10-K/A 1 file001.txt AMENDMENT NO. 1 TO FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2004 Commission File No. 0-24624 CHINDEX INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) [CHINDEX LOGO OMITTED] DELAWARE 13-3097642 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7201 Wisconsin Avenue Bethesda, Maryland, 20814 (301) 215-7777 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained is not contained herein, and will not be contained, to the best of registrant's knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [x] The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of September 30, 2003 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $13,733,000. The number of shares outstanding of each of the issuer's class of common equity, as of July 29, 2004, was 4,543,152 shares of Common Stock and 775,000 shares of Class B Common Stock. Documents Incorporated by Reference: None. INTRODUCTORY NOTE This Amendment to Annual Report on Form 10-K/A is being filed to supplement and amend the Annual Report on Form 10-K of Chindex International, Inc. (the "Company") for the fiscal year ended March 31, 2004, which report was filed on June 29, 2004, to add as new the entirety of Items 10-14 and to include revised and/or additional information under Items 1, 6, 7 and 8, each of which is presented herein in its entirety, and Item 15. PART I ITEM 1. BUSINESS GENERAL Chindex International, Inc., founded in 1981, is an American company operating in several healthcare sectors of the Chinese marketplace, including Hong Kong. Revenue is generated from the sale of healthcare equipment and products and the provision of healthcare services. The Company operates in three segments: o MEDICAL CAPITAL EQUIPMENT DIVISION. This division markets, sells and facilitates the export of select capital healthcare equipment and instrumentation to China on the basis of both exclusive and non-exclusive agreements with the manufacturers of these products. Chindex believes based on its knowledge and experience in the Chinese healthcare system, that it is the largest independent U.S. distributor of healthcare equipment in China. For the fiscal year ended March 31, 2004, the Medical Capital Equipment Division accounted for 38% of our revenue. o HEALTHCARE PRODUCTS DISTRIBUTION DIVISION. This division, through a network of wholly owned foreign subsidiaries in China, imports and distributes off-the-shelf healthcare instrumentation and health-related consumable products developed by third parties. For the fiscal year ended March 31, 2004, the Healthcare Products Distribution Division accounted for 44% of the Company's revenue. o HEALTHCARE SERVICES DIVISION. This division operates the Company's private hospital and clinics. Beijing United Family Hospital and Clinics (BJU) opened in 1997 and Shanghai United Family Hospital and Clinics (SHU), is scheduled to open in 2004. In 2002, we opened our first satellite clinic associated with BJU in Shunyi County outside of Beijing. For the fiscal year ended March 31, 2004, the Healthcare Services Division accounted for 18% of the Company's revenue. MEDICAL CAPITAL EQUIPMENT On the basis of exclusive and non-exclusive distribution agreements, Chindex offers manufacturers of quality medical capital equipment access to the greater Chinese marketplace through a wide range of marketing, sales, and technical services for their products. Through a matrix of dedicated marketing and technical service departments, local area product and technical specialists, and local area territory representatives and clinical application specialists, we provide comprehensive marketing coverage on behalf of our clients and suppliers on a nationwide basis. Marketing efforts are based on annual marketing plans developed by each marketing department within Chindex for each product, and normally include attendance at a variety of trade shows throughout China, advertisement in leading Chinese industrial, trade, and clinical journals, production of Chinese language product literature for dissemination to the potential customer base, direct mail and telemarketing campaigns, and other product promotions. -2- The medical capital equipment operations in China are managed by our medical department, which focuses on exporting quality Western medical capital equipment to the China market. These export sales are denominated in U.S. dollars and are made to China's larger hospitals. The medical department is organized both by clinical or therapeutic product specialty and by region. The medical department markets its products directly to hospitals, through hospital administrators and the doctors who are the ultimate users of the products. There is virtually no private practice of medicine in China and all physicians are affiliated with hospitals or similar institutions. Our marketing is addressed to all relevant participants in the purchasing decision, including the doctors and hospital administrators. Chindex has sold products to more than 2,000 hospitals in China, many of which have been repeat customers. Most purchases of the medical capital equipment sold by Chindex in China, regardless of the nature of the end-user, are made through foreign trade corporations, or FTCs. Although the purchasing decision is made by the end-user, which may be an individual or a group having the required approvals from their administrative organizations, we enter into formal purchase contracts with FTCs. The FTCs make purchases on behalf of the end-users and are legally authorized by the Chinese government to conduct import business. These organizations are chartered and regulated by the government and are formed to facilitate foreign trade. We market our products directly to end-users, but in consummating a sale we also must interact with the particular FTC representing the end-user. For this reason, we seek to maintain ongoing relationships with the FTCs in our industries. Chindex maintains a separate technical service unit, which is closely tied to the medical department. The Company is responsible for the technical support of virtually all the medical equipment that it sells. To support our capital healthcare equipment business, we own and operate a full-service technical service center. This service center supports spare parts inventories and factory-trained service engineers on a nationwide basis. It also makes use of a joint venture organization, the Chindex Meheco technical service center, which provides access to bonded warehousing facilities. This joint venture is a true contractual joint venture with each party assuming different responsibilities. Chindex handles the daily management while Meheco handles many of the customs and approval issues related to the importation of parts. Meheco also takes responsibility for the sale of some parts and the collection of payment for them. Since 1995, Chindex has from time to time helped arrange government-backed financing to help hospitals in China finance their purchases of medical equipment from the Company. Such financing has included loan guarantees from the U.S. Ex-Im Bank as well as commercial financing that is guaranteed by the Chinese government but without Ex-Im Bank participation. While these transactions are primarily used to promote purchases of the products that the Company exclusively distributes in China, equipment manufactured by other suppliers has also been incorporated. Sales utilizing government-backed financing are different from the standard sales of capital equipment in a number of ways. A standard sale will usually involve one hospital purchasing a single item of equipment by using a letter of credit. This, of course, requires that the hospital have the funds available at the time of the purchase. In a sale involving government-backed financing, a financing package is made available at attractive interest rates to a number of hospitals as part of a hospital improvement project approved by the Chinese government. The hospital is able to arrange to pay for the equipment over a number of years instead of having to have all the funds available up front. Since the hospitals involved in a project are likely to desire to purchase a variety of equipment, including equipment not normally supplied by Chindex, such sales involve Chindex establishing new relationships with suppliers in order to present the hospital with the package of equipment that it desires. Although these and other differences exist, ultimately sales that utilize government-backed financing are simply another way of financing the sale of equipment. Among the products sold by the Medical Capital Equipment Division are diagnostic color ultrasound imaging devices, chemistry analyzers, sterilizers, surgical equipment, computerized -3- electrophysiology systems, bone densitometers, mammography and breast biopsy devices, Pneumatic tube systems, and image-guided surgery and stereotactic radiosurgery systems. HEALTHCARE PRODUCTS DISTRIBUTION Through our Healthcare Products Distribution, or HPD, division, Chindex offers foreign manufacturers a unique nationwide distribution system for low price medical devices and consumables sold in hospitals, home healthcare, and other products sold to consumers in retail pharmacies. With an established distribution network, the Company's HPD division is poised to take advantage of new opportunities created by China's WTO-based liberalization, as well as Chinese government-mandated consolidation in the distribution industry, and to continue to leverage our experience and increasing scale of operations. Through a network of wholly foreign-owned enterprise, or WFOE, companies, chartered in China's free trade zones, the HPD division imports healthcare and other products into China, carries them in inventory, sells them downstream for local currency, and pays the suppliers in foreign exchange obtained legally under Chinese regulations. The HPD division imports products into China via two Chindex subsidiaries that it operates, one domiciled in the Shanghai Waigaoqiao Free Trade Zone and the other in the Tianjin Free Trade Zone. Our HPD division is comprised of three primary business units: o Retail Pharmacy Sales; o Hospital Dealer Sales; and o Logistic Services. RETAIL PHARMACY SALES Our HPD retail products business unit is focused on distribution, including sales and marketing, of branded healthcare and health-related consumer products through China's burgeoning retail pharmacy sector. Sales began in mid-1998 in Shanghai and plans call for coverage of all of the major pharmacies in the top 30 urban markets. The Company currently distributes to 36 cities and nearly 350 stores, doing business with eight of the top ten retail pharmacy chains in China. Our personalized, high service approach calls for coverage of all partner outlets by a field force of customer service representatives. Several new product areas are under development in parallel with growing distribution capabilities. All of these branded healthcare and health-related consumer products are subject to a strict regulatory regime in China and the process of registration of the products often presents substantial difficulties. Chindex initiated retail pharmacy distribution through a partnership with the L'Oreal Group, the world's largest producer of cosmetic products. In 1998, under a partnership agreement, Chindex became the exclusive distributor of a prominent brand of health-oriented cosmetics and skin care products. Chindex's ability to closely control both inventory and distribution in China has proven successful in both the test market and expansion phases of distribution for this product line. Chindex currently has exclusive distribution rights to certain premier brands, which are marketed through its Retail Pharmacy Sales channel. -4- HOSPITAL DEALER SALES Through our Hospital Dealer Sales division, Chindex HPD taps the market for quality imported medical consumables and low-priced instrumentation via a network of sub-distributors located throughout China. The network includes over two hundred active accounts which cover all of China's 350 hospitals with more than 500 beds. These hospitals account for approximately 80% of the demand for imports in China. Chindex provides marketing, logistical and distribution services to a number of manufacturers of medical instrumentation and consumables. LOGISTICS SERVICES Chindex logistics is the core of the HPD division, as it is through this business unit that we operate the import and distribution channels for bringing products to buyers nationwide. This business unit provides customized logistics services to other Chindex departments and business units, as well as to outside clients on a third party logistics basis. Chindex logistics services allow clients to avoid having to immerse themselves in the minutiae of China's opaque and heavily-regulated distribution sector so that they can focus on providing solutions to their end-user customers in China. The logistics services cover all aspects of importing products and delivering them to the local customers' sites as well as value-added administrative and financial services. In addition to providing logistics support to internal clients, Chindex logistics provides third party logistics services to providers of products related to our core healthcare and health-related markets. HEALTHCARE SERVICES In 1994, using our expertise in healthcare as a foundation, we began a long-term program to establish a private hospital network in China. In 1997, we opened Beijing United Family Hospital and Clinics (BJU), marking the successful completion of the first phase of our program. BJU is the first officially approved private, international-standard hospital in China. Future phases of Chindex's private hospital network program are planned to expand delivery of international-standard healthcare services to China's growing middle class throughout the country. BEIJING UNITED FAMILY HOSPITAL AND CLINICS BJU is a unique, state-of-the-art, fee-for-service, 50-bed specialty hospital providing primary family care for expatriates and Chinese citizens in Beijing. The hospital is housed in a modern facility in the eastern section of Beijing, and features seven 5-star birthing suites, three operating theaters, a medical - surgical inpatient ward, a pediatric ward, two executive VIP suites, a neonatal intensive care unit, an adult intensive care unit, nursery, a clinical laboratory, extensive digital diagnostic imaging facilities, a pharmacy, 24 hours emergency department and six outpatient clinics. BJU completed a significant expansion development program in 2002 resulting in a doubling of the hospital's capacity. In 2002, BJU also began to fulfill our strategy of expansion through well-placed satellite clinics, with the opening of the Beijing United Family Clinic - Shunyi, or the Shunyi Clinic. The Shunyi Clinic is the first satellite clinic associated with BJU and is the only outpatient clinic located in the densely expatriate-populated suburb of Shunyi County. It is also located near the International School of Beijing. This clinic has further broadened the patient base of BJU and subsequently the referral base for BJU's inpatient services. Plans are also underway to open additional affiliated satellite clinics throughout Beijing, expanding upon this initial program to provide outpatient services Emphasizing the need for well-care (routine visits in the absence of illness) and patient-centered care (involving the patient in health care decisions), BJU offers a full range of top-quality family healthcare services, including mental health services, for men, women and children. The hospital is staffed by a mix of Western and Chinese physicians and operates in accordance with international -5- hospital standards. BJU is also committed to community outreach programs and offers healthcare education classes, including CPR, Lamaze, and Stress Management. BJU was the first officially approved healthcare joint venture to provide international-standard healthcare services in China. An international standard hospital not only provides healthcare services at a level generally recognized and accepted internationally in the developed world, but also manages the hospital according to generally accepted international principles, such as transparency, infection control, medical records, patient confidentiality, peer review, etc. BJU was formed as a 90/10 contractual joint venture between Chindex and the Chinese Academy of Medical Sciences and received the initial national level approvals from the Chinese Ministry of Health, or MOH, and Ministry of Foreign Trade and Economic Cooperation, or MOFTEC, in 1995. SHANGHAI UNITED FAMILY HOSPITAL AND CLINICS In late 2001, Chindex received approval from the MOH and in early 2002 received approval from MOFTEC to open a second hospital venture. The new hospital, located in Shanghai is designed as a 50-bed facility, offering a full range of inpatient and outpatient services to both Shanghai's expatriate and Chinese communities. This hospital is also a contractual joint venture undertaking, with Chindex being entitled to 70% of the profits of the enterprise. Construction on the hospital has been underway for a number of months and Shanghai United is scheduled to be completed and opened in the fall of 2004. Funding for the initial development of this hospital was obtained through an agreement with a major supplier for deferred payment on equipment purchases by us from the supplier. CHINDEX HEALTHCARE NETWORK EXPANSION Our strategy is to continue to provide care to the expatriate community and increasingly to provide quality specialty healthcare to affluent Chinese society. An increasing portion of our healthcare network's market will be the growing urban middle class population. Our strategic business plan calls for the establishment of additional hospitals, each with affiliated satellite clinics, in selected urban cities throughout eastern China. These hospitals would be networked with each other and with Beijing United through a central administrative arm. In addition to the top-quality primary family healthcare services that would be available at each hospital in the network, we also plan to integrate visits by rotating specialists to each hospital, expanding the range of services offered. COMPETITION In the sale of products, we compete with other independent distributors in China that market similar products. In addition to other independent distributors, we face more significant competition from direct distribution by established manufacturers. In the medical products field we compete with General Electric Corporation, or GE, which maintains its own direct sales force in China as well as selling through distributors. In addition, since certain manufacturers, such as GE, market a wide variety of products under one brand name in China to different market sectors, those manufacturers may be better able than we are to establish name recognition across industry lines. For example, GE manufactures and markets other electrical products in China as well as other medical instruments not sold by us. We believe that GE, Philips and Toshiba are the largest such direct competitors in the medical products field. In the sales and distribution of off-the-shelf medical products and consumables, our sales, marketing and logistical distribution networks also compete with similar distribution operations of other independent distributors, both foreign and Chinese, joint ventures and foreign manufacturers. In addition, the products themselves supplied by us to the China market compete with similar products of foreign, joint venture and domestic manufacturers. Our competitive position for product sales depends in part upon our ability to attract and retain qualified personnel in sales, technical and administrative -6- capacities. In addition, many of our various competitors have greater resources, financial or otherwise, than we do. Two of our subsidiaries, Chindex Holdings International Trade (Tianjin) Ltd., and Chindex Shanghai International Trading Co., Ltd., sell goods and receive payment in local Chinese currency and use the currency to pay for local expenses. Payments are often required to be made in advance for consumable products. We recognize that any devaluation in the local currency may have a negative impact on the results of operations. At the present time, there are no Western-owned hospitals in Beijing which compete with Beijing United Family Hospital in catering to the expatriate diplomatic and affluent local Chinese markets. There are several Western-operated clinics and a variety of foreign-invested joint ventures which provide outpatient services. EMPLOYEES At March 31, 2004, the Company had 759 full-time salaried employees. Of these, 744 are in China and Hong Kong. Of the full-time personnel in China and Hong Kong, 74 are expatriates and 670 are Chinese or third country nationals. Of our non-U.S. based full-time employees, 363 are employed at Beijing United. INTERNET INFORMATION AND SEC DOCUMENTS The Company's internet site is located at www.chindex.com. Copies of the Company's reports and amendments thereto filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including Annual Reports filed on Form 10-K, Quarterly Reports filed on Form 10-Q and Current Reports filed on Form 8-K may be accessed from the Company's website, free of charge, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission. The information found on our internet site is not part of this or any other report Chindex files with or furnishes to the Commission. -7- PART II ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, MARCH 31, ------------------------------------------ 2004 2003 2002 2002 2001 2000 1999 ---------- -------- -------- -------- -------- -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA (in thousands, except per share data) Net sales......................... $88,183 $21,849 $15,578 $70,617 $56,118 $45,064 $37,128 Percent increase over prior period 25% 40% 47% 26% 25% 21% 72% (Loss) income from operations..... (1,582) 222 (293) 133 (401) 152 (221) Other (expenses) income........... (111) (66) (12) (126) 726 664 896 Net (loss) income before income taxes.......................... (1,923) 156 (305) 19 307 780 657 (Provision for) benefit from income taxes................... (64) (80) 113 240 77 (139) (265) Net (loss) income ................ (1,987) 76 (192) 259 384 641 392 Net (loss) income per share-basic. (.53) .02 (.05) .07 .10 .17 .11 Net (loss) income per share-diluted.................. (.53) .02 (.05) .07 .10 .17 .11 Market closing price per share- end of period.................. 10.09 2.00 2.78 1.86 3.18 1.53 3.77 Book value per share at end of period......................... 3.92 3.79 3.94 3.77 3.71 3.89 3.72 Cash dividends declared........... .00 .00 .00 .00 .00 .00 .00 BALANCE SHEET DATA (AT END OF PERIOD): Total assets...................... $47,851 $42,340 $32,859 $43,126 $33,369 $36,498 $24,384 Short term debt................... 5,668 696 702 1,946 200 0 0 Long term debt or vendor financing ..................... 125 3,734 0 3,609 0 0 91 Total shareholders' equity........ 17,198 14,044 13,497 13,968 13,611 13,235 12,587
YEAR ENDED THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, MARCH 31, ------------------------------------------ 2004 2003 2002 2002 2001 2000 1999 ---------- -------- -------- -------- -------- -------- -------- (UNAUDITED) SEGMENT INFORMATION: Medical Capital Equipment-sales... $33,836 $7,716 $6,653 $28,708 $25,819 Medical Capital Equipment-gross margin percent................. 28% 32% 22% 27% 29% Medical Capital Equipment- operations (loss) income....... (269) 521 (174) 198 439 Healthcare Products Distribution- sales.......................... 38,393 10,663 6,126 28,946 21,520 Healthcare Products Distribution- gross margin percent........... 13% 10% 12% 13% 13% Healthcare Products Distribution- operating loss................. (641) (121) (161) (601) (1,316) Healthcare Products-sales......... * * * * * $39,049 $33,182 Healthcare Products-gross margin percent........................ * * * * * 24% 25% Healthcare Products-operating (loss) income.................. * * * * * (66) 243 Healthcare Services-sales......... 15,954 3,470 2,799 12,963 8,779 6,015 3,946 Healthcare Services-operating (loss) income.................. (672) (178) 42 536 476 218 (464)
----------------- * We expanded to three segments in 2002 and restated 2001. -8- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Chindex International, Inc., is a Delaware corporation with headquarters located in the Washington, D.C. metropolitan area. We were founded in 1981 and currently are an American provider of healthcare products and services to China, including Hong Kong. We operate in three business segments: o MEDICAL CAPITAL EQUIPMENT DIVISION. This division markets, sells and facilitates the export of select capital healthcare equipment and instrumentation to China on the basis of both exclusive and non-exclusive agreements with the manufacturers of these products. We believe, based on our knowledge and experience in the Chinese healthcare system, that we are the largest independent U.S. distributor of healthcare equipment in China. For the fiscal year ended March 31, 2004, the Medical Capital Equipment Division accounted for 38% of our revenue. o HEALTHCARE PRODUCTS DISTRIBUTION DIVISION. This division, through a network of wholly owned foreign subsidiaries in China, imports and distributes off-the-shelf healthcare instrumentation and health-related consumable products developed by third parties. For the fiscal year ended March 31, 2004, the Healthcare Products Distribution Division accounted for 44% of our revenue. o HEALTHCARE SERVICES DIVISION. This division operates our private hospital and clinics. Beijing United Family Hospital and Clinics (BJU) opened in 1997 and Shanghai United Family Hospital and Clinics (SHU) is scheduled to open in 2004. In 2002, we opened our first satellite clinic associated with BJU in Shunyi County outside of Beijing. For the fiscal year ended March 31, 2004, the Healthcare Services Division accounted for 18% of our revenue. Substantially all of our assets are located in China and substantially all our revenue is derived from our operations in China. Accordingly, our business, financial condition and results of operations are subject, to a significant degree, to economic, political and legal developments in China. The economic system in China differs from the economics of most developed countries in many respects, including government investment, level of development, control of capital investment, control of foreign exchange and allocation of resources. Our Medical Capital Equipment Division and Healthcare Products Distribution Divisions are subject to challenges and risks as a result of our dependence on our relations with suppliers of equipment and products. In addition, the timing of our revenue from the sale of medical capital equipment is affected by the availability of funds to customers in the budgeting processes of the Chinese government, the availability of credit from the Chinese banking system and otherwise. The timing of sales of such equipment may depend on the timing of our customers' ability to arrange for credit sources. Further, because we recognize revenue and expenses relating to certain contracts as such products are shipped, the timing of shipments, among other things, affects our operating results for a particular period. Consequently, our operating results have varied and are expected to continue to vary from period to period. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the -9- financial statements and the reported amounts of revenue and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. These include receivables collectibility and income tax recognition of deferred tax items. In addition, Note 1 to the Consolidated Financial Statements includes further discussion of our significant accounting policies. REVENUE RECOGNITION Sales of equipment and consumables are recognized upon product shipment. We provide installation, warranty, and training services for certain of our capital equipment sales. These services are viewed as perfunctory to the overall arrangement and are not accounted for separately from the equipment sale. Cost associated with installation, after-sale servicing and warranty are not significant and are recognized in cost of sales as they are incurred. The estimated cost for training services is accrued upon shipment. Revenue related to services provided in our Healthcare Services segment is recognized in the period services are provided. Revenue includes an estimate of services at the end of the period for patients who have not completed service. Costs associated with such services are recognized in the period incurred. RECEIVABLE COLLECTIBILITY We grant credit to some customers in the ordinary course of business. We evaluate collectibility of accounts receivable periodically and adjust our allowance for doubtful accounts accordingly. Bad Debts are experienced predominately in Healthcare Services business and to a lesser extent in Medical Capital Equipment business. We have experienced few losses in Healthcare Products Distribution business. We incurred bad debt expense of $777,000, $118,000 and $279,000 in the year ended March 31, 2004, three months ended March 31, 2003 and the year ended December 31, 2002, respectively. The increased loss experience in 2004 is the result of periodic review of accounts and resulted in an increase to the allowance for doubtful accounts from $883,000 at December 31, 2002 to $1,131,000 at March 31, 2004. For more information on our bad debt accounts, see "- Fiscal 2004 compared to twelve months ended December 31, 2002 - Healthcare Services Segment." VALUATION ALLOWANCE OF DEFERRED TAX ASSETS Our operations are taxed in various jurisdictions including the United States and China. In certain jurisdictions individual subsidiaries are taxed separately. We have identified deferred tax assets resulting from cumulative temporary differences at each balance sheet date. A valuation allowance is provided for those deferred tax assets in which we are unable to conclude that it is more likely than not that the tax benefit will be realized. We released deferred tax valuation allowances totaling $660,000 and $232,000 in the years ended December 31, 2002 and 2001 based on assessments in those years that it was more likely than not that it would be able to use our U.S. federal net operating loss carryforwards. Certain of these benefits were realized in tax filings for the period ended March 2003. While losses were incurred in the U.S. in fiscal year 2004, our assessment, based on expected income in 2005 and 2006, is that it is more likely than not that a substantial portion of the deferred tax asset will be realized. These U.S. net operating loss carryforwards do not expire before 2014. -10- We have provided substantial deferred tax valuation allowances for certain deferred tax assets related to various subsidiaries in China because it is not able to conclude that it is more likely than not that those assets will be realized. FISCAL 2004 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 2002 GENERAL Our revenue for fiscal 2004 was $88,183,000, up 25% from the twelve months ended December 31, 2002 revenue of $70,617,000. We experienced continued revenue growth in each of the three segments of the business, with revenue growth of 18% in the medical capital equipment segment, 33% in the healthcare products distribution segment, and 23% in the healthcare services segment, compared to the twelve months ended December 31, 2002. The growth in revenue in the medical capital equipment and healthcare products distribution segments was primarily a result of increased marketing and sales efforts and expense. The growth in revenue in the healthcare services segment was primarily a result of expanded services offered at Beijing United, including the addition of staff to support those services. Costs and expenses were $89,987,000 for fiscal 2004 as compared with costs and expenses of $70,522,000 for the twelve months ended December 31, 2002. We recorded a net loss of $1,987,000 for fiscal 2004, as compared to net income of $259,000 for the twelve months ended December 31, 2002. Each of our three segments experienced an operating loss in fiscal 2004. We believe that there are three principal reasons for the loss from operations for the fiscal year. First, the fiscal year was marked by the extraordinary experience of dealing with Severe Acute Respiratory Syndrome (SARS), which had a significant negative impact in a variety of ways on our business. Normal Beijing business activity came to a near standstill resulting in the delay of contract negotiations for the sale of medical capital equipment and hospital visits were far below our expectations as foreign residents in Beijing left the capital. Second, the lack of government-sponsored loan programs in the period also adversely impacted the volume of our sales. Third, we continued to incur operational expenses in connection with SHU, while the opening of that hospital was delayed due to a number of factors. Cost increases for the segments are discussed below. There were a number of increased costs at our parent level, including for an upgrade of our data systems in China and new offices in Beijing. The largest parent level increases, which have been allocated among the segments as described below, include increased payroll of $163,000, increased professional fees of $117,000, increased accounting and legal fees of $82,000, and increased rent of $136,000. MEDICAL CAPITAL EQUIPMENT SEGMENT The medical capital equipment segment exports high quality Western medical capital equipment to the China market. In fiscal 2004, this segment had revenue of $33,836,000, an 18% increase over revenue of $28,708,000 in the twelve months ended December 31, 2002. Loss from operations was $269,000 in the recent fiscal year compared with income from operations of $198,000 in the twelve months ended December 31, 2002. Gross profit in fiscal 2004 increased to $9,427,000 from $7,822,000 in the twelve months ended December 31, 2002. Gross profit margin for the medical capital equipment segment for the recent fiscal year was 28% as compared to 27% in the prior period. Expenses for the medical capital equipment segment in fiscal 2004 increased to $9,697,000 from $7,624,000 in the twelve months ended December 31, 2002, and, as a percentage of revenue over the periods, increased to 29% from 27%. Payroll for the segment in fiscal 2004 increased by $864,000 over payroll in the twelve months ended December 31, 2002, and as a percentage of revenue was 11% compared to 10% for the twelve months ended December 31, 2002. The payroll increase was primarily due to increased sales personnel in connection with expanding the marketing of the segment's products. In addition, travel and entertainment expenses for the segment increased $428,000. Other costs increased $781,000 over the periods, primarily due to the segment's allocated portion of additional parent-level administrative expenses and higher costs for new customs fees related to parts purchases, promotion, meeting expenses and telephones. -11- HEALTHCARE PRODUCTS DISTRIBUTION SEGMENT The healthcare products distribution segment, consisting of medical consumables and personal healthcare products, had revenue growth of 33% to $38,393,000 fiscal 2004, as compared to revenue of $28,946,000 in the twelve months ended December 31, 2002. The segment had a loss from operations of $863,000 in the recent fiscal year, compared with a loss from operations of $601,000 in the twelve months ended December 31, 2002. We anticipate that revenue growth in this segment will be slower as several customers contemplate and effectuate direct sales and new products are subjected to an increasingly formalized Chinese regulatory process. For example, one significant client, Becton-Dickenson, has recently established a subsidiary in China that will perform the logistical services previously performed by our healthcare products distribution division. Another client, Guidant, is establishing a similar subsidiary in China. Both these principals have indicated their interest in Chindex continuing to perform value-added and higher margin distribution and marketing services for certain products and channels. This transition away from lower margin logistical services is consistent with the division's strategy of prioritizing higher margin business. With respect to delays in the Chinese regulatory process, the launch of new products is requiring longer lead times, due to the fact that China's regulatory environment is becoming more professional, bureaucratic and transparent, resulting in longer regulatory cycle time. During the regulatory approval process, some products that the division planned to launch encountered delays. The division's local currency sales of medical consumables and personal healthcare products are made from inventories maintained locally in China (see "Foreign Currency Exchange and Impact of Inflation") to a network of sub-dealers and pharmacies. Gross profit in fiscal 2004 rose to $4,788,000 from $3,856,000 in the twelve months ended December 31, 2002. Gross profit margin from the healthcare products distribution segment for the recent was the same, 13%, as for the twelve months ended December 31, 2002. Expenses for the healthcare products distribution segment in fiscal 2004 increased to $5,429,000 from $4,457,000 in the twelve months ended December 31, 2002, but decreased to 14% as a percentage of revenue as compared to 15% for the twelve months ended December 31, 2002. Payroll for the segment increased $281,000 primarily due to increased staff compensation. In addition, travel and entertainment expense for the segment was relatively unchanged while other costs increased $694,000, due primarily to the segment's allocated portion of additional parent-level administrative costs, increased other professional fees of $221,000 and $163,000 in promotion. HEALTHCARE SERVICES SEGMENT The healthcare services segment consists of two Western style primary care hospitals, Beijing United Family Hospital and Clinics (BJU) and Shanghai United Family Hospital and Clinics (SHU), which continues to be under construction, as well as an affiliated satellite clinic in Beijing. For fiscal 2004, the revenue from this segment was $15,954,000, an increase of 23% over the twelve months ended December 31, 2002 revenue of $12,963,000. The segment had a loss from operations of $672,000 in the recent fiscal year, compared with income from operations of $536,000 for the twelve months ended December 31, 2002. During the recent fiscal year, the hospital was significantly negatively impacted by the SARS crisis in Beijing. Many of BJU's expatriate patients left the country and many others deferred visits during the April to August period. Healthcare services costs increased for fiscal 2004 to $16,626,000, a 34% increase over the twelve months ended December 31, 2002 costs of $12,427,000. This increase was due primarily to the costs associated with adding to BJU dermatology services and an intensive care unit plus $780,000 of operating expenses of the not yet open SHU facility. Payroll increased by $2,181,000 (payroll was 55% of revenue for fiscal 2004 and 50% for the twelve months ended December 31, 2002), with all other costs increasing a total of $2,027,000, including increases of $679,000 in bad debt accounts, $437,000 in other professional fees and $193,000 in depreciation. During fiscal 2004, in the process of the ongoing roll-out of our new clinical and financial reporting systems throughout this segment, we completed a review of all accounts receivable reflected on our predecessor systems. The increase in our bad debt accounts over periods is primarily based on our determinations in -12- that review that certain patients and/or responsible parties had departed China or otherwise practically became unreachable. The roll-out of our new systems also impacted our allowance for doubtful accounts. In addition to our normal reviews, the review of all accounts in connection with the roll-out resulted in an increase in our allowance for doubtful accounts from $883,000 at December 31, 2002 to $1,130,000 at March 31, 2004. Our new systems are designed to better monitor our accounts receivable aging. The opening of SHU, originally scheduled for the fall of 2003, is now expected in the fall of 2004. The delay in opening the new hospital is due to a number of factors. During the SARS epidemic, travel between Beijing and Shanghai was very difficult and proved a major disruption in the schedule. After the SARS experience ended, we decided to reevaluate the SHU design in light of lessons learned during the epidemic. As a result of this reevaluation, a number of specific design changes were made, such as adding a fever clinic, changing the air conditioning system and increasing the number of rooms where negative pressure could be utilized. LOSS ON EQUITY INVESTMENT We recorded an additional equity investment loss of $222,000 in fiscal year 2004, which represents our pro-rata share of additional capital for Natural Formula Asia (NFAL), a joint venture in which we have a 40% interest. The joint venture purchases various cosmetics made by Nesh, an Israeli cosmetics manufacturer, and sells such products into China through pharmacy channels developed by us. The investment represents an amount that the joint venture partners determined was required to provide additional working capital. Our investment is in the form of a loan to the joint venture. The loan, which was accrued but not yet executed as of March 31, 2004, bears interest at the rate of 5% commencing May 15, 2004, has no stated maturity date and may be prepaid. We reported a loss of $38,000 for this venture in the year ended December 31, 2002. OTHER INCOME AND EXPENSES Interest expense on short-term debt of $5,668,000 and long term debt of $125,000 amounted to $249,000 whereas we had $54,000 the prior period. Over $2,900,000 of debt is for the development of SHU that is currently under construction (see "Liquidity and Capital Resources"). TAXES We recorded a $64,000 provision for taxes in fiscal 2004 as compared to a benefit from taxes of $240,000 for the twelve months ended December 31, 2002. Our deferred tax asset increased by $909,000. This tax computation is in accordance with current accounting standards but assumes a certain level of future profitability. We believe this properly recognizes the benefits we have achieved as a result of our tax restructuring and expect to utilize a substantial portion of the loss carry-forward benefit in fiscal years 2005 and 2006. We have provided a 100% valuation allowance on deferred tax benefits related to development expenses incurred at Shanghai United, since it has no operating history to support a conclusion that realization of the tax benefit is more likely than not. THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 (TRANSITION) Our revenue for the three months ended March 31, 2003 was $21,849,000, up 40% from the three months ended March 31, 2002 revenue of $15,578,000. We experienced continued growth in each of the three segments of the business, with revenue growth of 16% in the medical capital equipment segment, 74% in the healthcare products distribution segment, and 24% in the healthcare service segment, compared to the same period last year. We recorded net income of $76,000 for the three months ended March 31, 2003, as compared to a net loss of $192,000 for the three months ended March 31, 2002. -13- MEDICAL CAPITAL EQUIPMENT SEGMENT In the three months ended March 31, 2003, the medical capital equipment segment had revenue of $7,716,000, a 16% increase over revenue of $6,653,000 in the three months ended March 31, 2002. Income from operations was $521,000 in the recent period compared with a loss from operations of $174,000 in the prior period. Gross profit in the three months ended March 31, 2003 increased to $2,474,000 from $1,439,000 in the three months ended March 31, 2002. Gross profit margin for this segment for the recent period was 32% as compared to 22% in the prior period. The increase in gross profit margin is primarily attributable to two factors. First, we had made this a priority for our sales staff and instituted additional reporting and reviewed margin issues on a contract by contract basis. Accordingly, where a salesperson might previously have been inclined to accept an offer from a customer to purchase our equipment at a less than optimum margin, the salesperson knew that the contract would be reviewed critically once it was brought back to our senior review staff. This created an additional incentive for the salesperson to seek better pricing from the customer. Second, in the recent period there were no loan program sales, which typically are at a lower gross margin because we are not required to provide warranty service. Thus, in periods where there are loan program sales, such as the three months ended March 31, 2003, the average gross profit margin is often lower because of the inclusion of these lower-margin loan sales in the mix. Further, to the extent, as we intend, that in future periods a larger portion of sales are made through sub-dealers, which are local Chinese distributors, then our gross profit margin may be proportionately lower. Sub-dealers represent an additional layer in the distribution process and their compensation reduces our profit. They purchase our products and resell them to customer hospitals. We cannot yet quantify the impact such increase might have or the extent thereof and the related cost cannot as yet be determined. Expenses for the medical capital equipment segment in the three months ended March 31, 2003 increased to $1,937,000 from $1,609,000 in the three months ended March 31, 2002, and as a percentage of revenue over the periods increased to 25% from 24%. Salaries for the segment in the three months ended March 31, 2003 increased by $238,000 from the three months ended March 31, 2002, and as a percentage of revenue over the periods increased to 11% from 9%. The salary increase was primarily due to increased payroll benefits mandated by the Chinese government and increased commissions. In addition, travel and entertainment expenses for the segment decreased $11,000. Other costs increased $101,000 over the periods, primarily due to additional administrative expenses offset by lower costs for exhibitions. HEALTHCARE PRODUCTS DISTRIBUTION SEGMENT The healthcare products distribution segment had revenue growth of 74% to $10,663,000 in the three months ended March 31, 2003, as compared to revenue of $6,126,000 in the three months ended March 31, 2002. The segment had a loss from operations of $121,000 in the recent period, compared with a loss from operations of $161,000 in the prior period. The large revenue growth over the periods is attributed 26% to a temporary arrangement with an existing client to handle part of their product line that we had not previously handled and that we will not handle in the future. The remaining 48% increase in revenue was caused by growth across multiple product lines resulting from strong demand for healthcare and consumer products by our Chinese customers as well as our strong competitive position and management. Gross profit in the three months ended March 31, 2003 rose to $1,097,000 from $767,000 in the three months ended March 31, 2002. Gross profit margin from the healthcare products segment for the recent period was 10% as compared to 12% in the prior period. The decrease in gross profit is primarily attributable to the low margin non-recurring sale mentioned above. -14- Expenses for the healthcare products distribution segment in the three months ended March 31, 2003 increased to $1,218,000 from $928,000 in the three months ended March 31, 2002, but decreased as a percentage of revenue over the periods to 11% from 15%. Payroll for the segment increased $151,000 primarily due to increased staff compensation. In addition, travel and entertainment expense for the segment increased $6,000 (but was flat at 1% of revenue for both periods) and other costs increased $134,000 due primarily to increased promotion expense and costs relating to facilities. HEALTHCARE SERVICES SEGMENT For the three months ended March 31, 2003, the revenue from this segment was $3,470,000, an increase of 24% over the three months ended March 31, 2002 revenue of $2,799,000. The segment had a loss from operations of $178,000 in the recent period, compared with income from operations of $42,000 in the prior period. During the recent period, the hospital completed the $2.6 million expansion of its Beijing facility, which contributed to increased patient visits as well as increased inpatient stays over the periods. Total inpatient days in the hospital increased to 669 in the three months ended March 31, 2003 from 518 in the three months ended March 31, 2002, an increase of 29%. For outpatient clinic visits, total clinic visits increased to 13,152 in the three months ended March 31, 2003, from 12,200 for the three months ended March 31, 2003, an increase of 12%. Healthcare services costs increased 32% over the periods from $2,757,000 to $3,648,000. This increase was due primarily to the costs associated with expanded services offered. Payroll increased by $452,000 (payroll was 56% and 54% of revenue for the three months ended March 31, 2003 and 2002, respectively), with all other costs increasing $445,000, including increases of $186,000 in development expenses related to SHU, $90,000 in doubtful accounts reserve, $134,000 in professional fees and $90,000 in rent expense. OTHER INCOME AND EXPENSES Interest expense on short-term debt of $696,000 and long term debt of $3,734,000 amounted to $51,000 whereas we had little expense in the prior period. The long-term debt relates to the development of SHU that is currently under construction (see "-- Liquidity and Capital Resources"). TAXES We recorded a $80,000 provision for taxes for the three months ended March 31, 2003 as compared to a benefit from taxes of $113,000 for the three months ended March 31, 2002. FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2001 Our revenue for 2002 was $70,617,000, up 26% from 2001 revenue of $56,118,000. Of these amounts, $8,821,000 in 2002 and $4,175,000 in 2001 were attributable to loan project sales by us for our customers. We believe that this type of financing is important to our customers and will continue to try to offer such financings in the future. These financings can be very complex and their timing and impact on our results are difficult to predict (see "Timing of Revenue"). MEDICAL CAPITAL EQUIPMENT SEGMENT In 2002 this segment had revenue of $28,708,000, an 11% increase over the revenue of $25,819,000 in 2001. Income from operations for the segment was $198,000 in 2002 compared to income from operations of $439,000 in 2001. The decrease was primarily attributable to a decrease in the gross profit percentage. The period-to-period revenue of this segment fluctuate due to financing programs facilitated by us from time to time and due to fluctuating hospital purchasing cycles in China. The increase for 2002 was primarily attributable to loan project sales by us to our customers, which were $8,821,000 in the recent year as compared to $4,175,000 in the prior year. The U.S. dollar-based sales of capital medical equipment are often contingent on financing (see "Timing of Revenue"). -15- Gross profit in 2002 increased to $7,822,000 from $7,451,000 in 2001. Gross profit margin from the capital medical equipment segment for the recent period was 27% as compared to 29% in the prior period. The gross profit in 2001 reflected a different mix of revenue sources having different profit margins. In particular, in the recent year, we had less service contract revenue, which carries higher margins, than in the prior year. Service contract revenue in Hong Kong was down significantly because of the downturn in the economy there. In addition, competitive factors such as the timing and composition of major tenders, as well as ongoing competitive pricing pressures due to Chinese government tendering regulations in the sale of capital medical equipment in the recent year yielded lower margins on such sales. Finally, gross margins on loan project sales are generally lower than on our other sales because we are not required to provide warranty service on many of the products sold through the loan programs. Loan program shipments in 2002 were more than twice as large as in 2001. Expenses for the capital medical equipment segment in 2002 increased to $7,624,000 from $7,012,000 in 2001, and as a percentage of revenue over the period was the same at 27%. Salaries for the segment in 2002 increased by $561,000 from 2001 and as a percentage of revenue over the period increased to 10% from 9%. The salary increase was primarily due to increased payroll benefits mandated by the Chinese government. In addition, travel and entertainment expenses for the segment increased $197,000 but were flat at 5% of revenue in both years. Other costs decreased $123,000 as compared to the prior year, primarily due to lower administration allocations and lower promotion costs offset by increased exhibition fees and bad debt reserve. HEALTHCARE PRODUCTS DISTRIBUTION SEGMENT The healthcare products distribution segment, consisting of medical consumables and personal healthcare products, had revenue growth of 35% to $28,946,000 in 2002 from 2001 revenue of $21,520,000. This increase was attributable to an increase in sales in the hospital and retail pharmacy markets. The segment had a loss from operations of $639,000 in 2002 compared to a loss from operations of $1,316,000 in 2001. The sales of medical consumables and personal healthcare products are local currency-based sales made from inventories maintained locally in China (see "Foreign Currency Exchange and Impact of Inflation") to a network of sub-dealers and pharmacies. Gross profit in 2002 rose to $3,856,000 from $2,842,000 in 2001. Gross profit margin from the segment remained consistent at 13% in 2002 and 2001. Expenses for the healthcare products distribution segment in 2002 increased to $4,457,000 from $4,158,000 in 2001, but decreased as a percentage of revenue over the periods to 15% from 19%. Salaries for the segment increased $354,000, but remained flat as a percentage of revenue over the years at 5%. The increase is primarily due to increased payroll benefits mandated by the Chinese government. In addition, travel and entertainment expense for the segment increased $76,000 but was flat at 1% of revenue for both years and other costs decreased $131,000 primarily from decreased promotion. HEALTHCARE SERVICES SEGMENT For 2002, the revenue from this segment was $12,963,000, an increase of 48% over 2001 revenue of $8,779,000. Income from operations in 2002 was $536,000 as compared to $476,000 in 2001. During the recent period, Beijing United continued to expand the services offered, which contributed to increased patient visits as well as increased inpatient stays over the prior year. Healthcare services costs during 2002 were $12,427,000, an increase of 50% over 2001 costs of $8,303,000. This increase was due primarily to the costs associated with increased services offered. The hospital had recently finished expanding its present facility to include space formerly occupied by a sublease tenant. The hospital also had continued its efforts to explore the establishment of additional affiliated satellite clinics to serve as referral sites. In this regard, Beijing United is affiliated with a satellite clinic that opened in November of -16- 2002. This clinic, in Shunyi County outside of Beijing, is funded by one of our subsidiaries and is staffed by doctors and other health professionals from Beijing United. Salaries increased by $2,450,000 (salaries were 50% and 46% of revenue for 2002 and 2001, respectively), with all other costs increasing $1,674,000, including $193,000 in supplies, $457,000 in rent, $129,000 to establish a bad debt reserve and $104,000 in administrative allocation. The salary increases resulted from increased staffing for the emergency room and for other expanded facilities as well as additional payroll benefits. MINORITY INTEREST Our agreement with our joint venture partner for Beijing United calls for the partner to receive 10% of the profits of the hospital. In 2002, this minority interest in the net local income of Beijing United amounted to $71,000 as compared to $18,000 for 2001. This income is directly related to the local entity profitability of the hospital. We also recorded a $38,000 start-up loss on our investment in a joint venture in Hong Kong. This was offset by our minority partner share loss of $121,000 in our new start-up hospital venture in Shanghai. OTHER INCOME AND EXPENSES Other expense (other than interest) in 2002 was $131,000, compared to other income (other than interest) of $578,000 for 2001. The prior period other income was derived substantially from the sublease of space in the facility housing Beijing United that ended on December 31, 2001. The part of the building that was subleased has now been renovated as part of the hospital expansion. Although we did not anticipate any sublease revenue in 2002, we do anticipate that now that the space is renovated and in service for Beijing United, we will recognize additional revenue through the expanded operations of Beijing United, which may offset part or all of the loss of income from the sublease. TAXES We recorded a $240,000 benefit from taxes in 2002 as compared to a benefit for taxes of $77,000 in 2001. This tax computation is in accordance with current accounting standards but assumes a certain level of future profitability. We believe this properly recognizes the benefits we have has achieved as a result of our tax restructuring and short-term anticipation of future income tax loss carry forward utilization. As a result of this restructuring, we expect to make use of a portion of our U.S. federal net operating losses and accordingly, recorded a $660,000 deferred tax valuation adjustment in addition to last year's $232,000 recorded on previously fully reserved tax losses. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2004, our cash and cash equivalents, net accounts receivable and net inventories were $6,791,000, $17,374,000 and $10,363,000, respectively, as compared to $6,100,000, $16,195,000 and $10,346,000, respectively, as of December 31, 2002. As of March 31, 2004, our short-term loan payable was comprised of bank loans of $2,670,000 and extended payment accounts payable by one vendor of $2,998,000. With respect to the vendor accounts payable, the vendor has agreed to provide continuing credit facilities for purchases for a seven-year period, each grant of credit bearing interest of five percent per annum and expiring at the end of 18 months, to be replaced by subsequent purchases and payables. The classification from long-term to short-term is a result of the maturity of the first group of payables under this program having been less than 12 months at March 31, 2004. As of March 31, 2004, the accounts payable attributable to the vendor financing was $2,998,000. We are currently completing renovation and outfitting of our hospital facility in Shanghai, which has been financed primarily through the vendor financing and local bank borrowings. The estimated total costs for design and construction, including demolition, is -17- approximately $4.2 million. We have negotiated a loan with the Hong Kong and Shanghai Banking Corporation (HSBC), with which we have an existing loan relationship relating to Beijing United. This new loan would provide $4 million and recently received final approval on June 2, 2004. Although we have sufficient capital resources to complete SHU as currently scheduled, we will continue to explore additional financing opportunities, although there are no assurances that such additional financing will be available. As of March 31, 2004, letters of credit in the aggregate amount of approximately $420,000 and borrowings in the aggregate amount of $883,000 were outstanding under a credit facility with M&T Bank, our principal bank. The borrowings bear interest at 1% over the three-month London Interbank Offered Rate (LIBOR). Beijing United has a short-term financing arrangement in China with HSBC for $600,000 in revolving loans bearing interest at 1.75% over the three-month Singapore Interbank Money Market Offer Rate (SIBOR). Beijing United has agreed to utilize HSBC for a portion of its patient payments via credit cards. Also, a new line of credit is included in the arrangement with HSBC for up to $1,200,000, bearing interest at 2.25% over SIBOR and having a term of up to three years. As of March 31, 2004, the balances on these credit liens were $600,000 and $1,087,000, respectively. We on behalf of Beijing United have guaranteed the full amount of those facilities. RECENT ISSUANCE OF SECURITIES As of March 29, 2004, we entered into a securities purchase agreement with a limited number of accredited investors pursuant to which we agreed to issue and the investors agreed to purchase at a price of $9.00 per share 1,500,000 shares of our common stock, together with warrants to purchase an additional 300,000 shares of our common stock at an exercise price of $12.00 per share, for an aggregate purchase price of $13,500,000. The net proceeds to us from the financing, after deducting expenses of the financing including placement agent fees, were approximately $12,300,000. In connection with the financings, we also agreed to issue the placement agent five-year warrants to purchase 90,000 shares of our common stock at an exercise price of $12.00 per share. On March 31 and April 1, 2004, the initial closings of the financing occurred at which a total of 600,000 shares of our common stock together with warrants to purchase 120,000 shares of our common stock were issued to the investors. In connection with the initial closings, the placement agent was issued warrants to purchase 36,000 shares of our common stock. The final closing of the financing took place on May 5, 2004 at which the remaining 900,000 shares of common stock together with the remaining warrants to purchase 180,000 shares of our common stock were issued to the investors. In connection with the final closing, the placement agent was issued the remaining warrants to purchase 54,000 shares of our common stock. Pursuant to the securities purchase agreement, each investor irrevocably subscribed for and agreed to purchase the initial securities and the remaining securities, subject only to, in addition to the delivery of customary closing documentation, the completion of stockholder consent to the financing in accordance with the rules of the Nasdaq SmallCap Market as described below. The Nasdaq SmallCap Market, where our common stock is traded, prohibits us from issuing shares of our common stock in an amount greater than 20% of our outstanding common stock, if the purchase price per share in such issuance is less than the greater of book or market value of our common stock, without obtaining stockholder approval. Since the issuance of the shares was at such a lesser price, at the initial closings of the financing only a portion of the common stock and warrants (600,000 shares of common stock and warrants to purchase 120,000 shares of common stock for aggregate gross proceeds of $5,400,000) were issued to the investors. The remaining shares and warrants were issued to the investors at a final closing, which occurred on May 5, 2004, more than 20 days after we mailed an information statement to our stockholders relating to stockholders approval that had been obtained by written consent. We continue to consider various other financing alternatives to satisfy our future expansion, capital improvements and equipment requirements. -18- The following table sets forth our contractual cash obligations as of March 31, 2004: (thousands)
TOTAL 2005 2006 2007 2008 2009 THEREAFTER ----- ---- ---- ---- ---- ---- ---------- Line of credit $ 2,670 $2,670 $ 0 $ 0 $ 0 $ 0 $ 0 Vendor financing 2,998 2,998 0 0 0 0 0 Capital leases 320 152 150 17 1 0 0 Equity investment 220 220 0 0 0 0 0 Operating leases 10,719 1,616 1,387 1,348 1,263 1,219 3,886 ------ ----- ----- ----- ----- ----- ------ Total contractual cash obligations $16,927 $7,656 $1,537 $1,365 $1,264 $1,219 $3,886 ======== ======= ======= ======= ======= ====== ======
For information about these contractual cash obligations, see Notes 4 and 8 to the consolidated financial statements appearing elsewhere in this prospectus. TIMING OF REVENUE The timing of our revenue is affected by several significant factors. Many end-users of the capital equipment products sold by us depend to a certain extent upon the allocation of funds in the budgeting processes of the Chinese government and the availability of credit from the Chinese banking system. These processes and the availability of credit are based on policy determinations by the Chinese government and are not necessarily subject to fixed time schedules. In addition, the sales of certain products often require protracted sales efforts, long lead times and other time-consuming steps. Further, in light of the dependence by purchasers of capital equipment on the availability of credit, the timing of sales may depend upon the timing of our or our purchasers' abilities to arrange for credit sources, including Ex-Im Bank or other loan financing. As a result, our operating results have varied and are expected to continue to vary from period to period and year to year. In addition, a relatively limited number of orders and shipments may constitute a meaningful percentage of our revenue in any one period. As a result, a relatively small reduction in the number of orders can have a material impact on our revenue in any year. Further, because we recognize revenue and expense as products are shipped, the timing of shipments could affect our operating results for a particular period. At the same time, a growing percentage of our revenue is attributable to hospital services and local currency sales through the HPD, both of which have more even revenue streams. FOREIGN CURRENCY EXCHANGE AND IMPACT OF INFLATION Our results of operations for the periods discussed have not been significantly affected by inflation or foreign currency fluctuation. Since we receive over 60% of our revenue in local Chinese currency, we have some foreign currency risk. Changes in the valuation of the Chinese Renminbi or Hong Kong dollar may have an impact on our results of operations in the future. Our subsidiaries, Chindex Tianjin, Chindex Shanghai and Beijing United, sell products and services in Renminbi. For over 20 years the Chinese and Hong Kong dollars have been pegged to the US dollar. While discussions about the possible removal of this pegged rate have been in the news we do not believe at this time any change is imminent. Also, Chinese currency is not freely tradable and we do not hedge our transactions. We monitor the situation globally and continue to keep up with the discussion. While there can be no assurances that a change will not occur, we do not believe any such change will have a material adverse effect. We also have purchased and will continue to purchase some products in Western currencies other than U.S. dollars and has sold and will continue to sell such products in China for U.S. dollars. To the extent that the value of the U.S. dollar declines against such a currency, we could experience a negative -19- impact on profitability. We anticipate hedging transactions wherever possible to minimize such negative impacts. Currently there are no such hedges. As part of our risk management program, we also perform sensitivity analyses to assess potential changes in revenue, operating results, cash flows and financial position relating to hypothetical movements in currency exchange rates. Our sensitivity analysis of changes in the fair value of the Renminbi to the U.S. Dollar at March 31, 2004, indicated that if the U.S. Dollar uniformly increased in value by 10 percent relative to the Renminbi, then we would experience a 6% smaller loss. Conversely, a 10 percent increase in the value of the Renminbi relative to the U.S. Dollar at March 31, 2004 would have resulted in a 7% additional loss. -20- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTING DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Chindex International, Inc. We have audited the accompanying consolidated balance sheets of Chindex International, Inc. (the Company) as of March 31, 2004 and December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended March 31, 2004, the three months ended March 31, 2003 and the years ended December 31, 2002 and 2001. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chindex International, Inc. at March 31, 2004 and December 31, 2002, and the consolidated results of its operations and its cash flows for the year ended March 31, 2004, the three months ended March 31, 2003 and the years ended December 31, 2002 and 2001 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young, LLP McLean, Virginia June 15, 2004 -21- CHINDEX INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (thousands except share data)
March 31, December 31, 2004 2002 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 6,791 $ 6,100 Trade receivables less allowance for doubtful accounts of $1,131 in 2004 and $883 in 2002 Equipment sales receivables 15,039 14,378 Patient service receivables 2,335 1,817 Inventories 10,363 10,346 Income taxes receivable 0 11 Deferred income taxes 467 892 Other current assets 2,235 1,793 --------- --------- Total current assets 37,230 35,337 Property & equipment, net 8,901 7,128 Long term deferred income taxes 1,334 0 Other assets 386 661 --------- --------- Total assets $ 47,851 $ 43,126 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 23,383 $ 22,612 Accrued contract training 1,078 920 Short term debt or vendor financing 5,668 1,946 Income taxes payable 381 0 --------- --------- Total current liabilities 30,510 25,478 Long-term debt or vendor financing 125 3,609 --------- --------- Total liabilities 30,635 29,087 Minority interest 18 71 Stockholders' Equity: Preferred stock, $.01 par value, 500,000 shares authorized, none issued 0 0 Common stock, $.01 par value, 6,800,000 shares authorized, including 800,000 designated Class B: Common stock - 3,643,152 and 2,932,956 shares issued and outstanding in 2004 and 2002, respectively 36 29 Class B stock - 775,000 shares issued and outstanding in 2004 and 2002 8 8 Additional capital 22,488 17,356 Accumulated other comprehensive income 11 9 Accumulated deficit (5,345) (3,434) --------- --------- Total stockholders' equity 17,198 13,968 --------- --------- Total liabilities and stockholders' equity $ 47,851 $43,126 ========= =========
See accompanying notes -22- CHINDEX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (thousands except share and per share data)
Year ended Three months ended Year ended March 31, March 31, December 31, 2004 2003 2002 2002 2001 ---- ---- ---- ---- ---- (unaudited) Product sales $72,229 $18,379 $12,779 $57,654 $47,339 Hospital services revenue 15,954 3,470 2,799 12,963 8,779 ------ ----- ----- ------ ----- Total revenue 88,183 21,849 15,578 70,617 56,118 Cost and expenses Cost of product sales 58,014 14,808 10,578 45,976 37,046 Healthcare services costs 15,723 3,393 2,722 11,721 8,304 Selling and marketing expenses 10,346 2,007 1,567 7,934 6,899 General and administrative 5,682 1,419 1,004 4,853 4,270 --------- --------- --------- --------- --------- (Loss) income from operations (1,582) 222 (293) 133 (401) Minority interest (8) 0 0 50 (18) Loss on equity investment (222) 0 0 (38) 0 Other income and (expenses) Interest expense (249) (51) (4) (54) (13) Interest income 44 14 15 59 161 Miscellaneous income (loss) , net 94 (29) (23) (131) 578 --------- --------- --------- --------- --------- Total other (loss) income (111) (66) (12) (126) 726 --------- --------- --------- --------- --------- (Loss) income before income taxes (1,923) 156 (305) 19 307 (Provision for) benefit from income taxes (64) (80) 113 240 77 --------- --------- --------- --------- --------- Net (loss) income $(1,987) $76 $(192) $259 $384 ========= ========= ========= ========= ========= (Loss) income per share data Net (loss) income per common share - basic $(.53) $.02 $(.05) $.07 $.10 Weighted average shares outstanding - basic 3,758,170 3,708,232 3,672,460 3,699,052 3,667,204 Net (loss) income per common share - diluted $(.53) $.02 $(.05) $.07 $.10 Weighted average shares outstanding - diluted 3,758,170 3,715,908 3,672,460 3,796,340 3,950,636
See accompanying notes -23- CHINDEX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands)
Year ended Three months ended Year ended March 31, March 31, December 31, 2004 2003 2002 2002 2001 ---- ---- ---- ---- ---- OPERATING ACTIVITIES (unaudited) Net (loss) income $(1,987) $76 $(192) $259 $384 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation 1,309 280 241 1,016 773 Inventory write-down 151 31 43 158 147 Provision for doubtful accounts 777 118 0 279 0 Minority interest 8 0 0 (53) 0 Deferred income taxes (909) 0 0 (660) (232) Loss on Equity Investment 222 0 0 38 0 Changes in operating assets and liabilities: Trade receivables (3,121) 1,047 467 (3,542) 4,264 Inventories 373 (571) (979) (3,124) 1,608 Income taxes receivable 135 (122) (196) 154 112 Other current assets (713) 270 44 (125) (353) Other assets 25 26 67 98 282 Accounts payable and accrued expenses 678 388 (898) 3,992 (3,615) Income taxes payable 381 0 0 0 (90) --------- -------- --------- --------- --------- Net cash (used in) provided by operating activities (2,671) 1,543 (1,403) (1,510) 3,280 INVESTING ACTIVITIES Investment in equity joint venture 0 0 0 (40) 0 Purchases of property and equipment (2,925) (437) (323) (3,382) (1,798) --------- -------- --------- --------- --------- Net cash used in investing activities (2,925) (437) (323) (3,422) (1,798) FINANCING ACTIVITIES Proceeds from (repayment of) short term debt payable 1,974 (1,250) 502 1,746 200 Proceeds from issuance of common stock 4,892 0 0 0 0 Cash from (paid to) joint venture partner investment (61) 0 0 120 0 Long term vendor financing (623) 0 0 3,609 0 Exercise of stock options 247 0 56 81 0 --------- -------- --------- --------- --------- Net cash provided by (used in) financing activities 6,429 (1,250) 558 5,556 200 Effect of foreign exchange rate changes on cash and cash equivalents 2 0 22 17 (8) --------- -------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 835 (144) (1,146) 641 1,674 Cash and cash equivalents at beginning of period 5,956 6,100 5,459 5,459 3,785 --------- -------- --------- --------- --------- Cash and cash equivalents at end of period $6,791 $5,956 $4,313 $6,100 $5,459 ========= ======== ========= ========= ========= Cash paid for interest $124 $8 $1 $45 $13 Cash paid for taxes $460 $71 $56 $336 $518
See accompanying notes -24- CHINDEX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE PERIOD ENDED MARCH 31, 2004 AND YEARS ENDED DECEMBER 31, 2002 AND 2001 (thousands except share data)
Common Stock Accumulated Common Stock Class B Additional Accumulated Other ---------------------- --------------------- ------------ -------------- Comprehensive Shares Amount Shares Amount Capital Deficit Income (Loss) Total ------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 2,895,656 $29 775,000 $8 $17,275 ($4,077) $0 $ 13,235 ---------------------------------------------------------------------------------------------------------------------------------- Net income 2001 384 384 Foreign currency translation adjustment (8) (8) ------------- Comprehensive income 376 ------------- Balance at December 31, 2001 2,895,656 29 775,000 8 17,275 (3,693) (8) 13,611 ---------------------------------------------------------------------------------------------------------------------------------- Net income 2002 259 259 Foreign currency translation adjustment 17 17 ------------- Comprehensive income 276 ------------- Options exercised 37,300 0 81 81 ------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 2,932,956 29 775,000 8 17,356 (3,434) 9 13,968 ---------------------------------------------------------------------------------------------------------------------------------- Net income for the three months ended March 31, 2003 76 76 Net loss 2004 (1,987) (1,987) Foreign currency translation adjustment 2 2 ------------- Comprehensive income (1,985) ------------- Issuance of common stock 600,000 6 4,886 4,892 Options exercised 110,196 1 246 247 ------------------------------------------------------------------------------------------------------- Balance at March 31, 2004 3,643,152 $36 775,000 $8 $22,488 ($5,345) $11 $17,198 ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes -25- CHINDEX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2004 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Chindex International, Inc. (the Company or "Chindex") is an American company operating in several healthcare sectors of the Chinese marketplace, including Hong Kong. The Company conducts business in three segments. The Medical Capital Equipment segment markets and sells high-technology medical equipment and instrumentation acquired from several major U.S., European and other manufacturers. The Company markets and sells these products in China, including Hong Kong, and provides marketing, sales and technical services for the products. Substantially all direct sales, commissions and purchases of these products are denominated in U.S. dollars. The Healthcare Products Distribution segment operates a logistics platform through which it provides logistics services to internal clients as well as to other companies doing business in the Chinese market. Sales of consumables and low value healthcare and health-related consumer products are undertaken through Chindex Holdings International Trade (Tianjin) Ltd., and Chindex Shanghai International Trading Co., Ltd., subsidiaries that sell goods and receive payments in local Chinese currency and use the currency to pay for local expenses and U.S.-dollar imported goods. Most consumable products are shipped when payment is received. The Healthcare Services segment operates a hospital and clinic in Beijing and will be opening a second hospital in Shanghai in 2004. While Beijing United generally transacts its business in local Chinese currency it can receive payments in U.S. dollars. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Minority interest is derived from the Company's partner's 10% share of the earnings of Beijing United and 30% share of the earnings of Shanghai United. The Company also holds a 40% interest in Natural Formula Asia Limited (NFAL), which is accounted for using the equity method. The Company has agreed in principle with the other investors to fund an additional $220,000, in the form of a loan, to NFAL. This payment will be made in 2005. Significant intercompany balances and transactions are eliminated. REVENUE RECOGNITION Sales of equipment and consumables are recognized upon product shipment, which corresponds to the point at which the risk of loss transfers to the customer. A small amount of retail product uses the consignment sale model, where shipments are recorded as consignment inventory and revenue is recognized based on sales by the retail outlet to the end customers. Revenue related to services provided by Healthcare Services are net of contractual adjustments or discounts and is recognized in the period services are provided. Healthcare Services makes an estimate at the end of the month for certain in- -26- patients who have not completed service. This estimate reflects only the cost of care up to the end of the month. The Company earns revenue from sales of products and providing services. Substantially all revenue in the Medical Capital Equipment segment and the Healthcare Products Distribution segment are from the sale of products and substantially all revenue in Healthcare Services is from providing services. See Note 11 for further information on sales and gross profit by segment. INVENTORIES Inventory purchased to fill executed sales contracts and purchase orders that remain undelivered at year-end (merchandise inventory), service parts and inventory of peripheral components are stated at the lower of cost or market using the specific identification method. In addition, two wholly foreign owned subsidiaries maintain merchandise inventory based on expected sales targets. Certain items are purchased for demonstration purposes and subsequent sale (demonstration inventory). Management monitors the salability of such demonstration inventory and reduces the carrying amount to net realizable value when there is any impairment in value. Inventory items held by the healthcare services division are stated at the lower of cost or market using the average cost method. PROPERTY AND EQUIPMENT Property and equipment, including such assets held by Healthcare Services, are stated at historical cost. The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation is computed on the straight line method over the estimated useful lives of the related assets. Useful lives for office equipment, vehicles and furniture and fixtures range from 5 to 7 years. Leasehold improvements are amortized by the straight-line method over the shorter of the estimated useful lives of the improvements or the lease term. Certain medical equipment is depreciated over three years. The Company assesses the impairment of long-lived assets including intangible assets in accordance with Statement of Financial Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company evaluates its long-lived assets for impairment when indicators of impairment are identified. The Company records impairment charges based upon the difference between the fair value and carrying value of the original asset when undiscounted cash flows indicate the carrying value will not be recovered. No impairment losses have been recorded in the accompanying consolidated statement of operations. INCOME TAXES The Company's U.S. entities file a consolidated U.S. federal tax return. The U.S. provision for income taxes is computed for each entity in the U.S. consolidated group at the statutory rate based upon each entity's income or loss, giving effect to permanent differences. The Company's foreign subsidiaries file separate income tax returns on a December 31 fiscal year. Provisions for income taxes are based upon earnings reported for financial statement purposes and may differ from amounts currently payable or receivable because certain amounts may be recognized for financial reporting purposes in different periods than they are for income tax purposes. Deferred income taxes result from temporary differences between the financial statement amounts of assets and liabilities and their respective tax bases. A valuation allowance reduces the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. -27- CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company considers the recorded value of its financial instruments, which consist primarily of cash and cash equivalents, trade receivables, accounts payable, and short-term debt payable and vendor financing to approximate the fair value of the respective assets and liabilities at March 31, 2004 and December 31, 2002. EARNINGS PER SHARE The Company follows Statement of Financial Accounting Standards No. 128, "Earnings per Share" (Statement 128) whereby basic earnings per share excludes any dilutive effects of options, warrants and convertible securities and diluted earnings per share includes such effects. The Company does not include the effects of stock option, warrants and convertible securities for periods when the Company reports a net loss as such effects would be antidilutive. STOCK BASED COMPENSATION The Company accounts for stock-based compensation to employees under Accounting Principles Board ("APB") No. 25 - "Accounting for Stock Issued to Employees", and complies with the disclosure requirements for SFAS No. 123 - "Accounting for Stock-Based Compensation" and SFAS No. 148 - "Accounting for Stock-Based Compensation - Transition and Disclosure." DIVIDENDS The Company has not paid cash dividends to the stockholders of its common stock and any cash dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors. On June 19, 2002, the Company declared a 10% stock dividend to holders of record on July 15, 2002. 100% stock splits in the form of a stock dividend were announced by the Company on August 6, 2003 with a record date of August 18, 2003 and on December 29, 2003 with a record date of January 10, 2004. Common stock as reported in the financial statements has been adjusted for all periods to reflect these stock dividends. FOREIGN CURRENCIES Financial statements of the Company's foreign subsidiaries are translated from the functional currency, generally the local currency, to U.S. Dollars. Assets and liabilities are translated at the exchange rates on the balance sheet date. Results of operations are translated at average exchange rates. Accumulated other comprehensive income in the accompanying consolidated statements of stockholders' equity consists entirely of the resulting exchange difference. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Areas in which significant judgments and estimates are -28- used include receivable collectibility and deferred tax valuation allowances. There were no material changes to the estimates made by the Company this year as compared to last year. RECLASSIFICATIONS Certain balances in the 2003, 2002 and 2001 financial statements have been reclassified to conform to the 2004 presentation. 2. INVENTORIES (in thousands)
December 31, March 31, ----------------- 2004 2002 -------------------- ----------------- Inventories consist of the following: Merchandise inventory $ 7,834 $ 7,609 Healthcare services inventory 247 240 Demonstration inventory, net 826 840 Parts and peripherals 1,456 1,657 -------------------- ----------------- $10,363 $10,346 ==================== =================
3. PROPERTY AND EQUIPMENT, NET (in thousands)
March 31, ---------------- December 31, 2004 2002 ---------------- ----------------- Property and equipment, net consists of the following: Furniture and equipment $ 7,616 $ 5,408 Vehicles 109 109 Leasehold improvements 6,747 5,594 ---------------- ----------------- 14,472 11,111 Less: accumulated depreciation and amortization (5,571) (3,983) ---------------- ----------------- $ 8,901 $ 7,128 ================ =================
4. DEBT SHORT TERM The Company has a $1,750,000 credit facility with First National Bank of Maryland for short-term working capital needs, standby letters of credit, and spot and forward foreign exchange transactions. Balances outstanding under the facilities are payable on demand, fully secured and collateralized by government securities acceptable to the Bank having an aggregate fair market value of not less than $1,945,000. As of March 31, 2004, letters of credit issued by the bank amounted to approximately $420,000 and $883,000 was outstanding under the line of credit facility. Borrowings under the credit facility bear interest at 1% over three month London Interbank Offered Rate (LIBOR). The Company's hospital has recently completed short term financing arrangements in China with Hongkong Shanghai Banking Corp. (HSBC) for up to $600,000 in revolving loans or standby credit. As of March 31, 2004, this line of credit had $600,000 outstanding. Terms of the agreement are customary, with the interest rate being 1.75% over the three-month Singapore Interbank Money Market Offer Rate (SIBOR). In connection with the agreement, the hospital has agreed to utilize HSBC for a certain portion of its patient payments via credit cards. Under this credit card arrangement, all funds from patient invoices reimbursed by U.S. Dollar credit cards are received by HSBC in Beijing and posted directly to the Company's account at HSBC in Beijing. Currently HSBC in Beijing does not hold a Reminbi license and, accordingly, all Reminbi credit card transactions are processed through the Bank of China. -29- Also, a new line of credit is included in the arrangement with HSBC for up to $1,200,000, bearing interest at 2.25% over SIBOR and having a term of up to three years. As of March 31, 2004, the balance on this credit line was $1,087,000. The Company on behalf of Beijing United has guaranteed the full amount of these facilities. The Company has an agreement with a major supplier whereby the supplier has agreed to provide long term (one and one-half years on transactions to date) payment terms on the Company's purchases of medical equipment from the supplier. The arrangement carries an interest component of five percent. As of March 31, 2004, the Company has $2,998,000 of payables recorded under this agreement that are due in fiscal 2005. The following table sets forth the Company's debt obligations as of March 31, 2004: (in thousands)
TOTAL 2005 2006 2007 2008 2009 THEREAFTER ----- ---- ---- ---- ---- ---- ---------- Line of credit $ 2,670 $ 2,670 $ 0 $ 0 $ 0 $ 0 $ 0 Vendor financing 2,998 2,998 0 0 0 0 0
5. STOCKHOLDERS' EQUITY COMMON STOCK The Class B common stock and the common stock are substantially identical on a share-for-share basis, except that the holders of Class B common stock have six votes per share on each matter considered by stockholders and the holders of common stock have one vote per share on each matter considered by stockholders. Each share of Class B common stock will convert at any time at the option of the original holder thereof into one share of common stock and is automatically converted into one share of common stock upon (i) the death of the original holder thereof, or, if such stocks are subject to a stockholders agreement or voting trust granting the power to vote such shares to another original holder of Class B common stock, then upon the death of such original holder, or (ii) the sale or transfer to any person other than specified transferees. STOCK OPTION PLAN The Company's 1994 Stock Option Plan (the Plan) provided for the grant, at the discretion of the Board of Directors, of (i) options that are intended to qualify as incentive stock options (Incentive Stock Options) within the meaning of Section 422A of the Internal Revenue Code to certain employees, consultants and directors, and (ii) options not intended to so qualify (Nonqualified Stock Options) to employees, consultants and directors. On April 27, 2004, the Plan terminated by its terms and no additional options may be granted thereunder. The following is a summary of stock option activity during the year ended March 31, 2004, the three months ended March 31, 2003 and the years ended December 31, 2002 and 2001: -30-
Weighted Weighted Weighted Weighted Average Average Average Average Exercise Exercise Exercise Exercise 2004 Price 2003 Price 2002 Price 2001 Price --------- ------- ------- ------- Options outstanding, beginning of year: 1,053,416 $ 2.29 929,416 $ 2.35 838,404 $ 2.54 840,084 $ 2.49 Granted 20,000 2.60 124,000 1.90 128,508 2.60 112,240 2.34 Exercised (110,196) 2.25 0 0 (37,300) 2.18 0 0 Canceled (14,520) 2.49 0 0 (196) 2.08 (113,920) 2.05 --------- ------- ------- -------- Options outstanding, end of year 948,700 $ 2.30 1,053,416 $ 2.29 929,416 $ 2.35 838,404 $ 2.54 ========= ========= ======= =======
Options exercisable at March 31, 2004, March 31, 2003, December 31, 2002 and 2001, were 919,360, 1,010,476, 886,752 and 736,128, respectively, with weighted average exercise prices of $2.30, $2.28, $2.34 and $2.55, respectively. The weighted average exercise price of options outstanding is $2.30, $2.29, $2.35 and $2.54 and the weighted average remaining contractual life of such options is 6.77, 7.73, 7.68 and 8.6 years respectively as of March 31, 2004, March 31, 2003, December 31, 2002 and 2001 The Company accounts for stock-based compensation to employees under Accounting Principles Board Opinion ("APB") No. 25 - "Accounting for Stock Issued to Employees", and complies with the disclosure requirements for SFAS No. 123 - "Accounting for Stock-Based Compensation" and SFAS No. 148 - "Accounting for Stock-Based Compensation - Transition and Disclosure." Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net earnings and earnings per share ("EPS") would have been reduced to the following pro-forma amounts (in thousands, except share data):
2004 2003 2002 2001 -------- ------- ------- ------- Net (loss) income, as reported $(1,987) $76 $259 $384 Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (18) (36) (24) (186) -------- ------- ------- ------- Net (loss) income, pro-forma $(2,005) $40 $235 $298 ======== ======= ======= ======= Pro forma earnings per share: EPS, basic As reported $(.53) $ .02 $.07 $.10 EPS, basic Pro forma $(.53) $ .02 $.06 $.08 EPS, diluted As reported $(.53) $ .01 $.07 $.10 EPS, diluted Pro forma $(.53) $ .01 $.06 $.08
The fair value of each option is estimated at the date of grant using a modified Black-Scholes option pricing model, with the following weighted-average assumptions for 2003, 2002 and 2001: dividend yield 0.00%; expected volatility of 62.3%; risk-free interest rate of 3.00%; and expected life of 7.0 years. For March 2004: dividend yield 0.00%; expected volatility 99.8%; risk-free interest rate 2.00%; expected life 7.0 years. RECENT ISSUANCE OF SECURITIES As of March 29, 2004, the Company entered into a securities purchase agreement with a limited number of accredited investors pursuant to which we agreed to issue and the investors agreed to purchase at a price of $9.00 per share 1,500,000 shares of our common stock, together with warrants to purchase an additional 300,000 shares of our common stock at an exercise price of $12.00 per share, for an aggregate purchase price of $13,500,000. We sometimes refer to this financing as the "financing." The net proceeds to us from the financing, after deducting expenses of the financing including placement agent fees, were approximately $12,300,000. In connection with the financings, we also agreed to issue the placement agent five-year warrants to purchase 90,000 shares of our common stock at an exercise price of $12.00 per share. On March 31 and April 1, 2004, the initial closings of the financing occurred at which a total of 600,000 shares of our common stock together with warrants to purchase 120,000 -31- shares of our common stock were issued to the investors. In connection with the initial closings, the placement agent was issued warrants to purchase 36,000 shares of our common stock. The final closing of the financing took place on May 5, 2004 at which the remaining 900,000 shares of common stock together with the remaining warrants to purchase 180,000 shares of our common stock were issued to the investors. In connection with the final closing, the placement agent was issued the remaining warrants to purchase 54,000 shares of our common stock. SHARES OF COMMON STOCK RESERVED As of March 31, 2004, the Company had reserved 3,656,848 shares of common stock for issuance upon exercise of remaining private placement securities, stock options and Class B common stock convertibility. 6. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted Earnings per Share (EPS) computations for net income and other related disclosures: (thousands except share and per share data)
Three months Year ended ended March Year ended Year ended March 31, Three months 31, 2002 December 31, December 31, ------------- ended March ----------- ------------- ------------- 2004 31, 2003 (unaudited) 2002 2001 ------------- ------------ ----------- ------------- ------------- Net (loss) income $(1,987) $76 $(192) $259 $384 Weighted average shares outstanding-basic 3,758,170 3,708,232 3,672,460 3,699,052 3,667,204 Basic earnings per share $(.53) $.02 $(.05) $.07 $.10 Effect of dilutive securities: Shares issuable upon exercise of dilutive outstanding stock options: 0 7,676 0 97,288 283,432 Weighted average shares outstanding-basic 3,758,170 3,715,908 3,672,460 3,796,340 3,950,636 Diluted earnings per share $(.53) $.02 $(.05) $.07 $.10
For the periods in which losses were incurred, shares issuable upon exercise of stock options are excluded from diluted earnings per share because the effect would be anti-dilutive. 7. INCOME TAXES The Company's (provision for) benefit from income taxes consists of the following for the year ended March 31, 2004, three months ended March 31, 2003, and the years ended December 31, 2002 and 2001: -32-
(in thousands) 2004 2003 2002 2001 ------------- ------------- ------------ ------------- Current: Federal $ -- $ -- $ -- $ -- Foreign (356) (80) (545) (249) State 0 0 0 (34) ------------- ------------- ------------ ------------- (356) (80) (545) (283) Deferred: Federal 208 0 681 190 State 2 0 104 42 Foreign 82 0 0 128 ------------- ------------- ------------ ------------- 292 0 785 360 ------------- ------------- ------------ ------------- $ (64) $ (80) $ 240 $ 77 ============= ============= ============ =============
Significant components of the Company's deferred tax liabilities and assets are as follows for the years ended March 31, 2004 and December 31, 2002:
(in thousands) -------------------------------------------- 2004 2002 -------------------- ------------------ Deferred tax liabilities: Unremitted earnings on foreign subsidiaries $ 0 $ 0 Deferred tax assets: Allowance for doubtful accounts 286 286 Sales commissions 181 114 Net operating loss carryforwards 2,463 949 Foreign tax credit 194 0 Alternate minimum tax 47 0 Depreciation 27 0 Other 0 (1) -------------------- ------------------ Subtotal 3,198 1,348 Less valuation allowance (1,397) (456) -------------------- ------------------ Net deferred tax asset $ 1,801 $ 892 ==================== ==================
The Company's effective income tax rate varied from the statutory federal income tax rate for the year ended March 31, 2004, the three months ended March 31, 2003 and the years ended December 31, 2002 and 2001 are as follows:
2004 2003 2002 2001 ------ ------ ------ ------ Statutory federal income tax rate 34.0% 34.0% 34.0% 34.0% Adjustments: State income taxes, net of federal benefit 4.0 4.0 4.0 4.0 Foreign tax rate differential (9.0) 171.0 3,036.0 (188.0) Use of net operating losses 0.0 0.0 (5,289.0) (42.0) Change in valuation allowance 17.0 (38.0) (3,474.0) (75.0) Other, including permanent differences (49.0) (136.0) 4,426.0 242.0 ----- ------ -------- ----- (3.0)% 35.0% (1,263.0)% (25.0)% ===== ====== ======== =====
Due to the Company's global restructuring plan, it expects to be able to make use of a portion of its U.S. federal net operating losses, and accordingly, recorded reductions in its deferred tax valuation allowance on previously fully reserved tax losses of $660,000 in fiscal year 2002 and $232,000 in fiscal -33- year 2001. The Company expects the tax benefits from these net operating losses will be realized in 2005 or 2006. All profit-seeking hospitals are entitled to business tax deferral for 3 years starting from the receipt of certificate recognizing those hospitals as profit-seeking. Beijing United received this certificate on November 26, 2001 and as a result Beijing United is entitled to 3-year business tax exemption starting from November 26, 2001 through November 25, 2004. As of June 20, 2004 this approval, while only a formality, has not been received. The Company's liability is estimated at $900,000 should approval be denied. The Company has not recorded any accrual for the contingency related to this matter because it considers it remote that it will incur this tax liability. The Company has U.S. Federal net operating losses of approximately $3.2 million that expire in 2014 through 2024. The Company also has foreign losses from China of approximately $559,000 that expire in 2007 and 2009. 8. COMMITMENTS LEASES The Company leases office space, warehouse space, and space for both Beijing United and Shanghai United under operating leases. Future minimum payments under these noncancelable operating leases consist of the following: (thousands) Year ending March 31: 2005............................... $1,616 2006............................... 1,387 2007............................... 1,348 2008............................... 1,263 2009............................... 1,219 Thereafter......................... 3,886 ------- Net minimum rental commitments..... $10,719 ======= The above leases require the Company to pay certain pass through operating expenses and rental increases based on inflation. Rental expense was approximately $1,904,000, $472,000, $1,499,000 and $1,026,000 for the year ended March 31, 2004, three months ended March 31, 2003, and for the years ended December 31, 2002, and 2001, respectively. 9. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents trade receivables. Substantially all of the Company's cash and cash equivalents at March 31, 2004 and December 31, 2002 were held by one U.S. financial institution. All of the Company's sales during the years were to end-users located in China or Hong Kong. Most of the Company's equipment or consumables sales are accompanied by down payments of cash and/or letters of credit. Most of the Company's medical services provided by Beijing United were performed in China for patients residing in China. Approximately 65% of the payments received for such services were denominated in local currency and 35% in U.S. dollars. The Company conducts its marketing and sales and provides its services exclusively to buyers located in China, including Hong Kong. The medical services and products provided by Beijing United -34- and the marketing of such services are performed exclusively for/to patients in China. The Company's results of operations and its ability to obtain financing could be adversely affected if there was a deterioration in trade relations between the United States and China. Of the Company's assets at March 31, 2004 and December 31, 2002, approximately $33,476,000 and $29,784,000, respectively, of such assets are located in China, consisting principally of cash, receivables, inventories, leasehold improvements, equipment and other assets. Also, see Note 10. 10. SIGNIFICANT CUSTOMERS/SUPPLIERS Substantially all China purchases of the Company's U.S.-Dollar sales of products, regardless of the end-user, are made through Chinese foreign trade corporations (FTCs). Although the purchasing decision is made by the end-user, which may be an individual or a group having the required approvals from their administrative organizations, the Company enters into formal purchase contracts with FTCs. The FTCs make purchases on behalf of the end-users and are authorized by the Chinese government to conduct import business. FTCs are chartered and regulated by the government and are formed to facilitate foreign trade. The Company markets its products directly to end-users, but in consummating a sale the Company must also interact with the particular FTC representing the end-user. By virtue of its direct contractual relationship with the FTC, rather than the end user, the Company is to some extent dependent on the continuing existence of and contractual compliance by the FTC until a particular transaction has been completed. In fiscal 2002, the Company recorded sales to Instrimpex FTC of $8,821,000; this is the only customer over 10% of total sales. Purchases from several suppliers were each over 10% of total cost of goods. These were Siemens ($14,945,000), Becton-Dickenson ($8,863,000), Guidant ($11,926,000) and L'Oreal ($10,311,000) for the year ended March 31, 2004. Purchases over 10% for the year ended December 31, 2002 were Siemens, ($11,233,000), Becton-Dickenson ($11,145,000) and L'Oreal ($7,168,000). 11. SEGMENT REPORTING The Company has three reportable segments: Medical Capital Equipment, Healthcare Products Distribution and Healthcare Services. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, not including gains or losses on the Company's investment portfolio. The following segment information has been provided per Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information:" For the year ended March 31, 2004:
Medical Healthcare Capital Products Healthcare Equipment Distribution Services Total ----------- ------------ ----------- ----------- Assets $23,087,000 $12,525,000 $12,339,000 $47,951,000 Sales and service revenue $33,836,000 $38,393,000 $15,954,000 $88,183,000 Gross Profit 9,427,000 4,788,000 n/a n/a Gross Profit % 28% 13% n/a n/a (Loss) from operations $ (269,000) $ (643,000) $ (672,000) $(1,582,000) Other (expense) net (111,000) Minority interest (8,000) Loss on equity investment (222,000) ----------- Loss before income taxes $(1,923,000) ===========
-35- For the three months ended March 31, 2003:
Medical Healthcare Capital Products Healthcare Equipment Distribution Services Total ----------- ------------ ----------- ----------- Assets $19,521,000 $12,571,000 $10,248,000 $42,340,000 Sales and service revenue $ 7,716,000 $10,663,000 $ 3,470,000 $21,849,000 Gross Profit 2,474,000 1,097,000 n/a n/a Gross Profit % 32% 10% n/a n/a Income (loss) from operations $ 521,000 $ (121,000) $ (178,000) $ 222,000 Other (expense) net (66,000) Minority interest 0 Loss on equity investment (38,000) ----------- Income before income taxes $ 156,000 ===========
For the year ended December 31, 2002:
Medical Healthcare Capital Products Healthcare Equipment Distribution Services Total ----------- ------------ ----------- ----------- Assets $21,354,000 $10,616,000 $11,156,000 $43,126,000 Sales and service revenue $28,708,000 $28,946,000 $12,963,000 $70,617,000 Gross Profit 7,822,000 3,856,000 n/a n/a Gross Profit % 27% 13% n/a n/a Income (loss) from operations $ 198,000 $ (601,000) $ 536,000 $ 133,000 Other (expense) net (126,000) Minority interest 50,000 Loss on equity investment (38,000) ----------- Income before income taxes $ 19,000 ===========
For the year ended December 31, 2001:
Medical Healthcare Capital Products Healthcare Equipment Distribution Services Total ----------- ------------ ----------- ----------- Assets $17,511,000 $ 8,987,000 $ 6,871,000 $33,369,000 Sales and service revenue $25,819,000 $21,520,000 $ 8,779,000 $56,118,000 Gross Profit 7,451,000 2,842,000 n/a n/a Gross Profit % 29% 13% n/a n/a Income (loss) from operations $ 439,000 $(1,316,000) $ 476,000 $ (401,000) Other income, net 726,000 Minority interest (18,000) ----------- Income before income taxes $ 307,000 ===========
-36- 12. SELECTED QUARTERLY DATA (UNAUDITED) (thousands except per share data)
First Second Third Fourth For the year ended March 31, 2004: Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenue $20,373 $21,156 $21,630 $25,024 Gross profit from operations 5,670 7,152 7,506 8,247 (Loss) income before income taxes (1,726) 376 (502) (71) Net (loss) income (1,338) 218 (383) 484) Basic (loss) earnings per share of common stock (.36) .06 (.10) (.13) Diluted (loss) earnings per share of common stock (.36) .05 (.10) (.13) Cash dividends per share of common stock .00 .00 .00 .00 For the thee months ended March 31, 2003: Revenue $21,849 Gross profit from operations 6,702 Income before income taxes 156 Net income 76 Basic earnings per share of common stock .02 Diluted earnings per share of common stock .02 Cash dividends per share of common stock .00
First Second Third Fourth For the year ended December 31, 2002: Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenue $15,578 $14,968 $17,801 $22,270 Gross profit from operations 4,656 4,973 6,361 7,078 (Loss) income before income taxes (305) (612) 400 536 Net (loss) income (192) (411) 176 686 Basic (loss) earnings per share of common stock (.05) (.11) .05 .19 Diluted (loss) earnings per share of common stock (.05) (.11) .04 .19 Cash dividends per share of common stock .00 .00 .00 .00
-37- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company and their present positions with the Company are as follows: Name Positions with the Company ---- -------------------------- Roberta Lipson Chairperson of the Board of Directors, Chief Executive Officer and President Elyse Beth Silverberg Executive Vice President, Secretary and Director Lawrence Pemble Executive Vice President Finance and Business Development and Director Robert C. Goodwin, Jr. Executive Vice President Operations, Treasurer, Assistant Secretary, General Counsel and Director A. Kenneth Nilsson* Director Julius Y. Oestreicher* Director Carol R. Kaufman* Director ---------------- * Member of both the Compensation Committee and the Audit Committee. All directors of the Company hold office until the next annual meeting of the stockholders and until their successors have been duly elected and qualified. The officers of the Company are elected by the Board of Directors at the first meeting after each annual meeting of the Company's stockholders and hold office until their resignation, removal from office or death. Set forth below is certain information with respect to each director: ROBERTA LIPSON, 49, co-founded Chindex in 1981. Ms. Lipson has served as the chairperson of the board of directors, chief executive officer and president since that time. From 1979 until founding Chindex in 1981, Ms. Lipson was employed in China by Sobin Chemical, Inc., a worldwide trading company, as Marketing Manager, coordinating marketing and sales of various equipment in China. Ms. Lipson was employed by Schering-Plough Corp. in the area of product marketing until 1979. Ms. Lipson received a B.A. degree in East Asian Studies from Brandeis University and an MBA degree from Columbia University Graduate School of Business. ELYSE BETH SILVERBERG, 47, co-founded Chindex in 1981. Ms. Silverberg has served as our executive vice president and secretary and as a director since that time. Prior to founding us, from 1980 to 1981, Ms. Silverberg worked with Ms. Lipson at Sobin Chemical, Inc. and was an intern in China with the National Council for U.S.-China Trade from 1979 to 1980. Ms. Silverberg received a B.A. degree in Chinese Studies and History from the State University of New York at Albany. LAWRENCE PEMBLE, 47, joined us in 1984 and has served as executive vice president--finance and business development since January 1996. From 1986 until 1996, Mr. Pemble served as vice president of -38- marketing. From 1986 through April 1992 and September 1993 to the present, Mr. Pemble has also served as a director of Chindex. Prior to joining us, Mr. Pemble was employed by China Books and Periodicals, Inc. as Manager, East Coast Center. Mr. Pemble received a B.A. degree in Chinese Studies and Linguistics from the State University of New York at Albany. ROBERT C. GOODWIN, JR., 63, has served as executive vice president operations since January 1996, as assistant secretary since June 1995 and as general counsel, treasurer and a director of Chindex since October 1992. In addition to his other duties, from October 1992 until January 1996, Mr. Goodwin served as vice president of operations for us. Prior to joining us, Mr. Goodwin was engaged in the private practice of law from 1979 to 1992, with a specialty in international law, in Washington, D.C. and had served as our outside counsel since 1984. Prior to such employment, Mr. Goodwin served for two years as the assistant general counsel for International Trade and Emergency Preparedness for the United States Department of Energy and for three years as the deputy assistant general counsel for the Federal Energy Administration. From 1969 until 1974, Mr. Goodwin served as an attorney-advisor for the U.S. Department of Commerce. Mr. Goodwin received a B.A. degree from Fordham University and a J.D. degree from Georgetown University Law Center. A. KENNETH NILSSON, 71, has served as a director since January 1996. He formerly served as president of Cooper Laboratories, Inc.; president of Cooper Lasersonics, Inc.; managing director of Pfizer Taito Ltd.; president of Max Factor, Japan; and chairman of the Monterey Institute of International Studies. Mr. Nilsson received a B.A. degree from the University of Southern California and an M.A. degree from the University of California. JULIUS Y. OESTREICHER, 74, has served as a director for us since January 1996. Mr. Oestreicher has been a partner with the law firm of Oestreicher & Ennis, LLP and its predecessor firms for thirty years, engaged primarily in estate, tax and business law. Mr. Oestreicher received a B.S. degree in Business Administration from City College of New York and a J.D. degree from Fordham University School of Law. CAROL R. KAUFMAN, 55, was appointed a director of Chindex in November 2000. Ms. Kaufman has been vice president and chief administrative officer of The Cooper Companies, a medical device company, since October 1995 and was elected vice president of legal affairs in March 1996. From January 1989 through September 1995, she served as vice president, secretary and chief administrative officer of Cooper Development Company, a healthcare and consumer products company that was a former affiliate of The Cooper Companies. Ms. Kaufman received her undergraduate degree from Boston University. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of the Company's capital stock, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely upon review of the copies of such reports furnished to the Company during the one-year period ended March 31, 2004, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% stockholders were complied with. CODE OF ETHICS The Company has adopted a code of ethics that applies to all executive officers and directors of the Company, a copy of which is filed as Exhibit 14.1 to this report. -39- ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth information concerning the annual and long term compensation during our last three fiscal years and the three month fiscal period ended March 31, 2003 of our chief executive officer and other most highly compensated executive officers whose salary and bonus for fiscal 2004 exceeded $100,000 for services rendered in all capacities to us and our subsidiaries:
ANNUAL COMPENSATION -------------------------------------------------------- OTHER ANNUAL NAME AND PRINCIPAL POSITION YEAR(a) SALARY BONUS COMPENSATION --------------------------- ------- ------ ----- ------------ Roberta Lipson ....................... 2004 $184,437 -- $139,562(b) chairperson of the board, chief 2003 $ 46,109 -- $ 38,444(b) executive officer and president 2002 $184,437 $25,000 $137,765(b) 2001 $184,437 $25,000 $156,460(b) Elyse Beth Silverberg ................ 2004 $177,606 -- $ 99,062(c) executive vice president and 2003 $ 44,402 -- $ 24,750(c) secretary 2002 $177,606 $25,000 $ 98,750(c) 2001 $177,606 $25,000 $ 98,100(c) Lawrence Pemble ...................... 2004 $176,839 -- -- executive vice president finance 2003 $ 42,694 -- -- and business development 2002 $170,775 $25,000 -- 2001 $170,775 $25,000 -- Robert C. Goodwin, Jr ................ 2004 $172,497 -- -- executive vice president -- 2003 $ 41,811 -- -- operations, treasurer, assistant 2002 $167,244 $25,000 -- secretary and general counsel 2001 $167,244 $25,000 --
----------------- (a) Information is presented for our fiscal year ended March 31, 2004, the three months ended March 31, 2003, and our fiscal years ended December 31, 2002 and 2001. Effective April 1, 2003, we changed our fiscal year end from December 31 to March 31. (b) Includes tuition expenses for Ms. Lipson's sons in China in the amounts of $36,600 in the year ended March 31, 2004, $13,694 in the three months ended March 31, 2003, $36,475 in 2002 and $54,900 in 2001. Also includes rental expenses of $96,000 in each of the years presented and $24,000 in the three months ended March 31, 2003, for Ms. Lipson's housing in China. Also includes $3,062 in the year ended March 31, 2004, $750 in the three months ended March 31, 2003, $2,750 in 2002 and $2,100 in 2001 representing our matching contributions as deferred compensation under our 401(k) plan. (c) Includes rental expense in the amount of $96,000 in each of the years presented and $24,000 in the three months ended March 31, 2003, for Ms. Silverberg's housing in China. Also includes $3,062 in the year ended March 31, 2004, $750 in the three months ended March 31, 2003, $2,750 in 2002 and $2,100 in 2001, representing our matching contribution as deferred compensation under our 401(k) plan. OPTION GRANTS IN LAST FISCAL YEAR We did not grant any options to our named executive officers during fiscal 2004. -40- AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table provides summary information concerning stock options held as of March 31, 2004 by our chief executive officer and by the other executive officers named in the summary compensation table above.
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED ON OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END EXERCISE VALUE EXERCISABLE/ EXERCISABLE/ NAME (#)(A) REALIZED ($)(A) UNEXERCISABLE UNEXERCISABLE(B) ---- ------ --------------- ------------- ---------------- Roberta Lipson -- -- 96,800/0 $763,752/0 Elyse Silverberg -- -- 96,800/0 $763,752/0 Lawrence Pemble 16,800 $192,860 80,000/0 $631,200/0 Robert C. Goodwin, Jr. 10,000 $122,948 161,820/0 $1,284,162/0
----------------- (a) Based on the closing prices per share on the respective dates of exercise after giving effect to a subsequent 100% stock dividend in the form of a stock split. (b) Based on the closing price per share of $10.09 on March 31, 2004, the last trading day of fiscal 2004. EMPLOYMENT AGREEMENTS In 2001, we entered into five-year employment agreements with each of Mmes. Lipson and Silverberg and Messrs. Pemble and Goodwin, providing for base salaries to be subject to annual review and adjustment as determined by us, and which currently are $184,437, $177,606, $170,775 and $167,244, respectively. Each such executive officer also receives additional benefits, including those generally provided to our other executive officers. In addition, each of Mmes. Lipson and Silverberg also receives reimbursement of expenses relating to residing in China. Each employment agreement also provides certain additional compensation in the case of a departure related to a change of control of Chindex, including the payment of three times the annual salary. Each agreement also contains non-competition provisions that preclude each executive from competing with us for a period of two years from the date of termination of employment. We have obtained individual term life insurance covering Ms. Lipson in the amount of $2,000,000. We are the sole beneficiary under this coverage. COMMITTEES OF THE BOARD OF DIRECTORS We have no executive or nominating committee of the board of directors, but have a compensation committee and an audit committee. The compensation committee consists of Messrs. Oestreicher and. Nilsson and Ms. Kaufman. The function of the compensation committee is to make relevant compensation decisions for us and to attend to such other matters relating to compensation as may be prescribed by the board of directors. The audit committee consists of Ms. Kaufman and Messrs. Nilsson and Oestreicher, each of whom meets the independence requirements for audit committee members under the listing standards of the Nasdaq Stock Market, on which the common stock is quoted. The function of the audit committee is to make recommendations concerning the selection each year of our independent auditors, to review the effectiveness of our internal accounting methods and procedures and to determine through discussions with the independent auditors whether any instructions or limitations have been placed upon them in connection -41- with the scope of their audit or our implementation. The audit committee reviews and reassesses our charter annually and recommends any changes to the board of directors for approval. DIRECTOR COMPENSATION Each director who is not one of our employees is paid for serving on the board of directors a retainer at the rate of $3,000 per annum and an additional $1,000 for each meeting of our stockholders attended, $500 for each meeting of the board of directors attended and $300 for each meeting of a committee of the board of directors attended. We also reimburse each director for reasonable expenses in attending meetings of the board of directors. Directors also receive stock options as determined by the board of directors. Directors who are also our employees are not separately compensated for their services as directors. Since January 1, 2002, each of our outside directors annually has been granted options for the purchase of 6,000 shares of our common stock. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's compensation committee are Ms. Kaufman and Messrs. Nilsson and Oestreicher, all of whom are independent directors. No member of the compensation committee has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION Overview and Philosophy The Compensation Committee of the Board of Directors is composed entirely of non-employee directors and is responsible for developing and making recommendations to the Board of Directors with respect to the Company's executive compensation policies. In addition, the Compensation Committee, pursuant to authority delegated by the Board of Directors, determines the compensation to be paid to the Chief Executive Officer and each of the other executive officers of the Company. The objectives of the Company's executive compensation program are to: * Support the achievement of desired Company performance * Provide compensation that will attract and retain superior talent and reward performance The executive compensation program provides an overall level of compensation opportunity that is intended to be competitive. The Compensation Committee has considered companies of comparable size and in similar industries. The Compensation Committee believes that the Company is atypical in its combination of operations and China-based location, as well as other operational and human resource circumstances. As such, the Compensation Committee has designed its executive compensation in light of such circumstances. -42- Executive Officer Compensation Program The Company's executive officer compensation program is comprised of base salary, annual cash incentive compensation, long-term incentive compensation in the form of stock options, specific performance-based bonuses and various benefits, including medical and pension plans generally available to employees of the Company. In 2001, the Company entered into employment agreements with the executive officers. See "Executive Compensation - Employment Agreements." These employment agreements have not been amended during the last three years. Base Salary Base salary levels for the Company's executive officers are competitively set relative to historical levels as well as comparable entities in similar industries. In determining salaries, the Compensation Committee also takes into account individual experience and performance, as well as specific circumstances, particular to the Company. The base salary levels for the executive officers have not been increased during the past three years (except for an approximately 4% and 3% total increase over the three-year period for Messrs. Pemble and Goodwin, respectively) and currently are $184,437 for Ms. Lipson, our Chief Executive Officer and President; $177,606 for Ms. Silverberg, our Executive Vice President; $176,839 for Mr. Pemble, our Executive Vice President Finance and Business Development; and $172,497 for Mr. Goodwin, our Executive Vice President Operations and General Counsel. In light of the foregoing, the Compensation Committee currently is considering increasing the base salary levels for the Company's executive officers. Stock Option Program The stock option program has been the Company's long-term incentive plan for providing an incentive to key employees (including directors and officers who are key employees) and to directors who are not employees of the Company. This program would be expanded to include other equity incentives under the proposed 2004 Stock Option Plan. 1994 Stock Option Plan The 1994 Stock Option Plan, which by its terms has terminated, authorized the Board of Directors or a committee thereof to award key executives stock options during fiscal 2004. Options granted under the plan contained terms determined by the Board of Directors (or a committee thereof), including exercise periods and price; provided, however, that the Stock Option Plan required that the exercise price of the options be less than the fair market value of the Common Stock on the date of the grant and the exercise period not exceed ten years, subject to further limitations. During fiscal 2004 no options were granted under the plan to any executive officer, although such options were granted during fiscal 2005. In light of the expiration of the Stock Option Plan, the 2004 Stock Option Plan is being submitted for approval by the Company's stockholders. Benefits The Company provides to executive officers medical and pension benefits that generally are available to employees of the Company. The amount of perquisites, as determined in accordance with the rules of the SEC relating to executive compensation, exceeded 10% of salary for each of the fiscal year ended December 31, 2002, the fiscal period ended March 31, 2003 and the fiscal year ended March 31, 2004 with respect to Mmes. Lipson and Silverberg. The principal components of these perquisites were cost of tuition and housing in China. -43- Bonus In light of the Compensation Committee's satisfaction with the performance of management and the Company in general, the Company may pay bonuses to certain executive officers. Although certain executive officers from time to time have received annual bonuses in the amount of $25,000, during fiscal 2004 none of Ms. Lipson, Ms. Silverberg, Mr. Pemble nor Mr. Goodwin received any such bonus on the basis in part that the Compensation Committee awarded stock options to executive officers during fiscal 2005. Chief Executive Officer Compensation As noted above, in 2001, the Company entered into a five-year employment agreement with Ms. Lipson. See "Executive Compensation-Employment Agreements". In making compensation decisions as to the employment of Ms. Lipson, the Compensation Committee specifically considered the Company's recent revenue and earnings performance in the context of the continuing difficult time and unpredictable political and economic circumstances of the Company's industries, as well as the increased risk of loss of qualified management personnel. Julius Y. Oestreicher A. Kenneth Nilsson Carol Kaufman Members of the Compensation Committee PERFORMANCE GRAPH The following table compares the cumulative return to holders of the Company's Common Stock for the five years ended March 31, 2004 with the National Association of Securities Dealers Automated Quotation System Market Index and an index of companies with a market capitalization similar to that of the Company's, for the same period. The comparison assumes $100 was invested at the close of business on March 31, 1999 in the Company's Common Stock and in each of the comparison groups, and assumes reinvestment of dividends. The Company paid no cash dividends during the foregoing period. The peer group selected by the Company includes companies with similar market capitalization to that of the Company as of March 31, 2004. The Company does not use a published industry or line-of-business basis, and does not believe it could reasonably identify a different peer group. The companies that comprise the peer group are the following: American Vantage Companies; Omni Energy Services Corp.; Delcath Systems Inc.; Printware Inc.; Imagex Inc.; Regen Biologics Inc.; Insteel Industries; Rit Technologies Ltd.; Law Enforcement Associates Corp.; T/R Systems Inc.; Medwave Inc.; Wizzard Software Corp.; Mexco Energy Corp.; Teledigital Inc.; Non Invasive Monitor; and New Century Companies, Inc. -44- [GRAPH OMITTED] TOTAL RETURN TO SHAREHOLDER'S (INCLUDES REINVESTMENT OF DIVIDENDS)
ANNUAL RETURN PERCENTAGE YEARS ENDING COMPANY NAME / INDEX MAR00 MAR01 MAR02 MAR03 MAR04 ---------------------------------------------------------------------------------------------------------------- CHINDEX INTERNATIONAL INC 140.46 -13.27 19.51 -28.16 404.50 NASDAQ U.S. INDEX 85.81 -59.96 0.78 -26.60 47.58 PEER GROUP 14.40 -79.79 -32.11 -29.21 167.39
INDEXED RETURNS BASE PERIOD YEARS ENDING COMPANY NAME / INDEX MAR99 MAR00 MAR01 MAR02 MAR03 MAR04 ---------------------------------------------------------------------------------------------------------------- CHINDEX INTERNATIONAL INC 100 240.46 208.55 249.25 179.05 903.32 NASDAQ U.S. INDEX 100 185.81 74.39 74.97 55.03 81.21 PEER GROUP 100 114.40 23.12 15.70 11.11 29.72
PEER GROUP COMPANIES ---------------------------------------------------------------------------------------------------------------- AMERICAN VANTAGE COMPANIES NON INVASIVE MONITOR CHINDEX INTL INC OMNI ENERGY SERVICES CORP DELCATH SYSTEMS INC PRINTWARE INC IMAGEX INC REGEN BIOLOGICS INC INSTEEL INDUSTRIES RIT TECHNOLOGIES LTD LAW ENFORCEMENT ASSOCS CORP T/R SYSTEMS INC MEDWAVE INC TELEDIGITAL INC MEXCO ENERGY CORP WIZZARD SOFTWARE CORP NEW CENTURY COMPANIES INC
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. EQUITY COMPENSATION PLAN INFORMATION The following table contains a summary of the number of shares of our common stock to be issued upon the exercise of options, warrants and rights outstanding at March 31, 2004, the weighted-average exercise price of those outstanding options, warrants and rights, and the number of additional shares of our common stock remaining available for future issuance under our equity compensation plans as of March 31, 2004. Effective April 27, 2004, our 1994 Stock Option Plan, under which all of the options described below were granted, terminated by its terms. Consequently, no further options may be granted under any existing equity compensation plan as of the date of this prospectus.
---------------------------------------------------------------------------------------------------------------------- (a) (b) (c) Number of securities remaining available for the Number of securities to be Weighted-average future issuance under equity issued upon exercise of exercise price of compensation plans (excluding outstanding options, outstanding options, securities reflected in Plan Category warrants and rights warrants and rights column (a)) ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 948,700 $2.52 1,010,000 ---------------------------- ------------------------------ ------------------------ --------------------------------- Equity compensation plans not approved by security holders N/A N/A N/A ----------------------------------------------------------------------------------------------------------------------
The following table sets forth information as to the ownership of shares of the Company's Common Stock and Class B Common Stock as of July 23, 2004 with respect to (i) holders known to the Company to -45- beneficially own more than five percent (5%) of the outstanding Common Stock or the Class B Common Stock, (ii) each director, (iii) the Company's Chief Executive Officer and each other executive officer whose annual cash compensation for fiscal 2004 exceeded $100,000 and (iv) all directors and executive officers of the Company as a group.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(b)(c) PERCENT OF(d) -------------------------- ------------------------------------ CLASS B CLASS B NAME AND ADDRESS OF COMMON COMMON COMMON COMMON BENEFICIAL STOCKHOLDER(a) STOCK STOCK(e) STOCK STOCK COMBINED(f) ------------------------- ----- -------- ----- ----- ----------- Roberta Lipson.................. 118,012(g) 440,000(h) 2.5% 56.8% 29.6% Elyse Beth Silverberg........... 137,972(i) 260,500 3.0 33.6 18.3 Lawrence Pemble................. 101,148(j) 74,500 2.1 9.6 5.9 Robert C. Goodwin, Jr........... 168,328(k) -- 3.5 -- 2.0 Julius Y. Oestreicher........... 129,532(l) -- 2.7 -- 1.4 A. Kenneth Nilsson.............. 129,532(m) -- 2.7 -- 1.4 Carol R. Kaufman................ 69,360(n) -- 1.5 -- * Neon Liberty Capital Management LLC 230 Park Avenue, Suite 865 New York, NY 10169.......... 300,390(o) -- 6.6 -- 3.3 Federated Kaufman Fund, a portfolio of Federated Equity Funds 140 East 45th Street 43rd Floor New York, NY 10017........... 666,000(p) -- 11.9 -- 7.2 All executive officers and directors as a group (7 persons)..................... 873,884(q) 775,000 16.2 100.0 54.9
----------------- * Less than 1%. (a) Unless otherwise indicated, the business address of each person named in the table is c/o Chindex International, Inc., 7201 Wisconsin Avenue, Bethesda, Maryland 20814. (b) Except as otherwise indicated, each of the parties listed has sole voting and investment power with respect to all shares indicated below. (c) Beneficial ownership is calculated in accordance with Regulation S-K as promulgated by the Commission. (d) Gives effect to all of the 1,500,000 shares sold in the financing. (e) Our common stock is entitled to one vote per share and our Class B common stock is entitled to six votes per share. (f) Indicates percentage voting power represented by beneficial ownership when the Class B common stock and common stock vote together, based on total outstanding as of June 28, 2004 of 775,000 shares of Class B common stock and 4,551,152 shares of common stock, including all of the 1,500,000 shares sold in the financing. (g) Includes 116,800 shares underlying options that are currently exercisable with respect to all of the underlying shares. (h) Includes 20,000 shares held by each of the Ariel Benjamin Lee Trust, Daniel Lipson Plafker Trust and Jonathan Lipson Plafker Trust, all of which Ms. Lipson is a trustee. -46- (i) Includes 116,800 shares underlying options that are currently exercisable with respect to all of the underlying shares. (j) Includes 60,000 shares underlying options that are currently exercisable with respect to all of the underlying shares. (k) Includes 161,820 shares underlying options that are currently exercisable with respect to all of the underlying shares. (l) Represents shares underlying options that are currently exercisable with respect to all of the underlying shares. (m) Includes 123,480 shares underlying options that are currently exercisable with respect to all of the underlying shares. (n) Represents shares underlying options that are currently exercisable with respect to all of the underlying shares. (o) The amount and nature of beneficial ownership of these shares by Neon Liberty Capital Management LLC is based solely on a Schedule 13G filed by it with the Commission. The Schedule 13G indicates that the following natural persons share investment decisions over our shares owned by Neon Liberty Capital Management LLC: Satyen Mehta, Alejandro Baez-Sacasa and Fang Zheng. We have no independent knowledge of the accuracy or completeness of the information set forth in the Schedule 13G, but have no reason to believe that such information is not complete or accurate. (p) Federated Kaufmann Fund ("FKF") is a portfolio of Federated Equity Funds, a registered investment company. The parent holding company of FKF's advisors is Federated Investors Inc. FKF's advisor is Federated Equity Management Company of Pennsylvania ("FEMCPA") which has delegated daily management of the fund's assets to Federated Global Investment Management Corp.("FGIMC"), as subadvisor. While the officers and directors of FEMCPA have dispositive power over FKF's portfolio securities, they customarily delegate this dispositive power, and therefore the day to day dispositive decisions are made by the portfolio managers of FKF, currently, Lawrence Auriana and Hans P. Utsch. Messrs. Auriana and Utsch disclaim any beneficial ownership of the shares. With respect to voting power, FKF has delegated the authority to vote proxies to FEMCPA. FEMCPA has established a Proxy Voting Committee to cast proxy votes on behalf of FKF in accordance with proxy voting policies and procedure approved by FKF. (q) Includes 737,792 underlying options that are currently exercisable with respect to all of the underlying shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES During fiscal year ended March 31, 2004, the three months ended March 31, 2003 and the fiscal year ended December 31, 2002, the aggregate fees billed by Ernst & Young LLP for professional services were as follows: -47- Fiscal Year Three Months Fiscal Year Ended Ended Ended March 31, March 31, December 31, 2004 2003 2002 ----------- ------------ ----------- Audit Fees: (1) $135,000 $20,000 $125,000 Audit-Related Fees: 0 0 0 Tax Fees: (2) 36,300 0 34,660 All Other Fees: (3) $145,545 $ 6,853 $ 18,551 -------- ------- -------- Total $316,845 $26,853 $178,211 ======== ======= ======== (1) Represents fees for professional services provided in connection with the audit of our annual financial statements and review of our quarterly financial statements, advice on accounting matters that arose during the audit and audit services provided in connection with other statutory or regulatory filings. (2) Represents fees for international and U.S. tax planning and compliance services as well as consultations and assistance surrounding matters with various income and sales tax authorities. (3) Represents fees for services provided in connection with the Company's recently submitted registration statement and other miscellaneous items not otherwise included in the categories above. The Audit Committee has determined that the provision by Ernst & Young LLP of non-audit services is compatible with maintaining the independence of Ernst & Young LLP. In accordance with its charter, the Audit Committee approves in advance all audit and non-audit services to be provided by Ernst & Young LLP. In certain cases, the Audit Committee may delegate authority to pre-approve non-audit services on a preliminary basis to one or more members of the Audit Committee, provided that such pre-approvals re communicated to the full Committee at its next meeting. During fiscal 2004, all services were pre-approved by Audit Committee in accordance with this policy. PART IV ITEM 15. EXHIBITS Item 15 is hereby supplemented as follows: The following financial statement schedule is included in Item 15(a): Schedule II Valuation and Qualifying Accounts
------------------------------------------------------------------------------------------------------------------------- Balance beginning Additions Additions not Balance end Description (amounts in thousands) of year expensed expensed Deductions of year ------------------------------------------------------------------------------------------------------------------------- For the year ended March 31, 2004: ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Allowance for doubtful receivables $1,001 $777 $647 $1,131 ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Deferred income tax valuation allowance 456 278 $663 0 1,397 --- --- ---- - ----- ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Total allowances deducted from assets $1,457 $1,055 $663 $647 $2,528 ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- For the year ended March 31, 2004: ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Allowance for doubtful receivables $883 $118 $1,001 ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Deferred income tax valuation allowance 456 0 456 --- - --- ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Total allowances deducted from assets $1,339 $118 $0 $0 $1,457 ------------------------------------------------------------------------------------------------------------------------- -48- ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2002: ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Allowance for doubtful receivables $604 $279 $883 ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Deferred income tax valuation allowance 1,446 990 456 ----- --- --- ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Total allowances deducted from assets $2,050 $279 $0 $990 $1,339 ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- For the year ended December 31, 2001: ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Allowance for doubtful receivables $604 $604 ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Deferred income tax valuation allowance 3,081 1,635 1,446 ----- ----- ----- ------------------------------------------------- ------------- ------------- --------------- ------------- ------------- Total allowances deducted from assets $3,685 $0 $0 $1,635 $2,050 ------------------------------------------------- ------------- ------------- --------------- ------------- -------------
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. The following exhibits are filed as part of this Report: 14.1 Code of Ethics. 23.1 Consent of Independent Registered Public Accounting Firm 31.4 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.5 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.6 Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. -49- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized. CHINDEX INTERNATIONAL, INC. July 29, 2004 By: /s/ Robert C. Goodwin ---------------------------- Robert C. Goodwin, Jr. Executive Vice President and General Counsel -50-