The accompanying notes are an integral part of these consolidated condensed financial statements.
The accompanying notes are an integral part of these consolidated condensed financial statements.
The accompanying notes are an integral part of these consolidated condensed financial statements.
The accompanying notes are an integral part of these consolidated condensed financial statements.
The accompanying notes are an integral part of these consolidated condensed financial statements.
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 Companys 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 Companys Board of Directors upon the recommendation of the Boards 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 Companys
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 Companys 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 Companys 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
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 Companys stockholders and by a majority of the Companys disinterested stockholders, the regulatory approval under Chinese
antitrust laws, and other customary closing conditions. A special meeting of the Companys 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 Companys 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
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 managements 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
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 Chindexs 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
Companys 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 Companys
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 FosunPharmas 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
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 CMLs 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
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 collateralCertificates 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 Companys 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
Chinas 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 banks 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
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 expensesrent
|
|
$
|
5,625
|
|
|
$
|
7,158
|
|
Accrued compensation
|
|
|
5,948
|
|
|
|
8,063
|
|
Accrued expensesother
|
|
|
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
Note 8. DEBT
The Companys 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 Chindexs
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 Companys 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
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 Chindexs 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 Companys 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 Chinas 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 Chindexs 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 Companys 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
Debt Payments Schedule
The following table sets forth the Companys 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 Companys 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
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 outstandingbasic
|
|
|
17,813,312
|
|
|
|
16,582,068
|
|
|
|
17,750,642
|
|
|
|
16,566,004
|
|
Net loss per common sharebasic:
|
|
$
|
(.04
|
)
|
|
$
|
(.01
|
)
|
|
$
|
(.24
|
)
|
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(693
|
)
|
|
$
|
(122
|
)
|
|
$
|
(4,207
|
)
|
|
$
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic
|
|
|
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 sharediluted:
|
|
$
|
(.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
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 $2,234,000 for the three and six months ended June 30, 2013, respectively, for Company employees and outside directors.
The Company granted restricted shares in the first quarter of 2014 that vest over a three-year period. The Company also granted restricted
stock of 20,633 to independent directors in May 2014. The Company recognizes expense ratably over the vesting period of the stock options or restricted stock, net of estimated forfeitures. The Company will record additional expense if the actual
forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.
The
Company calculates grant-date fair values using the Black-Scholes option pricing model. To calculate fair market value, this model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as
the expected life of the option being valued and the exercise price of the option being valued. It also requires certain assumptions, such as the expected amount of time the option will be outstanding until it is exercised or it expires and the
expected volatility of the Companys common stock over the expected life of the option.
The following table summarizes the stock
option activity during the six months ended June 30, 2014:
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Number of
Shares
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Weighted
Average
Exercise
Price
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Weighted
Average
Remaining
Contractual
Term (Years)
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Aggregate
Intrinsic Value
(in thousands)*
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Options outstanding at December 31, 2013
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1,074,490
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$
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10.68
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Granted
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Exercised
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(101,150
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)
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9.27
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Expired
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(1,001
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)
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13.26
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Options outstanding at June 30, 2014
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972,339
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$
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10.82
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3.49
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$
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12,511
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Options exercisable at June 30, 2014
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967,838
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$
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10.81
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3.47
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$
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12,468
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*
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The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market price of the Companys common stock on June 30, 2014 ($23.69) and the exercise price of
the underlying options.
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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 $38,000, the
majority of which is expected to be expensed over the weighted-average period of 0.94 years.
19
The following table summarizes activity relating to restricted stock for the six months ended
June 30, 2014:
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Number of shares
underlying
restricted stock
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Aggregate Intrinsic
Value of Restricted
Stock
(in thousands) *
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Outstanding at December 31, 2013
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416,225
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Granted
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96,133
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Vested
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(172,227
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)
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Forfeited
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(10,614
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)
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Outstanding at June 30, 2014
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329,517
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$
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7,807
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Expected to vest
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233,213
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$
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5,525
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*
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The aggregate intrinsic value on this table was calculated based on the closing market price of the Companys common stock on June 30, 2014 ($23.69).
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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 Companys 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 Companys 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
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 Companys 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 Companys 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 Companys 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
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 Companys common stock (representing approximately 10% of all outstanding common stock after such sale, based on the number of outstanding shares as of the date of the Stock Purchase Agreement) at a
purchase price of $15 per share.
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 Companys Board of Directors on any matters submitted to a
vote of the stockholders of the Company relating to the election of directors and compensation matters and with respect to certain proxy or consent solicitations. The Stockholder Agreement also contains standstill restrictions on Investor generally
prohibiting the purchase of additional securities of the Company. The standstill restrictions terminate on the same basis as does the voting agreement above, except that the 5% standard would increase to 10% upon the Second Closing. In addition, the
Stockholder Agreement contains a lock-up restricting sales by Investor of its shares of the Companys common stock for a period of five years following the date of the Stockholder Agreement, subject to certain exceptions.
The Company evaluated whether this contingent Stock Purchase Agreement should be accounted for as a derivative instrument or whether it
qualified for a scope exception under ASC 815-10. The Company concluded that the contract qualified for the scope exception because the contract was indexed to the Companys own stock and was classified in stockholders equity.
22
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):
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|
|
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
|
|
|
|
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|
|
Net minimum rental commitments
|
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$
|
141,660
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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 Companys 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 Companys debt such as quoted prices in active markets are not available, as the Companys long-term debt is not publicly-traded.
Accordingly, the Company has estimated the fair value amounts using available market information and commonly accepted valuation methodologies. However, it requires considerable judgment in interpreting market data to develop estimates of fair
value. Accordingly, the fair value estimate presented is not necessarily indicative of the amount that the Company or holders of the debt instruments could realize in a current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair values.
23
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 Companys 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.