UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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]
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 $24,703,000.
The number of shares outstanding of each of the issuer's class of common equity,
as of June 23, 2004, was 4,551,152 shares of Common Stock and 775,000 shares of
Class B Common Stock.
Documents Incorporated by Reference: Part III: Proxy Statement.
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 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.
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 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.
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 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 open in 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 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.
ITEM 2. PROPERTIES
Our representative headquarters in China are located at a newly renovated
facility in Beijing. Our prior facility was designated for redevelopment in 2002
and accordingly, we moved into new space in mid-2002. We have a ten year lease
for this new space. We also lease regional offices in the Chinese cities of
Shanghai, Guangzhou and Tianjin. Our executive and administrative offices are
located in Bethesda, Maryland, which provides access to nearby Washington, D.C.
We also lease a four story building of approximately 52,000 square feet in
Beijing for Beijing United. This lease expires in 2010. In 1998, the Hospital
entered into a five-year lease for the building housing the dental clinic. This
lease provides for a ten-year extension. We initially renovated the first two
floors of the main building for Beijing United Family Hospital. We had subleased
the remaining two floors until the end of 2001, when the tenant moved out of the
space, allowing the hospital to renovate the space for hospital use. This
renovation was completed in 2002. We believe that our facilities will be
sufficient to satisfy our current requirements for at least the next twelve
months.
On March 1, 2002, we entered into an 18-year lease for our new hospital
facility in Shanghai. The lease is for a four-story stand alone building on the
grounds of the Shanghai Changning District Central Hospital. The building has
55,339 square feet.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or any
of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Our common stock is listed on the Nasdaq SmallCap Market under the symbol
"CHDX." The following table shows the high and low common stock closing bid
prices as quoted on the Nasdaq SmallCap Market. Such quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The closing bid prices below have
been adjusted to give effect to two two-for-one stock splits in the form of 100%
stock dividends, the first of which was in September 2003 and the second of
which was in January 2004, as well as an eleven-for-ten stock split in the form
of a 10% stock dividend in July 2002.
HIGH LOW
YEAR ENDED MARCH 31, 2003:
First Quarter................. $ 2.95 $ 2.61
Second Quarter................ 2.75 1.70
Third Quarter................. 2.24 1.61
Fourth Quarter................ 2.01 1.81
YEAR ENDED MARCH 31, 2004:
First Quarter................. 5.10 2.12
Second Quarter................ 11.10 5.05
Third Quarter................. 17.92 8.23
Fourth Quarter ............... 24.00 9.15
As of June 23, 2004, there were 41 record holders of our common stock and
six record owners of our Class B common stock.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and future earnings, if any, for
use in the operation and expansion of our business and do not anticipate paying
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands except share data)
Year ended Three months ended
March 31, March 31, Year ended December 31,
---------- ------------------ -------------------------------------------
2004 2003 2002 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
Net sales $88,183 $21,849 $15,578 $70,617 $56,118 $45,064 $37,128
Percent increase 25% 40% 47% 26% 25% 21% 72%
(Loss) income from operations (1,582) 222 (293) 133 (401) 152 (221)
Other expense and income (111) (66) (12) (126) 726 664 896
Net (loss) income before tax (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
December 31,
March 31, March 31, March 31, -------------------------------------------
2004 2003 2002 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
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
Segment information for the period: March 31, March 31 Year ended December 31,
---------- ------------------ ------------------------------------------
2004 2003 2002 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
(unaudited)
Medical Capital Capital Equipment
- sales $33,837 $7,716 $6,653 $28,708 $25,819
Medical Capital Capital Equipment
- gross margin percent 28% 32% 22% 27% 29%
Medical Capital 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
- operations loss (641) (121) (161) (601) (1,316)
Healthcare Products-sales * * * * * $39,049 $33,182
Healthcare Products-gross margin
percent * * * * * 24% 25%
Healthcare Products-operations
(loss) income * * * * * (66) 243
Healthcare Services-sales 15,954 3,470 2,799 12,963 8,779 6,015 3,946
Healthcare Services-operations
(loss) income (672) (178) 42 536 476 218 (464)
*the company expanded to three segments in 2002 and restated 2001
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Chindex International, Inc., is a Delaware corporation with headquarters
located in the Washington, D.C. metropolitan area. The Company was founded in
1981 and currently is a leading 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.
Chindex believes that it is the largest independent U.S. distributor
of healthcare equipment in China. For the twelve months 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
twelve months 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 twelve months ended March 31, 2004, the Healthcare
Services Division accounted for 18% of the Company's 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 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 income tax recognition of deferred
tax items and accruals for contingencies. There were no material changes to
these 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.
The Company provides installation, warranty, and training services for certain
of its 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
The Company grants credit to some customers in the ordinary course of
business. It evaluates collectibility of accounts receivable periodically and
adjusts its allowance for doubtful accounts accordingly. Bad Debts are
experienced predominately in Healthcare Services business and to a lesser extent
in Medical Capital Equipment business. The Company has experienced few losses in
Healthcare Products Distribution business.
The Company 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. 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.
VALUATION ALLOWANCE OF DEFERRED TAX ASSETS
The Company's operations are taxed in various jurisdictions including the
United States and China. In certain jurisdictions individual subsidiaries are
taxed separately. The Company has 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 the Company is
unable to conclude that it is more likely than not that the tax benefit will be
realized.
The Company released deferred tax valuation allowances totalling $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 its
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, the Company's 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.
The Company has 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
The Company's revenue for fiscal 2004 was $88,183,000, up 25% from the
twelve months ended December 31, 2002 revenue of $70,617,000. The Company
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. 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. The
Company recorded a net loss of $1,987,000 for the fiscal year ended March 31,
2004, as compared to net income of $259,000 for the twelve months ended December
31, 2002. Each of the three segments of the Company experienced an operation
loss in fiscal 2004. The Company believes 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
the Company's 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 sales. Third, the Company 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 the parent level of the Company, including
for an upgrade of the Company's 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 $33,837,000, 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 $9,428,000 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.
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") 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 period 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 primarily related to a systems conversion and periodic
assessments of receivables collectibility, $437,000 in other professional fees
and $193,000 in depreciation.
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, the Company 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
The Company recorded an additional equity investment loss of $222,000 which
represents the Company's pro-rata share of additional capital for Natural
Formula Asia (NFAL), a joint venture in which the Company has 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 the Company. The investment represents an amount that the joint
venture partners determined was required to provide additional working capital
for the venture. The Company's investment is in the form of a loan to the joint
venture. The Company 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 the company had $54,000 in 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
The Company 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. The Company's 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. The Company believes this properly
recognizes the benefits the Company has achieved as a result of its tax
restructuring and expects to utilize the losses in fiscal years 2005 and 2006.
The Company has provided a 100% valuation allowance on deferred tax benefits
related to development expenses incurred at Shanghai United since there is 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)
The Company's 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.
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 the Company's 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
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.
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.
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 the company 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
The Company's 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 the Company for its customers. The Company
believes that this type of financing is important to its 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 the Company's 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 the Company 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 the Company to its 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").
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, the Company 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. The Company anticipates that service contract revenue will not return to
previous levels. 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 the Company's other
sales because the Company is 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 2001and 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 2002. This clinic,
in Shunyi County outside of Beijing, is funded by a Chindex subsidiary 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
The Company's agreement with its 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. The Company also recorded a $38,000
start-up loss on its investment in a joint venture in Hong Kong. This was offset
by The Company's minority partner share loss of $121,000 in its 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 the Company did not anticipate any sublease revenue in 2002, it does
anticipate that now that the space is renovated and in service for Beijing
United, the Company 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
The Company 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. The Company believes this properly recognizes the benefits the
Company has achieved as a result of its tax restructuring and short-term
anticipation of future income tax loss carry forward utilization.
As a result of this restructuring the Company expects to make use of a
portion of its U.S. federal net operating losses and accordingly, recorded a
$660,000 deferred tax valuation adjustment in addition to last years $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 to 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. The Company is currently completing renovation
and outfitting of its 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 $4.2 million.
The Company has negotiated a loan with the Hong Kong and Shanghai Banking
Corporation (HSBC), with which the Company has an existing loan relationship
relating to Beijing United. This new loan totals $4 million and received final
approval June 2, 2004. Although the Company has sufficient capital resources to
complete SHU as currently scheduled, it 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, the Company's 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 credit card settlement business.
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 lines were
$600,000 and $1,087,000 respectively. The Company on behalf of Beijing United
has 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 the Company from
the financing, after deducting expenses of the financing including placement
agent fees, were $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. Pursuant to the Securities Purchase Agreement executed in
connection with the financing, 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. In connection with the final
closing, the placement agent was issued the remaining warrants to purchase
54,000 shares of our common stock.
The Nasdaq SmallCap Market, where the Company's 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, we structured the financing so that 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 at the initial closings on March 31 and April 1, 2004
and 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.
The Company continues to consider various other financing alternatives to
satisfy its future expansion, capital improvements and equipment requirements.
The following table sets forth the Company's contractual cash 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
- - - - -
Capital leases 320 152 150 17 1 0 0
Equity investment 220 220
--- ---
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 report.
TIMING OF REVENUE
The timing of the Company's revenue is affected by several significant
factors. Many end-users of the capital equipment products sold by the Company
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 some 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 revenue in any year. Further, because the Company recognizes
revenue and expense as products are shipped, the timing of shipments could
affect the Company's operating results for a particular period. At the same
time, a growing percentage of the Company's 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
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 revenue 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. 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, these currencies
are not freely tradable and the Company does not have a method to hedge its
transactions. It does monitor the situation globally and continues 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 large negative effect.
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 Report on Form 10-K 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 revenue and earnings from each of the Company's divisions, including
revenue 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, and (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. 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 7A. 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 revenue 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.
MARKET RISK
Market risk is the risk of loss related to adverse changes in market
prices, including interest rates and foreign exchange rates, of financial
instruments. In the normal course of our business, we are subject to market risk
associated with interest rate movements and currency movements on non-US Dollar
denominated assets and liabilities.
INTEREST RATE RISK
In the normal course of business and as the Company takes on more debt it
is exposed to market risk from changes in interest rates that could impact its
results of operations and financial condition. The Company manages its exposure
to interest rate risks through its regular operations and financing activities.
Presently the Company invests its cash and cash equivalents in high grade
commercial paper and other interest bearing accounts. The primary investment
objective is to ensure capital preservation of its invested principal funds by
limiting default and market risk. Currently the Company does not use derivative
financial instruments in its investment portfolio.
The Company is subject to movements in interest rate risks on its credit
facilities. All bank debt outstanding is floating. The Company currently does
not hedge its interest rate exposure. If interest rates were to increase 10
percent, assuming the amount outstanding remains constant, the result would be
an annual increase of interest expense of approximately $30,000. However, due to
uncertainty of the actions that would be taken and their possible effects, this
analysis does not consider the effect of the change in the level of overall
economic activity that could exist in such environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 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
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 386 691
--- ---
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 debit 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 36 29
outstanding in 2004 and 2002, respectively
Class B stock - 775,000 shares issued and outstanding in 2004 and 8 8
2002
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
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)
Total revenue $88,183 $21,849 $15,578 $70,617 $56,118
Cost and expenses
Cost of goods sold 59,608 15,147 10,922 47,549 38,426
Salaries and payroll taxes 16,952 3,977 3,043 13,463 10,091
Travel and entertainment 2,905 419 437 2,601 2,139
Other 10,300 2,084 1,469 6,871 5,863
------ ----- ----- ----- -----
(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
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
---- ---- ---- ---- ----
(unaudited)
OPERATING ACTIVITIES
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 1,974 (1,250) 502 1,746 200
payable
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 2 0 22 17 (8)
- - -- ---
equivalents
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
CHINDEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2004 AND YEARS ENDED DECEMBER 31, 2002, 2001
(thousands except share data)
Accumulated
Other
Additional Accumulated Comprehensive
Common Stock Common Stock-Class B Capital Deficit Income (Loss) Total
Shares Amount Shares Amount
----------- ---------- ----------- ---------- ------------ -------------- ---------------- ------------
Balance at
December 31, 2000 2,895,656 $29 775,000 $8 $17,275 ($4,077) $0 413,235
- ------------------------- ----------- ---------- ----------- ---------- ------------ -------------- ---------------- ------------
Net income 2001 384 384
Foreign currency
translation adjustment (8) (8)
Comprehensive income 376
----------- ---------- ----------- ---------- ------------ -------------- ---------------- ------------
Balance at 2,895,656 29 775,000 8 17,275 (3,693) (8) 13,611
December 31, 2001
- ------------------------- ----------- ---------- ----------- ---------- ------------ -------------- ---------------- ------------
Net income 2002 259 259
Foreign currency
translation adjustment 17 17
Comprehensive income 276
Options exercised 37,300 0 81 81
----------- ---------- ----------- ---------- ------------ -------------- ---------------- ------------
Balance at 2,932,956 29 775,000 8 17,356 (3,434) 9 13,968
December 31, 2002
- ------------------------- ----------- ---------- ----------- ---------- ------------ -------------- ---------------- ------------
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 (1,909)
Issuance of Common Stock 600,000 6 4,886 4,892
Options exercised 110,196 1 246 247
----------- ---------- ----------- ---------- ------------ -------------- ---------------- ------------
Balance at 3,643,152 $36 775,000 $8 22,488 ($5,345) $11 $17,198
March 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes
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 a leading
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 subsidiaries or controlled enterprises (ventures with less than 50%
ownership but are 100% consolidated because the Company has the power to govern
the financial and operating policies of the enterprise under an agreement).
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, 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
its equity investment, NFAL, This payment will be made in 2005. Significant
intercompany balances and transactions are eliminated.
REVENUE RECOGNITION
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 cost of sales 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 investment 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 are on a June 30 tax fiscal year and, beginning
in 2001, they filed 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.
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 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)
March 31, December 31,
Inventories consist of the following: 2004 2002
---- ----
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,
Property and equipment, net consists of the following: 2004 2002
---- ----
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 M&T Bank 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 short term financing arrangements in China with
Hongkong Shanghai Banking Corp. (HSBC) for up to $600,000 in revolving loans or
standby credit. Terms of the agreement are customary, with the interest rate
being 1.75% over the three-month Singapore Interbank Money Market Offer Rate
(SIBOR). The hospital has agreed to utilize HSBC for a certain portion of its
patient payments via credit cards. As of March 31, 2004 this line of credit had
$600,000 outstanding.
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. At March 31, 2004
the Company has $2,998,000 of payables recorded under this agreement which are
due in fiscal year 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:
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) (86)
-------- -------- -------- --------
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. The net proceeds to
the Company from the financing, after deducting expenses of the financing
including placement agent fees, were $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.
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 Three months ended March Year ended Year ended
March 31, ended March 31, 2002 December 31, December 31,
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-
diluted 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 exercises 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) 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:
(in thousands)
2004 2003 2002 2001
---- ---- ---- ----
Current:
Federal $- $-- $-- $-
Foreign 356 80 545 249
State 0 0 0 34
--- --- --- ---
187 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:
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 substantial portion of its' U.S. federal net operating losses, and
accordingly, recorded $660,000 in fiscal year 2002 and $232,000 in fiscal 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:
(in 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 and
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 consumable
sales are accompanied by down payments of either 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 the Healthcare Services group 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 $33,476,000and $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 Capital Healthcare Products
Equipment Distribution Healthcare Services Total
--------------- ------------------- ------------------- -----------
Assets $23,087,000 $12,525,000 $12,339,000 $47,951,000
Sales and service revenue $33,837,000 $38,393,000 $15,954,000 $88,183,000
Gross Profit 9,428,000 4,788,000 n/a n/a
Gross Profit % 28% 13% n/a n/a
(Lloss) 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)
============
For the three months ended March 31, 2003:
Medical Capital Healthcare Products
Equipment Distribution Healthcare 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
------------
Income before income taxes $156,000
============
For the year ended December 31, 2002:
Medical Capital Healthcare Products
Equipment Distribution Healthcare 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 Capital Healthcare Products
Equipment Distribution Healthcare 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
============
12. SELECTED QUARTERLY DATA (UNAUDITED)
(thousands except per share data)
First Fourth
Quarter Second Quarter Third Quarter Quarter
------- -------------- ------------- -------
For the year ended March 31, 2004:
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 three 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 Fourth
Quarter Second Quarter Third Quarter Quarter
------- -------------- ------------- -------
For the year ended March 31, 2002:
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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.
As of March 31, 2004, the Company carried out 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
and procedures. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that, notwithstanding the matters
described below, the Company's disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) which is required to be included in
its publicly filed reports. In early June 2004, in connection with the audit of
our financial statements for fiscal 2004, our independent auditors informed us
that heightened new standards suggest that they characterize three items as
material weaknesses in the Company's internal controls. The independent auditors
have completed their work and nonetheless have rendered an unqualified report on
our financial statements as contained elsewhere herein. Other than the three
items described below, there have been no significant changes during the fourth
quarter ended March 31, 2004 in the Company's internal controls or in other
factors which could significantly affect internal controls since that
evaluation.
The independent auditors initially were not able to test accounts
receivable at Beijing United and the total postings could not be fully
reconciled with the general ledger. This issue was found to be the result of a
software writing problem in connection with an outsourced software upgrade to
the systems at Beijing United. The software provider is remedying the system
problem. The reconciliation of all postings with the general ledger was
ultimately fully achieved and tested by measures outside of the system. We
anticipate this matter to be resolved in time for our report on the first
quarter of fiscal 2005.
The auditors also informed the Audit Committee and management that the Company's
existing level of tax expertise appeared to be insufficient in the United States
and China and that this was a material weakness. For example, in the United
States, the Company's tax benefit provision had to be recomputed at the close of
the audit. The auditors in prior periods had assisted the Company in the complex
computation of this number but in light of heightened new standards, the
auditors have notified us that they will no longer do so. Accordingly, the
Company has decided to retain additional outside tax expertise as well as add
personnel to its U.S. finance department. The auditors also expressed the view
that our level of tax expertise in China needed to be increased. We already have
added qualified tax staff in China. We expect to have our tax expertise fully
upgraded in time for our report on the first quarter of fiscal 2005.
Finally, the independent auditors indicated the need for procedures to
improve the financial statement close process. We have already begun to
supplement our resources in this regard by increasing staff in the process and
further formalizing the closing process, among other improvements. We expect
that these procedures will be implemented in time for our report on the first
quarter of fiscal 2005.
The implementation of the initiatives described above are among our highest
priorities. Our Board of Directors, in coordination with our Audit Committee,
will continually assess the progress and sufficiency of these initiatives and
make adjustments, if necessary. As of the date of this report, we believe that
our plans, when completed, will eliminate the weaknesses in internal accounting
control as described above. Nonetheless, a control system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the control system are met, and no evaluation of controls can provide absolute
assurance that all control issues have been detected.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required is set forth in the Proxy Statement, which is
incorporated herein by reference. PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Chindex International,
Inc. are included in Part II, Item 8:
Independent Auditors' Report. Consolidated Statements of Operations for the
year ended March 31, 2004, three months ended March 31, 2003, unaudited three
months ended March 31, 2002 and the years ended December 31, 2002 and 2001.
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2002.
Consolidated Statements of Stockholders' Equity for the period ended March 31,
2004, and the years ended December 31, 2002 and 2001. Consolidated Statements of
Cash Flows for the years ended March 31, 2004, three months ended March 31,
2003, unaudited three months ended March 31, 2002 and the years ended December
31, 2002 and 2001. Notes to Consolidated Financial Statements.
(a)(2) The following financial statement schedule of Chindex International is
included in Item 15(d):
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 1,397
------ ------ -- ----- ------
Total allowances deducted from assets $1,457 $1,055 $663 $647 $2,528
For the three months ended March 31, 2003:
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
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.
(a)(3) Exhibits
The exhibits listed below are filed as a part of this annual report:
3.1 Certificate of Incorporation of the Company. Incorporated by reference
to Annex B to the Company's Proxy Statement on Schedule 14A, filed with
the Securities and Exchange Commission on or about June 7, 2002 (the
"Proxy Statement")
3.2 Amendment to Certificate of Incorporation of the Company. Incorporated
by reference to Exhibit 3.2 to the Company's Form 10-Q for the nine
months ended December 31, 2003.
3.3 By-laws of the Company. Incorporated by reference to Annex C to the
Proxy Statement.
4.1 Form of Specimen Certificate of the Company's Common Stock.
Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form SB-2 (No. 33-78446) (the "IPO Registration
Statement").
4.2 Form of Specimen Certificate of Class B Common Stock. Incorporated by
reference to Exhibit 4.3 to the IPO Registration Statement.
10.1 The Company's 1994 Stock Option Plan, as amended as of July 17, 2001.
Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the six months ended June 30, 2001.
10.2 Lease Agreement, dated as of March 1994, between the Company and
Central Properties Limited Partnership, relating to the Company's
Bethesda, Maryland facility. Incorporated by reference to Exhibit 10.4
to the IPO Registration Statement.
10.3 First Amendment to Lease, dated as of June 26, 1996, between the
Company and Central Properties Limited Partnership, relating to
additional space at the Company's Bethesda, Maryland facility.
Incorporated by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997.
10.4 Lease Agreement between the School of Posts and Telecommunications and
the Company dated November 8, 1995. Incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995.
10.5 Amendments Numbers One, Two and Three to the Lease Agreement between
the School of Posts and Telecommunications and the Company dated
November 8, 1995, each such amendment dated November 26, 1996.
Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997.
10.6 Lease Agreement dated May 10, 1998, between the School of Posts and
Telecommunications and the Company relating to the lease of additional
space. Incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998.
10.7 Contractual Joint Venture Contract between the Chinese Academy of
Medical Sciences Union Medical & Pharmaceutical Group Beijing Union
Medical & Pharmaceutical General Corporation and the Company, dated
September 27, 1995. Incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995.
10.8 First Investment Loan Manager Demand Promissory Note dated July 10,
1997 between First National Bank of Maryland and Chindex, Inc.
Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997.
10.9 Distribution Agreement dated October 11, 2001 between Siemens AG and
the Company, Incorporated by reference to Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the nine months ended
September 30, 2001.
10.10 Second amendment to lease, dated as of November 24, 2000, between the
Company and Central Properties Limited Partnership, relating to the
extension of the lease term for the Company's Bethesda, Maryland
offices. Incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
10.11 Employment Agreement, dated as of September 1, 2001, between the
Company and Roberta Lipson. Incorporated by reference to Exhibit 10.20
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
10.12 Employment Agreement, dated as of September 1, 2001, between the
Company and Elyse Beth Silverberg. Incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
10.13 Employment Agreement, dated as of September 1, 2001, between the
Company and Lawrence Pemble. Incorporated by reference to Exhibit 10.22
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
10.14 Employment Agreement, dated as of September 1, 2001, between the
Company and Robert C. Goodwin, Jr. Incorporated by reference to Exhibit
10.23 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
10.15 Contractual Joint Venture Contract between Shanghai Changning District
Central Hospital and the Company, dated February 9, 2002. Incorporated
by reference to Exhibit 10.24 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2001.
10.16 Lease Agreement between Shanghai Changning District Hospital and the
Company related to the lease of the building for Shanghai United Family
Hospital. Incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
10.17 Lease Agreement between China Arts & Crafts Import & Export Corporation
and Chindex (Beijing) Consulting Incorporated related to the lease of
the building for the Company's main office in Beijing+. Incorporated by
reference to Exhibit 10.17 to the Company's Quarterly Report on Form
10-Q for the six months ended June 30, 2002.
10.18 Agreement between Siemens AG and the Company for long term payment of
vendor invoices. Incorporated by reference to Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the nine months ended
September 30, 2002.
10.19 Form of Securities Purchase Agreement dated as of March 29, 2004 among
the Company and the purchasers thereunder. Incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1 (No.
333-114299).
21.1 List of subsidiaries. Incorporated by reference to Exhibit 21.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2002.
23.1 Consent of Ernst & Young LLP, Independent Auditors (filed herewith).
31.1 Certification of the Company's Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of the Company's Executive Vice President Finance
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
31.3 Certification of the Company's Principal Accounting Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of the Company's Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of the Company's Executive Vice President Finance
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
32.3 Certification of the Company's Principal Accounting Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
- - -- -- -- -- -- -- -- -- --
* 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
1. On February 12, 2004, the Company filed a Form 8-K announcing its third
quarter and nine month results for the period ended December 31, 2003.
2. On February 14, 2004, under Item 12, the Company announced its revenue
guidance as stated in an attached press release.
3. On March 1, 2004, under item 12, the Company filed a Form 8-K correcting
prior filings for mathematical errors.
4. On March 29, 2004, under item 12, the Company announced a securities
purchase agreement relating to the placement of its common stock for an
aggregate purchase price of $13.5 million.
c. Exhibits.
The response to this portion of Item 15 is submitted as a separate section
of this report.
d. Financial Statement Schedule.
The response to this portion of Item 15 is submitted as a separate section
of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CHINDEX INTERNATIONAL, INC.
Dated: June 28, 2004 BY: /S/ ROBERTA LIPSON
----------------------
Roberta Lipson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Dated: June 28, 2004 BY: /S/ ROBERTA LIPSON
------------------
Roberta Lipson
Chairperson of the Board of Directors,
Chief Executive Officer and President
Dated: June 28, 2004 BY: /S/ ELYSE BETH SILVERBERG
-------------------------
Elyse Beth Silverberg
Executive Vice President,
Secretary and Director
Dated June 28, 2004 BY: /S/ LAWRENCE PEMBLE
--------------------
Lawrence Pemble
Executive Vice President-Finance
and Director
Dated: June 28, 2004 BY: /S/ ROBERT C. GOODWIN, JR.
--------------------------
Robert C. Goodwin, Jr.
Executive Vice President of Operations,
Treasurer, General Counsel and Director
Dated: June 28, 2004 BY: /S/ RONALD ZILKOWSKI
--------------------
Ronald Zilkowski
Senior Vice President Finance
and Controller
Dated: June 28, 2004 BY: /S/ A. KENNETH NILSSON
----------------------
A. Kenneth Nilsson
Director
Dated: June 28, 2004 BY: /S/ JULIUS Y. OESTREICHER
-------------------------
Julius Y. Oestreicher
Director
Dated: June 28, 2004 BY: /S/ CAROL R. KAUFMAN
------------------------
Carol R. Kaufman
Director