Attached files
file | filename |
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EX-32.2 - EX-32.2 - CHINDEX INTERNATIONAL INC | w83002exv32w2.htm |
EX-31.3 - EX-31.3 - CHINDEX INTERNATIONAL INC | w83002exv31w3.htm |
EX-31.2 - EX-31.2 - CHINDEX INTERNATIONAL INC | w83002exv31w2.htm |
EX-32.1 - EX-32.1 - CHINDEX INTERNATIONAL INC | w83002exv32w1.htm |
EX-32.3 - EX-32.3 - CHINDEX INTERNATIONAL INC | w83002exv32w3.htm |
EX-10.1 - EXHIBIT 10.1 - CHINDEX INTERNATIONAL INC | w83002exv10w1.htm |
EX-31.1 - EX-31.1 - CHINDEX INTERNATIONAL INC | w83002exv31w1.htm |
EX-10.3 - EX-10.3 - CHINDEX INTERNATIONAL INC | w83002exv10w3.htm |
EX-10.2 - EXHIBIT 10.2 - CHINDEX INTERNATIONAL INC | w83002exv10w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - CHINDEX INTERNATIONAL INC | Financial_Report.xls |
EX-10.4 - EX-10.4 - CHINDEX INTERNATIONAL INC | w83002exv10w4.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
(Registrants telephone number)
(Registrants 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 registrants 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
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share data)
(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.
3
Table of Contents
CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
(Unaudited)
(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.
4
Table of Contents
CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
(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.
5
Table of Contents
CHINDEX INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
For the six months ended June 30, 2011
(in thousands except share data)
(Unaudited)
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.
6
Table of Contents
CHINDEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(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 Companys 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 Chindexs 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
7
Table of Contents
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys investments in
Certificates of Deposit are intended to be held to maturity. Other than Certificates of Deposit, the Companys current investments also include
available-for-sale securities at fair
8
Table of Contents
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 Companys 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 Companys noncurrent
investments of $872,000 as of June 30, 2011, consist of corporate bonds which mature in 13 to 30
months.
The Companys 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 Companys investments in
Certificates of Deposit are intended to be held to maturity. Other than Certificates of Deposit,
the Companys 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 Companys
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 Companys 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 Chindexs
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
9
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interest entity. Therefore, the reduction of the Companys 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 entitys (VIEs) expected losses or receive portions of the
entitys expected residual returns. An equity interest is considered to be a variable interest in a
company and as such, the Companys 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
Fosuns 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 CMLs 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 CMLs 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
Companys investment in CML is accounted for as an equity method investment.
10
Table of Contents
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 Companys existing Beijing hospital campus including facilities
which will provide neurosurgical and orthopedic surgery services and initial construction of the
women and childrens 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 Companys 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 Companys 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 IFCs 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 Companys common stock; (ii) the Companys Tranche B
Convertible Notes due 2017 in the aggregate principal amount
of $25 million (the Tranche B Notes) and (iii) the Companys 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 Companys 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 Companys 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 Companys
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 Companys 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 Companys 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 Companys
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 Companys
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys Medical
Products division and certain of Investors 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys common stock and to vote for the Investors 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 Companys 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
20
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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 Companys debt such as quoted prices in active markets
are not available, as the Companys 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 Companys 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 Companys 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 Companys 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. MANAGEMENTS 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 Companys
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 Chindexs 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 Governments healthcare reform
program encourages private investment, such as Chindexs 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 Companys 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.
24
Table of Contents
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 Chindexs 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
25
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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
Governments healthcare reform program encourages private investment, such as Chindexs 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.
26
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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.
27
Table of Contents
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):
28
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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 Companys
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 SECs 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 Companys 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 SECs 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 Companys Chief Executive Officer Pursuant to Rule 13a-14(a) | |
31.2
|
Certification of the Companys Chief Financial Officer Pursuant to Rule 13a-14(a) | |
31.3
|
Certification of the Companys Principal Accounting Officer Pursuant to Rule 13a-14(a) | |
32.1
|
Certification of the Companys Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | |
32.2
|
Certification of the Companys Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | |
32.3
|
Certification of the Companys 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) |
||||
34