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, 1999
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 November 12, 1999, was 596,563 shares of Common Stock and 193,750
shares of Common Stock Class B.
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
___________ ____________
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 5,422,000 $ 4,723,000
Receivables:
Trade accounts, less allowance for doubtful
accounts of $604,000 (1998 and 1999) 3,842,000 7,953,000
Current portion-long term trade accounts 3,172,000 4,146,000
Inventories, net 5,298,000 5,771,000
Other current assets 980,000 697,000
__________ __________
Total current assets 18,714,000 23,290,000
Property & equipment, net 3,870,000 3,914,000
Accounts receivable, long term 323,000 551,000
Other 847,000 798,000
__________ __________
Total assets $23,754,000 $28,553,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 8,456,000 $12,086,000
Accrued contract training 1,408,000 1,101,000
Current portion-long term accounts payable, net 770,000 2,841,000
Income taxes payable 37,000 57,000
__________ __________
Total current liabilities 10,671,000 16,085,000
Long term accounts payable, net 210,000 272,000
__________ __________
Total liabilities 10,881,000 16,357,000
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 - 596,563 shares issued
and outstanding for each period 6,000 6,000
Common stock-Class B - 193,750 and 250,000
issued and outstanding as of June 30, 1999
and December 31, 1998 respectively 2,000 3,000
Additional paid in capital 17,294,000 17,294,000
Foreign currency equity translation
adjustment 2,000 2,000
Accumulated Deficit (4,431,000) (5,109,000)
__________ __________
Total shareholders' equity 12,873,000 12,196,000
__________ __________
Total liabilities and shareholders' equity $23,754,000 $28,553,000
=========== ===========
<FN>
</TABLE>
<PAGE>
<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Total Net Revenue $ 6,966,000 $3,365,000 $29,611,000 $11,786,000
Cost and Expenses
Cost of goods sold 4,630,000 2,167,000 20,832,000 7,868,000
Salaries and payroll taxes 1,635,000 1,421,000 4,890,000 3,828,000
Travel and entertainment 388,000 288,000 989,000 1,045,000
Other 983,000 767,000 2,885,000 2,852,000
___________ _________ ___________ __________
Total Costs and Expenses 7,636,000 4,643,000 29,596,000 15,593,000
Income/(Loss) from Operations ( 670,000) (1,278,000) 15,000 (3,807,000)
Other Income and Expenses, net 227,000 504,000 734,000 999,000
Minority Interest 0 ( 12,000) (18,000) ( 12,000)
___________ _________ ___________ __________
Income/(Loss) Before Provision for Taxes ( 443,000) ( 786,000) 731,000 (2,820,000)
(Provision)/Benefit for Income Taxes ( 2,000) 49,000 (53,000) 5,000
___________ _________ ___________ ___________
Net Income/(Loss) $( 445,000) $( 737,000) $ 678,000 $(2,815,000)
=========== ========== =========== ==========
Basic Net Income/(Loss) per Share $ ( .56) $ ( .93) $ .86 $ (3.56)
=========== ========== =========== ==========
Basic Weighted average shares outstanding 790,313 790,313 790,313 790,313
=========== ========== =========== ==========
Diluted Net Income/(Loss) per Share $ ( .56) $ ( .93) $ .85 $ (3.56)
=========== ========== =========== ==========
Diluted Weighted average shares outstanding 790,313 790,313 799,326 790,313
=========== ========== =========== ==========
<FN>
</TABLE>
<PAGE>
<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended September 30,
1999 1998
<S> <C> <C>
Operating activities
Net income/(loss) $ 678,000 $(2,815,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 498,000 476,000
Inventory write-down 122,000 115,000
Changes in operating assets and liabilities:
Accounts receivable 5,313,000 3,674,000
Inventories 351,000 (2,179,000)
Other current assets (283,000) (214,000)
Other assets (49,000) 25,000
Accounts payable and accrued expenses (5,456,000) 678,000
Income taxes payable (20,000) (183,000)
Restructuring Reserve 0 (232,000)
___________ __________
Net cash generated/(used) in operating
activities 1,154,000 (655,000)
Investing activities
Purchase of property and equipment (455,000) (531,000)
___________ __________
Net cash used in investing activities (455,000) (531,000)
Financing activities
Short term loan payable 0 90,000
___________ __________
Net cash used in financing activities 0 90,000
___________ __________
Net increase (decrease) in cash and
cash equivalents 699,000 (1,096,000)
Cash and cash equivalents at beginning of
period 4,723,000 6,228,000
___________ ___________
Cash and cash equivalents at end of period $ 5,422,000 $ 5,132,000
=========== ===========
<FN>
</TABLE>
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
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, 1999, the results
of operations for the three- and nine-months ended September 30, 1999 and 1998
and the cash flows for the nine months ended September 30, 1999 and 1998. 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 nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Segments Healthcare Products Healthcare Services Total
<S> <C> <C> <C>
Assets $19,116,000 $4,638,000 $23,754,000
=========== ========== ===========
Revenue $26,867,000 $2,744,000 $29,611,000
Gross Profit 6,442,000 n/a n/a
Gross Profit % 24%
Expenses 5,909,000 3,262,000 $ 9,171,000
----------- --------- -----------
Income (loss)from
operations 533,000 (518,000) 15,000
<S> <C>
Income from combined operations 15,000
Other income/expense, net 716,000
----------
Income before income tax $ 731,000
==========
</TABLE>
Intersegment transactions were insignificant during the nine months ended
September 30, 1999. All of the Company's revenue is attributable to its
operations in China.
For the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Segments Healthcare Products Healthcare Services Total
<S> <C> <C> <C>
Assets $19,995,000 $4,123,000 $24,118,000
=========== ========== ===========
Revenue $10,603,000 $1,183,000 $11,786,000
Gross Profit 2,917,000 n/a n/a
Gross Profit % 28%
Expenses 5,851,000 2,056,000 $ 7,907,000
----------- --------- -----------
Loss from operations (2,934,000) (873,000) (3,807,000)
<S> <C>
Loss from combined operations (3,807,000)
Other income 987,000
-----------
Loss before tax $(2,820,000)
===========
Intersegment transactions were insignificant during the nine months ended
September 30, 1998. All of the Company's revenue is attributable to its
operations in China.
Note 3. Shareholders Equity
Effective February 26, 1999 the Company implemented a one-for-eight reverse
stock split in respect of all the issued and outstanding Common Stock, as well
as the Units, Class A Warrants, Class B Warrants and Class B common stock. As
of the effective date of the reverse stock split, stockholders own one-eighth
the number of shares of Common Stock previously held. All financial information
and number of shares issued, authorized and outstanding, has been retroactively
restated to include the effect of the stock split.
Effective March 31, 1999 the Company cancelled 56,250 Common Stock-Class B
shares placed in escrow. The total amount of Common Stock-Class B shares issued
and outstanding is now 193,750.
The following is an illustration of the reconciliation of the numerators and
denominators of the basic and diluted Earnings per Share (EPS) computations for
"income before extraordinary item and accounting change" and other related
disclosures:
</TABLE>
<TABLE>
<CAPTION
For the nine Months Ended September 30, 1998
--------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Net loss $(2,815,000) 790,313 $(3.56)
Effect of Dilutive Securities
Warrants and Options --
----------- --------- ------
Diluted EPS
Net loss $(2,815,000) 790,313 $(3.56)
=========== ========= ======
</TABLE>
<TABLE>
<CAPTION
For the nine Months Ended September 30, 1999
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Net Income $ 678,000 790,313 $ .86
Effect of Dilutive Securities
Warrants and Options 9,013
----------- --------- ------
Diluted EPS
Net Income $ 678,000 799,326 $ .85
=========== ========= ======
</TABLE>
<PAGE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operation
Three months ended September 30, 1999 compared to three months ended
September 30, 1998
The Company's revenues are derived in two ways: sales of Healthcare Products
and Healthcare Services.
The Company's revenue (sales plus net commission income) for the three months
ended September 30, 1999 increased $3,601,000 or 107% from the three months
ended September 30, 1998. The increase in revenue was due to higher shipments
across all company departments.
Revenues from Healthcare Products contributed $6,047,000 or 87% of total
revenues.
Healthcare Services contributed $919,000 or 13% of total revenues. This is a
71% increase from the three months ended September 30, 1998 and is principally
related to increased patient activity as well as expanded Healthcare Services at
Beijing United Family Hospital (Beijing United).
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, 1999 was 26% as compared to 28% for the three months ended
September 30, 1998. The lower gross profit margin is attributable to a higher
number of sales of the lower margin consumable products. The Company does not
combine its two business segments in computing gross profit and, in accordance
with industry practice, does not calculate gross profit percentage for the
Healthcare Services segment.
The Company's Healthcare Products cost of goods sold for the three months
ended September 30, 1999 and 1998 were $4,483,000 and $2,101,000 respectively.
The increase in cost of goods sold of $2,382,000 is due to higher sales.
The expenses allocable to the segment, other than cost of goods sold, for
Healthcare Products for the three months ended September 30, 1999 and 1998 were
$1,995,000 and $1,929,000 respectively. An increase in travel and entertainment
of $100,000 allocable to that segment was partially offset by decreases in
salary and other costs of $34,000 allocable to the segment due to continued cost
controls.
The expenses from the Healthcare Services business were $1,158,000 during the
three months ended September 30, 1999 as compared with $635,000 for the three
months ended September 30, 1998. Increases in salaries of $239,000 allocable to
that segment and other costs of $224,000 allocable to the segment are related to
increased activity and expanded services at Beijing United.
Other income and expense, net for the three months ended September 30, 1999
and 1998 were $227,000 and $491,000 respectively. Approximately $160,000 in
both periods, is from sub-leasing a portion of the building housing the
hospital. The remainder of the income for 1999 is principally interest income
on investments. In 1998, the Company had lower interest income but generated
miscellaneous income from final contracts associated with the phase out of all
non-healthcare related product areas.
Nine months ended September 30, 1999 compared to nine months ended
September 30, 1998
The Company's revenues are derived in two ways: sales of Healthcare Products
and Healthcare Services.
The Company's revenue (sales plus net commission income) for the nine months
ended September 30, 1999 increased $17,825,000 or 151% from the nine months
ended September 30, 1998. The increase in revenue was principally related to
the shipment of $11.7 million in products financed through EXIM.
During this nine month period the Company completed the shipment of products
pursuant to the EXIM loan transaction. The Company continues its efforts to
arrange future similar financings, but there can be no assurance of when this
may occur.
Revenues from Healthcare Products contributed $26,867,000 or 91% of total
revenues.
Healthcare Services contributed $2,744,000 or 9% of total revenues. The $1.6
million increase for the nine months ended September 30, 1999 is a 132% increase
from the nine months ended September 30, 1998. It is principally related to
increased patient activity as well as expanded Healthcare Services at Beijing
United.
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, 1999 was 24% as compared to 28% for the nine months ended
September 30, 1998. The lower gross profit margin is attributable principally
to higher financing costs for the EXIM transaction. The Company does not
combine its two business segments in computing gross profit and, in accordance
with industry practice, does not calculate gross profit percentage for the
Healthcare Services segment.
The Company's Healthcare Products cost of goods sold for the nine months ended
September 30, 1999 and 1998 were $20,425,000 and $7,686,000 respectively. The
increase in cost of goods sold of $12,739,000 is principally related to sales
financed through EXIM.
The expenses allocable to the segment, other than cost of goods sold, for
Healthcare Products for the nine months ended September 30, 1999 and 1998 were
$5,909,000 and $5,851,000 respectively. An increase in salary and bonuses of
$431,000 allocable to that segment was substantially offset by decreases in
travel and entertainment of $53,000 allocable to the segment and other costs of
$319,000 allocable to the segment due to continued cost controls.
The expenses from the Healthcare Services business were $3,262,000 during the
nine months ended September 30, 1999 as compared with $2,056,000 for the nine
months ended September 30, 1998. Increases in salaries of $630,000 allocable to
that segment and other costs of $352,000 allocable to the segment are related to
the increased activity and expanded services at Beijing United.
Other income and expense, net for the nine months ended September 30, 1999 and
1998 were $734,000 and $999,000 respectively. Approximately half of other
income, in both periods, is from sub-leasing a portion of the building housing
the hospital. The remainder of the income for 1999 is principally interest
income on investments. In 1998, the Company had lower interest income but
generated miscellaneous income from final contracts associated with the phase
out of all non-healthcare related product areas.
Liquidity and Capital Resources
In addressing the issues related to the introduction of new foreign exchange
regulation in the third quarter of 1998, and the resulting difficulty in
repatriating foreign exchange relating to money owed the Company prior to the
imposition of the regulations the Company worked with the U.S. government, other
similarly situated foreign companies and with the Chinese government to solve
these repatriation problems. In meetings with Chinese government officials on
these issues, the Company was advised that it should arrange to accept local
currency payments for some of the outstanding amounts and the Company has done
this. These funds have been used to supplement the Company's China-based
funding.
The decrease in accounts receivable during the nine months ended September 30,
1999 of $5,313,000 is principally related to the EXIM transaction. The Company
received payment in May 1999.
During the nine months ended September 30, 1999 accounts payable decreased
$5,456,000 related to payments made to suppliers under the EXIM transaction.
These payments were made in May 1999.
The Company negotiated a revision in certain extended payment payables with a
supplier to defer approximately $167,000 of payables through mid 1999. This
agreement ended in July 1999 with final payment.
Inventories decreased $351,000 as a result of shipping goods under the EXIM
transaction offset by continued increases in certain consumable products.
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 (Y2K)
during late 1997. At September 30, 1999 the process of evaluating the Company's
services, products, internal systems and backup plan was mostly complete. 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 it is not expected to be material. Aside from certain personnel time the
cash outlay for compliance is estimated to be less than $20,000. However, as
noted below, there are considerable uncertainties with respect to the external
environment in China and whether infrastructure problems with such things as
water and electricity could occur.
As a distributor of high-technology medical equipment and a provider of
healthcare services, 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 will need retrofit in the field. In addition, the Company has
incurred some minimal expenses to repair certain specific problems with respect
to this equipment.
In approaching the question of whether there could be problems with the
equipment which the Company had sold, our concerns were twofold. First, if the
equipment is still under warranty the Company would have the obligation for
implementing any required repairs or upgrades. Second, if the equipment is not
under warranty the Company nevertheless desires to make sure that customers are
aware of the steps that they must take to address possible Y2K problems with
their equipment. A Company Task Force identified all individual items of
equipment which had been sold by the Company in China over the past ten years.
We then narrowed the list down to exclude some of the equipment from
manufacturers which the Company no longer represented in China.
The Task Force then contacted each of the manufacturers to inquire whether the
equipment was Y2K compliant so that we could alert the Chinese purchasers. In
most of the cases the manufacturers indicated that the equipment was already Y2K
compliant. In some cases we were informed that a software upgrade would be
required. We have informed customers of this information and have installed
some upgrades and undertaken repairs for customers. We anticipate installing a
few more software upgrades between now and the end of the year. In virtually
every case the manufacturer has assumed financial responsibility for the
upgrades so there is little impact on the Company other than the time expended
by our service engineers in China. Cost have been minimized by handling
multiple units on one trip of a Company engineer.
In cases where the Company no longer is the representative for a particular
manufacturer's products, we have given the customers contact information for the
new dealer.
With respect to the Company's computer and communication systems we have
completed a detailed review of all software and hardware in both the United
States and China. Necessary upgrades and adjustments have been made where
required. There are minor issues with respect to some of the software but none
of these will have a significant impact on operations. We have also reviewed
the telephone systems in both Bethesda and Beijing and have determined that they
are Y2K compliant.
The Company's Beijing United Family Hospital has completed a comprehensive Y2K
review of its medical equipment, computer systems and internal operations
systems such as elevator, water and power. Of the fifty four items of medical
equipment in the hospital eleven require manufacturer's upgrade in order to be
Y2K compliant. These upgrades are in process and will be completed before the
end of the fourth quarter of 1999. The computer system is Y2K compliant and the
internal operations systems are also compliant. Contingency plans exist for
stocking of additional medical supplies and procurement of a back up source for
drinking and tap water. The hospital has a backup generator for emergency use.
One issue relating to Y2K which is beyond the control of the Company relates
to the external environment, both in the United States and China. While experts
do not expect serious disruptions in the United States in such areas as
financial systems, communications, electricity and water supply, such
disruptions are possible. If there are any such disruptions they will adversely
affect the Company. More significantly, infrastructure disruptions in China are
more likely than they are in the United States and the Company's principal
operations are focused in that country. The process of rigorous review and
testing of infrastructure systems which is occurring in the United States has
not yet seen widespread application in China. Accordingly, there is considerable
risk that the Company could suffer adverse impact from Y2K problems in China
related to the infrastructure there.
Forward Looking Statements
With the exception of historical information, the matters discussed or
incorporated by reference in this Report on Form 10-QSB 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, particularly as affected by the availability of future EXIM
financings, as to which there can be no assurance, 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 12, 1999 /S/ Lawrence Pemble
Date Lawrence Pemble
Executive Vice President Finance and
Director
November 12, 1999 /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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5422000
<SECURITIES> 0
<RECEIVABLES> 7941000
<ALLOWANCES> (604000)
<INVENTORY> 5298000
<CURRENT-ASSETS> 18714000
<PP&E> 5735000
<DEPRECIATION> (1865000)
<TOTAL-ASSETS> 23754000
<CURRENT-LIABILITIES> 10881000
<BONDS> 0
0
0
<COMMON> 6000
<OTHER-SE> 12867000
<TOTAL-LIABILITY-AND-EQUITY> 23754000
<SALES> 29611000
<TOTAL-REVENUES> 29611000
<CGS> 20832000
<TOTAL-COSTS> 29596000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 731000
<INCOME-TAX> (53000)
<INCOME-CONTINUING> 678000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 678000
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.86
</TABLE>
