UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 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 [ ]
The number of shares outstanding of each of the issuer's classes
of common equity, as of November 13, 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>
September 30, December 31,
1998 1997
___________ ____________
ASSETS
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 5,132,000 $ 6,228,000
Receivables:
Trade accounts, less allowance 3,218,000 5,796,000
Current portion-long term accounts 4,065,000 4,123,000
Commissions receivable 28,000 84,000
Inventories 4,825,000 2,761,000
Other current assets 1,008,000 794,000
__________ __________
Total current assets 18,276,000 19,786,000
Plant, property & equipment 3,879,000 3,824,000
Accounts receivable, long term 1,110,000 2,092,000
Other 853,000 878,000
__________ __________
Total assets $ 24,118,000 $26,580,000
=========== ===========
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<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 8,016,000 $ 6,836,000
Accrued contract training 864,000 924,000
Current portion-long term accounts payable 2,521,000 2,171,000
Short term loan payable 557,000 467,000
Income taxes payable 25,000 208,000
Accrued restructuring 237,000 469,000
__________ __________
Total current liabilities 12,220,000 11,075,000
Long term accounts payable, net 478,000 1,270,000
__________ __________
Total liabilities 12,698,000 12,345,000
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized 5,000,000 shares -- --
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 (5,885,000) (3,070,000)
__________ __________
Total shareholders' equity 11,420,000 14,235,000
__________ __________
Total Liabilities and shareholders' equity $24,118,000 $26,580,000
=========== ===========
<FN>
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U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $3,365,000 $6,755,000 $11,770,000 $16,010,000
Net commission income 0 178,000 16,000 374,000
_________ _________ __________ _________
Total revenue 3,365,000 6,933,000 11,786,000 16,384,000
Costs and Expenses
Cost of goods sold 2,167,000 5,035,000 7,868,000 11,705,000
Salaries and payroll taxes 1,421,000 1,275,000 3,828,000 3,130,000
Travel and entertainment 288,000 627,000 1,045,000 1,575,000
Other 767,000 1,022,000 2,852,000 2,597,000
_________ _________ __________ _________
(1,278,000) (1,026,000) (3,807,000) (2,623,000)
Other income and expenses
Interest expense (34,000) 0 (73,000) 0
Interest income 98,000 119,000 206,000 417,000
Miscellaneous income 440,000 140,000 866,000 420,000
_________ _________ __________ _________
Total other income 504,000 259,000 999,000 837,000
Minority Interest (12,000) -- (12,000) --
(Loss) before provision for taxes ( 786,000) (767,000) (2,820,000) (1,786,000)
Benefit from income taxes 49,000 311,000 5,000 735,000
_________ _________ __________ _________
Net (loss) $( 737,000) $( 456,000) $ (2,815,000) $(1,051,000)
========== ========== =========== ==========
Net (loss) per share $( 0.12) $( 0.07) $ ( 0.45) $( 0.17)
========== ========== =========== ==========
Weighted average shares outstanding 6,322,500 6,322,500 6,322,500 6,322,500
========== ========== =========== ==========
</TABLE>
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<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended Sept. 30,
1998 1997
<S> <C> <C>
Operating activities
Net (loss)/income $(2,815,000) $(1,051,000)
Adjustments to reconcile net (loss)/income
to net cash used in operating activities:
Depreciation & amortization 476,000 145,000
Provision for doubtful accounts 0 15,000
Provision for deferred taxes 0 (504,000)
Inventory write-down 115,000 69,000
Sales of demo equipment 0 11,000
Changes in operating assets and liabilities:
Accounts receivable 3,618,000 (2,211,000)
Commissions receivable 56,000 255,000
Inventories (2,179,000) (1,208,000)
Other current assets (214,000) 0
Other assets 25,000 (885,000)
Accounts payable and accrued expenses 678,000 692,000
Income taxes payable (183,000) (425,000)
Restructuring (232,000) --
_________ _________
Net cash (used in) operating activities (655,000) (5,097,000)
Investing activities
Purchase of property and equipment (531,000) (1,806,000)
_________ _________
Net cash used in investing activities (531,000) (1,806,000)
Financing activities
Additional costs related to issuance of
common stock 0 (43,000)
Short term loan payable 90,000 335,000
-------- ---------
Net cash provided by financing activities 90,000 292,000
Effect of foreign exchange rate changes
on cash and cash equivalents 0 2,000
_________ _________
Net (decrease) in cash and cash equivalents (1,096,000) (6,609,000)
Cash and cash equivalents at beginning of
period 6,228,000 13,374,000
__________ _________
Cash and cash equivalents at end of period $ 5,132,000 $6,765,000
========== ==========
<FN>
</TABLE>
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 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 September 30, 1998,
the results of operations for the three month and nine month periods ended
September 30, 1998 and 1997 and the cash flows for the nine months ended
September 30, 1998 and 1997. These results have been determined on the basis
of generally accepted accounting principles 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.
The Company reclassified its consolidated statement of operations during the
second quarter of 1998. Previously reported amounts have been reclassified to
conform with the current period presentation.
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 nine months ended September 30, 1998:
Segments Healthcare Products Healthcare Services
Assets $19,995,000 $4,123,000
=========== ==========
Revenue $10,603,000 $1,183,000
Gross Profit 2,917,000 n/a
Gross Profit % 28%
Expenses 5,851,000 2,056,000
----------- ---------
Loss from operations ( 2,934,000) (873,000)
Loss from combined operations (3,807,000)
Other income/expense, net 999,000
Minority interest (12,000)
-----------
Loss before tax ($2,820,000)
==========
Intersegment transactions were insignificant during the nine months ended
September 30, 1998. Prior year results were all principally related to
healthcare products segment. All of the Company's revenue is attributable
to its operations in China.
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended September 30, 1998 compared to three months ended
September 30, 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. Moreover, with the opening
of its healthcare services business in September 1997, the Company's revenues
now include revenue from the sale of services as well as goods.
The Company's revenue (sales plus net commission income) for the three months
ended September 30, 1998 decreased $3,568,000 or 51% over the three months
ended September 30, 1997. Revenues from healthcare products contributed
$2,826,000 or 84% of total revenues; healthcare services contributed $539,000
or 16% of total revenues.
The Company believes that its health care products business has been
negatively impacted during the three months by a variety of factors. Primarily,
these include an inability of customers to make purchase commitments or open
letters of credit because of new foreign exchange documentation and procedural
requirements and delays in purchase commitments related to uncertainty regarding
foreign exchange regulations and exchange rates. In addition, the Company's
business has also been negatively impacted by 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 has begun to see substantial impact of the Asian
economic problems in China and in particular has been impacted by new
restrictions imposed by the Chinese Government on the transfer of foreign
exchange outside of China (See Liquidity and Capital Resources).
The Company's gross profit percentage on healthcare product revenue (as stated
in Note 2 in the accompanying interim financial statements) for the three months
ended September 30, 1998 was 26% as compared to 25% for the three months ended
September 30, 1997. The Company no longer combines its two business segments
in computing gross profit and will calculate gross profit on the health care
products segment of its business. The slightly higher gross profit margin is
attributable to reduced contract costs.
The Company's costs and expenses, including cost of goods sold, for the three
months ended September 30, 1998 and 1997 were $4,643,000 and $7,959,000
respectively. For the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997, cost of goods was down $2,868,000 on
lower sales, salaries were up $146,000 principally due to hiring increases in
healthcare services, travel and entertainment was down $339,000 due to reduced
spending and other expenses were down $255,000 due to continuing implementation
of cost containment measures.
In the Healthcare Products business total costs were $4,008,000 for the three
months ended September 30, 1998 as compared with $7,676,000 for the three months
ended September 30, 1997 for a decrease of $3,668,000 or 48%. The decrease was
primarily related to cost of goods decrease of $2,957,000 and to reductions in
salary costs of $44,000, travel and entertainment of $336,000 and other cost
reductions of $331,000. These reductions are principally related to the cost
containment measures implemented at the end of 1997.
The expenses from the Healthcare Services business were $635,000 during the
three months ended September 30, 1998 as compared with $283,000 for the three
months ended September 30, 1997. This increase is due to the commencement of
healthcare services beginning in September of 1997 and includes salaries of
$272,000 and other costs of $363,000.
Interest income for the three months ended September 30, 1998 and 1997 were
$98,000 and $119,000 respectively. The decrease is principally due to a decline
in available funds for investment.
Other income rose to $440,000 for the three months ended September 30, 1998 as
compared with $140,000 for the three months ended September 30, 1997. The
increase is principally related to the close down of certain businesses in the
Company's restructuring and the final resolution of specific contracts within
the pipeline.
Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997
The Company's revenue (sales plus net commission income) for the nine months
ended September 30, 1998 decreased $4,598,000 or 28% over the nine months ended
September 30, 1997. Revenues from healthcare products contributed $10,603,000
or 90% of total revenues; healthcare services contributed $1,183,000 or 10% of
total revenues.
The Company believes that its health care products business has been
negatively impacted during the three months by a variety of factors. Primarily,
these include an inability of customers to make purchase commitments or open
letters of credit because of new foreign exchange documentation and procedural
requirements and delays in purchase commitments related to uncertainty regarding
foreign exchange regulations and exchange rates. In addition, the Company's
business has also been negatively impacted by 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 has begun to see substantial impact of the Asian
economic problems in China and in particular has been impacted by new
restrictions imposed by the Chinese Government on the transfer of foreign
exchange outside of China (See Liquidity and Capital Resources).
The Company's gross profit percentage on healthcare product revenue (as stated
in Note 2 in the accompanying interim financial statements) for the nine months
ended September 30, 1998 was 28% as compared to 27% for the nine months ended
September 30, 1997. The Company no longer combines its two business segments in
computing gross profit and will calculate gross profit on the health care
products segment of the business. The slightly higher gross profit margin is
attributable to lower contract costs.
The Company's costs and expenses, including cost of goods sold, for the nine
months ended September 30, 1998 and 1997 were $15,593,000 and $19,007,000
respectively. For the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997, cost of goods were down $3,837,000 on
lower sales, salaries were up $698,000 principally due to hiring increases in
healthcare services, travel and entertainment was down $530,000 due to reduced
spending and other expenses were up $255,000 due to expenses related to
healthcare services.
In the Healthcare Products business total costs were $13,537,000 for the nine
months ended September 30, 1998 as compared with $18,706,000 for the nine months
ended September 30, 1997 for a decrease of $5,169,000 or 28%. The decrease was
primarily related to cost of goods decrease of $4,019,000, increase in salary
costs of $31,000 and decreases in travel and entertainment of $559,000 and
other costs of $622,000. The reductions are principally related to the cost
containment measures implemented at the end of 1997.
The expenses from the Healthcare Services business were $2,056,000 during the
nine months ended September 30, 1998 as compared with $301,000 for the nine
months ended September 30, 1997. This increase is due to the commencement of
healthcare services beginning in September of 1997 and includes salaries of
$767,000 and other costs of $1,289,000.
Interest income for the nine months ended September 30, 1998 and 1997 were
$206,000 and $417,000 respectively. The decrease is principally due to a
decline in available funds for investment.
Other income rose to $866,000 for the nine months ended September 30, 1998 as
compared with $420,000 for the nine months ended September 30, 1997. The
increase is principally related to the close down of certain businesses in the
Company's restructuring and the final resolution of specific contracts within
the pipeline.
Liquidity and Capital Resources
In the third quarter, the Chinese Government introduced new foreign exchange
regulations which have severely limited the Company's ability to repatriate
foreign exchange from China related to prior receivables and slowed the
implementation of payment procedures (such as opening of letters of credit) on
existing contracts. New contracts which the Company has entered into since
September 1, are not likely to be affected by these regulations and receipt of
foreign exchange with respect to these are not expected to present difficulties.
However, for pre-September contracts the new regulations are impacting the
Company's receipt of cash from China in connection with receivables for goods
previously shipped as well as in connection with initial payments on existing
contracts. China's State Administration of Foreign Exchange (SAFE) issued a
circular effective September 1 which increases both documentation and procedures
for the processing and release of foreign exchange payments. Most Chinese
importers to which the Company has sold goods have said that they are unable to
produce the documents now required for foreign remittances. This problem has
impacted on all companies which sell goods to China. The Company has been
working with the U.S. Government, other similarly situated foreign companies
and with the Chinese government to solve this problem. In the meantime, the
Company has advised its suppliers that cash flow from China for previously sold
goods has slowed significantly and has requested that its suppliers restructure
the Company's payables in light of the cash flow difficulties caused by these
regulations. The Company is negotiating with its principal suppliers a
restructuring of the Company's payables. In some cases the restructuring
involves the extension of the due dates on invoices, in other cases the
restructuring provides specifically that invoices related to pre-September 1,
1998, shipments are to be paid by the Company from the proceeds of the pending
Export-Import Bank transaction (which the Company expects to be received in
January of 1999). This transaction, involving a loan from the USA office of
ABN AMRO Bank, N.V., and guaranteed by the U.S. Export-Import Bank ("EXIM"),
for use by China's Ministry of Health in purchasing $14.1 million in equipment
from the Company, is awaiting approval at Export-Import Bank. There can be no
assurance that the transaction will not be delayed or even that all final
approvals by the Chinese Government or the U.S. Export-Import Bank will be
forthcoming.
During the nine months ended September 30, 1998, decreased sales resulted in
a $3,618,000 decrease in accounts receivable, however, accounts payable increase
of $678,000 is related to increased inventories in advance of the pending EXIM
transaction.
The Company negotiated a revision in certain extended payment payables with
a supplier to defer approximately $500,000 of payables through mid 1999. The
Company has also reached preliminary agreement with the same supplier to extend
the due date of any payable where the Company's customer has delayed payment
to the Company and entered into a security agreement with that supplier.
Inventories grew $2,179,000 as the Company continued to expand its selling
effort of certain consumable products and product purchases in advance of the
pending EXIM transaction.
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. During the nine months ended September 30, 1998, the
use of cash continued, but at a reduced rate. The Company had anticipated
raising additional funding early in 1998 to continue 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.
Nevertheless, the Company continues to explore the possibility of raising
additional capital.
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. Assuming timely completion of the EXIM transaction, the Company
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 is
continuing to consider various financing alternatives as well as additional
cost reduction measures to satisfy its future capital requirements and bring
operating costs in line with anticipated revenues.
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 September 30, 1998, the process of evaluating the Company's
services, products and internal systems was still 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.
The Company's analysis will address issues related to its suppliers as well
as issues related to its own internal systems as well as that of its subsidiary
hospital and distribution operations. As a distributor of high-technology
medical equipment and a provider of healthcare sarvices, the Company needs to
be assured that it has all relevant information from its suppliers with respect
to Year 2000 implications of the equipment which the Company sells or utilizes.
Some units previously sold by the Company or currently in use by the Company's
hospital and distribution operations may need retrofit in the field. In
addition, the Company may incur expense to train its service engineers to repair
certain specific software or other problems with respect to this equipment.
There may also be some minor additional expense related to transportation to
end-user sites in China, but, based on analysis to date, the principal expense
of retrofitting equipment with new components is likely to be absorbed by the
original equipment manufacturer. The process of evaluating the Year 2000
issues related to the equipment which the Company sells is ongoing.
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, regulatory 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.
November 13, 1998 /S/ Lawrence Pemble
Date Lawrence Pemble
Executive Vice President Finance and
Director
November 13, 1998 /S/ Ronald Zilkowski
Date Ronald Zilkowski
Vice President Finance and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5132000
<SECURITIES> 0
<RECEIVABLES> 8997000
<ALLOWANCES> (604000)
<INVENTORY> 4825000
<CURRENT-ASSETS> 18276000
<PP&E> 5087000
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<TOTAL-ASSETS> 24118000
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<CGS> 7868000
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<OTHER-EXPENSES> 7725000
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