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, 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 May 14, 1998, was 596,563 shares of Common Stock and
193,750 shares 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,
1999 1998
___________ ____________
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 4,891,000 $ 4,723,000
Receivables:
Trade accounts, less allowance for doubtful
accounts of $604,000 (1998 and 1999) 10,861,000 7,953,000
Current portion-long term trade accounts 4,163,000 4,146,000
Inventories, net 4,901,000 5,771,000
Other current assets 991,000 697,000
__________ __________
Total current assets 25,807,000 23,290,000
Property & equipment, net 3,860,000 3,914,000
Accounts receivable, long term 350,000 551,000
Other 835,000 798,000
__________ __________
Total assets $30,852,000 $28,553,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 14,218,000 $12,086,000
Accrued contract training 1,199,000 1,101,000
Current portion-long term accounts payable, net 2,799,000 2,841,000
Income taxes payable 40,000 57,000
__________ __________
Total current liabilities 18,256,000 16,085,000
Long term accounts payable, net 95,000 272,000
__________ __________
Total liabilities 18,351,000 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 March 31, 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 (4,803,000) (5,109,000)
__________ __________
Total shareholders' equity 12,501,000 12,196,000
__________ __________
Total liabilities and shareholders' equity $30,852,000 $28,553,000
=========== ===========
<FN>
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<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended March 31,
1999 1998
<S> <C> <C>
Total Net Revenue $9,405,000 $2,913,000
Cost and Expenses
Cost of goods sold 6,701,000 2,138,000
Salaries and payroll taxes 1,440,000 1,174,000
Travel and entertainment 261,000 273,000
Other 874,000 887,000
___________ _________
Total Costs and Expenses 9,276,000 4,471,000
Income/(Loss) from Operations 129,000 (1,559,000)
Other Income and Expenses
Interest Expense (8,000) (12,000)
Interest Income 0 67,000
Miscellaneous Income 202,000 138,000
___________ _________
Total Other Income/Expenses 194,000 193,000
Income/(loss) Before Provision for Taxes 323,000 (1,366,000)
Provision for Income Taxes (17,000) (41,000)
___________ _________
Net Income/(Loss) $ 306,000 $(1,407,000)
=========== ==========
Net Income/(Loss) per Share $ 0.39 $ (1.78)
=========== ==========
Weighted average shares outstanding 790,313 790,313
=========== ==========
<FN>
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<TABLE>
U.S.-CHINA INDUSTRIAL EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three months ended March 31,
1999 1998
<S> <C> <C>
Operating activities
Net income/(loss) $ 306,000 $(1,407,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 165,000 149,000
Inventory write-down 40,000 35,000
Changes in operating assets and liabilities:
Accounts receivable (2,724,000) 1,942,000
Inventories 830,000 (328,000)
Other current assets (294,000) (145,000)
Other assets (38,000) (55,000)
Accounts payable and accrued expenses 2,011,000 (551,000)
Income taxes payable (17,000) 65,000
Restructuring 0 (135,000)
___________ __________
Net cash used in operating activities 279,000 (430,000)
Investing activities
Purchase of property and equipment (111,000) (90,000)
___________ __________
Net cash used in investing activities (111,000) (90,000)
Financing activities
Repayment of short term borrowings 0 (467,000)
___________ __________
Net cash used in financing activities 0 (467,000)
Effect of foreign exchange rate changes on
cash and cash equivalents 0 0
___________ __________
Net increase (decrease) in cash and
cash equivalents 168,000 (987,000)
Cash and cash equivalents at beginning of
period 4,723,000 6,228,000
___________ ___________
Cash and cash equivalents at end of period $ 4,891,000 $ 5,241,000
=========== ===========
<FN>
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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, 1999, the
results of operations for the quarters ended March 31, 1999 and 1998 and the
cash flows for the quarters ended March 31, 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 three months ended March 31, 1999:
<TABLE>
<CAPTION>
Segments Healthcare Products Healthcare Services Total
<S> <C> <C> <C>
Assets $26,519,000 $4,333,000 $30,852,000
=========== ========== ===========
Revenue $ 8,643,000 $ 762,000 $ 9,405,000
Gross Profit 2,057,000 n/a n/a
Gross Profit % 24%
Expenses 1,707,000 983,000 $ 9,276,000
----------- --------- -----------
Income (loss)from
operations 350,000 (221,000) 129,000
<S> <C>
Income from combined operations 129,000
Other income/expense, net 194,000
-----------
Income before income tax $ 323,000
==========
</TABLE>
Intersegment transactions were insignificant during the three months ended
March 31, 1999. All of the Company's revenue is attributable to its
operations in China.
For the quarter ended March 31, 1998:
<TABLE>
<CAPTION>
Segments Healthcare Products Healthcare Services Total
<S> <C> <C> <C>
Assets $20,085,000 $4,000,000 $24,085,000
=========== ========== ===========
Revenue $ 2,729,000 $ 184,000 $ 2,913,000
Gross Profit 612,000 n/a n/a
Gross Profit % 22%
Expenses 1,734,000 621,000 $ 4,472,000
----------- --------- -----------
Loss from operations (1,122,000) (437,000) (1,559,000)
Loss from combined operations (1,559,000)
Other income 193,000
----------
Loss before tax (1,366,000)
==========
Intersegment transactions were insignificant during the three months ended
March 31, 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 and contributed to capital
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 Quarter Ended March 31, 1998
-------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Net loss $(1,407,000) 790,313 $(1.78)
Effect of Dilutive Securities
Warrants and Options --
----------- --------- ------
Diluted EPS
Net loss $(1,407,000) 790,313 $(1.78)
=========== ========= ======
</TABLE>
<TABLE>
<CAPTION
For the Quarter Ended March 31, 1999
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Net Income $ 306,000 790,313 $ .39
Effect of Dilutive Securities
Warrants and Options --
----------- --------- ------
Diluted EPS
Net Income $ 306,000 790,313 $ .39
=========== ========= ======
</TABLE>
<PAGE>
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, 1999 compared to quarter ended March 31, 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 quarter ended
March 31, 1999 increased $6,492,000 or 223% from the quarter ended March 31,
1998. Revenues from Healthcare Products contributed $8,643,000 or 92% of total
revenues; Healthcare Services contributed $762,000 or 8% of total revenues. The
increase in revenue was principally related to the shipment of $4.4 million in
goods related to the Export-Import Bank loan transaction (EXIM) and $.6 million
increase in Healthcare Services.
The Company's gross profit percentage on Healthcare Product revenue (as stated
in Note 2 in the accompanying interim financial statements) for the quarter
ended March 31, 1999 was 24% as compared to 22% for the quarter ended March 31,
1998. The higher gross profit margin is attributable to higher sales leveraged
against certain fixed costs. The company does not combine its two business
segments in computing gross profit and does not calculate gross profit
precentage for the Healthcare Services segment as the costs associated with that
segment do not lend themselves to such measures and industry standards follow
this approach.
The Company's Healthcare Products cost of goods sold for the quarter ended
March 31, 1999 and 1998 were $6,586,000 and $2,117,000 respectively. The
increase in cost of goods of $4,469,000 is principally related to the EXIM
transaction shipments.
The other expenses for Healthcare Products for the quarter ended March 31,
1999 and 1998 were $1,707,000 and $1,734,000 repectively. An increase in salary
costs of $83,000 were offset by decreases in travel and entertainment of $4,000
and other costs of $107,000 due to continued cost controls.
The expenses from the Healthcare Services business were $983,000 during the
quarter ended March 31, 1999 as compared with $621,000 for the quarter ended
March 31, 1998. This increase is principally due to the Beijing United Family
Hospital operating on a 24 hour availability, which did not happen the prior
year until the second quarter, as well as additional costs related to the
increase in patient activity as well as the expansion of Heathcare Services
through the opening of a dental clinic.
Interest income for the quarter ended March 31, 1999 and 1998 was $0 and
$67,000 respectively. The decrease is principally due to a decline in available
funds for investment.
Other income rose to $202,000 for the quarter ended March 31, 1999 as
compared with $138,000 for the quarter ended March 31, 1998. The increase is
principally due to income of $35,000 from final contracts associated with the
phase out of all non-healthcare related product areas.
Liquidity and Capital Resources
In the third quarter 1998, 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, 1998 have not been affected by these regulations and receipt of
foreign exchange with respect to these have not presented difficulties. However,
for pre-September 1998 contracts the regulations are impacting the Company's
receipt of U.S. dollars from China pursuant to the contractual terms of the
transactions in connection with receivables for goods previously shipped.
China's State Administration of Foreign Exchange ("SAFE") issued a circular
effective September 1, 1998 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 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 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. The Company advised its suppliers that cash flow
from China for previously sold goods had slowed significantly and requested that
its suppliers restructure the Company's payables in light of the cash flow
difficulties caused by these regulations. The Company successfully negotiated
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 provided specifically that invoices related to
pre-September 1, 1998, shipments are to be paid by the Company from the proceeds
of the $14 million Export-Import Bank transaction (which the Company expects to
receive in May 1999). The Company recognized revenue totaling $2.2 million
related to this transaction in 1998, $4.4 million in the quarter ended March 31,
1999 and anticipates recognizing the remaining $7.4 million of revenue in the
second quarter of 1999.
The increase in accounts receivable during the quarter ended March 31, 1999
of $2,724,000 is principally related to the shipment of goods under the EXIM
transaction. The Company expects to receive this payment in May 1999.
During the quarter ended March 31, 1999 accounts payable increased $2,011,000
and is related to the payment of the EXIM transaction. The Company expects to
pay down this balance when it receives payment.
The Company negotiated a revision in certain extended payment payables with
a supplier to defer approximately $335,000 of payables through mid 1999.
Inventories decreased 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 issues
during late 1997. At March 31, 1999, the process of evaluating the Company's
services, products, internal systems and backup plan was still underway and is
to be completed in 1999. 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. Aside
from certain personnel time the cash outlay for compliance is estimated to be
less than $20,000.
The Company's analysis is addressing issues related to its suppliers as well
as issues related to its own internal systems as well as those of its subsidiary
hospital and distribution operations. 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 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-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, 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, 1999 /S/ Lawrence Pemble
Date Lawrence Pemble
Executive Vice President Finance and
Director
May 14, 1999 /S/ Ronald Zilkowski
Date Ronald Zilkowski
Vice President Finance and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4891000
<SECURITIES> 0
<RECEIVABLES> 15978000
<ALLOWANCES> (604000)
<INVENTORY> 4901000
<CURRENT-ASSETS> 25807000
<PP&E> 5392000
<DEPRECIATION> (1532000)
<TOTAL-ASSETS> 30852000
<CURRENT-LIABILITIES> 18256000
<BONDS> 0
0
0
<COMMON> 6000
<OTHER-SE> 12495000
<TOTAL-LIABILITY-AND-EQUITY> 30852000
<SALES> 9405000
<TOTAL-REVENUES> 9405000
<CGS> 6701000
<TOTAL-COSTS> 2575000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8000)
<INCOME-PRETAX> 323000
<INCOME-TAX> (17000)
<INCOME-CONTINUING> 306000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306000
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
