Add
CHDX to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CHDX > SEC Filings for CHDX > Form 10-K on 12-Jun-2009 | All Recent SEC Filings |
12-Jun-2009
Annual Report
• Medical Products division. This 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. The division revenues are generated through a nation-wide direct sales force that also manages local sub-dealers regionally throughout the country. The division's distribution business provides supply chain management and logistics services to both divisions of the Company. Divisional growth is expected through increasing sales of our existing product portfolio, the addition of new product lines and the continued offering of government-back financing instruments to our customers in China. The Chinese Government's increasing investment in the healthcare system in China, including the recently announced three-year, $120 billion stimulus package will help to stimulate the market for medical devices from bottom to top and serve to deepen our market penetration in the medium term. For fiscal 2009, the Medical Products division accounted for 54% of our revenue. (See Note 15 to the consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.)
Substantially all of our non-cash assets are located in China and
substantially all our revenues are derived from our operations in China.
Accordingly, our business, financial condition and results of operations are
subject, to a significant degree, to economic, political and legal developments
in China. The economic system in China differs from the economics of most
developed countries in many respects, including government investment, level of
development, control of capital investment, control of foreign exchange and
allocation of resources.
Our Healthcare Services division is subject to challenges and risks
associated with operating in China, including the laws, policies and regulations
of the Chinese Government concerning healthcare facilities and dependence upon
the healthcare professionals staffing our hospital and clinic facilities. Our
operating results vary from period to period as a result of a variety of social
and epidemiological factors in the patient base served by our hospital network
and the investment and development cycle related to the opening of new
facilities.
Our Medical Products division is subject to challenges and risks as a result
of our dependence on our relations with suppliers of equipment and products. In
addition, the timing of our revenue from the sale of medical capital equipment
is affected by the availability of funds to customers in the budgeting processes
of those customers, the availability of credit from the Chinese banking system
and otherwise. Finally, our ability to launch, market and sell products is
impacted by regulatory delays which are beyond our control and which are
experienced by all sellers of medical equipment in China due to the abundance of
new regulations and the inability of the Chinese regulatory agencies to
efficiently process the backlog of applications. Consequently, our operating
results have varied and are expected to continue to vary from period to period.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Our estimates, judgments and assumptions are continually evaluated based
on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
Some of our accounting policies require higher degree of judgment than others
in their application. These include revenue recognition, receivable
collectibility, valuation allowance of deferred tax assets and inventories. In
addition, Note 1 to the consolidated financial statements includes further
discussion of our significant accounting policies.
Revenue recognition
The Company earns revenue from providing healthcare services and sales of
products. Substantially all revenue in the Healthcare Services division is from
providing services and substantially all revenue in the Medical Products
division is from the sale of products. See Note 15 on the Company's consolidated
financial statements for further information on sales by division.
Revenue related to services provided by the Healthcare Services division is
net of contractual adjustments or discounts and is recognized in the period
services are provided. The Healthcare Services division makes an estimate at the
end of the month for certain inpatients who have not completed service. This
estimate reflects only the cost of care up to the end of the month.
Revenue related to the sale of medical equipment, instrumentation and
products to customers in China by our Medical Products division is recognized
upon product shipment. Revenue from sales to customers in Hong Kong is
recognized upon delivery. We provide installation, warranty, and training
services for certain of our capital equipment and instrumentation sales. These
services are viewed as perfunctory to the overall arrangement and are not
accounted for separately from the equipment sale. Costs associated with
installation, training and standard warranty are not significant and are
recognized in cost of sales as they are incurred. Sales involving multiple
elements are analyzed and recognized under the guidelines of SAB 104, "Revenue
Recognition" and the Emerging Issues Task Force (EITF) 00-21, "Revenue
Arrangements with Multiple Deliverables". From time to time, the Company
supplies products and services to its customers which are delivered over time.
In some cases, this can result in deferral of revenue to future periods.
Deferred revenue was $2,134,000 and $765,000 as of March 31, 2009 and March 31,
2008, respectively.
Additionally, the Company evaluates revenue from the sale of equipment in
accordance with the provisions of EITF Issue 99-19, "Reporting Revenue Gross as
a Principal versus Net as an Agent," to determine whether such revenue should be
recognized on a gross or a net basis. All of the factors in EITF 99-19 are
considered with the primary factor being that the Company assumes credit and
inventory risk and therefore records the gross amount of all sales as revenue.
In the Healthcare Services division, our revenue is dependent on seasonal
fluctuations related to epidemiology factors and the life styles of the
expatriate community. In the Medical Products division, sales of capital
equipment often require protracted sales efforts, long lead times, financing
arrangements and other time-consuming steps. 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.
Receivable collectibility
We grant credit to some customers in the ordinary course of business.
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 balances
that are determined to be uncollectible, along with a general allowance
estimated as a percentage of probable collectibility, 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.
We recognized bad debt expense (benefit) in the Healthcare Services division
of $1,649,000, $1,607,000 and $887,000 for the years ended March 31, 2009, 2008
and 2007, respectively and $(6,000), $66,000 and $711,000, in the Medical
Products division for the years ended March 31, 2009, 2008 and 2007,
respectively.
We increased the consolidated reserve for doubtful accounts from $3,940,000
at March 31, 2008 to $5,041,000 at March 31, 2009.
Valuation allowance of deferred tax assets
Our operations are taxed in various jurisdictions including the United States
and China. In certain jurisdictions, individual subsidiaries are taxed
separately. We have identified deferred tax assets resulting from cumulative
temporary differences at each balance sheet date. A valuation allowance is
provided for those deferred tax assets for which we are unable to conclude that
it is more likely than not that the tax benefit will be realized.
We have provided substantial deferred tax valuation allowances for certain
deferred tax assets related to various subsidiaries in China and the U.S. as of
March 31, 2009 because we are not able to conclude that it is more likely than
not that those assets will be realized. The U.S. net operating loss
carryforwards expire at varying dates through 2028 and the China net operating
loss carryforwards expire at varying dates through 2013.
Inventories
Inventory items held by the Healthcare Services division are purchased to
fill hospital operating requirements and are stated at the lower of cost or net
realizable value using the average cost method.
Inventory held by the Medical Products division consists of items that are
purchased to fill executed sales contracts, items that are stocked for future
sales, including sales demonstration units and service parts. These items are
valued on the specific identification method or average cost basis.
Inventory valuation is reviewed on a quarterly basis and adjustments are
charged to the provision for inventory, which is a component of our product
sales costs. Valuation adjustments to inventory were $295,000, $600,000 and
$254,000 during fiscal 2009, 2008 and 2007 respectively.
Fiscal year ended March 31, 2009 compared to fiscal year ended March 31, 2008
Our revenue for fiscal 2009 was $171,442,000 up 32% from fiscal 2008 revenue
of $130,058,000. Our revenue grew over the period by 21% in the Healthcare
Services division and 43% in the Medical Products division. Costs and expenses
were $163,283,000 for fiscal 2009, up 34% as compared with costs and expenses of
$121,719,000 for fiscal 2008, including $2,066,000 of development and start-up
costs in fiscal 2009, including post opening expenses, for new healthcare
facilities, while such expenses were insignificant in the prior year. Operating
costs increased 30% and 37% over the years in the Healthcare Services and
Medical Products divisions, respectively. We recorded income from continuing
operations of $8,159,000 for fiscal 2009, as compared to income from continuing
operations of $8,339,000 for fiscal 2008. Costs at the parent level of the
Company, which have been allocated among the divisions as described below,
increased by $3,833,000 over the years. The majority of the increase relates to
compensation expense ($2,401,000), including the additional expense that
resulted from stock-based compensation expense in accordance with SFAS 123(R),
bank service fees ($358,000), other professional fees ($341,000) office rent
($134,000), and excise taxes ($127,000). Foreign exchange gains of $342,000 and
$604,000 in fiscal 2009 and 2008, respectively, were recognized as credits to
general and administrative expenses on the consolidated statements of
operations. See "Foreign Currency Exchange and Impact of Inflation" for further
details on the impact of the exchange rate changes on our operating results for
the period.
Healthcare Services Division
The Healthcare Services division operates our network of private healthcare
facilities in China. During fiscal 2009, the division consisted of a network of
United Family Hospitals and Clinics (UFH) in Beijing and Shanghai. In Beijing,
the UFH network included Beijing United Family Hospital and Clinics, and two
affiliated free-standing, primary care clinics. In Shanghai, the UFH network
included Shanghai United Family Hospital and Clinics and one affiliated,
free-standing, primary care clinic. As further described below, during fiscal
2009 we began expansion of the UFH network in the southern China market of
Guangzhou in October, 2008 with the opening of a free-standing primary care
clinic. Our facilities are managed through a corporate level shared
administrative network allowing cost and clinical efficiencies. We have
initiated a pilot project to market our hospital management expertise to third
party facilities not owned by Chindex. Our first managed facility was opened in
the city of Wuxi in April of 2008.
For fiscal 2009, revenue from the division was $79,357,000, an increase of
21% over fiscal 2008 revenue of $65,817,000 (for information on how the timing
of our revenues is affected by seasonality and other fluctuations, see "Timing
of Revenue"). This increase in 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 years by 30% to $72,048,000 from $55,475,000, including salaries which
increased by $10,140,000 over the years (representing 49% and 44% of division
revenue in the recent and prior year, respectively). This increase was due to
the renewal of multi-year physician contracts 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 staffing for the
Guangzhou clinic opening. Other costs increased $6,433,000 over the periods,
primarily due to increases in direct patient care ($1,698,000), excise taxes
($1,322,000), cost allocated from the parent company ($1,074,000), and rent
expense ($671,000).
The Healthcare Services division had income from continuing operations before
foreign exchange gains of $7,309,000 in fiscal 2009, a 29% decrease over the
$10,342,000 in fiscal 2008. The revenues and expenses of the division were
impacted by foreign exchange rate changes during the period. The impact of
exchange rate fluctuations between the periods had a positive impact on income
from operations of approximately $832,000 (see "Foreign Currency Exchange and
Impact of Inflation").
The division has begun expansion of the United Family network of private
healthcare facilities in China. We have raised additional capital and
established credit facilities in the aggregate amount of up to approximately
$105 million, subject to availability, to be used principally in connection with
this expansion During fiscal 2009 the development and start-up costs, including
post-opening expenses, for these projects were $2,066,000, compared to
insignificant such costs and expenses in the prior year. In the coming year we
have planned capital expenditures of more than $20 million for construction,
equipment and information systems related to projects in each of our operating
markets of Beijing, Shanghai and Guangzhou (see "Liquidity and Capital
Resources"). In Beijing we are currently executing a major expansion of our
existing hospital campus in Beijing which will double our size and available
beds and add a major new clinic facility which we believe will open within the
next year. In Guangzhou we opened a new clinic in 2008 and expect to open a
125-bed stand alone facility in 2012. In Shanghai, our proposed Shanghai Pudong
District clinic encountered delays in 2008 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 late fiscal 2010.
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 fiscal 2009, this division's revenue was $92,085,000 which was a 43%
increase over the revenue
of $64,241,000 for fiscal 2008 (for information on how the timing of our
revenues is affected by credit availability to our Chinese customers and other
factors, see "Timing of Revenue"). During fiscal 2009, we reported significant
increases in sales pursuant to government backed loan programs and robotic
surgical systems compared to the prior year. In addition, the division reported
robust growth in sales of diagnostic ultrasound, woman's health imaging systems,
cosmetic laser systems and clinical chemistry product lines.
In fiscal 2008, our reported revenues were negatively impacted by delays in
final delivery of sales contracts under the US Export-Import Bank and KfW
Development bank financing programs and delays in approving product
registrations by the Chinese Government, some of which had been in process for
well over a year. While these circumstances were largely relieved in fiscal
2009, there can be no assurance that delays and regulatory issues of this nature
will not arise again in the future.
Gross profit for the Medical Products division increased to $23,058,000
during fiscal 2009 from $16,562,000 during fiscal 2008. As a percentage of
revenue, gross profit from the Medical Products division decreased to 25% from
26% over the years. The gross profit margin in the current and prior period is
in line with historical averages.
Expenses for the Medical Products division increased to $22,550,000 from
$19,169,000 over the years and, as a percentage of division revenue, decreased
to 24% from 30% over the years. Salaries for the division increased by $288,000
over the year. The other costs for the division increased by $3,093,000 over the
years primarily due to costs allocated from the parent company ($2,301,000) and
selling cost ($638,000). The division had income from continuing operations
before foreign exchange gains of $508,000 in the recent period, compared to a
prior period loss from continuing operations before foreign exchange gains of
$2,607,000. The revenues and expenses of the division were impacted by foreign
exchange rate changes during the period. The impact of exchange rate
fluctuations between the periods had a negative impact on income from operations
of approximately $1,092,000 (see "Foreign Currency Exchange and Impact of
Inflation").
In the Medical Products division we expect continued expansion of sales in
all current product offerings as well as the addition of select new product
lines and continued growth from our government backed financing programs to fuel
enhanced performance of the division. We believe that our new product
technologies in diagnostic ultrasound, robotically assisted surgical systems and
woman's health imaging systems in particular are key growth segments of the
market which we are addressing. Our product development process is focused on
new areas of minimally invasive and robotic surgical techniques. We believe that
the Chinese Government's increasing investment in the healthcare system in
China, including the recently announced three-year, $120 billion stimulus
package will help to stimulate the market for medical devices from bottom to top
and serve to deepen our market penetration in the medium term. In addition, our
long-range development programs will focus on growing comprehensive supply chain
services through strategic partnerships and expansion of our distribution
channels.
Other Income and Expenses
Interest expense during fiscal 2009 was incurred on short-term capitalized
leases of $22,000, short-term debt of $1,631,000 and long-term debt of
$23,709,000, totaling $1,004,000 as compared to interest expense of $3,575,000
in the prior year. Included in the prior year expense is $2,860,000 in interest
expense due to the conversion of a portion of our convertible debt accounted for
in accordance with the provisions of EITF Issue 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," and EITF 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments".
Interest income during the fiscal 2009 and prior year was $1,738,000 and
$1,159,000 respectively. 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 fiscal 2009 and prior year was $1,242,000 and
$226,000 respectively. During fiscal 2009, 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 less a benefit for the reversal of $554,000 of unrecognized CD
investment discounts previously recorded.
Taxes
We recorded a $2,687,000 tax expense from continuing operations in fiscal
2009 as compared to a tax expense of $2,042,000 for fiscal 2008. The increase in
tax expense was due to an increase in income from continuing operations in
fiscal 2009. The effective tax rate in fiscal 2009 of 35.1%, was slightly less
than the effective tax rate of 35.8% in the prior year.
Fiscal year ended March 31, 2008 compared to fiscal year ended March 31, 2007
Our revenue for fiscal 2008 was $130,058,000 up 23% from fiscal 2007 revenue
of $105,921,000. Our revenue grew over the period by 37% in the Healthcare
Services division and 11% in the Medical Products division. Costs and expenses
were $121,719,000 for fiscal 2008, up 20% as compared with costs and expenses of
$101,276,000 for fiscal 2007. Operating costs increased 29% and 13% over the
years in the Healthcare Services and Medical Products divisions, respectively.
We recorded income from continuing operations of $8,339,000 for fiscal 2008, as
compared to income from continuing operations of $4,645,000 for fiscal 2007.
Costs at the parent level of the Company, which have been allocated among the
divisions as described below, increased by $3,134,000 over the years. The
majority of the increase relates to compensation expense ($1,971,000), including
the additional expense that resulted from stock-based compensation expense in
accordance with SFAS 123(R), legal fees ($269,000), excise taxes ($280,000) and
auditing fees ($176,000). Foreign exchange gains of $604,000 and $771,000 in
fiscal 2008 and 2007, respectively, were recognized as credits to general and
administrative expenses on the consolidated statements of operations. See
"Foreign Currency Exchange and Impact of Inflation" for further details on the
impact of the exchange rate changes on our operating results for the period.
Healthcare Services Division
The Healthcare Services division operates our network of private healthcare
facilities in China. During fiscal 2008, the division consisted of a network of
United Family Hospitals and Clinics (UFH) in Beijing and Shanghai. In Beijing,
the UFH network included Beijing United Family Hospital and Clinics, and two
affiliated free-standing, primary care clinics. In Shanghai, the UFH network
included Shanghai United Family Hospital and Clinics and one affiliated,
free-standing, primary care clinic. During the year we entered into a management
agreement for the operation of the Wuxi United Family International Healthcare
Center, which opened on April 2, 2008.
The division has begun expansion of the United Family network of private
healthcare facilities in China. In addition to existing cash resources which
include proceeds remaining from our IFC financings in 2005, during the year we
. . .
|
|