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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-24624
CHINDEX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
     
DELAWARE
(State or other Jurisdiction of
Incorporation or Organization)

4340 East West Highway, Suite 1100, Bethesda,
Maryland

(Address of principal executive offices)
  13-3097642
(I.R.S. Employer
Identification Number)


20814
(Zip Code)
(301) 215-7777
(Registrant’s telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
Yes þ No o          
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o          
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ          
The number of shares outstanding of each class of the registrant’s common equity, as of August 2, 2011, was 15,643,049 shares of Common Stock and 1,162,500 shares of Class B Common Stock.
 
 


 

CHINDEX INTERNATIONAL, INC.
INDEX
FORM 10-Q
         
       
 
    3  
       
    4  
    5  
    6  
    7  
    22  
    31  
    31  
 
       
 
    32  
    32  
    32  
    32  
    32  
    32  
    33  
    34  
       
 Exhibit 10.1
 Exhibit 10.2
 EX-10.3
 EX-10.4
 EX-31.1
 EX-31.2
 EX-31.3
 EX-32.1
 EX-32.2
 EX-32.3
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share data)
(Unaudited)
                 
    June 30, 2011     December 31, 2010  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 38,583     $ 32,007  
Restricted cash
          300  
Investments
    37,859       37,631  
Accounts receivable, less allowance for doubtful accounts of $7,610 and $6,748, respectively
    13,055       11,601  
Receivables from affiliates
    432       9,330  
Inventories, net
    1,711       1,413  
Deferred income taxes
    4,407       3,242  
Other current assets
    2,700       3,856  
 
           
Total current assets
    98,747       99,380  
Restricted cash and sinking funds
    1,003       980  
Investments
    872       2,439  
Investment in unconsolidated affiliate
    32,338       31,756  
Property and equipment, net
    46,748       37,099  
Noncurrent deferred income taxes
    465       108  
Other assets
    2,921       2,411  
 
           
Total assets
  $ 183,094     $ 174,173  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 3,081     $ 4,038  
Payable to affiliates
    2,899        
Accrued expenses
    9,588       8,541  
Other current liabilities
    4,000       3,874  
Income taxes payable
    2,759       2,147  
 
           
Total current liabilities
    22,327       18,600  
Long-term debt and convertible debentures
    23,423       23,070  
Long-term deferred tax liability
    431       431  
 
           
Total liabilities
    46,181       42,101  
 
           
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, $.01 par value, 500,000 shares authorized, none issued
           
Common stock, $.01 par value, 28,200,000 shares authorized, including 3,200,000 designated Class B:
               
Common stock — 15,643,049 and 15,310,426 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    156       153  
Class B stock — 1,162,500 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    12       12  
Additional paid-in capital
    117,594       115,815  
Accumulated other comprehensive income
    6,148       4,802  
Retained earnings
    13,003       11,290  
 
           
Total stockholders’ equity
    136,913       132,072  
 
           
Total liabilities and stockholders’ equity
  $ 183,094     $ 174,173  
 
           
The accompanying notes are an integral part of these consolidated condensed financial statements.

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CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(Unaudited)
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
Revenue
                               
Healthcare services revenue
  $ 29,465     $ 24,749     $ 53,650     $ 45,917  
Product sales
          16,739             36,827  
 
                       
Total revenue
    29,465       41,488       53,650       82,744  
 
                       
 
                               
Operating expenses
                               
Healthcare services:
                               
Salaries, wages and benefits
    15,473       13,268       30,228       25,646  
Other operating expenses
    4,237       3,355       8,556       6,653  
Supplies and purchased medical services
    3,227       2,514       5,862       4,634  
Bad debt expense
    498       602       930       941  
Depreciation and amortization
    1,057       927       2,194       1,807  
Lease and rental expense
    1,599       984       2,799       1,960  
 
                       
 
    26,091       21,650       50,569       41,641  
 
                       
Products:
                               
Product sales costs
          11,644             26,197  
Product selling and other operating expenses
          6,299             11,878  
 
                       
 
          17,943             38,075  
 
                       
 
                               
Total operating expenses
    26,091       39,593       50,569       79,716  
 
                       
 
                               
Income from operations
    3,374       1,895       3,081       3,028  
 
                               
Other income and (expenses)
                               
Interest income
    218       165       360       302  
Interest (expense)
    (78 )     (208 )     (181 )     (407 )
Equity in income of unconsolidated affiliate
    729             582        
Miscellaneous (expense) income — net
    (25 )     (4 )     (67 )     231  
 
                       
 
                               
Income before income taxes
    4,218       1,848       3,775       3,154  
Provision for income taxes
    (1,275 )     (1,012 )     (2,062 )     (1,803 )
 
                       
 
                               
Net income
  $ 2,943     $ 836     $ 1,713     $ 1,351  
 
                       
 
                               
Net income per common share — basic
  $ .18     $ .06     $ .11     $ .09  
 
                       
 
                               
Weighted average shares outstanding — basic
    16,129,328       14,785,510       16,102,735       14,753,881  
 
                       
 
                               
Net income per common share — diluted
  $ .17     $ .06     $ .11     $ .09  
 
                       
 
                               
Weighted average shares outstanding — diluted
    17,522,106       16,200,544       17,437,933       16,196,379  
 
                       
The accompanying notes are an integral part of these consolidated condensed financial statements.

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CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
                 
    Six months ended June 30,  
    2011     2010  
OPERATING ACTIVITIES
               
 
Net income
  $ 1,713     $ 1,351  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,194       1,939  
Provision for demonstration inventory
          306  
Inventory write down
    3       96  
Provision for doubtful accounts
    930       1,104  
Loss on disposal of property and equipment
    77       36  
Equity in income of unconsolidated affiliate
    (582 )      
Deferred income taxes
    (1,454 )     382  
Stock based compensation
    1,668       1,518  
Foreign exchange (gain) loss
    (257 )     2,013  
Amortization of debt issuance costs
    5       4  
Amortization of debt discount
    124       124  
Non-cash charge for change in fair value of warrants
          (224 )
Changes in operating assets and liabilities:
               
Restricted cash
    300       (198 )
Accounts receivable
    (2,101 )     4,957  
Receivable from affiliates
    8,898        
Inventories
    (260 )     (5,162 )
Other current assets and other assets
    724       (529 )
Accounts payable, accrued expenses, other current
               
liabilities and deferred revenue
    339       (192 )
Payable to affiliates
    2,899        
Income taxes payable
    570       (1,642 )
 
           
Net cash provided by operating activities
    15,790       5,883  
INVESTING ACTIVITIES
               
Purchases of short-term investments and CDs
    (21,271 )     (4,020 )
Proceeds from redemption of CDs
    22,837       21,802  
Purchases of property and equipment
    (11,157 )     (5,733 )
 
           
Net cash (used in) provided by investing activities
    (9,591 )     12,049  
FINANCING ACTIVITIES
               
Proceeds from debt, vendor financing and convertible debentures
          39  
Repayment of debt, sinking fund deposits and vendor financing
          (1,472 )
Repurchase of restricted stock for income tax withholding
          (4 )
Proceeds from exercise of stock options and warrants
    114       90  
 
           
Net cash provided by (used in) financing activities
    114       (1,347 )
Effect of foreign exchange rate changes on cash and cash equivalents
    263       1,761  
 
           
Net increase in cash and cash equivalents
    6,576       18,346  
Cash and cash equivalents at beginning of period
    32,007       23,760  
 
           
Cash and cash equivalents at end of period
  $ 38,583     $ 42,106  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $     $ 641  
Cash paid for taxes
  $ 2,973     $ 4,770  
 
               
Non-cash investing and financing activities consist of the following:
               
Property and equipment additions included in accounts payable
  $ 100     $ 808  
Cashless exercise of warrants at fair value
  $     $ 800  
Exercise of warrants at fair value
  $     $ (201 )
The accompanying notes are an integral part of these consolidated condensed financial statements.

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CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the six months ended June 30, 2011
(in thousands except share data)
(Unaudited)
                                                                 
    Common Stock     Common Stock Class B     Additional Paid In     Retained     Accumulated
Other
Comprehensive
       
    Shares     Amount     Shares     Amount     Capital     Earnings     Income     Total  
     
Balance at December 31, 2010
    15,310,426     $ 153       1,162,500     $ 12     $ 115,815     $ 11,290     $ 4,802     $ 132,072  
 
                                                             
Net income
                                  1,713             1,713  
Foreign currency translation adjustment
                                        985       985  
Share of other comprehensive income of unconsolidated affiliate
                                        361       361  
 
                                                             
Comprehensive income
                                              3,059  
Stock based compensation
                            1,668                   1,668  
 
Options exercised and issuance of restricted stock
    332,623       3                   111                   114  
     
Balance at June 30, 2011
    15,643,049     $ 156       1,162,500     $ 12     $ 117,594     $ 13,003     $ 6,148     $ 136,913  
     
The accompanying notes are an integral part of these consolidated condensed financial statements.

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CHINDEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. BASIS OF PRESENTATION
     Chindex International, Inc. (“the Company”), founded in 1981, is an American health care company providing health care services in China through the operations of United Family Healthcare, a network of private care hospitals and affiliated ambulatory clinics. United Family Healthcare (“UFH”) currently operates in Beijing, Shanghai and Guangzhou.
     The accompanying unaudited consolidated condensed financial statements of Chindex International, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Transition Report on Form 10-K for the nine months ended December 31, 2010.
Change in fiscal yearend
     The Company changed its fiscal yearend from March 31 to December 31 each year, effective December 31, 2010.
Policies and procedures
Consolidation
     The consolidated condensed financial statements include the accounts of the Company, its subsidiaries in which the Company has greater than 50 percent ownership, and variable interest entities. All intercompany balances and transactions are eliminated in consolidation. Entities in which the Company has less than 50 percent ownership or does not have a controlling financial interest but is considered to have significant influence are accounted for on the equity method.
     On December 31, 2010, the Company’s Medical Products division was contributed to Chindex Medical Limited (CML), a newly formed entity in which the Company has a 49% ownership interest (see Note 4). Until December 31, 2010, the Company operated in two business segments, the Healthcare Services division and the Medical Products division. On December 31, 2010, the Company deconsolidated the Medical Products division upon the formation of CML, a newly formed entity consisting of certain medical device businesses contributed by Chindex and Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“FosunPharma”). The investment in CML is recorded using the equity method of accounting, effective December 31, 2010, with Chindex’s 49% interest in the earnings of CML beginning January 1, 2011.
     Due to the deconsolidation of the Medical Products division on December 31, 2010, the Company now operates in only one reportable segment based on the way the Company manages its business. Major decisions, including capital resource allocations, are made at the corporate level by the “Chief Operating Decision Maker” team, not at the regional market or hospital level.
Use of Estimates

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     The preparation of the consolidated condensed 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 condensed 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 revenue recognition, receivable collectibility, and deferred tax valuation allowances.
Revenue Recognition
     The Company earns revenue from providing healthcare services and, in the prior year, sales of products.
     Revenue related to services provided by the Healthcare Services division is net of contractual adjustments or discounts and is recognized in the period services are provided. The Healthcare Services division makes an estimate at the end of the month for certain inpatients who have not completed service. This estimate reflects only the cost of care up to the end of the month.
     The Company’s revenue is dependent on seasonal fluctuations related to epidemiology factors and the life styles of the expatriate community. As a result of these factors impacting the timing of revenues, our operating results have varied and are expected to continue to vary from period to period and year to year.
Reclassifications
     Certain balances in the 2010 consolidated condensed financial statements have been reclassified to conform to the 2011 presentation. The changes primarily relate to the Statement of Operations. Due to the deconsolidation of the Company’s previous Medical Products business, the captions in the Statement of Operations have been revised to reflect a presentation more common for companies in the hospital and healthcare services businesses.
Note 2. INVESTMENTS
     The following table summarizes the Company’s investments, including accrued interest, as of June 30, 2011 and December 31, 2010 (in thousands):
                 
    June 30, 2011     December 31, 2010  
Current investments:
               
Certificates of deposit
  $ 33,050     $ 34,037  
U.S. Government Sponsored Enterprises
    400       500  
Corporate bonds
    4,409       3,094  
 
           
Total current investments
  $ 37,859     $ 37,631  
 
           
 
               
Noncurrent investments:
               
Corporate bonds
  $ 872       2,439  
 
           
Total noncurrent investments
  $ 872     $ 2,439  
 
           
     The Company’s current investments as of June 30, 2011 include $33,050,000 of Certificates of Deposit, with fixed interest rates between 0.55% and 2.25% issued by HSBC, a large international financial institution, and by large financial institutions in China. The Company’s investments in Certificates of Deposit are intended to be held to maturity. Other than Certificates of Deposit, the Company’s current investments also include available-for-sale securities at fair

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value, which approximates cost, of $400,000 issued by U.S. Government-sponsored enterprises and corporate bonds of $4,409,000, which mature within the next twelve months. The Company’s current investments are recorded at fair value, and the difference between fair value and amortized cost as of June 30, 2011 was de minimis. The Company’s noncurrent investments of $872,000 as of June 30, 2011, consist of corporate bonds which mature in 13 to 30 months.
     The Company’s current investments as of December 31, 2010 include $34,037,000 of Certificates of Deposit, with fixed interest rates between 0.05% and 2.25% issued by HSBC, a large international financial institution, and by large financial institutions in China. The Company’s investments in Certificates of Deposit are intended to be held to maturity. Other than Certificates of Deposit, the Company’s current investments also include available-for-sale securities at fair value, which approximates cost, of $500,000 issued by U.S. Government-sponsored enterprises and corporate bonds of $3,094,000, which mature within one year from period ended December 31, 2010. The Company’s current investments are recorded at fair value, and the difference between fair value and amortized cost as of December 31, 2010 was de minimis. The Company’s noncurrent investments of $2,439,000 as of December 31, 2010, consist of corporate bonds which mature in 13 to 21 months.
Note 3. INVENTORIES, NET
     Inventories consist of medical supplies and pharmaceuticals in the amounts of $1,711,000 at June 30, 2011 and $1,413,000 at December 31, 2010, respectively.
Note 4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Background — Chindex Medical Limited
     On December 31, 2010, Chindex International, Inc. (“Chindex”) and Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“FosunPharma”), a leading manufacturer and distributor of Western and Chinese medicine and devices in China, completed the first closing of the formation of a joint venture to independently operate certain combined medical device businesses, including Chindex’s Medical Products division (MPD). The formation of the joint venture represents a basis of the strategic alliance between the two companies, which aims to capitalize on the long-term opportunity presented by medical product sectors in China. The joint venture entity, Chindex Medical Limited (the “joint venture” or “CML”), a Hong Kong entity, is focused on marketing, distributing, selling and servicing medical devices in China, including in Hong Kong, as well as activities in R&D and manufacturing of medical devices for the Chinese and export markets. CML is owned 51% by FosunPharma and 49% by Chindex.
     CML owns the Chindex-contributed businesses (principally the Medical Products division) and is entitled to a pending and obligatory final investiture of the FosunPharma-contributed businesses. The FosunPharma-contributed businesses have been segregated and, until such investiture, are being operated and managed by the joint venture under an entrustment arrangement. Such investiture will be finished once all requisite governmental and other approvals and other closing conditions have been satisfied. Fosun Pharma has advised us that all the governmental approvals required for the contribution and investiture to CML of the portion of the business to be contributed by Fosun have been obtained. These governmental approvals include the requirement by Fosun to both register its investment with Shanghai Administration of Foreign Exchange and apply to the Shanghai branch of the Chinese Ministry of Commerce and the Shanghai Administration for Industry and Commerce for approvals relating to the business contained in such portion.
Deconsolidation
     FosunPharma has a controlling financial interest in CML. The Company is required to deconsolidate the contributed businesses when it ceases to have a controlling financial interest in the applicable subsidiaries. As explained below, the Company concluded that CML is a voting interest entity, rather than a variable

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interest entity. Therefore, the reduction of the Company’s interest to 49% indicated that it no longer had a controlling financial interest and needed to deconsolidate under ASC 810. Accordingly, Chindex deconsolidated its Medical Products Division from its consolidated balance sheet, effective December 31, 2010.
Variable Interest Entity Analysis
     ASC 810-10-20 defines a variable interest as an investment or other interest that will absorb portions of a variable interest entity’s (“VIE’s”) expected losses or receive portions of the entity’s expected residual returns. An equity interest is considered to be a variable interest in a company and as such, the Company’s interest in CML is a variable interest. A holder of a variable interest in an entity is required to determine whether the entity is a VIE and, if so, whether it must consolidate the entity.
     In its VIE analysis, the Company considered the five characteristics of a VIE described in ASC 810-10-15-14. Management evaluated the characteristics of its investment in CML and believes that CML would not be deemed a VIE. Management concluded that Fosun effectively contributed its businesses to CML as of the formation date since the entrusted management agreement (the “Entrustment Agreement”) entered into by a subsidiary of CML, Fosun Pharmaceutical and a subsidiary of Fosun Pharmaceutical provides CML with unilateral control over Shanghai Chuangxin (as defined in the Entrustment Agreement). Although the legal form of the transaction is that Fosun initially delivered a promissory note in exchange for its interest in CML, Management notes that this was required solely due to a timing delay in receiving regulatory approvals. The substance of the arrangement is that Fosun has irrevocably arranged the contribution of Shanghai Chuangxin in exchange for its equity interest in CML particularly because the probability of governmental approvals was high (and in fact have already been obtained). Accordingly, Management believes that Fosun’s investment would be deemed equity at risk and that the combined equity of CML would be sufficient to permit the entity to finance its activities without additional subordinated financial support. It should be noted that CML has been financed 100% with equity and does not have any other forms of subordinated financial support, which justifies the position that the amount of equity is sufficient to conduct operations.
     Management also considered certain characteristics related to control and expected economics of CML to support the conclusion that CML is not a VIE. The Company and Fosun control CML, as they have the ability to elect all of the members of the Board of Directors of CML, and there are no other interests that provide its holders with participating rights over the activities that most significantly impact CML’s economic performance. Accordingly, the group of holders of the equity investment at risk has the power to direct the activities of CML that most significantly impact CML’s economic performance. Additionally, Management concluded that, pursuant to the agreements entered into in connection with the formation of CML, the voting rights held by both Fosun and the Company are proportional to their economic interests in CML. Management further noted that Fosun and the Company have both the obligation to absorb the losses and the right to receive the expected residual returns of CML as there are no other interests that either protect them from absorbing expected losses or cap their residual returns. Therefore, Management has concluded the entity is not a VIE and must be assessed under the voting interest model.
     It is generally understood that when a company owns less than 50% of an entity that is not considered a VIE, the company is precluded from consolidating its investee. Specifically, ASC 810-10-25-1 states that the usual condition for a controlling financial interest is ownership of a majority voting interest. Since the Company owns 49% of CML (whereas a single entity, Fosun, owns 51%), and does not have control over the entity through the Board (whereas Fosun has the power to appoint a majority of such Board), the Company should not consolidate CML. Conversely, Fosun obtained control through its majority stock ownership and Board representation upon the initial closing of CML, which occurred on December 31, 2010 (the “Initial Closing”). Therefore, the Company’s investment in CML is accounted for as an equity method investment.

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Summarized Financial Information for CML
     Beginning with the commencement of CML operations on January 1, 2011, Chindex follows the equity method of accounting to recognize its 49% interest in the net assets and the net earnings of CML on an on-going basis. Summarized financial information for the unconsolidated CML affiliate for which the equity method of accounting is used is presented below on a 100 percent basis. The assets and liabilities of CML as of June 30, 2011 and December 31, 2010, including provisional fair value adjustments are as follows (in thousands):
                 
    June 30 , 2011     December 31, 2010  
 
               
Current assets
  $ 87,355     $ 94,083  
Noncurrent assets
    18,152       17,543  
 
           
Total assets
  $ 105,507     $ 111,626  
 
           
 
               
Current liabilities
  $ 44,950     $ 53,551  
Noncurrent liabilities
    910       1,064  
 
           
Total liabilities
    45,860       54,615  
Stockholders’ equity
    59,647       57,011  
 
           
Total liabilities and stockholders’ equity
  $ 105,507     $ 111,626  
 
           
                 
    Three months ended     Six months ended  
    June 30, 2011     June 30, 2011  
 
               
Revenue
  $ 38,066     $ 64,153  
Income before income taxes
    2,055       2,299  
Net income
    1,748       1,711  
     CML is a 51%-owned subsidiary of Fosun Pharma. The assets, liabilities and stockholders’ equity in the summarized financial data table presented above for CML have been prepared on a stand-alone basis, with the assets and liabilities of the entities contributed to CML by Fosun Pharma reported on a historical cost basis, while the assets and liabilities acquired from Chindex have been recorded on a fair value basis. In reporting its 49% interest in the net assets and net earnings of CML using the equity method of accounting, Chindex includes its 49% interest in the stand-alone financial statements of CML, and also records adjustments to reflect the amortization of basis differences attributable to the fair values in excess of net book values of identified tangible and intangible assets contributed by Fosun Pharma to CML at its formation date. In addition, certain employees of CML participate in Chindex stock-based compensation programs. The expense for these stock options or restricted stock is recognized by CML as the services are provided. The total stock-based compensation expense recognized by CML in the three and six months ended June 30, 2011 was $402,000 and $681,000, respectively.
     For the three and six months ended June 30, 2011, Chindex recognized income of $729,000 and $582,000, respectively, for its 49% equity in the operating results of CML. This consisted of income of $858,000 and $840,000, respectively, for the stand-alone net income of CML (after recognition of stock-based compensation expense) and after deducting $129,000 and $258,000, respectively, for the amortization of basis differences attributable to acquired intangibles.
     As of June 30, 2011, Chindex had a receivable from CML of $432,000 and a payable to CML of $2,899,000.
     As of December 31, 2010, Chindex had a net receivable from CML of $9,330,000. This amount was substantially settled by cash payment in January 2011.

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Note 5. PROPERTY AND EQUIPMENT, NET
                 
(in thousands)   June 30, 2011     December 31, 2010  
     
Property and equipment, net consists of the following:
               
Furniture and equipment
  $ 20,013     $ 17,592  
Vehicles
    234       170  
Construction in progress
    11,937       12,224  
Leasehold improvements
    27,512       17,988  
 
           
 
    59,696       47,974  
Less: accumulated depreciation and amortization
    (12,948 )     (10,875 )
 
           
 
  $ 46,748     $ 37,099  
 
           
     Construction in progress relates to the development of the United Family Healthcare network of private hospitals and health clinics in China, including facilities and systems development. Construction costs incurred during the six months ended June 30, 2011 primarily related to the expansion of the Company’s existing Beijing hospital campus including facilities which will provide neurosurgical and orthopedic surgery services and initial construction of the women and children’s hospital in Tianjin. Capitalized interest on construction in progress was $272,000 and $60,000 during the six months ended June 30, 2011 and 2010, respectively. Depreciation and amortization expense for property and equipment for the six months ended June 30, 2011 was $2,194,000 and was $1,939,000, for the six months ended June 30, 2010, which included $132,000 related to the Medical Product business.
Note 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
                 
(in thousands):   June 30, 2011     December 31, 2010  
     
Accrued expenses:
               
Accrued expenses- healthcare services
  $ 4,344     $ 3,331  
Accrued compensation
    4,642       3,531  
Accrued expenses- other
    602       1,679  
 
           
 
  $ 9,588     $ 8,541  
 
           
 
               
Other current liabilities:
               
Accrued other taxes payable- non-income
  $ 679     $ 698  
Customer deposits
    2,623       2,609  
Other current liabilities
    698       567  
 
           
 
  $ 4,000     $ 3,874  
 
           
Note 7. DEBT
     The Company’s short-term and long-term debt balances are: (in thousands)

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    June 30, 2011     December 31, 2010  
    Short term     Long term     Short term     Long term  
Long term loan
  $     $ 10,025     $     $ 9,797  
Convertible notes, net of debt discount
          13,398             13,273  
 
                       
 
  $     $ 23,423     $     $ 23,070  
 
                       
Long term loan- IFC 2005
     In October 2005, Beijing United Family Hospital (BJU) and Shanghai United Family Hospital (SHU), majority-owned subsidiaries of the Company, obtained long-term debt financing under a program with the International Finance Corporation (IFC) (a division of the World Bank) for 64,880,000 Chinese Renminbi (approximately $8,000,000). The term of the loan is 10 years at an initial interest rate of 6.73% with the borrowers required to make annual payments into a sinking fund beginning with the first payment in September 2010. Deposits into the sinking fund will accumulate until a lump sum payment is made at maturity of the debt in October 2015. The interest rate will be reduced to 4.23% for any amount of the outstanding loan on deposit in the sinking fund. The loan program also includes certain other covenants which require the borrowers to achieve and maintain specified liquidity and coverage ratios in order to conduct certain business transactions such as pay intercompany management fees or incur additional indebtedness. Chindex International, Inc. guaranteed repayment of this loan. In terms of security, IFC has, among other things, a lien over the equipment owned by the borrowers and over their bank accounts. In addition, IFC has a lien over Chindex bank accounts not already pledged, but not over other Chindex assets. As of June 30, 2011, the outstanding balance of this debt was 64,880,000 Chinese Renminbi (current translated value of $10,025,000, see “Foreign Currency Exchange and Impact of Inflation”) classified as long-term. As the annual deposits into the sinking fund do not extinguish a portion of the long-term debt liability, the entire loan is expected to be classified as long-term until a financial reporting date that is less than one year from final maturity. The balance sheet classification of the sinking fund assets is similarly noncurrent, until a date that is less than one year from the lump sum payment. As of June 30, 2011, sinking fund assets of 6,488,000 Chinese Renminbi (current translated value of $1,003,000) were included in Restricted Cash and Sinking Funds on the Company’s consolidated condensed balance sheets.
     The Company is currently in discussions with IFC to revise the terms of the 2005 loan, which is necessary in order to incorporate the effects of the expansion of the Beijing hospital campus on the collateral and loan covenant provisions. The Company expects the revised terms will provide for (1) advance funding by the Company of the full principal amount into the sinking fund and (2) revised loan covenants which reflect the positive impact of the advance funding on IFC’s collateral and overall loan security.
Convertible Notes- JPM
     On November 7, 2007, the Company entered into a securities purchase agreement with Magenta Magic Limited, a wholly owned subsidiary of J.P. Morgan Chase & Co organized under the laws of the British Virgin Islands (JPM), pursuant to which the Company agreed to issue and sell to JPM: (i) 538,793 shares (the “Tranche A Shares”) of the Company’s common stock; (ii) the Company’s Tranche B Convertible Notes due 2017 in the aggregate principal amount of $25 million (the “Tranche B Notes”) and (iii) the Company’s Tranche C Convertible Notes due 2017 in the aggregate principal amount of $15 million (the “Tranche C Notes” and, with the Tranche B Notes, the “Notes”) at a price of $18.56 per Tranche A Share (for an aggregate price of $10 million for the Tranche A Shares) and at face amount for the Notes for a total purchase price of $50 million in gross proceeds (the “JPM Financing”).
     The Tranche B Notes had a ten-year maturity, bore no interest of any kind and provided for conversion into shares of the Company’s common stock at an initial conversion price of $18.56 per share at any time and automatic conversion upon the Company entering into one or more newly committed financing facilities (the “Facilities”) making available to the Company at least $50 million, pursuant to which Facilities all conditions precedent (with certain exceptions) for initial disbursement had been satisfied, subject to compliance with certain JPM Financing provisions.

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The Facilities as required for conversion of the Tranche B Note had to have a minimum final maturity of 9.25 years from the date of initial drawdown, a minimum moratorium on principal repayment of three years from such date, principal payments in equal or stepped up amounts no more frequently than twice in each 12-month period, no sinking fund obligations, other covenants and conditions, and also limit the purchase price of any equity issued under the Facilities to at least equal to the initial conversion price of the Notes or higher amounts depending on the date of issuance thereof. In January 2008, the Tranche B Notes were converted into 1,346,984 shares of our common stock.
     The Tranche C Notes have a ten-year maturity, bear no interest of any kind and are convertible at the same conversion price as the Tranche B Notes at any time and will be automatically converted upon the completion of two proposed new and/or expanded hospitals in China in Beijing and Guangzhou (the “JV Hospitals”), subject to compliance with certain JPM Financing provisions. Notwithstanding the foregoing, the Notes would be automatically converted after the earlier of 12 months having elapsed following commencement of operations at either of the JV Hospitals or either of the JV Hospitals achieving break-even earnings before interest, taxes, depreciation and amortization for any 12-month period ending on the last day of a fiscal quarter, subject to compliance with certain JPM Financing provisions.
     The JPM Financing was completed in two closings. At the first closing, which took place on November 13, 2007, the Company issued (i) the Tranche A Shares, (ii) the Tranche B Notes and (iii) an initial portion of the Tranche C Notes in the aggregate principal amount of $6 million, with the closing of the balance of the Tranche C Notes in the aggregate principal amount of $9 million subject to, among other things, the approval of the Company’s stockholders. At the second closing, which took place on January 11, 2008, following such stockholder approval, the Company issued such balance of the Tranche C Notes.
     In connection with the issuance of the Notes, the Company incurred issuance costs of $314,000, which primarily consisted of legal and other professional fees. Of these costs, $61,000 is attributable to the Tranche A shares, $159,000 is attributable to Tranche B Notes which converted in January 2008 and the remaining of $94,000 is attributable to the Tranche C Notes and has been capitalized to be amortized over the life of the Notes. As of June 30, 2011 and December 31, 2010, the unamortized financing cost was $59,000 and $64,000, respectively, and is included in Other Assets in the consolidated condensed balance sheets.
     The Company accounts for convertible debt in accordance with ASC 470-20. Accordingly, the Company recorded, as a discount to convertible debt, the intrinsic value of the conversion option based upon the differences between the fair value of the underlying common stock at the commitment date and the effective conversion price embedded in the note. Debt discounts under these arrangements are usually amortized over the term of the related debt to their stated date of redemption. So, in respect to the Notes, this debt discount would be amortized through interest expense over the 10 year term of the Notes unless earlier converted or repaid. In fiscal 2008, under this method, the Company recorded (i) a discount on the Tranche B Notes of $2,793,000 against the entire principal amount of the Notes; and (ii) a discount on the Tranche C Notes of $2,474,000 against the entire principal amount of the Notes.
     The debt discount pursuant to the Notes as of June 30, 2011 and December 31, 2010 and was $1,603,000 and, $1,727,000, respectively. Amortization of the discount was approximately $62,000 for the three months ended June 30, 2011 and June 30, 2010, and $124,000 for the six months ended June 30, 2011 and June 30, 2010, respectively.
Loan Facility- IFC 2007
     The Company had entered into a loan agreement with IFC (the “IFC Facility”), designed to provide for loans (the “IFC Loans”) in the aggregate amount of $25 million to expand the Company’s United Family Hospitals and Clinics network of private hospitals and clinics in China, subject to the satisfaction of certain disbursement conditions, including the establishment of two new Joint Venture entities in Beijing and Guangzhou (the “Joint Ventures”) qualified to undertake the construction, equipping and operation of the proposed healthcare facilities, minimum Company ownership and control over the Joint Ventures, the availability to IFC of certain information regarding the Joint Ventures and other preconditions. The IFC Loans were designed to fund a portion of the Company’s financing for the expansion program. There can be no assurances that the preconditions to disbursements under the IFC Facility will be satisfied or that, in any event, disbursements under the IFC Facility will be achieved. As of June 30, 2011, the IFC Facility was not available.

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     The IFC Loans would be made directly to the Joint Ventures. We have experienced delays in the development timeline due to certain changes in project scope for the proposed healthcare facilities and the fluctuations and uncertainties in the real estate markets in China resulting from the global economic downturn and as a result the process to approve both of the Joint Ventures has taken longer than originally expected. However, in July 2010, we received formal approval of the new Joint Venture for the Beijing expansion project from the Chinese authorities. Accordingly, we are currently in discussion with IFC regarding the remaining preconditions to the first disbursement under the IFC Facility. We previously entered into an amendment to the IFC Loans in July 2010 extending the initial draw down date to October 1, 2010 or such later date as the parties agree. As of the date of this report, the parties have not established a specific date by which time the first disbursement would be required. Draws under the IFC Facility remain subject to lender agreement as to project scope, collateral and other provisions. As initially negotiated, the term of the IFC Loans would be 9.25 years and would bear interest equal to a fixed base rate determined at the time of each disbursement of LIBOR plus 2.75% per annum. The interest rate may be reduced to LIBOR plus 2.0% upon the satisfaction of certain conditions. The loans would include certain other covenants that require the borrowers to achieve and maintain specified liquidity and coverage ratios in order to conduct certain business transactions such as pay intercompany management fees or incur additional indebtedness. Mutual agreement or amendment of these terms will be required in addition to the formation and approval of the second of the new Joint Ventures and finalization of conditions precedent, as to which there can be no assurances.
     The obligations of each borrowing Joint Venture under the IFC Facility would be guaranteed by the Company pursuant to a guarantee agreement with IFC, would be secured by a pledge by the Company of its equity interests in the borrowing Joint Ventures pursuant to a share pledge agreement by the Company with IFC and would be secured pursuant to a mortgage agreement between each borrowing Joint Venture and IFC.
     The IFC Facility contains customary financial covenants, including maintenance of a maximum ratio of liabilities to tangible net worth and a minimum debt service coverage ratio, and covenants that, among other things, place limits on the Company’s ability to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, prepay subordinated debt, merge with other entities, engage in transactions with affiliates, and make capital expenditures. The IFC Facility also contains customary events of default. As of June 30, 2011, the Company was in compliance with the loan covenants as amended.
Loan Facility- DEG 2008
     Chindex China Healthcare Finance, LLC (“China Healthcare”), a wholly-owned subsidiary of the Company, had entered into a Loan Agreement with DEG-Deutsche Investitions und Entwicklungsgesellschaft (DEG) of Cologne, Germany, a member of the KfW banking group, designed to provide for loans (the “DEG Loans”) in the aggregate amount of $20 million to expand the Company’s United Family Hospitals and Clinics network of private hospitals and clinics in Beijing and Guangzhou, China (the “DEG Facility”), subject to substantially the same disbursement conditions as contained in the IFC Facility. The DEG Loans were designed to fund a portion of the Company’s financing for the expansion program. There can be no assurance that the preconditions to disbursements under the DEG Facility will be satisfied or that, in any event, disbursements under the DEG Facility will be achieved. As of June 30, 2011, the DEG Facility was not available.
     The DEG Loans would be made directly to the two Joint Ventures. We have experienced delays in the development timeline due to certain changes in project scope for the proposed healthcare facilities and the fluctuations and uncertainties in the real estate markets in China resulting from the global economic downturn and as a result the process to approve both of the Joint Venture entities has taken longer than originally expected. However, in July 2010, we received formal approval of the new Joint Venture for the Beijing expansion project from the Chinese authorities. Accordingly, we are currently in discussion with DEG regarding the remaining preconditions to the first disbursement under the DEG Facility. We previously entered into an amendment to the DEG Loans in July 2010 extending the initial draw down date to October 1, 2010 or such later date as the parties agree. As of the date of this report, the parties have not established a specific date by which time the first disbursement would be required to be made. Draws under the DEG Facility remain subject to lender agreement as to project scope, collateral and other provisions. As initially negotiated, the DEG Loans are substantially identical to the IFC Loans, having a 9.25-year term and an initial interest rate set at

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LIBOR plus 2.75%. Mutual agreement on or amendment of these terms will be required in addition to the formation and approval of the second of the new Joint Ventures and finalization of conditions precedent, as to which there can be no assurances.
     The obligations under the DEG Facility would be guaranteed by the Company and would be senior and secured, ranking pari passu in seniority with the IFC Facility and sharing pro rata with the IFC in the security interest granted over the Company’s equity interests in the Joint Ventures, the security interests granted over the assets of the Joint Ventures and any proceeds from the enforcement of such security interests.
     The Company’s guarantee of the DEG Facility contains customary financial covenants, including maintenance of a maximum ratio of liabilities to tangible net worth and a minimum debt service coverage ratio, and covenants that, among other things, place limits on the Company’s ability to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, prepay subordinated debt, merge with other entities, engage in transactions with affiliates, and make capital expenditures. The DEG Facility contains customary events of default. As of June 30, 2011, the Company was in compliance with the loan covenants as amended.
     In connection with the issuance of the IFC and DEG Facilities, the Company incurred issuance costs of $1,019,000, which primarily consisted of legal and other professional fees. These issuance costs have been capitalized and will be amortized over the life of the debt. As of June 30, 2011 and December 31, 2010, the balance of the unamortized financing costs was $1,019,000 and is included in other assets in the consolidated condensed balance sheets.
Debt Payments Schedule and Restricted Cash
     The following table sets forth the Company’s debt obligations and sinking fund requirements as of June 30, 2011:
                                                         
                    (In thousands)              
    Total     2011     2012     2013     2014     2015     Thereafter  
Long term loan less sinking fund deposits
  $ 9,023     $ 1,003     $ 2,005     $ 2,005     $ 2,005     $ 2,005     $  
Convertible notes
    15,000                                     15,000  
 
                                         
Total
  $ 24,023     $ 1,003     $ 2,005     $ 2,005     $ 2,005     $ 2,005     $ 15,000  
 
                                         
     Restricted cash of $1,003,000 as of June 30, 2011, consisted of the sinking fund deposits related to the IFC loan. Restricted cash of $1,280,000 as of December 31, 2010, consists of $980,000 for the sinking fund deposits related to the IFC loan and $300,000 for a performance bond.
Note 8. TAXES
     We recorded a $1,275,000 provision for taxes in the three months ended June 30, 2011 as compared to a provision for taxes of $1,012,000 for the three months ended June 30, 2010. We recorded a $2,062,000 provision for taxes in the six months ended June 30, 2011 as compared to a provision for taxes of $1,803,000 for the six months ended June 30, 2010. The effective tax rate was calculated in accordance with ASC 740-270. Our tax expense includes the effect of losses in entities for which we cannot recognize a benefit in accordance with the provisions of ASC 270, “Interim Reporting” and ASC 740-270 and the effect of valuation allowance for deferred tax assets.

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     We recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2011 and December 31, 2010, we had no accrued interest or penalties related to uncertain tax positions.
Note 9. EARNINGS PER SHARE
     The Company follows ASC 260, “Earnings Per Share,” whereby basic earnings per share excludes any dilutive effects of options, restricted stock, warrants and convertible securities and diluted earnings per share includes such effects. The Company does not include the effects of stock options, restricted stock, warrants and convertible securities for periods when such an effect would be antidilutive.
     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:
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
Basic net income per share computation:
                               
Numerator:
                               
Net income
  $ 2,943     $ 836     $ 1,713     $ 1,351  
Denominator:
                               
Weighted average shares outstanding- basic
    16,129,328       14,785,510       16,102,735       14,753,881  
Net income per common share — basic:
  $ .18     $ .06     $ .11     $ .09  
 
                       
 
                               
Diluted net income per share computation:
                               
Numerator:
                               
Net income
  $ 2,943     $ 836     $ 1,713     $ 1,351  
Interest expense for convertible notes
    62       62       124       124  
 
                       
Numerator for diluted earnings per share
  $ 3,005     $ 898     $ 1,837     $ 1,475  
 
                       
 
                               
Denominator:
                               
Weighted average shares outstanding- basic
    16,129,328       14,785,510       16,102,735       14,753,881  
Effect of dilutive securities:
                               
 
                               
Shares issuable upon exercise of dilutive outstanding stock options, conversion of convertible debentures, vesting of restricted stock and exercise of warrants:
    1,392,778       1,415,034       1,335,198       1,442,498  
 
                       
Weighted average shares outstanding-diluted
    17,522,106       16,200,544       17,437,933       16,196,379  
 
                       
Net income per common share — diluted:
  $ .17     $ .06     $ .11     $ .09  
 
                       
     For the three months ended June 30, 2011 and 2010, there were 150,618 and 617,454 shares, respectively, which were not included in the calculation of diluted net income per share as the effect would have been antidilutive. For the six months ended June 30, 2011 and 2010, there were 128,656 and 644,219 shares, respectively, which were not included in the calculation of diluted net income per share as the effect would have been antidilutive.
Note 10. STOCKHOLDERS’ EQUITY
Stock-Based Compensation
     The Company incurred stock based compensation expense of $466,000 for the three months ended June 30, 2011 and $664,000 for the three months ended June 30, 2010, and $1,668,000 for the six months ended June 30, 2011 and $1,518,000 for the six months ended June 30, 2010 for Chindex employees and outside directors.

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     The Company generally grants stock options that vest over a three or five year period to senior, long-term employees. Option awards are granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Stock options have up to 10-year contractual terms. The Company recognizes expense ratably over the vesting period of the stock options or restricted stock, net of estimated forfeitures. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.
     The Company calculates grant-date fair values using the Black-Scholes option pricing model. To calculate fair market value, this model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the expected life of the option being valued and the exercise price of the option being valued. It also requires certain assumptions, such as the expected amount of time the option will be outstanding until it is exercised or it expires and the expected volatility of the Company’s common stock over the expected life of the option.
     The following table summarizes the stock option activity during the six months ended June 30, 2011:
                                 
                    Weighted Average        
                    Remaining     Aggregate Intrinsic  
    Number of     Weighted Average     Contractual Term     Value  
    Shares     Exercise Price     (Years)     (in thousands)*  
Options outstanding at December 31, 2010
    1,256,889     $ 10.03                  
Granted
    18,000       14.22                  
Exercised
    (13,175 )     8.66                  
Canceled
    (4,647 )     13.15                  
Expired
    (2,125 )     13.42                  
 
                       
Options outstanding at June 30, 2011
    1,254,942     $ 10.09       5.91     $ 4,939  
 
                             
 
Options exercisable at June 30, 2011
    925,214     $ 9.11       5.26     $ 4,629  
 
                             
 
*   The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market price of the Company’s common stock on June 30, 2011 ($13.62) and the exercise price of the underlying options.
     During the six months ended June 30, 2011 and 2010, the total intrinsic value of stock options exercised was $112,000 and $21,000 respectively, and the actual cash received upon exercise of stock options was $114,000 and $90,000 respectively. The unamortized fair value of the stock options as of June 30, 2011 was $1,476,000, the majority of which is expected to be expensed over the weighted-average period of 0.74 years.
     The following table summarizes activity relating to restricted stock for the six months ended June 30, 2011:

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    Number of     Aggregate Intrinsic  
    shares underlying     Value of Restricted  
    restricted stock     Stock (in thousands) *  
Outstanding at December 31, 2010
    412,774          
Granted
    321,898          
Vested
    (56,000 )        
Forfeited
    (2,450 )        
 
           
Outstanding at June 30, 2011
    676,222     $ 9,210  
 
             
Expected to vest
    645,972     $ 8,798  
 
             
 
*   The aggregate intrinsic value on this table was calculated based on the closing market price of the Company’s common stock on June 30, 2011 ($13.62).
     The weighted average remaining contractual term of the restricted stock, calculated based on the service-based term of each grant, is approximately two years. As of June 30, 2011, the unamortized fair value of the restricted stock was $8,225,000. This unamortized fair value is expected to be expensed over the weighted-average period of 3.3 years. Restricted stock is valued at the stock price on the date of grant.
Note 11. STOCK PURCHASE AGREEMENT — FOSUN PHARMA
     On June 14, 2010, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Fosun Industrial Co., Limited (the “Investor”) and Shanghai Fosun Pharmaceutical (Group) Co., Ltd (the “Warrantor”). Pursuant to the Stock Purchase Agreement, the Company has agreed to issue and sell to Investor up to 1,990,447 shares of the Company’s common stock (representing approximately 10% of all outstanding common stock after such sale, based on the number of outstanding shares as of the date of the Stock Purchase Agreement) at a purchase price of $15 per share, for an aggregate purchase price of $30 million, the net proceeds of which are expected to be used, among other things, to continue expansion of the Company’s United Family Healthcare network.
     The sale of the shares of common stock to Investor would be completed in two closings, each of which would relate to approximately one-half of the shares to be purchased and be subject to certain customary closing conditions, including that no material adverse change shall have occurred with respect to the Company. In addition, the second closing is subject to the consummation of a joint venture (the “Joint Venture”) between the parties to be comprised of the Company’s Medical Products division and certain of Investor’s medical device businesses in China. The initial closing occurred on August 27, 2010, with the Investor purchasing 933,022 shares of Chindex common stock at $15 per share, resulting in proceeds to Chindex, net of transaction costs, of $13,803,000. The occurrence of the second closing will depend on the receipt of all requisite governmental and other approvals. As of the date of this report, we have been advised by Fosun Pharma that all requisite governmental approvals have been received, and procedures to consummate the joint venture are underway.
     At the initial closing under the Stock Purchase Agreement, the Company, Investor and Warrantor entered into a stockholder agreement (the “Stockholder Agreement”). Under the Stockholder Agreement, until the first to occur of (i) Investor holds 5% or less of the outstanding shares of common stock, (ii) there shall have been a change of control of the Company as defined in the Stockholder Agreement, and (iii) the seventh anniversary of the initial closing, Investor has agreed to vote its shares in accordance with the recommendation of the Company’s Board of Directors on any matters submitted to a vote of the stockholders of the Company relating to the election of directors and compensation matters and with respect to certain proxy or consent solicitations. The Stockholder Agreement also contains standstill restrictions on Investor generally prohibiting the purchase of additional securities of the Company. The standstill restrictions terminate on the same basis as does the voting agreement above, except that the 5% standard would increase to 10%

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upon the second closing. In addition, the Stockholder Agreement contains an Investor lock-up restricting sales by Investor of its shares of the Company’s common stock for a period of five years following the date of the Stockholder Agreement, subject to certain exceptions.
     Upon the second closing under the Stock Purchase Agreement, Investor will have the right to, among other things, nominate two representatives for election to the Company’s Board of Directors, which will be increased to nine members, and pledge its shares, subject to certain conditions. In order to induce Investor to enter into the proposed transaction and without any consideration therefor, each of the Company’s chief executive, operating and financial officers, in their capacities as stockholders of the Company, has agreed to certain limitations on his or her right to dispose of shares of the Company’s common stock and to vote for the Investor’s board nominees.
     The Company evaluated whether this contingent stock purchase agreement should be accounted for as a derivative instrument or whether it qualified for a scope exception under ASC 815-10. The Company concluded that the contract qualified for the scope exception because the contract was indexed to the Company’s own stock and was classified in stockholders’ equity.
Note 12. COMMITMENTS AND CONTINGENCIES
Leases
     The Company leases office space, warehouse space, and space for hospital and clinic operations under operating leases. Future minimum payments under these noncancelable operating leases consist of the following (in thousands):
         
Six months ending December 31, 2011
  $ 2,601  
Year ending December 31,
       
2012
    5,874  
2013
    5,389  
2014
    5,090  
2015
    5,049  
Thereafter
    44,311  
 
     
Net minimum rental commitments
  $ 68,314  
 
     
     The above leases require the Company to pay certain pass through operating expenses and rental increases based on inflation.
     Rental expense was approximately $1,599,000 and $984,000 for the three months ended June 30, 2011 and 2010, respectively. Rental expense was approximately $2,799,000 and $1,960,000 for the six months ended June 30, 2011 and 2010, respectively. The prior year amounts of $984,000 and $1,960,000 excludes rental expense for the Medical Product business which is included in product selling and other operating expenses.
Note 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
     ASC 820, which defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such

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assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
     The following table presents the balances of investment securities measured at fair value on a recurring basis by level (in thousands):
     As of June 30, 2011:
                                 
            Quoted              
            Prices in              
            Active     Significant        
            Markets for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
Description   Total     (Level 1)     (Level 2)     (Level 3)  
Assets
                               
U.S. Government Sponsored Enterprises
  $ 400     $     $ 400     $  
Corporate Bonds
    5,281             5,281        
 
                       
Total
  $ 5,681     $     $ 5,681     $  
 
                       
     As of December 31, 2010:
                                 
            Quoted              
            Prices in              
            Active     Significant        
            Markets for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
Description   Total     (Level 1)     (Level 2)     (Level 3)  
Assets
                               
U.S. Government Sponsored Enterprises
  $ 500     $     $ 500     $  
Corporate Bonds
    5,533             5,533        
 
                       
Total
  $ 6,033     $     $ 6,033     $  
 
                       
     The valuation of these investment securities are obtained from a financial institution that trades in similar securities.
     The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.
     The fair value of debt under ASC 820 is not the settlement amount of the debt, but is based on an estimate of what an entity might pay to transfer the obligation to another entity with a similar credit standing. Observable inputs for the Company’s debt such as quoted prices in active markets are not available, as the Company’s long-term debt is not publicly-traded. Accordingly, the Company has estimated the fair value amounts using available market information and commonly accepted valuation methodologies. However, it requires considerable judgment in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimate presented is not necessarily indicative of the amount that the Company or holders of the debt instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

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     The fair value of the Company’s convertible debt was calculated based on an estimate of the present value of the debt payments combined with an estimate of the value of the conversion option, using the Black-Scholes option pricing model. For the Company’s other long-term debt, the fair value was calculated based on an estimate of the present value of the debt payments. As of June 30, 2011, the carrying value of the Company’s convertible debt, net of debt discount, and the long-term debt outstanding for the IFC 2005 RMB loan was $23.4 million, and the estimated fair value was $28.7 million. The carrying amounts of the remaining debt instruments approximate fair value, as the instruments are subject to variable rates of interest or have short maturities.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     Statements contained in this quarterly report on Form 10-Q relating to plans, strategies, objectives, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth under the heading “Risk Factors” and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company’s Transition Report on Form 10-K for the nine months ended December 31, 2010. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential,” or “continue” or similar terms or the negative of these terms. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.
Critical Accounting Policies
     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 revenue recognition, receivable collectability, and deferred tax valuation allowances.
RESULTS OF OPERATIONS
Three months ended June 30, 2011 compared to three months ended June 30, 2010
Overview of Consolidated Results
     Chindex International, Inc. operates in several healthcare markets in China, including Hong Kong. Until December 31, 2010, the Company operated in two business segments, the Healthcare Services division and the Medical Products division. On December 31, 2010, the Company deconsolidated the Medical Products division upon the formation of Chindex Medical Limited (CML), a newly formed entity consisting of certain medical device businesses contributed by Chindex and Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“FosunPharma”). The investment in CML is recorded using the equity method of accounting, effective December 31, 2010, with Chindex’s 49% interest in the equity in the earnings of CML beginning January 1, 2011.
     This Company operates the United Family Healthcare network of private hospitals and clinics. United Family Healthcare currently owns and operates hospitals and affiliated clinic facilities in the Beijing, Shanghai and Guangzhou markets. We also operate a managed clinic in the city of Wuxi, west of Shanghai. We have undertaken a number of

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market expansion projects in our current markets. In Beijing, we expect to significantly increase service offerings and more than double our available beds progressively in 2011 through expansion at our existing hospital campus as well as from the opening of two additional affiliated clinics during 2010. In addition, we have begun development of United Family Beijing Rehabilitation Hospital, a facility of approximately 100 beds. In Tianjin, a city just to the southeast of Beijing, United Family Healthcare has begun the development of a maternity hospital facility of approximately 25 beds which is expected to open in 2011. In Shanghai, expansion projects are expected to include increased services at the current hospital campus and the geographic expansion into the Pudong district with an affiliated clinic established through a strategic joint venture management initiative with Shanghai Huashan Pudong Hospital during 2010. In Guangzhou, we will increase service offerings at our current clinic facilities in 2011 and continue our development plans to build a main hospital facility expected to open in 2013. The Chinese Government’s healthcare reform program encourages private investment, such as Chindex’s United Family Healthcare, as the primary source for development of specialty and premium healthcare services within the Chinese healthcare system.
     In connection with the expansion plans, in our operating markets of Beijing, Shanghai and Guangzhou outlined above, over the next twelve months we have planned capital expenditures of up to $68 million for construction, equipment and information systems. (see “Liquidity and Capital Resources”). During the period ended June 30, 2011, the development, pre-opening and start up expenses, including post-opening expenses, for these projects were $1,249,000 compared to $388,000 in the prior period, reflecting primarily expenses incurred in the Beijing, Pudong and Tianjin projects.
     The Company’s expansion projects are subject to, among other things, the receipt of (i) medical-related approvals from local health authorities and the Ministry of Health at the national level, (ii) foreign invested joint venture health facility approvals from the Ministry of Foreign Trade and Commerce at the local level and (iii) local approvals as to construction.
     Our discussion and analysis below relates to the revenue and expenses of our healthcare services business for the three months ended June 30, 2011 compared to the comparable period in the prior year.
     Due to the change in our business organization, the operating results for the healthcare services business in 2011 are not completely comparable to 2010. In the prior year, the Company operated in two reportable segments, and corporate overhead was fully allocated to the two segments. In 2011, the Company operates in only one business and, since corporate overhead costs are not allocated over two businesses, the healthcare services business results in 2011 include a greater proportion of corporate overhead than in prior years.
Net Revenue
                         
    Three months ended June 30,  
    2011     2010     Change  
     
Healthcare services net revenue
  $ 29,465     $ 24,749       19 %
     
     Our healthcare services revenue for the three months ended June 30, 2011 was $29,465,000, a 19% increase from the three months ended June 30, 2010 revenue of $24,749,000. The increase in net revenue is attributable to growth in both inpatient and outpatient services.
     The table below identifies the relative contribution of inpatient and outpatient services to gross revenue.

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    Three months ended June 30,  
    2011     2010  
     
Inpatient/Outpatient gross revenue percentages
               
Inpatient services as percent of gross revenue
    41 %     41 %
Outpatient services as percent of gross revenue
    59 %     59 %
 
           
 
    100 %     100 %
 
           
     The table below identifies the primary service lines contributing to gross revenue.
                 
      Three months ended June 30,  
    2011     2010  
     
Gross revenue by service line (hospital facilities only):
               
Surgical services
    18.1 %     19.3 %
OB/GYN
    14.1 %     14.3 %
Pediatrics
    8.4 %     7.5 %
Ancillary services
               
Laboratory
    10.0 %     10.1 %
Radiology
    11.1 %     11.7 %
Pharmacy
    11.5 %     12.1 %
All other services
    26.8 %     25.0 %
 
           
 
    100 %     100 %
 
           
Operating expenses
                         
    Three months ended June 30,  
    2011     2010     Change  
     
Salaries, wages and benefits
    15,473       13,268       17 %
Other operating expenses
    4,237       3,355       26 %
Supplies and purchased medical services
    3,227       2,514       28 %
Bad debt expense
    498       602       -17 %
Depreciation and amortization
    1,057       927       14 %
Lease and rental expense
    1,599       984       63 %
 
                 
 
  $ 26,091     $ 21,650       21 %
 
                 
     Salaries, wages and benefits increased 17% in the current period compared to the prior year period primarily due to the increased headcount of 15.7% associated with the revenue increases and development activities. Increases in headcount were due to both increased activities in our existing facilities as well as for pre-opening activities in advance of the opening of our expanded Beijing facilities.
     Other operating expenses increased by $882,000 or 26%, primarily due to increased office and administrative supplies of approximately $263,000, business travel and meals $194,000, marketing of $135,000, and building utilities and maintenance of $119,000.
     Supplies and purchased medical services increased by $713,000 or 28%, due to increased usage of medical supplies and pharmaceuticals related to higher patient procedures of approximately $608,000 or 28%, and increased purchased medical services of approximately $105,000 or 29%.
     Bad debt expense decreased by $104,000 or 17%. As percentage of net revenue, bad debt expense was 1.7% in 2011 compared to 2.4% in the prior year period, which is in line with our historic averages.

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     Depreciation and amortization expense increased by $130,000 or 14% to $1,057,000, primarily due to the completion of the construction of the New Hope Oncology Center, which is now being depreciated.
     Lease and rental expense increased to $1,599,000 in the current period compared to $984,000 in the prior year period, primarily due to the increase in the total building space utilized in the expanded operations of our hospital and clinic network.
Other Income and Expenses
     Interest income during the recent quarter and prior quarter was $218,000 and $165,000, respectively, as there were no significant changes in average investment balances or interest rates.
     Interest expense during the recent quarter was $78,000 as compared to interest expense of $208,000 in the same quarter of the prior year due to decreases of short-term debt and increases of capitalized interest due to higher construction activities.
     Equity in income of unconsolidated affiliates in the amount of $729,000 represents our 49% interest in the income of CML for the three months ended June 30, 2011. CML was formed on December 31, 2010 and, accordingly, there is no comparable amount in the prior year period.
     Miscellaneous expense during the recent quarter and prior quarter was $25,000 and $4,000, respectively.
Taxes
     We recorded a provision for taxes of $1,275,000 (an effective tax rate of approximately 30%) in the three months ended June 30, 2011, compared to a provision for taxes of $1,012,000 (an effective tax rate of approximately 55%) in the three months ended June 30, 2010. In 2011, the Company incurred a loss before income taxes in the first quarter but achieved a profit before income taxes in the second quarter. The second quarter tax provision includes both the effect of moving from a loss to profit position and also the effect of losses in entities for which we cannot recognize tax benefit.
Six months ended June 30, 2011 compared to six months ended June 30, 2010
Overview of Consolidated Results
     Chindex International, Inc. operates in several healthcare markets in China, including Hong Kong. Until December 31, 2010, the Company operated in two business segments, the Healthcare Services division and the Medical Products division. On December 31, 2010, the Company deconsolidated the Medical Products division upon the formation of Chindex Medical Limited (CML), a newly formed entity consisting of certain medical device businesses contributed by Chindex and Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“FosunPharma”). The investment in CML is recorded using the equity method of accounting, effective December 31, 2010, with Chindex’s 49% interest in the equity in the earnings of CML beginning January 1, 2011.
     This Company operates the United Family Healthcare network of private hospitals and clinics. United Family Healthcare currently owns and operates hospitals and affiliated clinic facilities in the Beijing, Shanghai and Guangzhou markets. We also operate a managed clinic in the city of Wuxi, west of Shanghai. We have undertaken a number of market expansion projects in our current markets. In Beijing, we expect to significantly increase service offerings and more than double our available beds progressively in 2011 through expansion at our existing hospital campus as well as from the opening of two additional affiliated clinics during 2010. In addition, we have begun development of United

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Family Beijing Rehabilitation Hospital, a facility of approximately 100 beds. In Tianjin, a city just to the southeast of Beijing, United Family Healthcare has begun the development of a maternity hospital facility of approximately 25 beds which is expected to open in 2011. In Shanghai, expansion projects are expected to include increased services at the current hospital campus and the geographic expansion into the Pudong district with an affiliated clinic established through a strategic joint venture management initiative with Shanghai Huashan Pudong Hospital during 2010. In Guangzhou, we will increase service offerings at our current clinic facilities in 2011 and continue our development plans to build a main hospital facility expected to open in 2013. The Chinese Government’s healthcare reform program encourages private investment, such as Chindex’s United Family Healthcare, as the primary source for development of specialty and premium healthcare services within the Chinese healthcare system.
     In connection with the expansion plans, in our operating markets of Beijing, Shanghai and Guangzhou outlined above, over the next twelve months we have planned capital expenditures of up to $68 million for construction, equipment and information systems. (see “Liquidity and Capital Resources”). During the period ended June 30, 2011, the development, pre-opening and start up expenses, including post-opening expenses, for these projects were $2,047,000 compared to $801,000 in the prior period, reflecting primarily expenses incurred in the Beijing, Pudong and Tianjin projects.
     Our discussion and analysis below relates to the revenue and expenses of our healthcare services business for the six months ended June 30, 2011 compared to the comparable period in the prior year.
     Due to the change in our business organization, the operating results for the healthcare services business in 2011 are not completely comparable to 2010. In the prior year, the Company operated in two reportable segments, and corporate overhead was fully allocated to the two segments. In 2011, the Company operates in only one business and, since corporate overhead costs are not allocated over two businesses, the healthcare services business results in 2011 include a greater proportion of corporate overhead than in prior years.
Net Revenue
                         
    Six months ended June 30,  
    2011     2010     Change  
     
Healthcare services net revenue
  $ 53,650     $ 45,917       17 %
     
     Our healthcare services revenue for the six months ended June 30, 2011 was $53,650,000, a 17% increase from the six months ended June 30, 2010 revenue of $45,917,000. The increase in net revenue is attributable to growth in both inpatient and outpatient services.
     The table below identifies the relative contribution of inpatient and outpatient services to gross revenue.
                 
    Six months ended June 30,  
    2011     2010  
     
Inpatient/Outpatient gross revenue percentages
               
Inpatient services as percent of gross revenue
    40 %     41 %
Outpatient services as percent of gross revenue
    60 %     59 %
 
           
 
    100 %     100 %
 
           
     The table below identifies the primary service lines contributing to gross revenue.

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    Six months ended June 30,  
    2011     2010  
     
Gross revenue by service line (hospital facilities only):
               
Surgical services
    18.0 %     18.5 %
OB/GYN
    14.5 %     14.5 %
Pediatrics
    8.0 %     8.1 %
Ancillary services
               
Laboratory
    10.2 %     10.3 %
Radiology
    11.2 %     11.9 %
Pharmacy
    11.6 %     11.9 %
All other services
    26.5 %     24.8 %
 
           
 
    100 %     100 %
 
           
Operating expenses
                         
    Six months ended June 30,  
    2011     2010     Change  
     
Salaries, wages and benefits
    30,228       25,646       18 %
Other operating expenses
    8,556       6,653       29 %
Supplies and purchased medical services
    5,862       4,634       26 %
Bad debt expense
    930       941       -1 %
Depreciation and amortization
    2,194       1,807       21 %
Lease and rental expense
    2,799       1,960       43 %
 
                 
 
  $ 50,569     $ 41,641       21 %
 
                 
     Salaries, wages and benefits increased 18% in the current period compared to the prior year period primarily due to the increased headcount of 14.1% associated with the revenue increases and development activities. Increases in headcount were due to both increased activities in our existing facilities as well as for pre-opening activities in advance of the opening of our expanded Beijing facilities.
     Other operating expenses increased by $1,903,000 or 29%, primarily due to increased office and administrative supplies of approximately $364,000, professional fees for legal and valuation services in the current period related to the formation and startup of CML of approximately $400,000, other legal and professional fees of $454,000, building utilities and maintenance of $250,000, increased outside services such as housekeeping of $66,000, and similar hospital operating expenses.
     Supplies and purchased medical services increased by $1,228,000 or 26%, due to increased usage of medical supplies and pharmaceuticals related to higher patient procedures of approximately $1,132,000 or 29%, and increased purchased medical services of approximately $96,000 or 14%.
     Bad debt expense decreased by $11,000 or 1%. As percentage of net revenue, bad debt expense was 1.7% in 2011 compared to 2.0% in the prior year period, which is in line with our historic averages.
     Depreciation and amortization expense increased by $387,000 or 21% to $2,194,000, primarily due to the completion of the construction of the New Hope Oncology Center, which is now being depreciated.
     Lease and rental expense increased to $2,799,000 in the current period compared to $1,960,000 in the prior year period, primarily due to the increase in the total building space utilized in the expanded operations of our hospital and clinic network.

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Other Income and Expenses
     Interest income during the recent period and prior period was $360,000 and $302,000, respectively, as there were no significant changes in average investment balances or interest rates.
     Interest expense during the recent period was $181,000 as compared to interest expense of $407,000 in the same period of the prior year due to decreases of short-term debt and increases of capitalized interest due to higher construction activities.
     Equity in income of unconsolidated affiliates in the amount of $582,000 represents our 49% interest in the income of CML for the six months ended June 30, 2011. CML was formed on December 31, 2010 and, accordingly, there is no comparable amount in the prior year period.
     Miscellaneous (expense) income during the recent period and prior period was ($67,000) and $231,000, respectively. The income in the prior period was substantially due to the gain on the change in fair value of the warrants of $224,000.
Taxes
     We recorded a provision for taxes of $2,062,000 (an effective tax rate of approximately 55%) in the six months ended June 30, 2011, compared to a provision for taxes of $1,803,000 (an effective tax rate of approximately 57%) in the six months ended June 30, 2010. The effective tax rate in both periods exceeds the statutory rate due to losses in entities for which we cannot recognize tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
     The following table sets forth our cash, investments, and accounts receivable as of June 30, 2011 and December 31, 2010 (in thousands):
                 
    June 30, 2011     December 31, 2010  
     
Cash and cash equivalents
  $ 38,583     $ 32,007  
Investments
    37,859       37,631  
Receivables from affiliates
    432       9,330  
Accounts receivable
    13,055       11,601  
     The following table sets forth a summary of our cash flows from operating activities for the six months ended June 30, 2011 and 2010 (in thousands):

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    Six months ended  
    June 30, 2011     June 30, 2010  
     
OPERATING ACTIVITIES
               
Net income
  $ 1,713     $ 1,351  
Non cash items
    2,708       7,298  
Changes in operating assets and liabilities:
               
Restricted cash
    300       (198 )
Accounts receivable
    (2,101 )     4,957  
Receivable from affiliates
    8,898        
Inventories
    (260 )     (5,162 )
Accounts payable, accrued expenses, other current liabilities and deferred revenue
    339       (192 )
Payable to affiliates
    2,899        
Other
    1,294       (2,171 )
 
           
Net cash provided by operating activities
  $ 15,790     $ 5,883  
 
           
     Operating cash flow for the six months ended June 30, 2011 was higher than the six months ended June 30, 2010, primarily due to the reduction in accounts receivable from our unconsolidated affiliate. For the six months ended June 30, 2010, the cash flow activity above includes the Medical Products division for the entire period.
     The following table sets forth a summary of our cash flows from investing activities for the six months ended June 30, 2011 and 2010 (in thousands):
                 
    Six months ended  
    June 30, 2011     June 30, 2010  
     
INVESTING ACTIVITIES
               
Purchases of short-term investments and CDs
  $ (21,271 )   $ (4,020 )
Proceeds from redemption of CDs
    22,837       21,802  
Purchases of property and equipment
    (11,157 )     (5,733 )
 
           
Net cash (used in) provided by investing activities
  $ (9,591 )   $ 12,049  
 
           
     Investing activities for the six months ended June 30, 2011 included acquisitions of property and equipment in connection with our ongoing development and expansion of the United Family Healthcare network of private hospitals and clinics, and redemption of CDs were reinvested in comparable instruments. Investing activities for the six months ended June 30, 2010, included acquisitions of property and equipment in connection with our ongoing development and expansion of the United Family Healthcare network of private hospitals and clinics, while proceeds from redemptions of CDs were added to cash on hand primarily for potential expenditure in the Company’s hospital construction program.
     The following table sets forth a summary of our cash flows from financing activities for the six months ended June 30, 2011 and 2010 (in thousands):
                 
    Six months ended  
    June 30, 2011     June 30, 2010  
     
FINANCING ACTIVITIES    
Proceeds from debt, vendor financing and convertible debentures
  $     $ 39  
Repayment of debt, sinking fund deposits and vendor financing
          (1,472 )
Repurchase of restricted stock for income tax withholding
          (4 )
Proceeds from exercise of stock options and warrants
    114       90  
 
           
Net cash provided by (used in) financing activities
  $ 114     $ (1,347 )
 
           

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     In December 2007 and January 2008, we had entered into loan agreements with IFC (the “IFC Facility”) and DEG-Deutsche Investitions und Entwicklungsgesellschaft (DEG) of Cologne, Germany (a member of the KfW banking group) (the “DEG Facility”), respectively, designed to provide for loans in the aggregate amounts of $25 million and $20 million, respectively, directly to our future healthcare joint ventures in Beijing and Guangzhou, China. Although as of the date of this filing, these facilities are not available, we are currently in discussion with IFC regarding the remaining precondition to an initial draw down under the IFC facility (see Note 7).
     In October 2005, BJU and SHU obtained long-term debt financing under a program with the IFC. As of June 30, 2011, the outstanding balance of this debt was 64,880,000 Chinese Renminbi (current translated value of $10,025,000 and is classified as long-term). Beginning of October 2010, we began payments to the sinking fund pursuant to the loan agreement. As of June 30, 2011, the sinking fund assets were 6,488,000 Chinese Renminbi (current translated value of $1,003,000 was recorded in long-term restricted cash). In the coming twelve months, we will make the second deposit to the sinking fund of 6,488,000 Chinese Renminbi.
     Over the past three years, there have been continuing and significant disruptions in the world financial markets including those in China. We have not experienced significant negative impacts to operating activities as a result of these events. We have taken steps to ensure the security of our cash and investment holdings through deposits with highly liquid, global banking institutions and government-backed insurance programs in the United States and elsewhere. Our daily operations in the Healthcare Services business generate significant operating cash flows and have not been dependent upon credit availability. Our patient base in our current facilities are by and large considered to be in the wealthiest segment of society, for whom healthcare spending represents a very small percentage of their income and therefore is expected to be less impacted by an economic slowdown and to the extent their assets are affected, this will likely not impact their decision making on healthcare purchases. The UFH development projects to establish and build hospitals in China are expected to be funded with existing cash and credit facilities as described above, provided that there can be no assurances that such facilities will be available or sufficient, that the preconditions to disbursements under the facilities will be satisfied or that, in any event, disbursements under the IFC and DEG Facilities will be achieved.
     Over the next twelve months we anticipate total capital expenditures of up to $68 million related to the maintenance and expansion of our business operations.
     In our three operating markets of Beijing, Shanghai and Guangzhou, we plan capital expenditures of up to $10 million for maintenance, development of existing facilities and implementation of a new healthcare information system platform. In addition, the expansion projects in the Beijing and Tianjin markets are planned for capital expenditures of up to $58 million for construction and equipment. These expansions will be funded through corporate capital reserves and cash flow from operations.
     In addition, as described above, we have entered into arrangements designed to provide future debt facilities, which are currently not available, the principal purpose of which is to fund expansion of our United Family Healthcare network. The expansion projects in the Beijing, Shanghai, Tianjin and Guangzhou markets are underway. Due to the timing of the development process for the planned joint venture hospital in Guangzhou, significant expenditures for that project are not expected until 2013 and beyond. There can be no assurances that any of the foregoing projects will be completed, that the actual costs or timing of the projects will not exceed our expectations or that the foregoing expected sources of financing, including the IFC and DEG debt Facilities, will be available or sufficient for any proposed capital expenditures.
TIMING OF REVENUES
     The timing of our revenue is affected by several factors.

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     Our healthcare services revenue is dependent on seasonal fluctuations related to epidemiological factors and the life styles of the expatriate community. For example, many expatriate families traditionally take annual home leave outside of China during the summer months of June through August.
     As a result of these factors impacting the timing of revenues, our operating results have varied and are expected to continue to vary from period to period and year to year.
FOREIGN CURRENCY EXCHANGE AND IMPACT OF INFLATION
     Because we receive over 100% of our revenue and generated 93% of our expenses within China, we have foreign currency exchange risk. The Chinese currency (RMB) is not freely traded and is closely controlled by the Chinese Government. The U.S. dollar (USD) has experienced volatility in world markets recently. During the six month period ended June 30, 2011, the RMB appreciated approximately 2.7% against the USD, resulting in an exchange gain of $257,000.
     As part of our risk management program, we also perform sensitivity analyses to assess potential changes in revenue, operating results, cash flows and financial position relating to hypothetical movements in currency exchange rates. Our sensitivity analysis of changes in the fair value of the RMB to the USD at June 30, 2011, indicated that if the USD uniformly increased in value by 10% relative to the RMB, we would have experienced a 25% decrease in net income. Conversely, a 10% increase in the value of the RMB relative to the USD at June 30, 2011, would have resulted in a 30% increase in net income.
     Based on the Consumer Price Index, for the three months ended June 30, 2011, inflation in China was 5.7% and inflation in the United States was 3.4%, and for the six months ended June 30, 2011, inflation in China was 5.4% and inflation in the United States was 2.5%. The average annual rate of inflation over the three-year period from 2008 to 2010 was 2.8% in China and 1.7% in the United States.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     The Company holds the majority of all cash assets in 100% principal protected AA/Aa or higher rated accounts. Therefore, the Company believes that its market risk exposures are immaterial and reasonable possible near-term changes in market interest rates will not result in material near-term reductions in other income, material changes in fair values or cash flows. The Company does not have instruments for trading purposes. Instruments for non-trading purposes are operating and development cash assets held in interest-bearing accounts. The Company is exposed to certain foreign currency exchange risk (see “Foreign Currency Exchange and Impact of Inflation”).
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
     In accordance with Exchange Act Rules 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial

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Officer (CFO), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
     Our management, including our principal executive and principal financial officers have evaluated any changes in our internal control over financial reporting that occurred during the three months ended June 30, 2011, and has concluded that there was no change that occurred during the three months ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
     None.
ITEM 1A. RISK FACTORS
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Transition Report on Form 10-K for the nine months ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Transition Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     None.
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
     None.

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ITEM 6. EXHIBITS
The exhibits listed below are filed as a part of this quarterly report:
     
10.1
  RMB Loan Agreement dated October 10, 2005 among Beijing United Family Health Center, Shanghai United Family Hospital, Inc. and International Finance Corporation.
 
10.2
  Loan Agreement dated December 10, 2007 between the Company and International Finance Corporation.
 
10.3
  Stockholder Agreement dated June 14, 2010 among the Company Fosun Industrial Co., Limited and Shanghai Fosun Pharmaceutical (Group) Co., Ltd.
 
10.4
  Trademark License Agreement dated December 31, 2010 between the Company and Chindox Medical Limited.
 
31.1
  Certification of the Company’s Chief Executive Officer Pursuant to Rule 13a-14(a)
 
31.2
  Certification of the Company’s Chief Financial Officer Pursuant to Rule 13a-14(a)
 
31.3
  Certification of the Company’s Principal Accounting Officer Pursuant to Rule 13a-14(a)
 
32.1
  Certification of the Company’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
 
32.2
  Certification of the Company’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
 
32.3
  Certification of the Company’s Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CHINDEX INTERNATIONAL, INC.
 
 
Dated: August 9, 2011  By:   /s/ Lawrence Pemble    
    Lawrence Pemble   
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) 
 
 
     
Dated: August 9, 2011  By:   /s/ Robert C. Low    
    Robert C. Low   
    Vice President of Finance,
Chief Accounting Officer
and Corporate Controller
(Principal Accounting Officer) 
 
 

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