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 June 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 [ ]
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 August 11, 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>
June 30, December 31,
1998 1997
___________ ____________
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 4,781,000 $ 6,228,000
Receivables:
Trade accounts, less allowance 3,466,000 5,796,000
Current portion-long term trade accounts 4,119,000 4,123,000
Commissions receivable 28,000 84,000
Inventories, net 3,490,000 2,761,000
Other current assets 945,000 794,000
__________ __________
Total current assets 16,829,000 19,786,000
Property & equipment, net 3,685,000 3,824,000
Accounts receivable, long term 1,529,000 2,092,000
Other 862,000 878,000
__________ __________
Total assets $22,905,000 $26,580,000
=========== ===========
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<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 6,360,000 $ 6,836,000
Accrued contract training 782,000 924,000
Current portion-long term accounts payable, net 2,174,000 2,171,000
Short-term loan payable 0 467,000
Income taxes payable 178,000 208,000
Restructuring 291,000 469,000
__________ __________
Total current liabilities 9,785,000 11,075,000
Long term accounts payable, net 964,000 1,270,000
__________ __________
Total liabilities 10,749,000 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 (5,149,000) (3,070,000)
__________ __________
Total shareholders' equity 12,156,000 14,235,000
__________ __________
Total liabilities and shareholders' equity $22,905,000 $26,580,000
=========== ===========
<FN>
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<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $5,492,000 $3,757,000 $ 8,405,000 $ 9,255,000
Net commission income 16,000 81,000 16,000 195,000
_________ _________ __________ _________
Total Revenue 5,508,000 3,838,000 8,421,000 9,450,000
Costs and Expenses
Cost of goods sold 3,564,000 2,744,000 5,702,000 6,669,000
Salaries and payroll taxes 1,233,000 1,020,000 2,407,000 1,855,000
Travel and entertainment 483,000 644,000 756,000 949,000
Other 1,198,000 935,000 2,085,000 1,575,000
_________ _________ __________ _________
Total Costs and Expenses 6,478,000 5,343,000 10,950,000 11,048,000
Loss from operations ( 970,000) (1,505,000) (2,529,000) (1,598,000)
Other income and expenses
Interest expense (27,000) (5,000) (39,000) (21,000)
Interest income 41,000 111,000 108,000 320,000
Miscellaneous income 288,000 140,000 426,000 279,000
_________ _________ __________ _________
Total other income/expenses 302,000 246,000 495,000 578,000
Loss before provision
for income taxes ( 668,000) (1,259,000) (2,034,000) (1,020,000)
(Provision for)/benefit from
income taxes ( 3,000) 498,000 ( 44,000) 424,000
_________ _________ __________ _________
Net loss $( 671,000) $( 761,000) $(2,078,000) $( 596,000)
========== ========== =========== ==========
Net loss per share $( 0.11) $( 0.12) $( 0.33) $( 0.09)
========== ========== =========== ==========
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>
Six months ended June 30,
1998 1997
<S> <C> <C>
Operating activities
Net (loss)/income $(2,078,000) $ (596,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 302,000 90,000
Provision for doubtful accounts 0 10,000
Provision for deferred taxes 0 (11,000)
Inventory write-down 74,000 40,000
Sales of demo equipment 0 11,000
Changes in operating assets and liabilities:
Accounts receivable 2,897,000 (221,000)
Commissions receivable 56,000 196,000
Inventories (803,000) (996,000)
Other current assets (151,000) (191,000)
Other assets 16,000 (17,000)
Accounts payable and accrued expenses (922,000) 134,000
Income taxes payable (30,000) (465,000)
Restructuring (178,000) 0
___________ __________
Net cash used in operating activities (817,000) (2,016,000)
Investing activities
Purchase of property and equipment (163,000) (1,125,000)
___________ __________
Net cash used in investing activities (163,000) (1,125,000)
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 (1,447,000) (3,179,000)
Cash and cash equivalents at beginning of
period 6,228,000 13,374,000
___________ ___________
Cash and cash equivalents at end of period $ 4,781,000 $10,195,000
=========== ===========
<FN>
</TABLE>
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U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 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 June 30, 1998, the
results of operations for the three- and six-month periods ended June 30, 1998
and 1997 and the cash flows for the six-months ended June 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 six-months ended June 30, 1998:
Segments Healthcare Products Healthcare Services
Revenue $7,777,000 $ 644,000
Gross Profit 2,169,000 n/a
Gross Profit % 28%
Expenses 3,921,000 1,421,000
--------- ---------
Loss from operations (1,752,000) (777,000)
Loss from combined operations (2,529,000)
Other income/expense, net 495,000
----------
Loss before tax ($2,034,000)
==========
Intersegment transfers are insignificant.
Prior year results were all principally related to healthcare products segment.
Assets $19,050,000 $3,855,000
All of the Company's revenue is attributable to its operations in China.
Note 3. Implications Of Year 2000
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.
<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 June 30, 1998 compared to three months ended June 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 June 30, 1998 increased $1,670,000 or 44% over the three months
ended June 30, 1997. Revenues from healthcare products contributed $5,048,000
or 92% of total revenues; healthcare services contributed $460,000 or 8% of
total revenues.
The Company believes that its business has been negatively impacted during
the three months 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, delays in purchase commitments related
to uncertainty regarding exchange rates, 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 some impact of the Asian
economic problems in China.
The Company's gross profit percentage on healthcare product revenue (as
stated in Note 2) for the three months ended June 30, 1998 was 28% as compared
to 29% for the three months ended June 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
lower gross profit margin is attributable to lower than anticipated sales.
The Company's costs and expenses, including cost of goods sold, for the three
months ended June 30, 1998 and 1997 were $6,478,000 and $5,343,000 respectively.
For the three months ended June 30, 1998 as compared to the three months ended
June 30, 1997, cost of goods was up $820,000 on higher sales, salaries were up
$213,000 principally due to hiring increases in healthcare services, travel
and entertainment was down $161,000 due to reduced spending and other expenses
were up $263,000 due to expenses related to healthcare services.
In the Healthcare Products business total costs were $5,678,000 for the
three months ended June 30, 1998 as compared with $5,334,000 for the three
months ended June 30, 1997 for an increase of $344,000 or 6%. The increase was
primarily related to cost of goods increase of $746,000 offset by reductions
in salary costs of $31,000, travel and entertainment of $170,000 and other
cost reductions of $201,000. These reductions are principally related to the
cost containment measures implemented at the end of 1997.
The expenses from the Healthcare Services business were $800,000 during the
three months ended June 30, 1998 as compared with $9,000 for the three months
ended June 30, 1997. This increase is due to the commencement of healthcare
services beginning in September of 1997 and includes salaries of $244,000
and other costs of $467,000.
Interest income for the three months ended June 30, 1998 and 1997 were
$41,000 and $111,000 respectively. The decrease is principally due to a decline
in available funds for investment.
Other income rose to $288,000 for the three months ended June 30, 1998 as
compared with $140,000 for the three months ended June 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.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
The Company's revenue (sales plus net commission income) for the six months
ended June 30, 1998 decreased $1,029,000 or 11% over the six months ended June
30, 1997. Revenues from healthcare products contributed $7,777,000
or 92% of total revenues; healthcare services contributed $644,000 or 8% of
total revenues.
The Company believes that its business has been negatively impacted during
the six months 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, delays in purchase commitments related
to uncertainty regarding exchange rates, 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 some impact of the Asian
economic problems in China.
The Company's gross profit percentage on healthcare product revenue (as
stated in Note 2) for the six months ended June 30, 1998 was 28% as compared
to 30% for the six months ended June 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
lower gross profit margin is attributable to lower than anticipated sales.
The Company's costs and expenses, including cost of goods sold, for the six
months ended June 30, 1998 and 1997 were $10,950,000 and $11,048,000
respectively. For the six months ended June 30, 1998 as compared to the six
months ended June 30, 1997, cost of goods was down $967,000 on lower sales and
lower margin, salaries were up $552,000 principally due to hiring increases in
healthcare services, travel and entertainment was down $193,000 due to reduced
spending and other expenses were up $510,000 due to expenses related to
healthcare services.
In the Healthcare Products business total costs were $9,530,000 for the six
months ended June 30, 1998 as compared with $11,030,000 for the six months
ended June 30, 1997 for a decrease of $1,500,000 or 14%. The decrease was
primarily related to cost of goods decrease of $1,062,000 and reductions in
salary costs of $75,000, travel and entertainment of $225,000 and other cost
reductions of $291,000. These reductions are principally related to the cost
containment measures implemented at the end of 1997.
The expenses from the Healthcare Services business were $1,421,000 during the
six months ended June 30, 1998 as compared with $18,000 for the six months
ended June 30, 1997. This increase is due to the commencement of healthcare
services beginning in September of 1997 and includes salaries of $495,000 and
other costs of $791,000.
Interest income for the six months ended June 30, 1998 and 1997 were
$108,000 and $320,000 respectively. The decrease is principally due to a
decline in available funds for investment.
Other income rose to $426,000 for the six months ended June 30, 1998 as
compared with $279,000 for the six months ended June 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
During the six months ended June 30, 1998, decreased sales resulted in
a $2,898,000 decrease in accounts receivable offset somewhat by a $922,000
decrease in accounts payable.
The Company negotiated a revision in certain extended payment payables with
a supplier to defer approximately $500,000 of payables until 1999. The Company
has also reached preliminary agreement with the same supplier to extend the
payment due date of any payable where the Company's customer has delayed
payment to the Company.
Inventories grew an additional $803,000 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 six months ended June 30, 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. During the six months ended June 30, 1998, the
use of cash continued to grow, but at a reduced rate. The Company had
anticipated raising additional funding early in 1998 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. 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. 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.
August 14, 1998 /S/ Lawrence Pemble
Date Lawrence Pemble
Executive Vice President Finance and
Director
August 14, 1998 /S/ Ronald Zilkowski
Date Ronald Zilkowski
Vice President Finance and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4781000
<SECURITIES> 0
<RECEIVABLES> 9746000
<ALLOWANCES> (604000)
<INVENTORY> 3490000
<CURRENT-ASSETS> 16829000
<PP&E> 4755000
<DEPRECIATION> (1070000)
<TOTAL-ASSETS> 22905000
<CURRENT-LIABILITIES> 9785000
<BONDS> 0
0
0
<COMMON> 68000
<OTHER-SE> 12088000
<TOTAL-LIABILITY-AND-EQUITY> 22905000
<SALES> 8405000
<TOTAL-REVENUES> 8421000
<CGS> 5702000
<TOTAL-COSTS> 5702000
<OTHER-EXPENSES> 5248000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (39000)
<INCOME-PRETAX> (2034000)
<INCOME-TAX> (44000)
<INCOME-CONTINUING> (2078000)
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<NET-INCOME> (2078000)
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</TABLE>
