training 794,000 924,000
Current portion-long term accounts payable, net 1,962,000 2,171,000
Short-term loan payable 0 467,000
Income taxes payable 273,000 208,000
Restructuring 334,000 469,000
__________ __________
Total current liabilities 10,314,000 11,075,000
Long term accounts payable, net 943,000 1,270,000
__________ __________
Total liabilities 11,257,000 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 stock - 4,772,500 shares issued
and outstanding 48,000 48,000
Common stock-Class B - 2,000,000 shares
issued and outstanding 20,000 20,000
Additional paid in capital 17,235,000 17,235,000
Foreign currency equity translation
adjustment 2,000 2,000
Retained earnings (4,477,000) (3,070,000)
__________ __________
Total shareholders' equity 12,828,000 14,235,000
__________ __________
Total liabilities and shareholders' equity $24,085,000 $26,580,000
=========== ===========
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U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended March 31,
1998 1997
<S> <C> <C>
Net Sales $2,913,000 $5,498,000
Cost of goods sold 2,138,000 3,925,000
___________ _________
Gross profit on sales 775,000 1,573,000
Net commission income 0 114,000
___________ _________
Total gross profit on sales
and net commission income 775,000 1,687,000
Selling, general and administrative
Salaries and payroll taxes 1,174,000 835,000
Travel and entertainment 273,000 305,000
Other 887,000 640,000
___________ _________
(1,559,000) (93,000)
Other Income and Expenses
Interest Expense (12,000) (16,000)
Interest Income 67,000 209,000
Miscellaneous Income 138,000 139,000
___________ _________
Total Other Income/Expenses 193,000 332,000
(Loss)/income before provision for taxes (1,366,000) 239,000
(Provision for) income taxes (41,000) (74,000)
___________ _________
Net (loss)/income $(1,407,000) $ 165,000
=========== ==========
Net (loss)/income per share $ (0.22) $ 0.03
=========== ==========
Weighted average shares outstanding 6,322,500 6,322,500
=========== ==========
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U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three months ended March 31,
1998 1997
<S> <C> <C>
Operating activities
Net (loss)/income $(1,407,000) $ 165,000
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 149,000 45,000
Provision for doubtful accounts 0 5,000
Provision for deferred taxes 0 (11,000)
Inventory write-down 35,000 20,000
Sales of demo equipment 0 11,000
Changes in operating assets and liabilities:
Accounts receivable 1,878,000 (1,937,000)
Commissions receivable 64,000 58,000
Inventories (328,000) (347,000)
Other current assets (145,000) (168,000)
Other assets (55,000) (121,000)
Accounts payable and accrued expenses (551,000) 1,030,000
Income taxes payable 65,000 (53,000)
Restructuring (135,000) 0
___________ __________
Net cash used in operating activities (430,000) (1,303,000)
Investing activities
Purchase of property and equipment (90,000) (402,000)
___________ __________
Net cash used in investing activities (90,000) (402,000)
Financing activities
Fee expense from issuance of common stock 0 (40,000)
Repayment of short term borrowings (467,000) 0
___________ __________
Net cash used in financing activities (467,000) (40,000)
Effect of foreign exchange rate changes on
cash and cash equivalents 0 2,000
___________ __________
Net decrease in cash and
cash equivalents (987,000) (1,743,000)
Cash and cash equivalents at beginning of
period 6,228,000 13,374,000
___________ ___________
Cash and cash equivalents at end of period $ 5,241,000 $11,631,000
=========== ===========
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U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Note 1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have
been prepared in accordance with form 10-QSB instructions and in the opinion
of management contain all adjustments and normal or recurring accruals as
necessary to present fairly the financial position as of March 31, 1998, the
results of operations for the quarter ended March 31, 1998 and 1997 and the
cash flows for the quarters ended March 31, 1998 and 1997. These results
have been determined on the basis of generally accepted accounting principles
and practices applied consistently with those used in the preparation of the
Company's Form 10-KSB.
Certain information and footnote disclosure normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the accompanying consolidated financial statements be read in conjunction
with the financial statements and notes thereto incorporated in the
Company's Form 10-KSB.
Note 2. Segment Information
The following segmental information has been provided in response to the
Company's adoption of Financial Accounting Standards No. 131, 'Disclosures
about Segments of an Enterprise and Related Information':
For the quarter ended March 31, 1998:
Segments Healthcare Products Healthcare Services
Sales $2,728,000 $184,000
Gross Profit 612,000 163,000
Gross Profit % 22% 89%
Selling & Admin Costs 1,734,000 600,000
--------- -------
Loss from operations (1,122,000) (437,000)
Loss from combined operations (1,559,000)
Other income 193,000
----------
Loss before tax (1,366,000)
==========
Intersegment transfers are insignificant.
Prior year results were all principally related to one segment.
Assets $20,085,000 $4,000,000
All of the Company's sales were to China.
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U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operation
Quarter ended March 31, 1998 compared to quarter ended March 31, 1997
Historically the Company's revenues have been 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 and has
chosen to structure virtually all sales of medical equipment as net sales by
the Company for its own account while sales of non-healthcare equipment have
often been structured as commission sales. Since the Company has discontinued
the marketing of non-healthcare products the Company believes that there will
be little or no commission income in future periods.
The Company's net sales for the quarter ended March 31, 1998 decreased
$2,585,000 or 47% and net commission income decreased $114,000 or 100% over the
quarter ended March 31, 1997. The total gross profit on sales and net
commission income decreased $912,000 or 54%.
The Company believes that the total gross profit on sales has been
negatively impacted during the quarter by a variety of factors. These include
delays in opening letters of credit on signed contracts which the Company
believes are principally attributable to bureaucratic delays resulting from
the recent restructuring of the Chinese government, significantly increased
competition due to an increased focus on China by the Company's competitors
and lack of financing available to the Company's customers including
restrictions imposed by the Chinese government on the availability of credit
from the Chinese banking system.
The Company's gross profit on sales as a percentage of net sales for
the quarter ended March 31, 1998 was 27% as compared to 29% for the quarter
ended March 31, 1997. The mix in gross profit is now affected by the
Company's Healthcare Services business.
In the quarter ended March 31, 1998 the Healthcare Products business had a
gross profit percent of 22% as compared to 29% for the quarter ended March 31,
1997. This decrease is principally due to lower revenues and competitive
pressures.
The Company's Healthcare Services business had a gross profit percent of 89%
for the quarter ended March 31, 1998 with no comparable prior year results
since operations did not commence until September 1997.
Selling, general and administrative expenses for the quarters ended
March 31, 1998 and 1997 were $2,334,000 and $1,780,000, respectively,
representing an increase of 31%.
These expenses represent costs associated with the different businesses.
In the Healthcare Products business the SG&A costs were $1,734,000 for the
quarter ended March 31, 1998 as compared with $1,771,000 for the quarter
ended March 31, 1997 for a decrease of $37,000 or 2% over prior year. This
is principally related to the cost containment measures implemented at the
end of 1997.
The SG&A costs from the Healthcare Services business was $600,000 during
the quarter ended March 31, 1998 as compared with $9,000 for the quarter ended
March 31, 1997. This increase is due to the commencement of operations of
the Beijing United Hospital in September of 1997.
Interest income for the quarters ended March 31, 1998 and 1997 were
$67,000 and $209,000 respectively. The decrease is principally due to a decline
in available funds for investment.
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Liquidity and Capital Resources
During the quarter ended March 31, 1998, decreased sales resulted in
a $1,878,000 decrease in accounts receivable offset somewhat by a $551,000
decrease in accounts payable.
The Company negotiated a revision in certain extended payment payables with
a supplier to defer approximately $500,000 of payables. The length of this
extension is still being negotiated.
Inventories grew an additional $328,000 as the Company continued to expand
its selling effort of certain consumable products. The Company expects this
growth to continue at a moderate pace for the foreseeable future.
During the quarter ended March 31, 1998 the Company continued to offer
financing arrangements to selected purchasers. The Company has continued to
seek alternative funding sources for its customers and currently has received
preliminary approval from the relevant Chinese Government organizations for a
$15 million borrowing to be guaranteed by the U.S. Export-Import Bank. The
loan, if approved, would be utilized by Chinese hospitals for the purchase of
health care equipment to be exported by the Company. There can be no
assurance that final approvals by the Chinese Government or the U.S. Export-
Import Bank will be forthcoming.
As a result of the Company's efforts in connection with the expansion of
its Healthcare Products business and establishment and start-up of its new
Healthcare Services business, the Company's use of cash grew significantly
in 1997 over prior periods. The Company had anticipated raising additional
funding early in 1998 to continue with its expansion plans at a rapid pace,
but the Asian financial crisis has created an atmosphere of uncertainty with
respect to raising capital for companies operating in Asia.
As a result of these factors, in order to reduce the rate of cash depletion
and in an effort to bring operating expenses in line with current and
projected revenues, the Company undertook a restructuring charge of $1,500,000
at the end of 1997 and increased its cost controls in order to reduce operating
expenses. Although the Company currently believes that its cash and cash
equivalents as well as cash flow from operations is sufficient to maintain
its current and planned operations under the restructured program for
approximately the next eight months, the Company currently is considering
various financing alternatives as well as additional cost reduction measures
in order to satisfy its future capital requirements and bring operating costs
in line with anticipated revenues.
With the exception of historical information, the matters discussed or
incorporated by reference in this Report on Form 10-KSB and 10-KSB/A 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. None
b. Reports on Form 8-K
None
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
May 14, 1998 /S/ Lawrence Pemble
Date Lawrence Pemble
Executive Vice President Finance and
Director
May 14, 1998 /S/ Ronald Zilkowski
Date Ronald Zilkowski
Vice President Finance and Controller
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