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| CHDX > SEC Filings for CHDX > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
Quarterly Report
The division has begun expansion of the United Family network of private
healthcare facilities in China. In addition to existing cash resources, during
fiscal 2008 we raised additional capital and established credit facilities in
the aggregate amount of approximately $105 million to be used principally toward
the development and construction of healthcare facilities in connection with
this expansion (see "Liquidity and Capital Resources"). The projects include
affiliated clinic operations in Shanghai and Guangzhou and new hospital
facilities in Guangzhou and Beijing. In October 2008, we announced the opening
of the Guangzhou United Family Health Center clinic. In September 2008, the
proposed Shanghai Pudong District clinic encountered delays due to zoning
restrictions imposed by the Chinese government and we decided to abandon the
initial site and to relocate the clinic rather than challenge the zoning
restrictions. We now expect the opening of the Shanghai Pudong clinic facility
in fiscal 2010. The new hospital facilities in both Guangzhou and Beijing are in
the early development phase. During the period ended December 31, 2008, the
development and start up costs, including post-opening expenses, for these
projects were $662,000.
For the three months ended December 31, 2008, revenue from the division was
$20,530,000, an increase of 16% over the three months ended December 31, 2007
revenue of $17,695,000 (for information on how the timing of our revenues may be
affected by seasonality and other fluctuations, see " Timing of Revenues "). The
increased revenue is attributable to growth in both inpatient and outpatient
services provided in the Beijing and Shanghai markets, but was less than
expected. Total Healthcare Services operating costs increased over the periods
by 27%, to $18,388,000 from $14,475,000. Salaries for the division increased by
$2,333,000 over the periods (representing 48% of division revenue in the recent
period and 42% of revenue in the prior period). This increase was due to the
renewal of multi-year physician contracts coming up in an inflationary
environment and the hiring of new personnel to meet the demand for expected
continuing increases in services in both the Beijing and Shanghai facilities, as
well as staffing for the Guangzhou clinic which opened in October 2008. Other
costs increased $1,580,000 over the periods, primarily due to increased direct
patient care costs ($404,000), costs allocated from the parent company
($231,000) and higher excise taxes ($207,000).
The Healthcare Services division had income from operations before foreign
exchange gains of $2,142,000 for the three months ended December 31, 2008,
compared with income from operations before foreign exchange gains of $3,220,000
in the prior period. The impact of exchange rate fluctuations between the
periods had a positive impact on income from operations of approximately
$239,000.
Medical Products Division
The Medical Products division markets, distributes and sells select medical
capital equipment, instrumentation and other medical products for use in
hospitals in China and Hong Kong on the basis of both exclusive and
non-exclusive agreements with the manufacturers of these products.
In the three months ended December 31, 2008, this division had revenue of
$21,070,000, a 15% increase from revenue of $18,316,000 for the three months
ended December 31, 2007. During the recent period, we continued deliveries under
the U.S. Export-Import Bank and KfW Development Bank contracts for which we
recorded revenues in the three month period of approximately $4,182,000. In
addition, approximately $2,405,000 of revenue under one KfW Development Bank
contract was deferred at the end of the period pending final contract completion
in the fourth quarter (see Note 6 Deferred Revenue). We believe that the
delivery of major contracts, recognition of the deferred revenue and completion
of our current government backed loan contracts will result in significantly
increased revenue performance in the fourth quarter over prior periods.
Revenues in the division are normally impacted by factors such as credit
availability to our customers and other factors as outlined in "Timing of
Revenues", in addition, during the period, we experienced continuing disruption
to business operations as a result of the May 2008 earthquake in Sichuan
Province in southwestern China.
Gross profit for the Medical Products division increased to $5,577,000 from
$5,185,000 over the periods. As a percentage of revenue, gross profit from the
Medical Products division decreased to 26% during the recent period from 28%
during the same period last year. A 2% variance in gross profit margin is in
line with historical averages.
Expenses for the Medical Products division increased to $6,207,000 from
$4,988,000 over the periods and, as a percentage of division revenue, increased
to 29% from 27% over the periods. In addition, increased expenses during the
period were a result of increased sales activity in advance of expected greater
increases in sales which were not realized to the expected levels due partially
to timing of shipments and deferred revenues. Salary expense for the division
increased by $188,000 over the periods. The other costs for the division
increased $1,031,000 over the periods, primarily due to increased costs
allocated from the parent company ($513,000), general selling expenses
($369,000) and bad debt expense ($121,000). The division had loss from
operations before foreign exchange gains of $630,000 in the recent period,
compared with income from operations before foreign exchange gains of $197,000
in the prior period. In the current period, the impact of exchange rate
fluctuations between the periods had a negative impact on loss from operations
of approximately $334,000.
Other Income and Expenses
Interest expense during the recent quarter was incurred on the current
portion of debt ($970,000), short-term portion of capitalized leases ($31,000)
and long-term debt ($22,930,000), totaling $259,000. Interest expense of
$198,000 was recorded in the same quarter of the prior year.
Interest income during the recent quarter and prior period was $527,000 and
$358,000 respectively, due to higher cash balances in the current period.
Interest income in the current year third quarter also included $47,000 for the
accretion of the discount on our variable-return CDs.
Miscellaneous expense during the recent quarter and prior year quarter was
$661,000 and $124,000 respectively. During the three months ended December 31,
2008, we recorded total miscellaneous expense of $653,000 in connection with our
variable-return CDs, consisting of an expense for $1,080,000 in penalties in
connection with the early redemption of the CDs, an expense of $127,000 to write
off the remaining balance of the derivatives related to the CDs recorded in
Other Current Assets, less a benefit in the income statement for the reversal of
$554,000 of unrecognized CD investment discounts previously recorded.
Taxes
The Company has estimated its annual effective tax rate for the full fiscal
year 2009 and applied that rate to its income before income taxes in determining
its provision for income taxes for the three months ended December 31, 2008 in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes"
(SFAS 109) and APB Opinions No. 28, "Interim Financial Reporting" (APB 28). The
Company also records discrete items in each respective period as appropriate. In
determining the Company's provision for income taxes, net deferred tax assets,
liabilities, valuation allowances, and uncertain tax positions, management is
required to make judgments and estimates related to projections of domestic and
foreign profitability, the timing and extent of the utilization of loss
carryforwards, applicable tax rates, transfer pricing methods, expected tax
authority positions on audit, and prudent and feasible tax planning strategies.
Judgments and estimates related to the Company's projections and assumptions are
inherently uncertain and therefore, actual results could differ materially from
projections.
For the three months ended December 31, 2008 and 2007, the Company's
consolidated annualized effective tax rate from operations was 43.7% and 1.9%,
respectively. The current period tax rate includes the effect of higher pretax
losses in certain jurisdictions with no related income tax benefit, as the
Company currently lacks evidence that the loss carryforwards in those
jurisdictions will be able to be used prior to their expiration. The Company's
effective tax rate from operations was low in the prior year quarter due to an
increase in its net deferred tax asset resulting from an increase in the
projected profitability in future periods of entities in the U.S. and China,
which made it more likely than not that it would utilize an increased portion of
its deferred tax assets.
Nine months ended December 31, 2008 compared to nine months ended December 31,
2007
Our revenue for the nine months ended December 31, 2008 was $111,778,000, up
17% from the nine months ended December 31, 2007 revenue of $95,434,000. We
experienced an increase in revenue over the periods of 22% in the Healthcare
Services division and an increase in revenue of 12% in the Medical Products
division. Costs and expenses were $107, 480,000 for the nine months ended
December 31, 2008 as compared with $87,521,000 for the prior period. The average
rate of inflation in China increased over the nine month period to 5.2% compared
to 5.4% in the prior period and the RMB continued to appreciate against the US
dollar (see "Foreign Currency Exchange and Impact of Inflation"). Healthcare
Services division operating costs increased 32% over the periods and operating
costs in the Medical Products division increased by 19%. We recorded income from
operations of $4,298,000 for the recent period, as compared to income from
operations of $7,913,000 for the same period last year. We recorded net income
of $1,546,000 for the recent period, as compared to net income of $6,341,000 for
the same period last year. Costs at the parent level of the Company, which have
been allocated among the segments as described below, increased $2,601,000
between the periods, including salaries ($1,616,000), professional fees
($358,000), bank service fee ($253,000), auditing fees ($112,000) and office
rent ($115,000).
Healthcare Services Division
The Healthcare Services division operates our network of private healthcare
facilities in China. During the nine month period ended December 31, 2008, the
division consisted of a network of United Family Hospitals and Clinics (UFH) in
Beijing, Shanghai and Guangzhou. In Beijing, the UFH network includes Beijing
United Family Hospital and Clinics, and two affiliated free-standing, primary
care clinics. In Shanghai, the UFH network includes Shanghai United Family
Hospital and Clinics and one affiliated, free-standing, primary care clinic. In
October 2008, we entered the Guangzhou market, with the opening of a
free-standing, primary care clinic there, as part of our expansion program
discussed below. In addition, beginning in April 2008, UFH began a pilot project
in the City of Wuxi to assess the business potential of contracted healthcare
management services.
The division has begun expansion of the United Family network of private
healthcare facilities in China. In addition to existing cash resources, during
fiscal 2008 we raised additional capital and established credit facilities in
the aggregate amount of approximately $105 million to be used principally toward
the development and construction of healthcare facilities in connection with
this expansion (see "Liquidity and Capital Resources"). The projects include
affiliated clinic operations in Shanghai and Guangzhou and new hospital
facilities in Guangzhou and Beijing. In October 2008, we announced the opening
of the Guangzhou United Family Health Center clinic. In September 2008, the
proposed Shanghai Pudong District clinic encountered delays due to zoning
restrictions imposed by the Chinese government and we decided to abandon the
initial site and to relocate the clinic rather than challenge the zoning
restrictions. We now expect the opening of the Shanghai Pudong clinic facility
in fiscal 2010. The new hospital facilities in both Guangzhou and Beijing are in
the early development phase. During the period ended December 31, 2008, the
development and start up costs, including post-opening expenses, for these
projects were $1,530,000.
For the nine months ended December 31, 2008, revenue from the division was
$59,171,000, an increase of 22% over the nine months ended December 31, 2007
revenue of $48,355,000 (for information on how the timing of our revenues may be
affected by seasonality and other fluctuations, see "Timing of Revenues"). The
increased revenue is attributable to growth in both inpatient and outpatient
services provided in the Beijing and Shanghai markets, but was less than
expected. Revenue growth was negatively impacted during the period due to a
number of factors, including disruptions in travel and tourism related to
China's Olympic preparations, which included difficulty in obtaining visas to
enter the country for both tourists and business travelers; a generally light
flu-season, which occurs in March and April in China, which resulted in lower
than expected patient acuity levels, and an institutional focus on Joint
Commission accreditation preparation. Total Healthcare Services operating costs
increased over the periods by 32%, to $53,201,000 from $40,298,000. Salary
expense for the division increased by $7,172,000 over the periods (representing
48% of division revenue in the recent period and 44% of revenue in the prior
period). This increase was due to the renewal of multi-year physician contracts
coming up in an inflationary environment and the hiring of new personnel to meet
the demand for expected continuing increases in services in both the Beijing and
Shanghai facilities, as well as pre-opening staffing for the Guangzhou clinic
which opened in October 2008.
Other costs increased $5,732,000 over the periods, primarily due to increases in
direct patient care expenses ($1,221,000), additional excise taxes ($1,155,000),
cost allocated from the parent company ($801,000), office rent ($686,000) and
cost related to the Pudong clinic project ($332,000). The Healthcare Services
division had income from operations before foreign exchange gains of $5,970,000
in the nine months ended December 31, 2008, compared with income from operations
before foreign exchange gains of $8,057,000 in the prior period. In the current
period, the impact of exchange rate fluctuations between the periods had a
positive impact on income from operations of approximately $743,000.
Medical Products Division
The Medical Products division markets, distributes and sells select medical
capital equipment, instrumentation and other medical products for use in
hospitals in China and Hong Kong on the basis of both exclusive and
non-exclusive agreements with the manufacturers of these products.
In the nine months ended December 31, 2008, this division had revenue of
$52,607,000, a 12% increase from revenue of $47,079,000 for the nine months
ended December 31, 2007. Revenue during the period included approximately
$6,177,000 in shipments under U.S. Export-Import Bank and KfW Development Bank
contracts and approximately $4,600,000 in shipments of robotic surgical systems.
As of December 31, 2008, revenue of approximately $2,405,000 under one KfW
Development Bank contract was deferred at the end of the period pending final
contract completion in the fourth quarter (see Note 6 Deferred Revenue). We
believe that the delivery of major contracts, recognition of the deferred
revenue and completion of our current government backed loan contracts will
result in significantly increased revenue performance in the fourth quarter over
prior periods.
Revenues in the division are normally impacted by factors such as credit
availability to our customers and other factors as outlined in "Timing of
Revenues". During the first half of the year, we experienced significant
disruptions in business operations resulting from the May 12, 2008 earthquake in
Sichuan Province in southwestern China and the Beijing Olympics. Since the close
of the Olympics, business operations have generally returned to normal.
Gross profit for the Medical Products division increased to $14,031,000 from
$12,662,000 over the periods. As a percentage of revenue, gross profit from the
Medical Products division was 27% during the nine month ended December 31, 2008,
the same as the comparable period in the prior year.
Expenses for the Medical Products division increased to $16,216,000 from
$13,665,000 over the periods and, as a percentage of division revenue, increased
to 31% from 29% over the periods. Increased expenses during the period were a
result of increased sales activity in advance of expected greater increases in
sales which were not realized to the expected levels due to the disruption in
the marketplace as discussed above. Salary expense for the division increased by
$138,000 over the periods. The other costs for the division increased $2,414,000
over the periods, primarily due to increased costs allocated from the parent
($1,585,000) and general selling expenses ($575,000). The division had a loss
from operations before foreign exchange gains of $2,185,000 in the recent
period, compared with a loss from operations before foreign exchange gains of
$1,003,000 in the prior period. In the current period, the impact of exchange
rate fluctuations between the periods had a negative impact on loss from
operations of approximately $872,000.
Other Income and Expenses
Interest expense during the recent nine month period was incurred on the
current portion of debt ($970,000), current portion of capitalized leases
($31,000) and long-term debt ($22,930,000), totaling $738,000. Interest expense
of $573,000 was recorded in the same period of the prior year.
Interest income during the nine month period and prior year same period was
$1,316,000 and $500,000 respectively, due to higher cash balances in the current
period. Interest income in the current year period also included $167,000 for
the accretion of the discount on our variable-return CDs.
Miscellaneous expense during the current nine month period and prior year
nine month period was $1,257,000 and $171,000 respectively. During the nine
months ended December 31, 2008, we recorded total miscellaneous expense of
$1,247,000 in connection with our variable-return CDs, consisting of an expense
for $1,080,000 in penalties in connection with the early redemption of the CDs
and an expense of $721,000 to write off the derivatives related to the CDs
recorded in Other Current Assets, less a benefit for the reversal of $554,000 of
unrecognized CD investment discounts previously recorded.
Taxes
The Company has estimated its annual effective tax rate for the full fiscal
year 2009 and applied that rate to its income before income taxes in determining
its provision for income taxes for the nine months ended December 31, 2008 in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes"
(SFAS 109) and APB Opinion No. 28, "Interim Financial Reporting" (APB 28). The
Company also records discrete items in each respective period as appropriate. In
determining the Company's provision for income taxes, net deferred tax assets,
liabilities, valuation allowances, and uncertain tax positions, management is
required to make judgments and estimates related to projections of domestic and
foreign profitability, the timing and extent of the utilization of loss
carryforwards, applicable tax rates, transfer pricing methods, expected tax
authority positions on audit, and prudent and feasible tax planning strategies.
Judgments and estimates related to the Company's projections and assumptions are
inherently uncertain and therefore, actual results could differ materially from
projections.
For the nine months ended December 31, 2008 and 2007, the Company's
consolidated annualized effective tax rate from operations was 57.3% and 17.3%,
respectively. The Company's effective tax rate from operations increased during
the nine months ended December 31, 2008 due primarily to the correction of an
error in the first quarter that was not material to prior periods and higher
pretax losses in certain jurisdictions with no related income tax benefit, as
the Company currently lacks evidence that the loss carryforwards in those
jurisdictions will be able to be used prior to their expiration. The Company's
effective tax rate from operations was low in the prior year quarter due to an
increase in its net deferred tax asset resulting from an increase in the
projected profitability in future periods of entities in the U.S. and China,
which made it more likely than not that it would utilize an increased portion of
its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2008, our unrestricted cash, cash equivalents and
investments were $74,868,000 composed of $21,669,000 cash and cash equivalents,
$14,055,000 of short-term investments consisting of certificates of deposits and
$39,144,000 of noncurrent investments consisting of a certificate of deposit.
As of the end of fiscal 2008, we had entered into a series of equity and debt
financings, as described below, that provide for $105 million in total
financing. Pursuant to these financings to date we have received a total of
$60 million in cash. The principal purpose of the financings is to provide funds
for the expansion of our healthcare system in China, including two joint venture
hospitals. Additional details of these financings may be found in Notes 7 and 10
to the accompanying consolidated condensed financial statements.
On November 7, 2007, we entered into a securities purchase agreement with
Magenta Magic Limited, a wholly owned subsidiary of J.P. Morgan Chase & Co
(JPM), pursuant to which we sold to JPM: (i) 538,793 shares (the "Tranche A
Shares") of common stock for an aggregate purchase price of $10 million or the
subscription price of $18.56 per share, (ii) our Tranche B Convertible Notes due
2017 in the aggregate principal amount of $25 million, which were converted into
1,346,984 shares of our common stock, and (iii) our Tranche C Convertible Notes
due 2017 in the aggregate principal amount of $15 million (the "Tranche C
Notes") for a total purchase price of $50 million in gross proceeds. The Tranche
C Notes have a ten-year maturity, do not bear interest of any kind and are
convertible to common stock at the subscription price at any time by JPM or are
mandatorily converted at the subscription price to common stock upon certain
project-related events.
On December 10, 2007, we entered into a securities purchase agreement with the International Finance Corporation (a division of the World Bank) (IFC), pursuant to which we sold to IFC 538,793 shares of common stock for an aggregate purchase price of $10 million or the subscription price of $18.56 per share. The closing of the sale of common stock pursuant to the IFC securities purchase agreement occurred on January 11, 2008 at which time we received $10 million in cash. In addition, on December 10, 2007, we entered into a loan agreement with IFC that provides for loans in the aggregate amount of $25 million directly to our future healthcare joint ventures in China (the "IFC Loans"), subject to the satisfaction of certain disbursement conditions, including the establishment of . . .
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