UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

For the quarterly period ended December 31, 2003

Commission file number 0-24624

CHINDEX INTERNATIONAL, INC.

(301) 215-7777
(Registrant’s telephone number)

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 the filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o  No þ

The number of shares outstanding of each of the issuer’s class of common equity, as of February 3, 2004, was 3,043,428 shares of Common Stock and 775,000 shares of Class B Common Stock.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

The accompanying notes are an integral part of the financial statements. Share information retroactively adjusted to give effect to the stock splits, each in the form of a 100% stock dividend, announced by the Company on August 6, 2003 and December 29, 2003.

CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

The accompanying notes are an integral part of the financial statements. Share information retroactively adjusted to give effect to the stock splits, each in the form of a 100% stock dividend. The stock splits 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.

CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

The accompanying notes are an integral part of the financial statements.

CHINDEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CHINDEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Note 1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated condensed financial statements of Chindex International, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year.

     On March 31, 2003, the Company’s Board of Directors approved a change in the Company’s fiscal year end from December 31 to March 31. The transition period began January 1, 2003 and ended March 31, 2003. The Company’s new fiscal year began April 1, 2003 and will end March 31, 2004. With this change, the Company’s new fiscal year now coincides with its material business cycle.

     For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K and Form 10-K/A for the year ended December 31, 2002 and the transitional filing report on Form 10-QT for the period ended March 31, 2003.

     The share information has been restated after giving retroactive effect to the stock split, in the form of a stock dividend, announced by the Company on August 6, 2003 and having a record date of August 18, 2003 and a second stock split announced by the Company on December 29 and having a record date of January 10, 2004.

Note 2. INVENTORIES

Note 3. PROPERTY AND EQUIPMENT

Note 4. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted Earnings Per Share (EPS) or Loss Per Share (LPS) for the periods indicated:

* excluded because effect would be anti-dilutive

STOCK-BASED COMPENSATION: The Company accounts for stock options under the provisions of Accounting Principles Board Opinion (“APB”) No. 25, under which no compensation expense is recognized when the stock options are granted to colleagues and directors at fair market value as of the grant date. The Company’s 1994 Stock Option Plan (the Plan) provides 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. The total number of shares of common stock for which options may be granted under the Plan is currently 2,000,000. There were 20,000 options granted in the nine months ended December 31, 2003.

Had compensation cost for the plan been determined as required under SFAS No. 123, “Accounting for Stock-Based Compensation,” amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” the Company’s pro forma net (loss) income and pro forma (loss) earnings per share would have been as follows:

Note 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other provisions, this Statement eliminates the requirement that gains and losses from extinguishment of debt be classified as extraordinary items. SFAS No. 145 became effective for the Company on January 1, 2003. Upon adoption of SFAS No. 145, the Company now reclassifies losses on extinguishments of debt that were classified as extraordinary items in prior periods when such prior periods are presented.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than when a company commits to an exit plan as was previously required. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The new standard will result in the Company recognizing liabilities for any future restructuring activities at the time the liability is incurred rather than the past method of recognizing the liability upon the announcement of the plan and communication to colleagues.

In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition and measurement provisions of FIN 45 are effective for all guarantees issued or modified after December 31, 2002. The Company currently does not have any guarantees requiring disclosure under FIN 45.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” FIN 46 addresses consolidation by business enterprises of certain variable interest entities that are currently not consolidated. FIN 46 is effective for variable interests created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For variable interest entities in which the Company holds a variable interest that it acquired before February 1, 2003, the Interpretation is applicable as of the end of the first interim period after March 31, 2004. The Company is currently analyzing the impact of FIN 46 on its condensed consolidated financial statements.

Note 6. SEGMENT INFORMATION

     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.

Inter-segment transactions were eliminated for the three and nine months ended December 31, 2003 and 2002.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Three months ended December 31, 2003 compared to three months ended December 31, 2002

     The Company’s revenue for the three months ended December 31, 2003 was $21,630,000, down 3% from the three months ended December 31, 2002 revenue of $22,270,000. The Company growth in each of the three segments was mixed, with revenue down 15% in the medical capital equipment segment (in the absence of a government-supported customer financing loan program which positively impacted the prior quarter by $3,500,000), down 1% in the healthcare products distribution segment, and up 27% in the healthcare services segment, compared to the same period last year. Costs and expenses were $22,151,000 for the period as compared with costs and expenses of $21,788,000 for the three months ended December 31, 2002. The nature of the increased costs in particular segments is discussed below. In addition, there were a number of increased costs for the corporation as a whole. These include salary and professional fees related to the upgrade of the Company’s data systems in China, increased accounting and legal fees, and increased rent and associated costs related to the Company’s new offices in Beijing. The Company recorded a net loss of $383,000 for the three months ended December 31, 2003, as compared to net income of $687,000 for the three months ended December 31, 2002.

     There were the following developments of note during the quarter. On the positive side, the direct impact of Severe Acute Respiratory Syndrome (SARS) outbreak last spring has faded — normal contracts began to be executed again and patient visits at our hospital, Beijing United Family Hospital (BJU) returned to and then exceeded pre-SARS levels. On the negative side, the relevant agencies of the Chinese Government delayed negotiations with the U.S. Export-Import Bank on a new framework agreement for government supported loan programs, effectively postponing any such loan programs until sometime later which we believe will be in the latter half of calendar 2004. The Company has made effective use of government supported loan programs in the past and continues to market them to end users in anticipation of being able to obtain approvals for such loan programs in the future. The inability to gain approval for a loan program during the recent quarter is substantially responsible for the Company’s drop in revenue over the periods.

Medical Capital Equipment Segment

     The medical capital equipment segment exports high quality Western medical capital equipment to the China market. In the three months ended December 31, 2003, this segment had revenue of $8,238,000, a 15% decrease from revenue of $9,713,000 in the three months ended December 31, 2002. Loss from operations was $634,000 in the recent period compared with income from operations of $590,000 in the prior period. A significant factor in the revenue decrease was the absence of loan program sales in the three months ended December 31, 2003 as compared with the prior period, in which loan program sales were $3.5 million.

     Gross profit in the three months ended December 31, 2003 decreased to $2,019,000 from $2,766,000 in the three months ended December 31, 2002. As a percentage of revenue, gross profit from the medical capital equipment segment for the recent period was 25%, compared to 28% for the prior period. This lower gross profit was due to lower sales over certain fixed cost of goods.

     Expenses for the medical capital equipment segment in the three months ended December 31, 2003 increased to $2,653,000 from $2,176,000 in the three months ended December 31, 2002, and as a percentage of revenues over the period increased to 32% from 22%. Salaries for the segment in the three months ended December 31, 2003 increased by $58,000 from the three months ended December 31, 2002, and as a percentage of revenues over the period increased to 10% from 8%. The salary increase was primarily due to additional sales personnel and higher payroll benefits which have been mandated by the Chinese Government. In addition, while travel and entertainment expenses for the segment decreased $11,000 and exhibitions costs decreased $30,000, other costs increased $383,000 over the three months. Over half of this cost increase was due to the segment’s allocable share of the additional corporate administrative costs such as costs for data system upgrades and accounting and legal costs. Other increases were related to increased costs for promotion and meeting expenses.

Healthcare Products Distribution Segment

     The healthcare products distribution segment, consisting of medical consumables and personal healthcare products, had a revenue decrease of 1% to $8,850,000 in the three months ended December 31, 2003, as compared to revenue of $8,980,000 in the three months ended December 31, 2002. Revenues from one logistics client declined by $1,600,000, but this was offset by strong sales growth for other products. The segment experienced increased sales of higher margin products and thus had income from operations of $127,000 in the recent period, compared with a loss from operations of $102,000 in the prior period.

     Gross profit in the three months ended December 31, 2003 increased to $1,364,000 from $1,112,000 in the three months ended December 31, 2002. As a percentage of revenue, gross profit from the healthcare products distribution segment for the recent period was 15% as compared to 12% in the prior period. The decrease in sales and the increase in gross profit is attributable to relative increases in sales for non-logistics products balanced by a drop-off in revenues for logistics since margins in the logistics business are typically lower. The Company expects continued gross profit improvement in the future. Gross profit percentages with suppliers vary depending on the arrangements negotiated with those suppliers, the number of products carried, the volume for each product line and market conditions for

each product.

     Expenses for the healthcare products distribution segment in the three months ended December 31, 2003 increased to $1,237,000 from $1,214,000 in the three months ended December 31, 2002, but remained the same as a percentage of revenues at 14%. Salaries for the segment increased $8,000, consisting of a drop in salaries of $28,000 but an increase in overall benefits of $36,000. In addition, travel and entertainment expenses for the segment decreased $26,000 (but was flat at 1% of revenue for both periods) and other costs increased $40,000 due primarily to increased other professional fees and additional administrative allocations.

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”) (under construction) as well as an affiliated satellite clinic in Beijing. For the three months ended December 31, 2003, the revenues from this segment were $4,541,000, an increase of 27% over the three months ended December 31, 2002 revenues of $3,577,000. The segment had a loss from operations of $14,000 in the recent period, compared with a loss from operations of $6,000 in the prior period. The hospital and clinic both saw increased patient visits as well as more inpatient days. Healthcare services costs increased for the three months ended December 31, 2003 to $4,555,000, a 27% increase over the three months ended December 31, 2002 costs of $3,583,000. This increase was due primarily to the costs associated with increased services offered plus the increasing operating expenses of the not yet open Shanghai United facility. Salaries increased by $476,000 (salaries were 52% of revenue for the three months ended December 31, 2003 and 2002, respectively), with all other costs increasing $498,000, including increases of $257,000 in other professional fees and increased depreciation of 96,000. Included in both salary and other costs was a $291,000 increase in expenses related to the development of SHU.

     The opening of SHU, originally scheduled for the fall of 2003, has been delayed until the middle 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 receded, the Company decided to reevaluate the SHU design in light of lessons learned during the epidemic. As a result of this process, a number of specific design changes were made, including adding a fever clinic, changing the air conditioning system, increasing the number of rooms where negative pressure could be utilized.

Other Income and Expenses

     Interest expense on short-term debt of $6,774,000 and long-term debt of $182,000 amounted to $67,000 whereas the company had only $40,000 expense in the prior period. Over $3,500,000 of debt was incurred for the development of SHU that is currently under construction (see Liquidity and Capital Resources).

Taxes

     The Company recorded a $119,000 tax benefit for the three months ended December 31, 2003 as compared to a tax benefit of $152,000 for the three months ended December 31, 2002.

Nine months ended December 31, 2003 compared to nine months ended December 31, 2002

     The Company’s revenue for the nine months ended December 31, 2003 was $63,159,000, up 15% from the nine months ended December 31, 2002 revenue (which included $3,500,000 of loan sales) of $55,029,000. The Company experienced continued growth in each of the three segments of the business, with revenue growth of 9% in the medical capital equipment segment, 21% in the healthcare products distribution segment, and 13% in the healthcare services segment, compared to the same period last year. Costs and expenses were $64,954,000 for the period as compared with costs and expenses of $54,651,000 for the nine months ended December 31, 2002. The nature of the increased costs in particular segments is discussed below. In addition, there were a number of increased costs for the corporation as a whole. These include salary and professional fees related to the upgrade of the Company’s data systems in China, increased accounting and legal fees, and increased rent and associated costs related to the Company’s new offices in Beijing. The Company recorded a net loss of $1,503,000 for the nine months ended December 31, 2003, as compared to net income of $451,000 for the nine months ended December 31, 2002.

     The current period was marked by the extraordinary experience of dealing with Severe Acute Respiratory Syndrome (SARS). SARS had a significant impact on the Company’s results for the period. As previously announced, a number of contracts for the sale of medical capital equipment were delayed and hospital visits were far below normal as foreign residents in Beijing left the capital. While revenues were up substantially in two out of three of the Company’s segments, the Company had budgeted for even larger revenue increases and incurred expenses in line with its internal growth projections.

Medical Capital Equipment Segment

     The medical capital equipment segment exports high quality Western medical capital equipment to the China market. In the nine months ended December 31, 2003 this segment had revenue of $23,991,000, a 9% increase over revenue of $22,044,000 in the nine months ended December 31, 2002. Loss from operations was $690,000 in the recent period compared with income from operations of $372,000 in the prior period.

     Gross profit in the nine months ended December 31, 2003 decreased to $6,374,000 from $6,383,000 in the nine months ended

December 31, 2002. As a percentage of revenue, gross profit from the medical capital equipment segment for the recent period was 27% as compared to 29% in the prior period. The decrease in gross profit percentage is attributable to the impact of SARS slowing sales into the marketplace for the period as well as the lack of a government supported loan program.

     Expenses for the medical capital equipment segment in the nine months ended December 31, 2003 increased to $7,064,000 from $6,014,000 in the nine months ended December 31, 2002, but as a percentage of revenues over the period increased to 29% from 27%. Salaries for the segment in the nine months ended December 31, 2003 increased by $279,000 from the nine months ended December 31, 2002, and as a percentage of revenues remained the same over the prior period at 10%. The salary increase was primarily due to increased sales personnel and higher payroll benefits. In addition, travel and entertainment expenses for the segment increased $70,000. Other costs increased $773,000 over the nine months, primarily due to additional administrative allocation and higher costs for promotion, meeting expenses, and telephones.

Healthcare Products Distribution Segment

     The healthcare products distribution segment, consisting of medical consumables and personal healthcare products, had revenue growth of 21% to $27,690,000 in the nine months ended December 31, 2003, as compared to revenue of $22,820,000 in the nine months ended December 31, 2002. The segment had a loss from operations of $456,000 in the recent period, compared with a loss from operations of $478,000 in the prior period. The Company anticipates that revenue growth in this segment will be slower as several customers pull back business and new products are delayed in the Chinese regulatory cycle. These local currency sales of medical consumables and personal healthcare products are made from inventories maintained locally in China (see Foreign Currency Exchange) to a network of sub-dealers and pharmacies.

     Gross profit in the nine months ended December 31, 2003 rose to $3,614,000 from $3,089,000 in the nine months ended December 31, 2002. As a percentage of revenue, gross profit from the healthcare products distribution segment for the recent period was 13% as compared to 14% in the prior period. The decrease in gross profit is attributable in part to the re-negotiation of service terms with one of our suppliers. Gross profit percentages vary depending on the arrangements negotiated with those suppliers, the number of products carried, the volume for each product line and market conditions for each product.

     Expenses for the healthcare products distribution segment in the nine months ended December 31, 2003 increased to $4,070,000 from $3,568,000 in the nine months ended December 31, 2002, but decreased as a percentage of revenues over the period to 15% from 16%. Salaries for the segment increased $180,000 primarily due to increased staffing and increased payroll benefits mandated by the Chinese government. In addition, travel and entertainment expense for the segment decreased $51,000 (but was flat at 1% of revenue for both periods) and other costs increased $371,000 due primarily to additional administrative allocation and increased other professional fees.

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”) (under construction) as well as an affiliated satellite clinic in Beijing. For the nine months ended December 31, 2003, the revenues from this segment were $11,478,000, an increase of 13% over the nine months ended December 31, 2002 revenues of $10,164,000. The segment had a loss from operations of $649,000 in the recent period, compared with income from operations of $494,000 in the prior period. During the recent period the hospital was significantly impacted by the SARS crisis in Beijing. Many of its core expatriate patients left the country and many others deferred visits during the April to August period. Healthcare services costs increased for the nine months ended December 31, 2003 to $12,127,000, a 25% increase over the nine months ended December 31, 2002 costs of $9,670,000. This increase was due primarily to the costs associated with increased services offered plus the increasing operating expenses of the not yet open Shanghai United facility. Salaries increased by $1,269,000 (salaries were 55% of revenue for the nine months ended December 31, 2003 and 49% for the nine months ended December 31, 2002), with all other costs increasing $1,188,000, including increases of $359,000 in doubtful accounts reserve, $467,000 in other professional fees and $158,000 in depreciation. Included in these increased salaries and other costs was a $746,000 increase in developmental expenses related to SHU.

     The opening of SHU, originally scheduled for the fall of 2003, has been delayed until the middle 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 had ended, the Company decided to reevaluate the SHU design in light of lessons learned during the epidemic. As a result of this process, a number of specific design changes were made, such as adding a fever clinic, changing the air conditioning system, increasing the number of rooms where negative pressure could be utilized, and a number of other changes. Interior construction on SHU has begun.

Other Income and Expenses

     Interest expense on short-term debt of $6,774,000 and long term debt of $182,000 amounted to $186,000 whereas the company had $50,000 the prior period. Over $3,500,000 of debt is for the development of SHU that is currently under construction (see Liquidity and Capital Resources).

Taxes

     The Company recorded a $349,000 benefit from taxes for the nine months ended December 31, 2003 as compared to a benefit from taxes of $127,000 for the nine months ended December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2003, total accounts receivable decreased by $825,000 as compared to March 31, 2003. This was primarily due to the collection of receivables from significant sales in the three months ended March 31, 2003.

     As of December 31, 2003, net inventories were $9,567,000, decreasing $1,319,000 from the March 31, 2003 balance of $10,886,000. This decrease was primarily due to shipment of Medical Capital Equipment that was waiting for final shipping instructions.

     Short-term loan payables were made up of bank loans of $2,841,000 and extended payment accounts payable by one vendor of $3,658,000. The vendor accounts payable relates to the provision of financing for SHU (discussed below). Under this program, the vendor has agreed to provide continuing credit facilities for purchases for a 7 year period, each grant of credit expiring at the end of 18 months and replaced by subsequent purchases and payables. The classification from long-term to short-term is a result of this timing of the first group of payables under this program being now less than 12 months. The company is currently in discussions about the re-timing of the loans.

     The Company is currently renovating and outfitting its hospital facility in Shanghai, which is being primarily financed through vendor financing and local bank borrowings. The Company has signed 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 continues for seven years and carries an interest component of five percent. Due to this vendor financing the Company has recorded a short-term accounts payable of $3,749,000 as of December 31, 2003. The funds will be available to cover design and construction costs. The design work for SHU has been completed as has the interior demolition work and construction of the interior is well under way. The construction principally has been and will be interior construction since the building itself already exists. The estimate for design and construction costs (including demolition) is approximately $4.2 million. The Company has not finalized its agreement in principle with the Changning Branch of the Industrial and Commercial Bank (ICBC) for the loan of up to $3 million for the purchase of medical equipment and has decided to commence negotiations with the Hong Kong and Shanghai Banking Corporation (HSBC), with which the Company has an existing loan relationship relating to the Beijing United Hospital. While the Shanghai Municipality has adopted new lending policies that require all registered capital to have been contributed prior to allowing SHU to borrow locally, the Company believes, but cannot be assured, that this requirement will not be applied to the Company. If it is applied to the Company, then the final payment of $900,000 of registered capital which is scheduled for June of 2004 will be accelerated in order to complete negotiations for the local loan and keep the project on schedule. The Company will continue to explore additional financing opportunities but there are no assurances that such additional financing will be available.

     As of December 31, 2003, letters of credit issued by the Company’s principal bank M&T Bank, in the amounts of approximately $226,000 were outstanding under the line of credit facility. Borrowings under the credit facility were $1,267,000, which bear interest at 1% over the three-month London Interbank Offered Rate (“LIBOR”). Beijing United has a short term financing arrangement in China with Hongkong Shanghai Banking Corp. (“HSBC”) for $600,000 in revolving loans. Terms of the agreement include interest at 1.75% over the three-month Singapore Interbank Money Market Offer Rate (“SIBOR”). Beijing United has agreed to utilize HSBC for a certain portion of its credit card settlement business. Also, a new line of credit for up to $1,200,000 carries an interest rate of 2.25% over SIBOR and has a term of up to three years. As of December 31, 2003, both lines of credit were fully utilized. The Company has issued a guarantee of repayment covering the full $1.8 million credit on behalf of Beijing United.

     The Company continues to consider various other financing alternatives to satisfy its future expansion, capital improvements and equipment requirements.

TIMING OF REVENUES

     The timing of the Company’s revenues is affected by several significant factors. Many end-users of products sold by the Medical Capital Equipment segment depend to a certain extent upon the allocation of funds in the budgeting processes by 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.

     As noted earlier, timing of revenues has been impacted by Severe Acute Respiratory Syndrome (SARS) as some Chinese customers have delayed purchases of equipment from the Company until SARS is under control. See Item 3.

     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 the Company’s or its purchasers’ abilities to arrange for credit sources, including Ex-Im Bank or other loan financing. As a result, the

Company’s 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 the Company’s revenue in any one period. As a result, a relatively small reduction in the number of orders can have a material impact on the Company’s revenues in any year. Further, because the Company recognizes revenues and expenses as products are shipped, the timing of shipments could affect the Company’s operating results for a particular period. Offsetting this trend, a growing percentage of the Company’s revenues are attributable to the Healthcare Services segment and local currency sales through the Healthcare Products Distribution segment, both of which have more even revenue streams.

FOREIGN CURRENCY EXCHANGE AND IMPACT OF INFLATION

     The results of operations of the Company for the periods discussed have not been significantly affected by inflation or foreign currency fluctuation. Since the Company receives over 60% of its revenues in local Chinese currency, the Company has some foreign currency risk. Changes in the valuation of the Chinese Renminbi or Hong Kong dollar may have an impact on the Company’s results of operations in the future. The Company’s subsidiaries, Chindex Tianjin, Chindex Shanghai and Beijing United, sell products and services in Renminbi. If the Chinese government allows the Renminbi to float in a broader band as against the dollar, the expectation of economists is that the Renminbi would strengthen, thus having a positive impact on the Company.

     The Company has also 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, the Company could experience a negative impact on profitability. The Company anticipates hedging transactions wherever possible to minimize such negative impacts. Currently there are no such hedges.

FORWARD-LOOKING STATEMENTS

     With the exception of historical information, the matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks and uncertainties, including risks associated with uncertainties pertaining to the Company’s (i) performance goals, including successful conclusion of efforts to secure government-backed financing, (ii) future revenues and earnings, including revenues from the Company’s developmental businesses such as the healthcare services, (iii) markets, including growth in demand in China for the Company’s products and services, (iv) proposed new operations, including without limitation that there can be no assurance as to the opening schedule, budgeting or success of the Company’s hospital in Shanghai, (v)the impact of the SARS epidemic, including the recovery of delayed or reduced sales, (vi) the timing of the opening of new hospital facilities, and (vii) the availability of loan funds. Actual results, events and performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risks in a variety of ways. The principal market risk is related to the nature of the Chinese economy and political system. Since the Company generates all of its revenues from China, any risk having to do with the environment in China for a foreign business operating there can have a significant impact on the Company. In addition, in the near term, Severe Acute Respiratory Syndrome (SARS) creates a risk for the Company as discussed below.

     The Chindex growth plan includes continuing expansion of the Medical Capital Equipment segment, rapid expansion of the Healthcare Products Distribution segment product portfolio, with an emphasis on increasing the number and variety of products that are sold directly to retail pharmacies, and the development of Healthcare Services, a network of private family hospitals and clinics, based on the Beijing United model, to serve China’s growing middle class. Management continues to develop this growth plan, the implementation of which will be contingent on a number of factors, including requisite financing.

     Although the Company remains optimistic about the marketplace, there are continuing uncertainties as to the direction of China’s on-going political and economic reforms, the possibility for future revaluation of the Chinese or Hong Kong currencies, and China’s relationship with the United States. These uncertainties may influence the budgeting and purchasing process in China. Any of the foregoing circumstances may impede trade with China, thus impairing the ability of the Company’s customers to purchase the Company’s products. In the Company’s view, China’s entry into the World Trade Organization in 2001 has made the dangers from these uncertainties less significant. Other possibly adverse circumstances include a decrease in the funds available for Chinese end-users as a result of a general economic slowdown, and increased competition from other American and European companies.

Severe Acute Respiratory Syndrome (SARS)

     The outbreak of Severe Acute Respiratory Syndrome (SARS) in China and Hong Kong has impacted the Company in the current period. It appears that SARS is no longer an active threat to public health in China and business operations have basically returned to normal. However, many medical experts believe that SARS could return in the winter. While there is no way to quantify this possibility,

the Company considers it a risk factor that needs to be taken into consideration.

Internal Political Risk

     The political environment in China may adversely impact the Company’s interests. China is a socialist state, which since 1949 has been, and is expected to continue to be, controlled by the Communist Party of China. Changes in the top political leadership of the Chinese government and/or the Communist Party may have a significant impact on policy and the political and economic environment in China. Moreover, economic reforms and growth have been more successful in certain sections of the country than others, and the continuation or increase of such disparities could affect political or social stability.

Timing for Completion of Shanghai United Family Hospital

     The Company’s ability to complete construction of its Shanghai United Family Hospital has already been delayed, principally due to the SARS epidemic. Additional delays are possible and should be considered a risk factor. For example, additional delays could be caused by design, engineering or construction problems or caused by regulatory actions by the Chinese Government. Delays could also be caused by a lack of availability of financing.

Recovery of Sales Delayed by SARS

     The Company’s expectation is that sales of equipment that were delayed because of SARS will now move forward. However, there is a risk that some expected sales may not take place once the initial cause for delay is past. Reasons for this could include intervention of competitors during the delay period, a changing of priorities on the part of the customer, or other reasons.

Government Control Over Economy

     The government of China has exercised and continues to exercise substantial control over virtually every section of the Chinese economy through regulation and state ownership. China’s continued commitment to reform and the development of a vital private sector in that country have, to some extent, limited the practical effects of the control currently exercised by the government over individual business enterprises. However, the economy continues to be subject to significant government controls, which, if directed towards business activities of the Company, could have a significant adverse impact on the Company. For example, if the government were to limit the number of foreign personnel who could work in the country, or were to substantially increase taxes on foreign businesses or were to impose any number of other possible types of limitations on the Company’s operations, the impact would be significant.

Legal System

     China’s legal system is a civil law system, which is based on written statutes and in which decided legal cases have little precedential value. Moreover, China’s legal system is still in the early stage of development and there are not sufficient numbers of trained judges or other legal professionals to manage disputes that may arise. As a result, the administration of laws and regulations by government agencies in China may be subject to considerable discretion.

Foreign Trade Corporations

     In the sale of its medical capital equipment to China, the Company must make most of its sales through foreign trade corporations (“FTCs”). Although purchasing decisions are made by the end-user, which is obligated to pay the applicable purchase prices, the Company enters into a formal purchase contract with only the FTC. By virtue of its direct contractual relationship with the FTC, rather than the end-user, the Company is to some extent dependent upon the continuing existence of and contractual compliance by the FTC until the particular transaction has been completed.

ITEM 4. CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that are filed with the Securities and Exchange Commission is recorded, processed and reported within the time periods required for each report and that such information is reported to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

     The Company performed an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls as of December 31, 2003. Based on that evaluation, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal control or in other factors that could significantly affect internal controls.

PART II. OTHER INFORMATION

ITEM 2 — CHANGES IN SECURITIES AND USE OF PROCEEDS

     As noted in Item 4 below, at a special meeting of stockholders held on December 23, 2003, the Company’s stockholders approved an increase in the number of authorized shares of Common Stock from 2,300,000 to 6,000,000. As a result of this increase, the Company’s authorized capitalization consists of 7,300,000 shares, consisting of 6,000,000 shares of Common Stock, par value $.01 per share (of which 3,043,428 shares were outstanding as of February 3, 2004), 800,000 shares of Class B Common Stock, par value $.01 per share (of which 775,000 shares were outstanding as of February 3, 2004), and 500,000 shares of Preferred Stock, par value $.01 per share (none of which shares were outstanding as of February 3, 2004). The increase in the number of authorized shares of Common Stock does not affect the rights of the holders of currently outstanding Common Stock, except for the effects incidental to increasing the number of shares of Common Stock outstanding in the event that additional shares are issued, subject to the terms of such issuance.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

     A special meeting of stockholders was held on December 23, 2003, for the purpose of voting on (I) a proposed amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of Common Stock, par value $.01 per share, from 2,300,000 to 6,000,000, and (ii) a proposed amendment to the Company’s Certificate of Incorporation to permit increases or decreases in the number of authorized shares of any class of stock without class voting. Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934 and there was no solicitation in opposition.

     Approval of the proposal described in clause (i) above required the affirmative vote of a majority of the outstanding shares of Common Stock, voting as a class. The proposal was approved upon the following vote of the Common Stock: 3,446,929 shares in favor, 70,881 shares against, 782 shares abstaining and 720 shares non-voted. Approval of the proposal described in clause (ii) above required the affirmative vote of a majority of the outstanding shares of Common Stock and Class B Common Stock, each voting as a class. The proposal was not approved upon the following vote of the Common Stock: 411,126 shares in favor, 168,835 shares against, 21,122 shares abstaining and 593,229 shares non-voted. In light of the Common Stock voting, no vote was taken of the Class B Common Stock.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

The exhibits listed below are filed as a part of this quarterly report:

* Confidential treatment has been granted as to a portion of this Exhibit.

+ English translation of summary from Chinese original.

(b) Reports on Form 8-K

     Reports on Form 8-K filed during the quarter ended December 31, 2003:

     On November 12, 2003, the Company filed a Current Report on Form 8-K reporting, under Item 9, its earnings release for the quarter ended September 30, 2003.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.