Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - CHINDEX INTERNATIONAL INCd761636dex311.htm
EX-31.3 - EXHIBIT 31.3 - CHINDEX INTERNATIONAL INCd761636dex313.htm
EX-32.3 - EXHIBIT 32.3 - CHINDEX INTERNATIONAL INCd761636dex323.htm
EX-32.2 - EXHIBIT 32.2 - CHINDEX INTERNATIONAL INCd761636dex322.htm
EX-31.2 - EXHIBIT 31.2 - CHINDEX INTERNATIONAL INCd761636dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - CHINDEX INTERNATIONAL INCFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - CHINDEX INTERNATIONAL INCd761636dex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

 

¨ 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   13-3097642
(State or other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
4340 East West Highway, Suite 1100,
Bethesda, Maryland
  20814
(Address of principal executive offices)   (Zip Code)

(301) 215-7777

(Registrant’s telephone number)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each class of the registrant’s common equity, as of August 8, 2014, was 17,100,747 shares of Common Stock and 1,162,500 shares of Class B Common Stock.

 

 

 


Table of Contents

CHINDEX INTERNATIONAL, INC.

INDEX

FORM 10-Q

PART I – FINANCIAL INFORMATION

 

Item 1.

  Financial Statements (Unaudited):   
  Consolidated Condensed Balance Sheets as of June 30, 2014 and December 31, 2013      3   
  Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2014 and 2013      4   
  Consolidated Condensed Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013      5   
  Consolidated Condensed Statements of Stockholders’ Equity for the six months ended June 30, 2014      6   
  Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2014 and 2013      7   
  Notes to Consolidated Condensed Financial Statements      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      34   

Item 4.

  Controls and Procedures      34   
PART II – OTHER INFORMATION   

Item 1.

  Legal Proceedings      35   

Item 1A.

  Risk Factors      35   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      35   

Item 3.

  Defaults Upon Senior Securities      35   

Item 4.

  Mine Safety Disclosures      35   

Item 5.

  Other Information      35   

Item 6.

  Exhibits      36   

Signatures

     37   

Exhibits Index

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands except share data)

(Unaudited)

 

     June 30, 2014      December 31, 2013  
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 39,340       $ 33,107   

Restricted cash

     1,272         1,286   

Accounts receivable, less allowance for doubtful accounts of $15,775 and $14,338, respectively

     24,960         23,041   

Receivables from affiliates

     1,870         2,897   

Inventories of supplies, net

     2,975         2,781   

Deferred income taxes

     5,208         4,763   

Other current assets

     5,236         3,787   
  

 

 

    

 

 

 

Total current assets

     80,861         71,662   

Restricted cash and sinking funds

     18,391         19,262   

Investment in unconsolidated affiliate

     33,559         34,178   

Property and equipment, net

     115,286         113,838   

Noncurrent deferred income taxes

     905         811   

Other assets

     4,186         4,817   
  

 

 

    

 

 

 

Total assets

   $ 253,188       $ 244,568   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Short-term debt

   $ 4,336       $ 3,648   

Accounts payable

     12,567         11,705   

Payable to affiliates

     2,746         1,977   

Accrued expenses

     14,470         17,984   

Other current liabilities

     14,526         11,408   

Income taxes payable

     2,821         3,658   
  

 

 

    

 

 

 

Total current liabilities

     51,466         50,380   

Long-term debt

     36,450         26,715   

Long-term deferred rent

     1,530         1,223   

Long-term deferred tax liability

     229         231   
  

 

 

    

 

 

 

Total liabilities

     89,675         78,549   
  

 

 

    

 

 

 

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 – 17,100,747 and 16,934,753 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     171         169   

Class B stock – 1,162,500 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     12         12   

Additional paid-in capital

     143,489         140,809   

Retained earnings

     8,243         12,450   

Accumulated other comprehensive income

     11,598         12,579   
  

 

 

    

 

 

 

Total stockholders’ equity

     163,513         166,019   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 253,188       $ 244,568   
  

 

 

    

 

 

 

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)

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

Healthcare services revenue

   $ 55,453      $ 45,977      $ 105,338      $ 87,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Salaries, wages and benefits

     30,786        26,834        58,822        49,497   

Other operating expenses

     6,579        5,642        13,019        11,274   

Supplies and purchased medical services

     6,970        5,590        12,925        10,555   

Bad debt expense

     460        1,140        1,574        2,119   

Depreciation and amortization

     3,410        2,353        6,652        4,655   

Lease and rental expense

     3,371        2,410        6,636        4,771   

Merger transaction expenses

     2,035        109        5,336        192   
  

 

 

   

 

 

   

 

 

   

 

 

 
     53,611        44,078        104,964        83,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1,842        1,899        374        4,479   

Other income and (expenses)

        

Interest income

     226        241        451        489   

Interest expense

     (389     (226     (748     (328

Equity in loss of unconsolidated affiliate

     (174     (387     (524     (1,287

Miscellaneous income—net

     40        39        60        37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     1,545        1,566        (387     3,390   

Provision for income taxes

     (2,238     (1,688     (3,820     (3,574
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (693   $ (122   $ (4,207   $ (184
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share—basic

   $ (.04   $ (.01   $ (.24   $ (.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—basic

     17,813,312        16,582,068        17,750,642        16,566,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share—diluted

   $ (.04   $ (.01   $ (.24   $ (.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     17,813,312        16,582,068        17,750,642        16,566,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

4


Table of Contents

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

Net loss

   $ (693   $ (122   $ (4,207   $ (184
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

        

Foreign currency translation adjustment

     (150     1,561        (886     1,770   

Share of other comprehensive (loss) income of unconsolidated affiliate

     19        (198     (95     (167
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (131     1,363        (981     1,603   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (824   $ 1,241      $ (5,188   $ 1,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

(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, 2013

     16,934,753      $ 169         1,162,500       $ 12       $ 140,809      $ 12,450      $ 12,579      $ 166,019   

Net loss

     —          —           —           —           —          (4,207     —          (4,207

Foreign currency translation adjustment

     —          —           —           —           —          —          (886     (886

Share of other comprehensive loss of unconsolidated affiliate

     —          —           —           —           —          —          (95     (95

Stock based compensation

     —          —           —           —           2,209        —          —          2,209   

Purchase and retirement of restricted stock for tax witholding

     (14,916     —           —           —           (355     —          —          (355

Options exercised and issuance of restricted stock, net of restricted stock forfeited

     180,910        2         —           —           826        —          —          828   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     17,100,747      $ 171         1,162,500       $ 12       $ 143,489      $ 8,243      $ 11,598      $ 163,513   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

6


Table of Contents

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Six months ended June 30,  
     2014     2013  

OPERATING ACTIVITIES

    

Net loss

   $ (4,207   $ (184

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     6,652        4,655   

Inventory write down

     3        10   

Provision for doubtful accounts

     1,351        2,119   

Loss on disposal of property and equipment

     9        8   

Equity in net loss of unconsolidated affiliate

     524        1,287   

Deferred income benefit

     (589     (519

Stock based compensation

     2,209        2,234   

Foreign exchange loss (gain)

     237        (286

Amortization of debt issuance costs

     272        5   

Amortization of debt discount

     —          124   

Changes in operating assets and liabilities:

    

Accounts receivable

     (3,495     (4,967

Receivables from affiliates

     1,027        (612

Inventories of supplies

     (224     (425

Other current assets and other assets

     (1,191     (2,257

Accounts payable, accrued expenses, other current liabilities and deferred rent

     1,119        (4,232

Payable to affiliates

     769        (12

Income taxes payable

     (807     (878
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     3,659        (3,930

INVESTING ACTIVITIES

    

Purchases of property and equipment

     (9,137     (5,899
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,137     (5,899

FINANCING ACTIVITIES

    

Restricted cash from IFC RMB loan sinking funds

     446        444   

Restricted cash from Exim loan

     252        —     

Proceeds from debt

     12,000        11,000   

Repayment of debt

     (1,469     (800

Repurchase of restricted stock for income tax withholding

     (355     (220

Proceeds from exercise of stock options

     828        114   
  

 

 

   

 

 

 

Net cash provided by financing activities

     11,702        10,538   

Effect of foreign exchange rate changes on cash and cash equivalents

     9        (87
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     6,233        622   

Cash and cash equivalents at beginning of period

     33,107        33,184   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 39,340      $ 33,806   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for interest

   $ 387      $ 57   

Cash paid for taxes

   $ 5,197      $ 5,005   

Non-cash investing and financing activities consist of the following:

    

Change in property and equipment additions included in accounts payable and payable to affiliates

   $ (41   $ 1,691   

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

7


Table of Contents

CHINDEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Chindex International, Inc. (“Chindex” or “the Company”), founded in 1981, is an American healthcare company providing healthcare services in China through the operations of United Family Healthcare (“UFH”), a network of private care hospitals and affiliated ambulatory clinics. UFH currently operates in Beijing, Shanghai, Tianjin, and Guangzhou.

Note 1. PROPOSED MERGER

On February 17, 2014, the Company entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with Healthy Harmony Holdings, L.P., a Cayman Islands limited partnership (“Merger Parent”), and Healthy Harmony Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of Merger Parent (“Merger Sub”). Merger Parent is indirectly owned by TPG Asia VI, L.P., a Cayman Islands limited partnership (“TPG”), and, upon the closing, Fosun Industrial Co., Limited, a corporation organized under the laws of Hong Kong (“Fosun Industrial”), and Roberta Lipson, the Company’s Chief Executive Officer, would also become limited partnership interest holders of Merger Parent. Under the terms of the Original Merger Agreement, shareholders of the Company would have received $19.50 per share in cash as merger consideration. Commencing on February 17, 2014, the Company and its representatives engaged in a “go shop” process pursuant to the Original Merger Agreement. In connection therewith, the Company received and considered a competing offer at $23.00 per share from a financial bidder. Following further bidding and the ultimate decline by that financial bidder to bid further, the Company on April 18, 2014 entered into an Amended and Restated Agreement and Plan of Merger (the “Amended Merger Agreement”) with Merger Parent and Merger Sub providing for the acquisition of the Company by a buyer consortium comprised of an affiliate of TPG, Fosun Industrial, and Roberta Lipson. Under the terms of the Amended Merger Agreement, Merger Sub will be merged (the “Merger”) with and into the Company, as a result of which the Company will continue as the surviving corporation and a wholly-owned subsidiary of Merger Parent. The Amended Merger Agreement, which has been unanimously approved by the Company’s Board of Directors upon the recommendation of the Board’s Transaction Committee comprised of independent and disinterested directors, amends and restates in its entirety the Original Merger Agreement.

Under the terms of the Amended Merger Agreement, among other changes, the merger consideration was increased to $24.00 per share in cash from the merger consideration of $19.50 per share in cash under the Original Merger Agreement.

Under the terms of the Amended Merger Agreement, at the effective time of the Merger (i) each outstanding share of the Company’s Common Stock, other than shares owned by Merger Parent, Merger Sub and any other subsidiary of Merger Parent, including shares contributed to Merger Parent by rollover stockholders (including Fosun Industrial, Ms. Lipson and any additional rollover stockholders), shares held in the Company’s treasury or owned by any subsidiary of the Company and shares owned by any stockholders who properly exercise appraisal rights under Delaware law, will be cancelled and converted into the right to receive the merger consideration of $24.00 per share in cash without interest, (ii) each option to purchase the Company’s Common Stock that is outstanding as of the effective time of the Merger (other than certain options that will be converted into options to acquire Merger Parent equity) will be cancelled in exchange for the right to receive the excess (if any) of the merger consideration per share over the exercise price of such option, less applicable taxes required to be withheld and (iii) restricted stock and restricted stock units that are not vested immediately prior to the effective time of the Merger (other than certain awards that will be converted into awards to acquire Merger Parent equity) will be fully vested and free of any forfeiture restrictions immediately prior to the effective time, whereupon the shares represented thereby (net of any shares withheld to cover applicable taxes) will be converted in the Merger into the right to receive in cash the merger consideration per share. The transaction will result in the Company becoming a private company.

 

8


Table of Contents

In the Amended Merger Agreement, the Company has made customary representations and warranties that expire at the effective time of the Merger, as well as customary covenants, including, without limitation, covenants regarding the conduct of the business of the Company prior to the consummation of the Merger and the use of commercially reasonable efforts to cause the Merger to be consummated as promptly as practicable. The Amended Merger Agreement may be terminated by the Company or Merger Parent under certain circumstances. Upon the termination of the Amended Merger Agreement, under specified circumstances the Company will be required to pay a termination fee to Merger Parent in the amount of $14,623,500. Under other specified circumstances under which the Amended Merger Agreement is terminated, Merger Parent will be required to pay the Company a termination fee of $30,834,000, which amount will be guaranteed by TPG.

Consummation of the Merger is subject to certain conditions, including, among others, the adoption of the Amended Merger Agreement by the Company’s stockholders and by a majority of the Company’s disinterested stockholders, the regulatory approval under Chinese antitrust laws, and other customary closing conditions. A special meeting of the Company’s stockholders will be held following the filing of a definitive proxy statement with the SEC and subsequent mailing of the proxy statement to stockholders. The Merger will be financed through cash contributed by TPG, a combination of cash and equity contributed by Fosun Industrial (except that if the shareholders of Fosun Pharma fail to approve the cash contribution TPG will fund all such cash contribution) and equity contributed by Ms. Lipson. The Merger is not subject to a financing condition. Assuming the satisfaction of conditions specified in the Amended Merger Agreement, the Company expects the Merger to close in the second half of 2014.

In connection with the execution of the Original Merger Agreement, Ms. Lipson and her affiliated trusts, Ms. Silverberg, Mr. Pemble and Fosun, entered into a Support Agreement, dated February 17, 2014, with Merger Parent, TPG and Fosun Industrial (the “Support Agreement”), which likewise applies to the Amended Merger Agreement, pursuant to which the parties have agreed, among other things, to vote their respective shares in the Company in favor of the adoption of the Amended Merger Agreement and against any alternative acquisition proposals and to grant Merger Parent a proxy to vote such shares; provided however that the Company’s management and Fosun Industrial, as current stockholders of the Company, are permitted to engage in discussions or negotiations with parties that make alternative acquisition proposals if, and only during such time as, the Company is permitted under the Amended Merger Agreement to have discussions or negotiations with respect to such alternative acquisition proposal. The Support Agreement will terminate upon the earliest to occur of (i) the effective time of the Merger, (ii) the date and time the Amended Merger Agreement is terminated in accordance with its terms and provisions and (iii) the effectiveness of a mutual written agreement of the parties thereto to terminate the Support Agreement.

Note 2. BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements of the Company has 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, 2014 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 Annual Report on Form 10-K for the year ended December 31, 2013.

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 in which the Company has a controlling financial interest. 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.

 

9


Table of Contents

Use of Estimates

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, stock-based compensation, and deferred tax valuation allowances.

Revenue Recognition

All revenue is derived from providing healthcare services. Revenue related to services provided is net of contractual adjustments or discounts and is recognized in the period services are provided. The Company makes an estimate at the end of the month for certain inpatients that have not completed service.

Accounts Receivable

Accounts receivable are customer obligations due under normal trade terms. Accounts receivable are reviewed on a quarterly basis to determine if any receivables will potentially be uncollectible based on the aging of the receivable and historical cash collections. Any accounts receivable that are determined to be uncollectible, along with a percentage allowance for each aging category of receivables are included in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Final write-offs of receivables in China require approval from Chinese tax authorities. Such approvals require substantial historical documentation of collection efforts and are not normally granted until several years have passed. As a result, the allowance for doubtful accounts is relatively high when compared to account receivable balances. Management believes the allowance for doubtful accounts as of June 30, 2014 and June 30, 2013 is adequate; however, actual write-offs might exceed the recorded allowance.

In management’s review of the allowance for doubtful accounts at June 30, 2014, it was noted that the allowance was too high at the end of the prior quarter ended March 31, 2014 by approximately $540,000. The reversal of the $540,000 resulted in the relatively low bad debt expense in the three months ended June 30, 2014. Management believes that the impact of correcting this in the three-month period ended June 30, 2014 is immaterial to both periods ended June 30, 2014 and March 31, 2014, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

Reclassification

Certain amounts related to merger transaction expenses, which were included in Other Operating expenses in the prior year three and six month periods, have been reclassified to the separate line item Merger Transaction Expenses for consistency of presentation.

Note 3. INVENTORIES OF SUPPLIES, NET

Inventories of supplies consist of medical supplies and pharmaceuticals in the amounts of $2,975,000 at June 30, 2014 and $2,781,000 at December 31, 2013.

 

10


Table of Contents

Note 4. INVESTMENT IN UNCONSOLIDATED AFFILIATE

Background – Chindex Medical Limited

On December 31, 2010, 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 (the “Initial Closing”) of the formation of Chindex Medical Limited (“CML”) to independently operate certain combined medical device businesses, including Chindex’s Medical Products division (“MPD”). The formation of CML 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. CML is focused on marketing, distributing, selling and servicing medical devices in China, including Hong Kong, as well as activities in R&D and manufacturing of medical devices for the Chinese and export markets. At the time of formation, CML was owned 51% by FosunPharma and 49% by Chindex.

Upon the Initial Closing, CML became the owner of the Company’s former Medical Products division. On June 24, 2011, CML became the holder of legal title to the FosunPharma-contributed businesses. Notwithstanding this transfer, the registration with and approval of Shanghai Administration of Foreign Exchange (SAFE) was required in order for CML to exercise certain of the rights and benefits as shareholder of such businesses, but CML was entitled to such benefits on a contractual basis under an entrusted management agreement. The registration with and approval of SAFE was received on March 7, 2012, and all legal formalities related to the final closing of the joint venture formation were completed as of March 30, 2012.

Deconsolidation of Chindex MPD

FosunPharma has a controlling financial interest in CML. The Company was required to deconsolidate the MPD-contributed businesses when it ceased to have a controlling financial interest in the applicable subsidiaries. In its analysis, the Company concluded that CML was a voting interest entity, rather than a variable interest entity. Therefore, the reduction of the Company’s initial interest to 49% on December 31, 2010 indicated that it no longer had a controlling financial interest and needed to deconsolidate under Accounting Standards Codification (“ASC”) 810. Accordingly, Chindex deconsolidated its Medical Products division from its consolidated balance sheet, effective December 31, 2010.

CML Purchase of Interest in Alma Lasers, Inc.

On May 27, 2013, CML acquired approximately 36.17% of Alma Lasers, Inc. (“Alma”) as part of a purchase by a group of buyers for substantially all of Alma. The buying group, which consisted of CML, another subsidiary of FosunPharma, and the Pramerica-Fosun China Opportunity Fund, acquired 95.16% of Alma indirectly through a jointly-owned entity, Sisram Medical, Ltd. The total acquisition price by all buyers for Alma was approximately $221.6 million. Alma is a leading global medical energy-based (including lights, laser, radio frequency and ultrasonic) device manufacturer, with a comprehensive product offering and international sales network. Alma has developed leading R&D capabilities globally in the medical and aesthetic equipment manufacturing field and established a global brand in the market segment.

In order to help fund the acquisition by CML of its interest in Alma, FosunPharma invested approximately $41 million in cash into CML for additional equity in CML. Chindex International waived its right to participate in the additional investment of capital into CML and also agreed to increase FosunPharma’s board seats at CML from four of seven to five of eight. Following such investment, the cumulative net assets contributed by each party to CML since inception were approximately 70% by FosunPharma and 30% by Chindex. After consideration of the relative net assets contributed to CML by each investor, the parties agreed that the equity interests should be revised to 70% for FosunPharma and 30% for Chindex. Since the resulting basis for Chindex approximated its equity interest in CML, there was no gain or loss recognized by Chindex on the revised equity percentages, as the amount was de minimis.

Summarized Financial Information for CML-Unconsolidated Affiliate

Chindex follows the equity method of accounting to recognize its interest in CML. The Chindex interest in CML at the time of formation on December 31, 2010 was 49% and, was subsequently reduced to 30%, effective May 27, 2013. 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.

 

11


Table of Contents

The assets and liabilities of CML as of June 30, 2014 and December 31, 2013 were as follows (in thousands):

 

     June 30, 2014      December 31, 2013  

Current assets

   $ 147,507       $ 144,338   

Noncurrent assets

     233,673         234,440   
  

 

 

    

 

 

 

Total assets

   $ 381,180       $ 378,778   
  

 

 

    

 

 

 

Current liabilities

   $ 57,860       $ 141,053   

Noncurrent liabilities

     193,420         109,866   
  

 

 

    

 

 

 

Total liabilities

     251,280         250,919   

Redeemable noncontrolling interests

     10,331         10,001   

Stockholders’ equity

     119,569         117,858   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 381,180       $ 378,778   
  

 

 

    

 

 

 

The operating results of CML for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

 

     Three months ended June 30,     Six months ended June 30,  
     2014      2013     2014      2013  

Revenue

   $ 46,863       $ 39,286      $ 95,676       $ 57,962   

Income (loss) before income taxes

     1,746         (570     2,410         (2,444

Net income (loss)

     1,116         (848     1,490         (2,410

The operating results of CML in 2014 and 2013 have thus far been significantly impacted by restructuring at the Ministry of Health, uncertainty surrounding proposed reforms and the disruption to normal hospital purchasing activity due to the government campaign to improve compliance in the public hospitals’ purchasing activities, all of which has led to an overall slowdown in business activity among capital medical equipment markets in China.

CML is a 70%-owned subsidiary of FosunPharma. 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 FosunPharma 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 interest in the net assets and net (losses) income of CML using the equity method of accounting, Chindex includes its 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 FosunPharma to CML at its formation date and also includes the amortization of acquisition accounting adjustment to reflect fair values in connection with CML’s investment in the net assets of Sisram (Alma). 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 for three months ended June 30, 2014 and 2013 were $481,000 and $476,000, respectively. The total stock-based compensation expense recognized by CML for six months ended June 30, 2014 and 2013 were $771,000 and $863,000, respectively.

As of June 30, 2014 and December 31, 2013, Chindex had a receivable from CML entities of $1,870,000 and $2,897,000, respectively, primarily related to advance payments for procurement of medical equipment supplied under a logistics service agreement whereby CML serves as an agent for Chindex. As of June 30, 2014 and December 31, 2013, Chindex had a payable to CML entities of $2,746,000 and $1,977,000, respectively, which represented the actual purchases of medical equipment by CML on behalf of Chindex under the logistics service agreement.

 

12


Table of Contents

Services Agreement

CML and Chindex entered into a services agreement (the “Services Agreement”), effective January 1, 2011. Under the Services Agreement, Chindex provides advice and support services as requested by CML. The services include management and administrative support services for marketing, sales and order fulfillment activities conducted in the United States and China, order processing and exporting of goods sold to customers in China, advice relating to the marketing of products sold in China by CML, analysis of sales opportunities and other assistance including services such as payroll, database administration, internal auditing, accounting and finance that will assist CML in carrying out its activities in the United States and China. For the three months ended June 30, 2014 and 2013, total expenses recognized by CML under the services agreement were $911,000 and $998,000, respectively, in addition to stock-based compensation. For the six months ended June 30, 2014 and 2013, total expenses recognized by CML under the services agreement were $1,633,000 and $2,037,000, respectively, in addition to stock-based compensation.

Note 5. RESTRICTED CASH AND SINKING FUNDS

Restricted cash and sinking funds at June 30, 2014 and December 31, 2013 consist of the following:

(in thousands)

 

     June 30, 2014      December 31, 2013  

Current

     

IFC RMB loan interest collateral

   $ 446       $ 450   

China Exim loan collateral

     826         836   
  

 

 

    

 

 

 
   $ 1,272       $ 1,286   
  

 

 

    

 

 

 

Noncurrent

     

IFC RMB loan sinking fund

   $ 10,991       $ 11,542   

China Exim loan collateral—Certificates of Deposit

     7,400         7,720   
  

 

 

    

 

 

 
   $ 18,391       $ 19,262   
  

 

 

    

 

 

 

The China Exim loan collateral of $826,000 consists of a number of deposits for the China Exim loan with an interest rate between 3%-5% per annum, and the term of the deposits is from June 2014 to March 2015. The IFC RMB loan interest collateral of $446,000 consists of a deposit for the IFC RMB loan with an interest rate of 4.5% per annum, and the term of the deposit is from June 2014 to March 2015.

The IFC RMB loan sinking fund consists of Certificates of Deposit (CDs) for the advance funding of the loan principal and interest for the Company’s IFC 2005 RMB loan from the International Finance Corporation (IFC). As of June 30, 2014, the CDs totaled $10,991,000, and are recorded in long-term restricted cash and sinking funds. The RMB debt is also classified as long-term and will be paid off as originally scheduled on October 15, 2015. The CDs in the amount of $10,991,000 have an interest rate of 5%, and the term of the CDs are from June 2014 to October 2015.

In June 2011, the Company entered into a contract for the purchase of $11,100,000 of medical equipment to be used at our newly expanded hospital facilities in Beijing. The equipment was primarily sourced from the United States. Since the equipment is for qualified government-sponsored projects under financing agreements between the U.S. Export-Import Bank and China’s Ministry of Finance, the Company may import the equipment into China on a duty and VAT free basis. The Company entered into loan agreements for the principal amount of $11,100,000, with a term of seven years, an interest rate of 2.15%, and a collateral cash deposit of approximately $7,400,000. Certificates of Deposit in a restricted account at a major bank in China were opened in June 2012 to provide the collateral for the expected draw of $11,100,000 under the loan agreements. The Certificates of Deposit earn interest at a rate of 3.05% as of June 30, 2014, and the interest rate is reset every six months based on the bank’s standard rates, and the term of the CDs are from June 2014 to August 2019. The remaining steps to draw the principal of the loan were completed and the entire $11,100,000 was drawn on October 18, 2012.

 

13


Table of Contents

Note 6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:

(in thousands)

 

     June 30, 2014     December 31, 2013  

Property and equipment, net consists of the following:

    

Furniture and equipment

   $ 56,463      $ 53,281   

Vehicles

     327        361   

Construction in progress

     1,733        2,510   

Leasehold improvements

     96,454        91,166   
  

 

 

   

 

 

 
     154,977        147,318   

Less: accumulated depreciation and amortization

     (39,691     (33,480
  

 

 

   

 

 

 
   $ 115,286      $ 113,838   
  

 

 

   

 

 

 

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. Additions incurred during the period pertained to the completion of the construction of the Beijing Rehabilitation Hospital and new clinics in Beijing and Shanghai. Remaining costs to complete major construction activities in progress are approximately $31 million. Capitalized interest on construction in progress was $10,000 and $33,000 during the three months ended June 30, 2014 and 2013, respectively. Capitalized interest on construction in progress was $37,000 and $158,000 during the six months ended June 30, 2014 and 2013, respectively. Depreciation and amortization expense for property and equipment for the three months ended June 30, 2014 and 2013 were $3,410,000 and $2,353,000, respectively. Depreciation and amortization expense for property and equipment for the six months ended June 30, 2014 and 2013 were $6,652,000 and $4,655,000, respectively.

Note 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

(in thousands)

 

     June 30, 2014      December 31, 2013  

Accrued expenses:

     

Accrued expenses—rent

   $ 5,625       $ 7,158   

Accrued compensation

     5,948         8,063   

Accrued expenses—other

     2,897         2,763   
  

 

 

    

 

 

 
   $ 14,470       $ 17,984   
  

 

 

    

 

 

 

Other current liabilities:

     

Accrued other taxes payable- non-income

   $ 1,433       $ 1,659   

Customer deposits

     9,495         6,430   

Other current liabilities

     3,598         3,319   
  

 

 

    

 

 

 
   $ 14,526       $ 11,408   
  

 

 

    

 

 

 

 

14


Table of Contents

Note 8. DEBT

The Company’s short-term and long-term debt balances are (in thousands):

 

     June 30, 2014      December 31, 2013  
     Short term      Long term      Short term      Long term  

IFC 2005 RMB loan

   $ —         $ 10,545       $ —         $ 10,641   

IFC 2013 loan

     1,500         4,125         1,125         4,875   

DEG 2013 loan

     1,250         3,437         937         4,063   

China Exim loans

     1,586         6,343         1,586         7,136   

IFC 2014 Rehab loan

     —           12,000         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,336       $ 36,450       $ 3,648       $ 26,715   
  

 

 

    

 

 

    

 

 

    

 

 

 

IFC 2005 RMB loan

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 (“RMB”) (approximately $8,000,000) (the “IFC 2005 RMB Loan”). The term of the loan was 10 years at an initial interest rate of 6.73% with the borrowers required to make annual payments into a sinking fund with the first payment in September 2010. Deposits into the sinking fund would have accumulated until a lump sum payment was made at maturity of the debt in October 2015. The interest rate would have reduced to 4.23% for any amount of the outstanding loan on deposit in the sinking fund.

Effective March 14, 2012, the Company entered into an Amendment and Restatement Agreement to the IFC 2005 RMB Loan Agreement, and a Certificate of Deposit Retention and Pledge Agreement. The agreements were necessary in order to incorporate the effects of the expansion of the Beijing hospital campus on the collateral and loan covenant provisions of the original IFC 2005 RMB Loan Agreement. The revised terms of the agreements provide for (1) advance funding by the Company of the full principal and interest amounts by the purchase of a series of Certificates of Deposit having a face amount equal to the full principal and interest amount and the subsequent pledge of such Certificates of Deposit to the IFC, and (2) significant reduction of loan covenants required under the original loan agreement. The advance funding of the loan principal and interest by the Company into restricted accounts rather than paying off the debt was necessary in order to avoid significant prepayment penalties. As of June 30, 2014, the Certificates of Deposit totaled $10,991,000 and are recorded in long-term restricted cash and sinking funds. The RMB debt is classified as long-term and will be paid off as originally scheduled on October 15, 2015.

As of June 30, 2014, the outstanding balance of this debt was 64,880,000 RMB (current translated value of $10,545,000) and was classified as long-term. As the advance funding of the sinking fund does not extinguish 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.

IFC 2013 Beijing United Family Hospital Loan

In March 2013, the Company entered into a $6,000,000 loan facility with IFC for the financing of the expansion projects at our flagship hospital in Beijing. In June 2013, we drew down the entire $6,000,000 from this facility. The loan currently bears interest at the three-month LIBOR rate plus a spread of 4.95%. The loan duration is five years, with a one-year grace period. Principal payments will be made on a quarterly basis, beginning on June 15, 2014 through March 15, 2018. The obligations of the borrower (BJU) under the IFC facility is guaranteed by Chindex and secured by a pledge of Chindex’s indirect ownership interest in the borrower. The issuance costs of $1,111,000 were capitalized and are being amortized over the 5-year life of the loan. Amortization of the issuance cost was approximately $60,000 and $122,000 for the three and six months ended June 30, 2014. Amortization of the issuance cost was deminimus in the prior year period. The IFC Facility contains customary financial covenants, including maintenance of a maximum ratio of liabilities to tangible net worth and a minimum debt service coverage ratio, and covenants that, among other things, place limits on the Company’s ability to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, engage in transactions with affiliates, and make capital expenditures. The Company was in compliance with the financial covenants as of June 30, 2014, except for one financial covenant for which the Company received a waiver.

 

15


Table of Contents

DEG 2013 Beijing United Family Hospital Loan

In March 2013, the Company entered into a $5,000,000 loan facility with Deutsche Investitions und Entwicklungsgesellschaft (DEG) for the financing of the expansion projects at our flagship hospital in Beijing. In June 2013, we drew down the entire $5,000,000 from this facility. The loan currently bears interest at the three-month LIBOR rate plus a spread of 4.95%. The loan duration is five years, with a one-year grace period. Principal payments will be made on a quarterly basis, beginning on June 15, 2014 through March 15, 2018. The obligations of the borrower (BJU) under the DEG facility is guaranteed by Chindex and secured by a pledge of Chindex’s indirect ownership interest in the borrower. The issuance costs of $316,000 were capitalized and are being amortized over the 5-year life of the loan. Amortization of the issuance cost was approximately $17,000 and $36,000 for the three and six months ended June 30, 2014. Amortization of the issuance cost was deminimus in the prior year period. The DEG Facility contains customary financial covenants, including maintenance of a maximum ratio of liabilities to tangible net worth and a minimum debt service coverage ratio, and covenants that, among other things, place limits on the Company’s ability to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, engage in transactions with affiliates, and make capital expenditures. The DEG Facility also contains customary events of default. As of June 30, 2014, the Company was in compliance with the loan covenants.

China Exim Loans

In June 2011, the Company entered into a contract for the purchase of $11,100,000 of medical equipment to be used at our newly expanded hospital facilities in Beijing. The equipment was primarily sourced from the United States. As qualified government-sponsored projects under financing agreements between the U.S. Export-Import Bank and China’s Ministry of Finance, this would allow the Company to import the equipment into China on a duty and VAT free basis. The Company entered into loan agreements with Export-Import Bank of China (“China Exim”) for the principal amount of $11,100,000, with a term of seven years, an interest rate of 2.15%, and a collateral cash deposit of approximately $8,600,000 Certificates of Deposit in a restricted account were opened in June 2012 to provide the collateral for the expected draw of $11,100,000 under the loan agreements. The remaining steps to draw the principal of the loan were completed and the entire $11,100,000 was drawn on October 18, 2012. The issuance costs of $297,000 were capitalized and are being amortized over the 7-year lives of the loans. Amortization of the issuance was approximately $11,000 and $23,000 for the three and six months ended June 30, 2014, respectively.

IFC 2014 Rehabilitation Hospital Loan

On May 8, 2014, the Company entered into a $12,000,000 loan facility with IFC for the financing of the Beijing Rehabilitation Hospital project. In June 2014, we drew down the entire $12,000,000 from this facility. The loan currently bears interest at the three-month LIBOR rate plus a spread of 4.95%. The loan duration is 8.5 years, with a three-year grace period. Principal payments will be made on a semi-annual basis, beginning on June 15, 2017 through December 15, 2022. The obligations of the borrower (BJU) under the IFC facility is guaranteed by Chindex and secured by a pledge of Chindex’s indirect ownership interest in the borrower. The issuance costs of $44,000 were capitalized and are being amortized over the 8.5 year-life of the loan. Amortization of the issuance cost was de minimus during the period ended June 30, 2014. The IFC Facility contains customary financial covenants, including maintenance of a maximum ratio of liabilities to tangible net worth and a minimum debt service coverage ratio, and covenants that, among other things, place limits on the Company’s ability to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, engage in transactions with affiliates, and make capital expenditures. The Company was in compliance with the financial covenants as of June 30, 2014.

 

16


Table of Contents

Debt Payments Schedule

The following table sets forth the Company’s debt obligations as of June 30, 2014:

(In thousands)

 

     Total      2014      2015      2016      2017      2018      Thereafter  

IFC 2005 loan

   $ 10,545       $ —         $ 10,545       $ —         $ —         $ —         $ —     

IFC 2013 loan

     5,625         1,500         750         1,500         1,500         375         —     

China Exim loans

     7,929         1,586         793         1,586         1,586         1,586         792   

DEG 2013 loan

     4,687         1,250         625         1,250         1,250         312         —     

IFC 2014 Rehab loan

     12,000         —           —           —           1,200         1,200         9,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,786       $ 4,336       $ 12,713       $ 4,336       $ 5,536       $ 3,473       $ 10,392   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 9. TAXES

We recorded a $2,238,000 provision for taxes in the three months ended June 30, 2014 compared to a provision for taxes of $1,688,000 for the three months ended June 30, 2013. We recorded a $3,820,000 provision for taxes in the six months ended June 30, 2014 compared to a provision for taxes of $3,574,000 for the six months ended June 30, 2013. 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 and ASC 740-270 and the effect of valuation allowance for deferred tax assets.

The Company’s effective tax rate is higher in the three and six months ended June 30, 2014 than in the three and six months ended June 30, 2013. The table below provides detail into our consolidated pretax loss and provision for income tax by separating this information into three categories: operating entities, start-up entities and corporate entities. Our operating entities consist of our established hospitals and clinics in China, and which therefore record tax expense at the China statutory rate of approximately 25%. Our start up entities in the table below primarily consists of our hospital in Tianjin and the newly-opened Rehabilitation Hospital in Beijing, and no tax benefit has been recorded for the effect of the start up losses for those entities. Our parent company and subsidiary holding companies, referred to as the corporate entities in the table below, have incurred losses for which no tax benefits were recorded.

(in thousands)

Period ended June 30, 2014

 

     Three months     Six months  
     Income (loss)
Before Income
Taxes
    Provision
for Income
Taxes
     Effective
Tax Rate
    Income (loss)
Before Income
Taxes
    Provision
for Income
Taxes
     Effective
Tax Rate
 

Operating Entities

   $ 7,549      $ 2,203         29   $ 13,566      $ 3,792         28

Start-Up Entities

     (2,793     0         0     (6,400     0         0

Corporate Entities

     (3,211     35         -1     (7,553     28         0
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 1,545      $ 2,238         145   $ (387   $ 3,820         -987
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Period ended June 30, 2013

 

     Three months     Six months  
     Income (loss)
Before Income
Taxes
    Provision
for Income
Taxes
     Effective
Tax Rate
    Income (loss)
Before Income
Taxes
    Provision
for Income
Taxes
     Effective
Tax Rate
 

Operating Entities

   $ 5,557      $ 1,668         30   $ 11,246      $ 3,554         32

Start-Up Entities

     (2,243     —           0     (4,244     —           0

Corporate Entities

     (1,748     20         -1     (3,612     20         -1
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 1,566      $ 1,688         108   $ 3,390      $ 3,574         105
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

17


Table of Contents

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2014 and December 31, 2013, we had no accrued interest or penalties related to uncertain tax positions.

Note 10. EARNINGS PER SHARE

The Company follows ASC 260 whereby basic earnings per share exclude any dilutive effects of options, restricted stock and performance restricted stock units and diluted earnings per share includes such effects. The Company does not include the effects of stock options, restricted stock and performance restricted stock units 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 loss and other related disclosures (in thousands, except for share and per share data):

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

Basic net loss per share computation:

        

Numerator:

        

Net loss

   $ (693   $ (122   $ (4,207   $ (184

Denominator:

        

Weighted average shares outstanding—basic

     17,813,312        16,582,068        17,750,642        16,566,004   

Net loss per common share—basic:

   $ (.04   $ (.01   $ (.24   $ (.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net loss per share computation:

        

Numerator:

        

Net loss

   $ (693   $ (122   $ (4,207   $ (184
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted average shares outstanding—basic

     17,813,312        16,582,068        17,750,642        16,566,004   

Effect of dilutive securities:

        

Shares issuable upon exercise of dilutive outstanding stock options, vesting of restricted stock and PRSUs:

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding-diluted

     17,813,312        16,582,068        17,750,642        16,566,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share—diluted:

   $ (.04   $ (.01   $ (.24   $ (.01
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2014 and 2013, there were 1,615,618 and 110,059 shares, respectively, which were not included in the calculation of diluted net loss per share as the effect would have been antidilutive. For the six months ended June 30, 2014 and 2013, there were 1,650,173 and 521,516 shares, respectively, which were not included in the calculation of diluted net income per share as the effect would have been antidilutive.

During the first quarter of 2012, the Company granted performance-based restricted stock units (“PRSU”) awards representing at target approximately 214,000 shares. The Company includes the shares underlying the PRSU awards in the calculation of diluted EPS when they become contingently issuable and excludes such shares when they are not contingently issuable. Based on the achievement of results in excess of targets, 286,760 PRSUs was earned on December 31, 2012 and were included in the calculation of diluted EPS on a prorated basis for the three and six months ended June 30, 2014 and 2013.

During the first quarter of 2013, the Company granted PRSU awards representing at target approximately 147,800 shares. The Company includes the shares underlying the PRSU awards in the calculation of diluted EPS when they become contingently issuable and excludes such shares when they are not contingently issuable. For the three and six months ended June 30, 2014, the Company has excluded such shares when calculating the diluted EPS as the performance conditions underlying the awards have not yet been satisfied.

 

18


Table of Contents

During the first quarter of 2014, the Company granted PRSU awards representing at target approximately 92,700 shares. The Company includes the shares underlying the PRSU awards in the calculation of diluted EPS when they become contingently issuable and excludes such shares when they are not contingently issuable. For the three and six months ended June 30, 2014, the Company has excluded such shares when calculating the diluted EPS as the performance conditions underlying the awards have not yet been satisfied.

Note 11. STOCKHOLDERS’ EQUITY

Stock-Based Compensation

The Company incurred stock based compensation expense of $1,442,000 and $2,209,000 for the three and six months ended June 30, 2014, respectively, and $1,444,000 and $2,234,000 for the three and six months ended June 30, 2013, respectively, for Company employees and outside directors.

The Company granted restricted shares in the first quarter of 2014 that vest over a three-year period. The Company also granted restricted stock of 20,633 to independent directors in May 2014. The Company recognizes expense ratably over the vesting period of the stock options or restricted stock, net of estimated forfeitures. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.

The Company calculates grant-date fair values using the Black-Scholes option pricing model. To calculate fair market value, this model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the expected life of the option being valued and the exercise price of the option being valued. It also requires certain assumptions, such as the expected amount of time the option will be outstanding until it is exercised or it expires and the expected volatility of the Company’s common stock over the expected life of the option.

The following table summarizes the stock option activity during the six months ended June 30, 2014:

 

     Number of
Shares
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinsic Value
(in thousands)*
 

Options outstanding at December 31, 2013

     1,074,490      $ 10.68         

Granted

     —          —           

Exercised

     (101,150     9.27         

Expired

     (1,001     13.26         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding at June 30, 2014

     972,339      $ 10.82         3.49       $ 12,511   
  

 

 

         

Options exercisable at June 30, 2014

     967,838      $ 10.81         3.47       $ 12,468   
  

 

 

         

 

* The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market price of the Company’s common stock on June 30, 2014 ($23.69) and the exercise price of the underlying options.

During the six months ended June 30, 2014 and 2013, the total intrinsic value of stock options exercised was $1,097,000 and $58,000, respectively, and the actual cash received upon exercise of stock options was $828,000 and $112,000, respectively. The unamortized fair value of the stock options as of June 30, 2014 was $38,000, the majority of which is expected to be expensed over the weighted-average period of 0.94 years.

 

19


Table of Contents

The following table summarizes activity relating to restricted stock for the six months ended June 30, 2014:

 

     Number of shares
underlying
restricted stock
    Aggregate Intrinsic
Value of Restricted
Stock
(in thousands) *
 

Outstanding at December 31, 2013

     416,225     

Granted

     96,133     

Vested

     (172,227  

Forfeited

     (10,614  
  

 

 

   

 

 

 

Outstanding at June 30, 2014

     329,517      $ 7,807   
  

 

 

   

Expected to vest

     233,213      $ 5,525   
  

 

 

   

 

* The aggregate intrinsic value on this table was calculated based on the closing market price of the Company’s common stock on June 30, 2014 ($23.69).

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, 2014, the unamortized fair value of the restricted stock was $2,906,000. This unamortized fair value is expected to be expensed over the weighted-average period of 1.54 years. Restricted stock is valued at the stock price on the date of grant.

Long-Term Incentive Plans (“LTIP”)

The Company has three long-term incentive plans in progress. Each plan has required performance, service and market conditions, with the exception that the 2014 LTIP does not have a market condition, as described below.

2014 LTIP

On March 27, 2014, the Company’s Compensation Committee, with the assistance of its independent executive compensation consultant, adopted a new long-term incentive program (“2014 LTIP”) under our amended and restated 2007 Stock Incentive Plan (the “Plan”) for 2014 grants to executive officers and other key employees of performance-based restricted stock units (“PRSUs”). The new program closely aligns the equity compensation paid to participants with the achievement of pre-set quantitative metrics. The new program also is intended to enable our equity awards to be deductible as performance-based compensation in accordance with Section 162(m) of the Code.

The awards under the 2014 LTIP are initially expressed as a target number of units. The target number of units will be adjusted to reflect the attainment of the Company’s performance metrics during the applicable performance period, which in the case of the awards granted for the 2014 LTIP, will be the combined calendar years 2014, 2015 and 2016. The performance metrics used for these awards are Revenue and Adjusted EBITDA, with the adjustment to the target number of units based on a combination of the level of performance on these metrics, ranging from zero if performance did not meet specified levels up to a maximum of 150% of the target number of units. The number of units earned vest based on continued employment at the end of 2017, subject to accelerated vesting in specified events. Upon the vesting of a unit, the award holder will receive one share of our common stock in settlement of that unit. The target number of PRSUs awarded under the 2014 LTIP was 92,700 units. Upon the completion of the service period, vested PRSUs will be settled by the delivery of Chindex common stock. Compensation expense is based on the fair value of the PRSUs at the grant date, which was equal to the stock price on the date of the grant and will be recognized over the combined performance and service periods of approximately 3.75 years, beginning on March 27, 2014. The Company recognized expense of $84,000 and $88,000 for the three and six months ended June 30, 2014. Based on our estimates as

 

20


Table of Contents

of June 30, 2014, the unamortized fair value of the PRSUs expected to be awarded, net of amount expected to be invoiced to CML, was $1,186,000. This unamortized fair value is expected to be expensed over the period through December 31, 2017, as adjusted to reflect the actual number of PRSUs awarded.

2013 LTIP

On March 27, 2013, the Company’s Compensation Committee, with the assistance of its independent executive compensation consultant, adopted a new long-term incentive program (“2013 LTIP”) under our amended and restated 2007 Stock Incentive Plan (the “Plan”) for 2013 grants to executive officers and other key employees of performance-based restricted stock units (“PRSUs”). The new program closely aligns the equity compensation paid to participants with the achievement of pre-set quantitative metrics. The new program also is intended to enable our equity awards to be deductible as performance-based compensation in accordance with Section 162(m) of the Code.

The awards under the 2013 LTIP are initially expressed as a target number of units. The target number of units will be adjusted to reflect the attainment of the Company’s performance metrics during the applicable performance period, which in the case of the awards granted for the 2013 LTIP, will be the combined calendar years 2013 and 2014. The performance metrics used for these awards are Revenue and Adjusted EBITDA, with the adjustment to the target number of units based on a combination of the level of performance on these metrics, ranging from zero if performance did not meet specified levels up to a maximum of 150% of the target number of units. The number of units so determined will be increased or decreased by up to 25% based on the Company’s stock performance during 2013 and 2014 relative to the performance of the NASDAQ Golden Dragon China Index. The number of units earned after this adjustment are subject to vesting based on continued employment, with one-half of the units vesting at the end of each of 2015 and 2016, subject to accelerated vesting in specified events. Upon the vesting of a unit, the award holder will receive one share of our common stock in settlement of that unit. The target number of PRSUs awarded under the 2013 LTIP was 147,800 units. Upon the completion of the service period, vested PRSUs will be settled by the delivery of Chindex common stock. Compensation expense is based on the estimated fair value of the PRSUs at the grant date, using a Monte Carlo simulation and will be recognized over the combined performance and service periods of approximately 3.75 years, beginning on March 27, 2013. Expense for the 2013 LTIP in the three months ended June 30, 2014 and 2013, net of amount invoiced to CML, was $133,000 and $121,000, respectively. Expense for the 2013 LTIP in the six months ended June 30, 2014 and 2013, net of amount invoiced to CML, was $263,000 and $128,000, respectively.

Based on our estimates as of June 30, 2014, the unamortized fair value of the PRSUs expected to be awarded, net of amount expected to be invoiced to CML, was $1,016,000. This unamortized fair value is expected to be expensed over the period through December 31, 2016, as adjusted to reflect the actual number of PRSUs awarded.

2012 LTIP

The 2012 LTIP is similar to the 2013 LTIP, as both programs have four-year durations. However, the 2012 LTIP has a one-year performance period and three-year service period subsequent to the performance period, whereas the 2013 LTIP has a two-year performance period and a two-year service period subsequent to the performance period. The one-year performance period for the 2012 LTIP was completed on December 31, 2012. Actual financial results in 2012 exceeded targets, and the value of the Earned PRSUs will be amortized over the remaining service period through December 31, 2015. Expense for the 2012 LTIP in the three months ended June 30, 2014 and 2013, net of amount invoiced to CML, was $127,000 and $233,000, respectively. Expense for the 2012 LTIP in the six months ended June 30, 2014 and 2013, net of amount invoiced to CML, was $251,000 and $463,000, respectively. Based on our estimates as of June 30, 2014, the unamortized fair value of the PRSUs expected to be awarded, net of amount expected to be invoiced to CML, was $465,000. This unamortized fair value is expected to be expensed over the period through December 31, 2015, as adjusted to reflect the actual number of PRSUs awarded.

 

21


Table of Contents

Note 12. STOCK PURCHASE AGREEMENT – FOSUNPHARMA

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 (“FosunPharma”). Pursuant to the Stock Purchase Agreement, the Company agreed to issue and sell to Investor a total of 1,990,447 shares (the “Shares”) of the Company’s common stock (representing approximately 10% of all outstanding common stock after such sale, based on the number of outstanding shares as of the date of the Stock Purchase Agreement) at a purchase price of $15 per share.

Pursuant to the Stock Purchase Agreement, the sale of the Shares would be completed in two closings. The initial closing occurred on August 27, 2010, at which the Company issued 933,022 Shares to Investor for an aggregate purchase price of $13,995,330 or $13,803,000 net of transaction costs. At the second closing (the “Second Closing”) under the Stock Purchase Agreement, the Company would sell the remaining 1,057,425 Shares to Investor for an aggregate purchase price of $15,861,375. The Second Closing was subject to the consummation of CML, which was formed effective December 31, 2010. CML engages in the businesses of, among other things, (i) the marketing, distribution and servicing of medical equipment in China and Hong Kong and (ii) the manufacturing, marketing, sales and distribution of medical devices and medical equipment and consumables, including our former Medical Products division. CML was initially 51%-owned by FosunPharma and 49%-owned by the Company, and is currently 30%-owned by the Company. The Stock Purchase Agreement further provides that in the event that the Second Closing was not consummated within a prescribed period, then the Stock Purchase Agreement could be terminated by either party solely with respect to the Second Closing, provided the absence of such consummation was not principally caused by the terminating party. As a result of the elapse of the prescribed period, the Company terminated the Stock Purchase Agreement on April 10, 2014.

At the initial closing under the Stock Purchase Agreement, the Company, Investor and FosunPharma also entered into a stockholder agreement (the “Stockholder Agreement”). Under the Stockholder Agreement, until the first to occur of (i) Investor holds 5% or less of the outstanding shares of common stock, (ii) there shall have been a change of control of the Company as defined in the Stockholder Agreement, and (iii) the seventh anniversary of the initial closing, Investor has agreed to vote its shares in accordance with the recommendation of the Company’s Board of Directors on any matters submitted to a vote of the stockholders of the Company relating to the election of directors and compensation matters and with respect to certain proxy or consent solicitations. The Stockholder Agreement also contains standstill restrictions on Investor generally prohibiting the purchase of additional securities of the Company. The standstill restrictions terminate on the same basis as does the voting agreement above, except that the 5% standard would increase to 10% upon the Second Closing. In addition, the Stockholder Agreement contains a lock-up restricting sales by Investor of its shares of the Company’s common stock for a period of five years following the date of the Stockholder Agreement, subject to certain exceptions.

The Company evaluated whether this contingent Stock Purchase Agreement should be accounted for as a derivative instrument or whether it qualified for a scope exception under ASC 815-10. The Company concluded that the contract qualified for the scope exception because the contract was indexed to the Company’s own stock and was classified in stockholders’ equity.

 

22


Table of Contents

Note 13. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office space and space for hospital and clinic operations under operating leases. Future minimum payments under these non-cancelable operating leases consist of the following (in thousands):

 

Six months ending December 31,

  

2014

   $ 6,790   

Year ending December 31,

  

2015

     12,772   

2016

     10,916   

2017

     10,333   

2018

     9,936   

Thereafter

     90,913   
  

 

 

 

Net minimum rental commitments

   $ 141,660   
  

 

 

 

The above leases require the Company to pay certain pass through operating expenses and rental increases based on inflation.

Rental expense was approximately $3,371,000 and $2,410,000 for the three months ended June 30, 2014 and 2013, respectively. Rental expense was approximately $6,636,000 and $4,771,000 for the six months ended June 30, 2014 and 2013, respectively.

Contingencies

The Company is involved in various claims arising from services provided to patients in the ordinary course of business. Management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company’s financial position or results of operations.

Note 14. 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 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 carrying amounts reported in the consolidated condensed balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

The fair value of debt under ASC 820 is not the settlement amount of the debt, but is based on an estimate of what an entity might pay to transfer the obligation to another entity with a similar credit standing. Observable inputs for the Company’s debt such as quoted prices in active markets are not available, as the Company’s long-term debt is not publicly-traded. Accordingly, the Company has estimated the fair value amounts using available market information and commonly accepted valuation methodologies. However, it requires considerable judgment in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimate presented is not necessarily indicative of the amount that the Company or holders of the debt instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

 

23


Table of Contents

The fair value of debt was calculated based on an estimate of the present value of the debt payments. As of June 30, 2014, the carrying value of the Company’s debt outstanding was $40.8 million, and the estimated fair value was $40.8 million. The carrying amounts of the remaining debt instruments approximate fair value, as the instruments are subject to variable rates of interest or have short maturities.

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

Statements contained in this quarterly report on Form 10-Q relating to plans, strategies, objectives, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth under the heading “Risk Factors” and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. 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 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 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, stock based compensation and deferred tax valuation allowances.

RESULTS OF OPERATIONS

On April 21, 2014, the Company announced that it had entered into an amended and restated merger agreement (the “Amended Agreement”) with a buyer consortium (the “Buyer Consortium”) comprised of an affiliate of TPG, an affiliate of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., and Ms. Roberta Lipson, the CEO of the Company, and a merger subsidiary of the Buyer Consortium. Pursuant to the Amended Agreement, upon the terms and subject to the conditions thereof, at the effective time of the merger, the merger subsidiary of the Buyer Consortium will be merged with and into the Company and the Company will become a wholly-owned subsidiary of the Buyer Consortium. Among other changes, the Amended Agreement provides for an increase in the merger consideration from $19.50 under the original merger agreement entered into on February 17, 2014 with the Buyer Consortium (the “Original Agreement”) to $24.00 per share in cash and an increase in implied equity value from $369 million under the Original Agreement to $461 million.

If the merger is completed, the Company will cease to be a publicly traded company. See Note 1 for further information.

 

24


Table of Contents

Three months ended June 30, 2014 compared to three months ended June 30, 2013

Overview of Consolidated Results

We own and operate the United Family Healthcare network of private hospitals and clinics in the People’s Republic of China. United Family Healthcare currently operates hospitals and affiliated clinic facilities in the Beijing, Shanghai, Tianjin and Guangzhou markets. Our network operations in the Beijing, Shanghai and Guangzhou markets have earned the accreditation of the Joint Commission International. Our current network operations include the following facilities:

 

    Beijing Market

 

    Beijing United Family Hospital main campus

 

    120 licensed beds

 

    As of the close of the recent period, 67 available beds

 

    United Family Rehabilitation Hospital

 

    101 licensed beds

 

    As of the close of the recent period, 15 available beds

 

    Five affiliated satellite clinics

 

    Shanghai Market

 

    Shanghai United Family Hospital main campus

 

    50 licensed beds

 

    As of the close of the recent period, 30 available beds

 

    Two affiliated satellite clinics

 

    Two managed clinics

 

    Tianjin Market

 

    Tianjin United Family Hospital main campus

 

    26 licensed beds

 

    As of the close of the recent period, 25 available beds

 

    Guangzhou Market

 

    One affiliated clinic

We have undertaken a number of market expansion projects in our current markets:

Beijing. At Beijing United Family Hospital in 2014, we will begin a significant expansion which will add needed outpatient capacity for our core women and children services. We will continue to expand service offerings including comprehensive cancer care, neurosurgery, orthopedic surgery, cath lab and cardiovascular surgery. In addition, we will complete our initial expansion into western Beijing with a large outpatient clinic in the financial center.

In June 2013, we opened in Beijing the United Family Rehabilitation Hospital, which is a new 101 licensed bed, 124,000 square foot facility adjacent to a large park in east Beijing. Our expansion of services into the premium rehabilitation market targets an existing inadequacy in China’s health care system for those seeking quality premium care when recovering from surgeries or debilitating illnesses in the neurological, cardiac and orthopedic areas.

Shanghai. In Shanghai in 2014, we will continue to expand service offerings at our main Puxi campus and operations in the Pudong clinic. In addition, we have secured the site for our future hospital facility in Pudong and are beginning design work for the project. In Puxi in 2014, we will complete the renovation and expansion of our inpatient facilities at our main Shanghai United Family Hospital campus.

Tianjin. In 2014, we will begin operations of our IVF (in vitro fertilization) clinic which has recently received operating approvals from the local government. In addition, we will continue to expand our primary care service offerings.

 

25


Table of Contents

Guangzhou. In the southern tier one city of Guangzhou, we are near to finalizing plans for a new comprehensive care United Family hospital of approximately 200 beds, with a 2016 targeted opening (see “Liquidity and Capital Resources – Capital Resources and Financing Requirements”).

Qingdao. Following Tianjin, our expansion into second tier Chinese cities is planned for the affluent port city of Qingdao in Shandong Provence. We have secured a location and begun design and demolition work on the project which is planned to be a comprehensive care facility of approximately 50 beds, currently estimated to open over the 2015-2016 period.

Managed Services. We have begun to roll out management services leveraging the brand value of United Family Healthcare. Managed clinics in Wuxi and Pudong allow us to expand the UFH market penetration rapidly and in both cases have supplemented our UFH facilities in metropolitan Shanghai. We are currently exploring opportunities for managed service facilities in the large second tier cities of Chengdu, Nanjing, Xiamen and Hangzhou.

In connection with the expansion plans outlined above, over the next twelve months we have planned capital expenditures of up to $31 million for construction, equipment and information systems (see “Liquidity and Capital Resources”). During the three months ended June 30, 2014, development, pre-opening and start-up expenses, including post-opening expenses, for these projects were $3,049,000 compared to $2,895,000 in the prior period, reflecting primarily expenses incurred for the Beijing, Pudong and Qingdao projects.

The Chinese Government’s healthcare reform program encourages private development, such as our United Family network, as the primary source for providing specialty and premium healthcare services within the Chinese healthcare system. Nevertheless, expansions of our existing facilities as well as new hospital and affiliated clinic projects are complex, requiring several phases over extended periods of time. The projects are subject to delays routinely encountered in complex construction projects in regulated industries and are subject to, among other things, the receipt of (i) medical-related approvals from local health authorities and in some cases the Ministry of Health at the national level, (ii) foreign invested joint venture health facility approvals from the local Bureau of Commerce and Trade, and (iii) local construction and safety approvals. Accordingly, we give windows of expected completion of our expansion projects, the exact timing of which are subject to the actual receipt of the various government licenses and permits.

Our discussion and analysis below relates to the revenue and expenses of our healthcare services business for the three months ended June 30, 2014 compared to the comparable prior year period.

Net Revenue

(in thousands)

 

     Three months ended June 30,  
     2014      2013      Change  

Healthcare services net revenue

   $     55,453       $     45,977             21
  

 

 

    

 

 

    

 

 

 

Our healthcare services revenue for the three months ended June 30, 2014 was $55,453,000, a 21% increase from the three months ended June 30, 2013 revenue of $45,977,000. 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:

 

     Three months ended June 30,  
     2014     2013  

Inpatient/Outpatient gross revenue percentages

    

Inpatient services as percent of gross revenue

     43     42

Outpatient services as percent of gross revenue

     57     58
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

 

26


Table of Contents

The table below identifies the primary service lines contributing to gross revenue:

 

     Three months ended June 30,  
     2014     2013  

Gross revenue by service line:

    

Surgical services

     22.5     20.6

OB/GYN

     13.4     12.3

Pediatrics

     8.2     6.9

Ancillary services

    

Laboratory

     8.3     8.4

Radiology

     8.9     9.7

Pharmacy

     10.5     10.8

Internal Medicine

     3.4     3.6

Emergency Room

     2.9     3.7

Dental

     2.8     3.4

Family Medicine

     2.2     1.9

All other services

     16.9     18.7
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Operating expenses

(in thousands)

 

     Three months ended June 30,  
     2014      2013      Change  

Salaries, wages and benefits

   $ 30,786       $ 26,834         15

Other operating expenses

     6,579         5,642         17

Supplies and purchased medical services

     6,970         5,590         25

Bad debt expense

     460         1,140         -60

Depreciation and amortization

     3,410         2,353         45

Lease and rental expense

     3,371         2,410         40
  

 

 

    

 

 

    

 

 

 

Subtotal

     51,576         43,969         17

Merger transaction expenses

     2,035         109             1767
  

 

 

    

 

 

    

 

 

 
   $     53,611       $     44,078         22
  

 

 

    

 

 

    

 

 

 

Salaries, wages and benefits increased 15% in the recent period compared to the comparable prior year period primarily due to the increased headcount of 16.2% associated with the revenue increases and development activities as well as certain government mandated increases in social benefits. The increase in headcount was due to both increased activities in our existing facilities as well as for hiring new personnel to staff our expanded Beijing facilities.

Other operating expenses increased by $937,000, or 17%, primarily due to increased other professional fees of $352,000, repair and maintenance costs of $222,000, office supply of $109,000 and foreign exchange loss of $225,000.

Supplies and purchased medical services increased by $1,380,000, or 25%, due to increased usage of medical supplies of $1,410,000, or 28% and decreased pharmaceuticals of approximately $29,000, or 6%.

Bad debt expense decreased by $680,000, and, as a percentage of net revenue, bad debt expense was 0.8% for the three months ended June 30, 2014, compared to 2.5% in the prior year period, which is on the low end of our historic averages of approximately 1%-3%. In management’s review of the allowance for doubtful accounts at June 30, 2014, it was noted that the allowance was too high at the end of the prior quarter ended March 31, 2014 by approximately $540,000. The reversal of the $540,000 resulted in the relatively low bad debt expense in the three months ended June 30, 2014. Management believes that the impact of correcting this in the three-month period ended June 30, 2014 is immaterial to both periods ended June 30, 2014 and March 31, 2014, respectively.

Depreciation and amortization expense increased by $1,057,000, or 45% to $3,410,000, primarily due to the opening of expanded facilities.

 

27


Table of Contents

Lease and rental expense increased to $3,371,000 in the recent period compared to $2,410,000 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.

Merger transaction expenses in the three months ended June 30, 2014 were $2,035,000 primarily for the legal and financial services provided to the Board’s Transaction Committee which consists of independent directors.

Other Income and Expenses

Interest income during the three months ended June 30, 2014 and 2013 was $226,000 and $241,000, respectively, primarily due to the low interest rates.

Interest expense during the three months ended June 30, 2014 and 2013 was $389,000 and $226,000, respectively, primarily due to increases of new loans.

Equity in loss of unconsolidated affiliates was ($174,000) and ($387,000) for the three months ended June 30, 2014 and 2013. This represents our 30% interest for the three months ended June 30, 2014 and 2013 in the net loss of CML.

Taxes

We recorded a provision for taxes of $2,238,000 for the three months ended June 30, 2014, compared to a provision for taxes of $1,688,000 for the three months ended June 30, 2013. The effective tax rate for our operating entities was 29% compared to 30% in the comparable prior year period. The remaining portion of the variance in the effective tax rate in the current period is primarily due to the effect of losses in start-up entities and corporate entities for which we cannot recognize tax benefits.

Six months ended June 30, 2014 compared to six months ended June 30, 2013

Overview of Consolidated Results

In connection with the expansion plans outlined above, over the next twelve months we have planned capital expenditures of up to $31 million for construction, equipment and information systems (see “Liquidity and Capital Resources”). During the six months ended June 30, 2014, development, pre-opening and start-up expenses, including post-opening expenses, for these projects were $7,003,000 compared to $5,360,000 in the prior period, reflecting primarily expenses incurred for the Beijing, Pudong, Tianjin and Qingdao projects.

The Chinese Government’s healthcare reform program encourages private development, such as our United Family network, as the primary source for providing specialty and premium healthcare services within the Chinese healthcare system. Nevertheless, expansions of our existing facilities as well as new hospital and affiliated clinic projects are complex, requiring several phases over extended periods of time. The projects are subject to delays routinely encountered in complex construction projects in regulated industries and are subject to, among other things, the receipt of (i) medical-related approvals from local health authorities and in some cases the Ministry of Health at the national level, (ii) foreign invested joint venture health facility approvals from the local Bureau of Commerce and Trade, and (iii) local construction and safety approvals. Accordingly, we give windows of expected completion of our expansion projects, the exact timing of which are subject to the actual receipt of the various government licenses and permits.

Our discussion and analysis below relates to the revenue and expenses of our healthcare services business for the six months ended June 30, 2014 compared to the comparable prior year period.

Net Revenue

(in thousands)

 

     Six months ended June 30,  
     2014      2013      Change  

Healthcare services net revenue

   $     105,338       $     87,542             20
  

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

Our healthcare services revenue for the six months ended June 30, 2014 was $105,338,000, a 20% increase from the six months ended June 30, 2013 revenue of $87,542,000. 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,  
     2014     2013  

Inpatient/Outpatient gross revenue percentages

    

Inpatient services as percent of gross revenue

     42     42

Outpatient services as percent of gross revenue

     58     58
  

 

 

   

 

 

 
         100         100
  

 

 

   

 

 

 

The table below identifies the primary service lines contributing to gross revenue:

 

     Six months ended June 30,  
     2014     2013  

Gross revenue by service line:

    

Surgical services

     20.6     19.9

OB/GYN

     13.8     13.3

Pediatrics

     9.0     7.4

Ancillary services

    

Laboratory

     8.5     8.4

Radiology

     8.9     9.8

Pharmacy

     10.6     11.2

Internal Medicine

     3.3     3.6

Emergency Room

     2.9     3.7

Dental

     3.0     3.3

Family Medicine

     2.2     1.9

All other services

     17.2     17.5
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Operating expenses

(in thousands)

 

     Six months ended June 30,  
     2014      2013      Change  

Salaries, wages and benefits

   $ 58,822       $ 49,497         19

Other operating expenses

     13,019         11,274         15

Supplies and purchased medical services

     12,925         10,555         22

Bad debt expense

     1,574         2,119         -26

Depreciation and amortization

     6,652         4,655         43

Lease and rental expense

     6,636         4,771         39
  

 

 

    

 

 

    

 

 

 

Subtotal

     99,628         82,871         20

Merger transaction expenses

     5,336         192             2679
  

 

 

    

 

 

    

 

 

 
   $     104,964       $     83,063         26
  

 

 

    

 

 

    

 

 

 

 

29


Table of Contents

Salaries, wages and benefits increased 19% in the recent period compared to the comparable prior year period primarily due to the increased headcount of 16.5% associated with the revenue increases and development activities as well as certain government mandated increases in social benefits. The increase in headcount was due to both increased activities in our existing facilities as well as for hiring new personnel to staff our expanded Beijing and Shanghai facilities.

Other operating expenses increased by $1,745,000, or 15%, primarily due to increased other professional fees of $398,000, repair and maintenance costs of $425,000, utility costs of $251,000, office supply of $150,000 and foreign exchange loss of $523,000.

Supplies and purchased medical services increased by $2,370,000, or 22%, due to increased usage of medical supplies of $2,309,000, or 24% and increased pharmaceuticals of approximately $61,000, or 7%.

Bad debt expense decreased by $545,000, and, as a percentage of net revenue, bad debt expense was 1.5% for the six months ended June 30, 2014 due to strong collection results, compared to 2.4% in the prior year period, which is in line with our historic averages of approximately 1%-3%.

Depreciation and amortization expense increased by $1,997,000, or 43% to $6,652,000, primarily due to the opening of expanded facilities.

Lease and rental expense increased to $6,636,000 in the recent period compared to $4,771,000 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.

Merger transaction expenses in the six months ended June 30, 2014 were $5,336,000 primarily for the legal and financial services provided to the Board’s Transaction Committee which consists of independent directors.

Other Income and Expenses

Interest income during the six months ended June 30, 2014 and 2013 was $451,000 and $489,000, respectively, primarily due to the low interest rates.

Interest expense during the six months ended June 30, 2014 and 2013 was $748,000 and $328,000, respectively, primarily due to increases of new loans.

Equity in loss of unconsolidated affiliates was ($524,000) and ($1,287,000) for the six months ended June 30, 2014 and 2013. This represents our 30% interest for the six months ended June 30, 2014 and 2013 in the net loss of CML.

Taxes

We recorded a provision for taxes of $3,820,000 for the six months ended June 30, 2014, compared to a provision for taxes of $3,574,000 for the six months ended June 30, 2013. The effective tax rate for our operating entities was 28% compared to 32% in the comparable prior year period. The remaining portion of the variance in the effective tax rate in the current period is primarily due to the effect of losses in start-up entities and corporate entities for which we cannot recognize tax benefits.

 

30


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth our cash and accounts receivable as of June 30, 2014 and December 31, 2013 (in thousands):

 

     June 30, 2014      December 31, 2013  

Cash and cash equivalents

   $ 39,340       $ 33,107   

Accounts receivable

     24,960         23,041   

Receivables from affiliates

     1,870         2,897   

Cash Flows

The following table sets forth a summary of our cash flows from operating activities for the six months ended June 30, 2014 and 2013 (in thousands):

 

     Six months ended June 30,  
     2014     2013  

OPERATING ACTIVITIES

    

Net loss

   $ (4,207   $ (184

Non cash items

     10,668            9,637   

Changes in operating assets and liabilities:

    

Accounts receivable

     (3,495     (4,967

Receivable from affiliates

     1,027        (612

Inventories of supplies

     (224     (425

Accounts payable, accrued expenses, other current liabilities and deferred rent

     1,119        (4,232

Payable to affiliates

     769        (12

Income tax payable

     (807     (878

Other current assets and other assets

     (1,191     (2,257
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

   $     3,659      $ (3,930
  

 

 

   

 

 

 

Operating cash flow for the six months ended June 30, 2014 was higher than the six months ended June 30, 2013, primarily due to the decrease of receivable from affiliates and the increase of accounts payable.

The following table sets forth a summary of our cash flows from investing activities for the six months ended June 30, 2014 and 2013 (in thousands):

 

     Six months ended June 30,  
         2014             2013      

INVESTING ACTIVITIES

    

Purchases of property and equipment

   $ (9,137   $ (5,899
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (9,137   $ (5,899
  

 

 

   

 

 

 

Investing activities for the six months ended June 30, 2014 and 2013 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.

 

31


Table of Contents

The following table sets forth a summary of our cash flows from financing activities for the six months ended June 30, 2014 and 2013 (in thousands):

 

     Six months ended June 30,  
     2014     2013  

FINANCING ACTIVITIES

    

Restricted cash from IFC RMB loan sinking funds

   $ 446      $ 444   

Restricted cash from Exim loan

     252        —     

Proceeds from debt

     12,000        11,000   

Repayment of debt

     (1,469     (800

Repurchase of restricted stock for income tax withholding

     (355     (220

Proceeds from exercise of stock options

     828        114   
  

 

 

   

 

 

 

Net cash provided by financing activities

   $     11,702      $     10,538   
  

 

 

   

 

 

 

As of June 30, 2014, the Company utilized cash to fund the IFC RMB loan sinking funds and Exim loan of $446,000 and $252,000. The Company also made payments for the Exim loan, IFC loan and DEG loan of $1,469,000. The Company also received the proceeds of $12,000,000 from IFC loan for the Rehabilitation Hospital and $828,000 from the exercise of stock options for the six months ended June 30, 2014.

Capital Resources and Financing Requirements

Over the next twelve months, we anticipate total capital expenditures of up to approximately $31 million related to the maintenance and expansion of our business operations. Of this amount, up to approximately $8 million would be for maintenance and organic growth at our existing facilities in Beijing and Shanghai and up to approximately $3 million would be primarily related to network IT investment. Expansion projects would be expected to account for up to approximately $20 million of the remaining expenditures. These include final payments related to the opening of the Tianjin hospital of approximately $0.3 million, payments related to the Beijing Rehabilitation Hospital of approximately $0.6 million, payments related to clinic expansion in Beijing and Shanghai service areas of approximately $2.9 million, design and construction expenditures related to the Qingdao hospital project of up to $16 million, and design and construction expenditures for the Guangzhou hospital project of up to $0.2 million. We intend to fund these expenditures through corporate capital reserves, anticipated loan financings as described below and cash flow from operations. Registered foreign debt is expected to be secured by each operating foreign invested joint venture upon obtaining required governmental and credit approvals.

The expansion planning or projects in the Beijing, Shanghai, Tianjin, Qingdao and Guangzhou service areas are underway in various stages of progress. In particular, due to the timing of the development process for the planned joint venture hospitals in Guangzhou and Haidian, significant construction expenditures for those projects would not be incurred, if at all, until 2015 and beyond.

In March 2013, we entered into US Dollar loan facilities with International Finance Corporation (IFC) and Deutsche Investitions und Entwicklungsgesellschaft (DEG) for the financing of the expansion projects at our flagship hospital in Beijing. In June 2013, we drew down the entire $11 million in the aggregate from these facilities ($6 million from IFC and $5 million from DEG). The obligations of the borrower (our United Family Hospital) under both the IFC and DEG facilities are guaranteed by Chindex and secured by a pledge of Chindex’s ownership interest in the borrower.

In addition, in October 2012, we completed the drawdown of $11.1 million in loans at our hospital facilities in Beijing secured in part by U.S. Export-Import Bank guarantees. The loans were used for the purchase of medical equipment at our newly expanded facilities in Beijing, allowing us to import equipment into China at substantial savings due to duty and value added tax (VAT) exemptions. The loans have terms of seven years, an interest rate of 2.15% and required a collateral cash deposit of approximately $8.6 million.

On May 8, 2014, the Company entered into a $12 million loan facility with IFC for the financing of the Beijing Rehabilitation Hospital project. In June 2014, we drew down the entire $12 million. The loan currently bears interest at the three-month LIBOR rate plus a spread of 4.95%.

 

32


Table of Contents

To provide long term capital resources for our development projects we are engaged in early negotiations with the IFC and other potential creditors or investors of debt or equity based financing. There can be no assurances as to the amounts, if any, that may be finally available as a result of these negotiations or whether financing resulting from these negotiations will be finally achievable on terms acceptable to us and the lenders or investors. If the ongoing negotiations are unsuccessful and this loan or other facilities are not obtained for expansion projects, then, in the absence of alternative sources of financing, there could result a material adverse effect on our operations and would adversely affect our ability to complete our proposed expansion projects on time or at all.

Since the financial events of 2007 and 2008, 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. Our daily operations 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. Our current expansion projects as described above are expected to be funded with corporate capital reserves, cash flow from operations and credit facilities provided that there can be no assurances that such facilities will be established, available or sufficient for our intended purposes or that the preconditions to disbursements under the facilities will be satisfied.

Based on the foregoing, we believe that our existing capital resources are sufficient to fund our working capital and capital expenditure requirements for the next 12 months, although there can be no assurances to this effect. We will require additional financing arrangements to meet our planned capital expenditures for expansion projects and otherwise beyond this period. We will continue to evaluate a wide range of possibilities, including both debt and equity-based financings in which we may borrow funds and/or share with one or more financial, institutional or strategic partners the ownership interest in one or more projects.

We currently do not have and may not be able to raise adequate capital to complete certain or all of our business strategies, including our ongoing expansion projects, or to react rapidly to changes in technology, products, services or the competitive landscape. We currently do not expect cash flow from operations to be sufficient to fund all of our currently existing and proposed expansion projects. Healthcare service in China often face high capital requirements in order to take advantage of new market opportunities, respond to rigorous competitive pressures and react quickly to changes in technology. Many of our competitors are committing substantial capital and, in many instances, are forming alliances to acquire or maintain market leadership. There can be no assurance that we will be able to satisfy our capital requirements in the future. In particular, our strategy of expanding our healthcare facilities and services includes the establishment and maintenance of healthcare facilities, which require particularly significant capital. With the strategy and goal of capitalizing on immediate opportunities in the evolving healthcare environment in China, we have in the past and likely in the future will consider and commence expansion projects that require and depend on the availability of significant capital, not all of which is available at the time of such consideration or commencement. Further, certain planned expansion projects including in particular the planned hospital facility in Guangzhou, are dependent upon significant funding that we understand have been arranged upon closing the merger, but is not currently available or preliminary arranged. In the absence of sufficient available or obtainable capital, including such capital that would only be available or obtainable upon closing the merger, we would be unable to establish or maintain healthcare facilities as planned or commenced, we may incur costs for projects that may not be completed as projected (if at all) and we may be required to seek capital in financings under circumstances and at times that limit the optimization of the terms of such financings.

TIMING OF REVENUES

Our revenue is dependent on seasonal fluctuations related to epidemiology 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. 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.

 

33


Table of Contents

FOREIGN CURRENCY EXCHANGE AND IMPACT OF INFLATION

Because we receive 100% of our revenue and generate approximately 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 months ended June 30, 2014, the RMB depreciated approximately 0.92% against the USD, resulting in an exchange loss of $237,000.

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, 2014, indicated that if the USD uniformly increased in value by 10% relative to the RMB, we would have experienced $317,000 increase in net loss. Conversely, a 10% increase in the value of the RMB relative to the USD at June 30, 2014, would have resulted in $387,000 decrease in net loss.

Based on the Consumer Price Index, for the three months ended June 30, 2014, the average annual rate of inflation in China and the United States was 2.3% and 2.1%, respectively. For the six months ended June 30, 2014, the average annual rate of inflation in China and the United States was 2.2% and 1.7%, respectively. The average annual rate of inflation over the three-year period from 2011 to 2013 was 3.6% in China and 2.3% in the United States.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company holds the majority of all cash assets in Certificates of Deposit in major international banks. Therefore, the Company believes that its market risk exposures are immaterial and reasonable possible near-term changes in market interest rates will not result in material near-term reductions in other income, material changes in fair values or cash flows. The Company does not have instruments for trading purposes. Instruments for non-trading purposes are operating and development cash assets held in interest-bearing accounts. The Company is exposed to certain foreign currency exchange risk (See “Foreign Currency Exchange and Impact of Inflation”).

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. A control deficiency exists when the design or operation of a control does not allow management or employees, in the ordinary course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with GAAP, such that there is a more than remote likelihood that a misstatement of the Company’s annual or interim

 

34


Table of Contents

financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our CEO and CFO have concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

Our management, including our principal executive and principal financial officers have evaluated any changes in our internal control over financial reporting that occurred during the three months ended June 30, 2014, and has concluded that there was no change that occurred during the three months ended June 30, 2014 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 Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual 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. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

35


Table of Contents

ITEM 6. EXHIBITS

    2.2    Amended and Restated Agreement and Plan of Merger, dated April 18, 2014, by and among the Company, Healthy Harmony Holdings, L.P. and Healthy Harmony Acquisition, Inc. Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed April 21, 2014 (the “April 21, 2014 Form 8-K”).
    3.1    Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013.
    3.2    Amended and Restated Bylaws of the Company dated as of December 19, 2012. Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed December 26, 2012.
    3.3    Amendment to the Amended and Restated Bylaws of the Company, dated as of February 17, 2014. Incorporated by reference to Exhibit 3.1 to the February 18, 2014 Form 8-K.
    3.4    Certificate of Designations of Series A Junior Participating Preferred Stock of the Company. Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007.
    4.1    Form of Specimen Certificate representing the Common Stock of the Company. Incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form SB-2 (No. 33-78446) (the “IPO Registration Statement”).
    4.2    Form of Specimen Certificate representing the Class B Common Stock of the Company. Incorporated by reference to Exhibit 4.3 to the IPO Registration Statement.
    4.3    Rights Agreement, dated as of June 7, 2007, between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes a form of Right Certificate as Exhibit B and a Summary of Rights to Purchase Preferred Stock as Exhibit C. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 7, 2007.
    4.4    Amendment No. 1 to Rights Agreement, dated as of November 4, 2007, between the Company and American Stock Transfer & Trust Company, as Rights Agent. Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 7, 2007.
    4.5    Amendment No. 2 to Rights Agreement, dated as of June 8, 2010, between the Company and American Stock Transfer & Trust Company, as Rights Agent. Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 14, 2010.
    4.6    Amendment No. 3 to Rights Agreement, dated as of February 17, 2014, between the Company and American Stock Transfer & Trust Company, as Rights Agent. Incorporated by reference to Exhibit 4.1 to the February 18, 2014 Form 8-K.
    4.7    Amendment No. 4 to Rights Agreement, dated as of April 18, 2014, between the Company and American Stock Transfer & Trust Company, as Rights Agent. Incorporated by reference to Exhibit 4.1 to the April 21, 2014 Form 8-K.
  31.1    Certification of the Company’s Chief Executive Officer Pursuant to Rule 13a-14(a) (filed herewith)
  31.2    Certification of the Company’s Chief Financial Officer Pursuant to Rule 13a-14(a) (filed herewith)
  31.3    Certification of the Company’s Principal Accounting Officer Pursuant to Rule 13a-14(a) (filed herewith)
  32.1    Certification of the Company’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (furnished herewith)
  32.2    Certification of the Company’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (furnished herewith)
  32.3    Certification of the Company’s Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 (furnished herewith)
101.INS    XBRL Instance Document (filed herewith)
101.SCH    XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document (filed herewith)

 

36


Table of Contents

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 11, 2014     By:   /s/ Lawrence Pemble
      Lawrence Pemble
      Chief Operating Officer and Director
Dated: August 11, 2014     By:   /s/ Robert C. Low
      Robert C. Low
     

Senior Vice President of Finance, Chief Financial Officer, and Corporate Controller

(Principal Financial and Accounting Officer)

 

37