##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES 
EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 31, 2005 Commission File No. 0-24624 CHINDEX INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) (CHINDEX LOGO) DELAWARE
    
    13-3097642(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 7201 Wisconsin Avenue
Bethesda, Maryland, 20814
(301) 215-7777 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrants
knowledge, in a definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ The aggregate market value of the voting stock held by non-affiliates computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such stock, as of
September 30, 2004 (the last business day of the registrants most recently completed second fiscal
quarter) was approximately $41,232,510. The number of shares outstanding of each of the issuers class of common equity, as of June 17,
2005, was 5,728,443 shares of Common Stock and 775,000 shares of Class B Common Stock. Documents Incorporated by Reference: Part III: Proxy Statement




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PART I ITEM 1. BUSINESS General Chindex International, Inc. (Chindex or the Company), founded in 1981, is an American
company operating in several healthcare sectors of the Chinese marketplace, including Hong Kong.
Revenues are generated from the sale of healthcare equipment and products and the provision of
healthcare services. The Company operates in three segments:  
    
    Medical Capital Equipment Division.This division markets, sells and
facilitates the export of select capital healthcare equipment and instrumentation to
China on the basis of both exclusive and non-exclusive agreements with the
manufacturers of these products. Chindex believes based on its knowledge and
experience in the Chinese healthcare system, that it is the largest independent U.S.
distributor of healthcare equipment in China. For the fiscal year ended March 31,
2005, the Medical Capital Equipment Division accounted for 43% of our revenue.
    
    Healthcare Products Distribution Division.This division, through a
network of wholly owned foreign subsidiaries in China, imports and distributes
off-the-shelf healthcare instrumentation and health-related consumable products
developed by third parties and Chindex. For the fiscal year ended March 31, 2005, the
Healthcare Products Distribution Division accounted for 35% of the Companys revenue.
    
    Healthcare Services Division.This division operates the Companys private
hospitals and clinics. Beijing United Family Hospital and Clinics (BJU) opened in 1997
and Shanghai United Family Hospital and Clinics (SHU), opened at the end of calendar
year 2004. In 2002, we opened our first satellite clinic associated with BJU in Shunyi
County outside of Beijing and have also established a satellite clinic associated with
SHU. For the fiscal year ended March 31, 2005, the Healthcare Services Division
accounted for 22% of the Companys revenue. Medical Capital Equipment Division On the basis of exclusive and non-exclusive distribution agreements, Chindex offers
manufacturers of quality medical capital equipment access to the greater Chinese marketplace
through a wide range of marketing, sales, and technical services for their products. We refer to
these products as capital equipment since they are of the type that normally would be capitalized
and depreciated on the financial statements of a purchasing hospital, as distinguished from
products that normally would be expensed. Through a matrix of dedicated marketing and technical service departments, local area product
and technical specialists, and local area territory representatives and clinical application
specialists, we provide comprehensive marketing coverage on behalf of our clients and suppliers on
a nationwide basis. Marketing efforts are based on annual marketing plans developed by each
marketing department within Chindex for each product, and normally include attendance at a variety
of trade shows throughout China, advertisements in leading Chinese industrial, trade, and clinical
journals, production of Chinese language product literature for dissemination to the potential
customer base, direct mail and telemarketing campaigns, and other product promotions. -2-




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##### 



The medical capital equipment operations in China are managed by our Medical Capital Equipment
Division, which focuses on exporting quality Western medical capital equipment to the China
market. These export sales are denominated in U.S. dollars and are made to Chinas larger
hospitals. The Medical Capital Equipment Division is organized both by clinical or therapeutic
product specialty and by region. The Medical Capital Equipment Division markets its products directly to hospitals through all
relevant participants in the purchasing process, including hospital administrators and the doctors
who are the ultimate users of the products. There is virtually no private practice of medicine in
China and all physicians are affiliated with hospitals or similar institutions. In addition to marketing products directly to end-users we also make sales via a network of
sub distributors located throughout China who then sell the equipment to the end users. In
addition to U.S. dollar sales of products to Foreign Trade Corporations (FTCs) or sub distributors,
the Medical Capital Equipment Division has begun to utilize Chindex subsidiaries and the network of
sub distributors to import equipment and sell to buyers in local currency. Most purchases of the
medical capital equipment sold by Chindex in China, regardless of the nature of the end-user, are
made through foreign trade corporations, or FTCs. Although the purchasing decision is made by the
end-user, which may be an individual or a group having the required approvals from their
administrative organizations, we enter into formal purchase contracts with FTCs. The FTCs make
purchases on behalf of the end-users and are legally authorized by the Chinese government to
conduct import business. These organizations are chartered and regulated by the government and are
formed to facilitate foreign trade. We market our products directly to end-users, but in
consummating a sale we also must interact with the particular FTC representing the end-user. For
this reason, we seek to maintain ongoing relationships with the FTCs in our industries. Chindex owns and operates a separate, full service technical service center, within the
Medical Capital Equipment Division to support the activities of that division. The Company is
responsible for the technical support of virtually all the medical equipment that it sells. To
support our medical capital equipment business, we own and operate a full-service technical service
center in Beijing. This service center supports spare parts inventories and factory-trained
service engineers on a nationwide basis. Chindex has from time to time helped arrange government-backed financing to help hospitals in
China finance their purchases of medical equipment from the Company. Such financing has included
loans and loan guarantees from the U.S. Export-Import Bank and the German KfW Investment Bank as
well as commercial financing that is guaranteed by the Chinese government but without foreign
government participation. Among the products sold by the Medical Capital Equipment Division are diagnostic color
ultrasound imaging devices, chemistry analyzers, sterilizers, surgical equipment, computerized
electrophysiology systems, bone densitometers, mammography and breast biopsy devices, lasers for
cosmetic surgery, and robotic surgery systems. Subject to the availability of capital and other conditions, our growth plans for the division
include continuing to add new products and technologies to our offerings as well as continuing to
expand our sales channels, primarily through the use of local sub-distributor networks, to access
increasingly deeper levels of the Chinese hospital market place. Healthcare Products Distribution Division Through our Healthcare Products Distribution Division, or HPD division, Chindex offers foreign
manufacturers a unique nationwide distribution system for low price medical devices and consumables
sold in hospitals and used in home healthcare, and other products sold to consumers in retail
pharmacies. With an established distribution network, we believe that our HPD division is poised
to leverage our -3-




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experience and take advantage of new opportunities created by Chinas WTO-based
liberalization and government-mandated consolidation in the distribution industry. Through wholly owned subsidiaries, the HPD division imports healthcare and other products into
China, carries them in inventory, sells them downstream for local currency, and pays the suppliers
in foreign exchange. Our HPD division is comprised of three primary business units:  
    
    Retail Pharmacy Sales;
    
    Hospital Dealer Sales; and
    
    Logistics Services. Retail Pharmacy Sales Our HPD retail products business unit is focused on distribution, including sales and
marketing, of branded healthcare and health-related consumer products through Chinas burgeoning
retail pharmacy sector. Sales began in mid-1998 in Shanghai and we currently distribute to 60
cities and nearly 1,400 stores, doing business with eight of the top ten retail pharmacy chains in
China. Chindex initiated retail pharmacy distribution through an agreement with the worlds largest
producer of cosmetic products. Our ability to closely control both inventory and distribution in
China has proven important in the distribution of this product line. Chindex currently has
expanded its distribution relationships for the retail pharmacy sales channel by establishing
distribution rights to certain other premier brands, as well as its own brand of baby care
products, manufactured by Chinese manufacturers to the Companys detailed specifications. Several new product areas are under development by us in parallel with our planned expansion
of distribution capabilities. All of these branded healthcare and health-related consumer products
are subject to a strict regulatory regime in China and the process of registration of the products
often presents substantial challenges. Hospital Dealer Sales Through our hospital dealer sales division, we serve the market for quality imported medical
consumables and low-priced instrumentation sold in local currency via a network of sub-distributors
located throughout China. Beginning April 1, 2005, Chindex has moved some of the products of the Hospital Dealer Sales
business unit to the Medical Capital Equipment Division. The reason for this reorganization is to
take advantage of the synergies that are believed to be available by offering a broader range of
products under a single management structure. Logistics Services The HPD logistics services business unit operates the import and supply chain platform which
supports the retail sales and hospital sales business units, as well as portions of Chindexs
Medical Capital Equipment divisions business. The business unit is also the turnkey supplier of
medical consumables to our Healthcare Services division and provides logistic services for external
clients as well. The unit runs distribution centers in Shanghai and Tianjin and additional local
warehouses in eastern China. -4-




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Our business strategy for the division is to seek a strategic partner to position the retail
pharmacy and logistics platform we have developed for continued growth with expanded product
offerings and increased external capital resources. Healthcare Services Division United Family Hospitals and Clinics In 1997, we opened our first private, international standard hospital in Beijing which was the
opening phase in the development of our United Family Hospital network. In late 2004 we opened our
second United Family hospital in Shanghai, making us the only foreign-invested, multi-facility
hospital organization in China. Our facilities are managed through a shared administrative network
allowing cost and clinical efficiencies. The mission of our United Family Hospital network is to deliver top quality healthcare
services to the largest urban centers in China. Our target patient base includes the expatriate
communities and Chinas growing upper-middle class. Emphasizing the need for well-care (routine
visits in the absence of illness) and patient-centered care (involving the patient in healthcare
decisions), United Family Hospitals offer a full range of top-quality family healthcare services,
including 24/7 Emergency Rooms, ICUs and NICUs, operating rooms, clinical laboratory, radiology and
blood banking services for men, women and children. An international standard hospital not only
provides healthcare services at a level generally recognized and accepted internationally in the
developed world, but also manages the hospital according to generally accepted international
principles, such as transparency, infection control, medical records, patient confidentiality, peer
review, etc. The hospitals are staffed by a mix of Western and Chinese physicians and operate in
accordance with international hospital standards. Our facilities are also committed to community
outreach programs and offer healthcare education classes, including CPR, Lamaze, and Stress
Management. Both United Family Hospitals in Beijing and Shanghai are 50-bed models with affiliated
satellite clinics strategically located to expand geographical reach and service offerings into our
target patient markets. We maintain direct billing relationships with most insurers providing
coverage for the expatriate communities in Beijing and Shanghai. We are actively working to
facilitate development of a health insurance product that would provide top-tier coverage for the
local Chinese market. Services provided to patients without insurance are on a cash basis. Our expansion plans include the development of additional United Family Hospitals in target
cities in China including Xiamen and Guangzhou. In March of 2004 we announced that we had signed a
Letter of Intent with Xiamen Zhongshan Hospital for possible establishment of a hospital in the
city of Xiamen. Our plans also include the continued expansion of services in existing facilities
and the opening of additional affiliated satellite clinics. In addition, we are exploring the
possibility of marketing our hospital management expertise to third party facilities not owned and
operated by Chindex. All of these expansion plans depend on the availability of capital resources,
as to which there can be no assurances. Beijing United Family Hospital and Clinics  (BJU) The hospital is housed in a modern facility in the eastern section of Beijing, and features
seven 5-star birthing suites, three operating theaters, a medical  surgical inpatient ward, a
pediatric ward, two executive VIP suites, a NICU, an ICU, nursery, a clinical laboratory, extensive
digital diagnostic imaging equipment, a pharmacy, 24-hour emergency department and six outpatient
clinics. BJU completed a significant expansion development program in 2002 resulting in a doubling of
the hospitals capacity to its current size. In that year, we opened the first satellite clinic
affiliated with United Family hospitals; the Beijing United Family Clinic  Shunyi, or the Shunyi
Clinic. The Shunyi -5-




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Clinic is the only outpatient clinic located in the densely
expatriate-populated suburb of Shunyi County. It is also located near the International School of
Beijing. In June of 2005 we opened a second affiliated clinic in downtown
Beijing. The
opening of this facility completes the primary geographic coverage needed to access the full
expatriate community in Beijing. Two additional clinics aimed at projecting United Family Hospital
services into the more affluent Chinese neighborhoods are in the planning stages. BJU was the first officially approved healthcare joint venture to provide
international-standard healthcare services in China. It was formed as a contractual joint venture
between Chindex and the Chinese Academy of Medical Sciences with Chindex being entitled to 90% of
the profits of the enterprise. BJU received the initial national level approvals from the Chinese
Ministry of Health, or MOH, and Ministry of Foreign Trade and Economic Cooperation, or MOFTEC, in
1995. Shanghai United Family Hospital and Clinics  (SHU) In late 2001, Chindex received approval from the MOH and in early 2002 received approval from
MOFTEC to open a second hospital venture, Shanghai United Family Hospital and Clinics (SHU). This
second Chindex hospital is located in the Changning District of Shanghai, also a center of the
expatriate community. This facility is also a contractual joint venture undertaking. Our partner is
Changning District Central Hospital, with Chindex being entitled to 70% of the profits of the
enterprise. At the same time, we opened the Shanghai Racquet Club Clinic affiliated with SHU,
again geographically located in the expatriate residential district. Future affiliated clinics are
being planned for the Pudong area, the other affluent expatriate sector of the city. The
construction of SHU was interrupted by the SARS epidemic. When work resumed after the epidemic
significant changes were made in areas of infection control and sterilization in accordance with
the new regulations and standards that followed the SARS period. Competition In the sale of products by the Medical Capital Equipment Division, we compete with other
independent distributors in China that market similar products. In addition to other independent
distributors, we face more significant competition from direct distribution by established
manufacturers. In the medical products field we compete with General Electric Corporation, or GE,
which maintains its own direct sales force in China as well as selling through distributors. In
addition, since certain manufacturers, such as GE, market a wide variety of products under one
brand name in China to different market sectors, those manufacturers may be better able than we are
to establish name recognition across industry lines. For example, GE manufactures and markets
other electrical products in China as well as other medical instruments not sold by us. We believe
that GE, Phillips and Toshiba are the largest such direct competitors in the medical products
field. In the sales and distribution of off-the-shelf medical products and consumables, our sales,
marketing and logistical distribution networks also compete with similar distribution operations of
other independent distributors, both foreign and Chinese, joint ventures and foreign manufacturers.
In addition, the products themselves supplied by us to the China market compete with similar
products of foreign, joint venture and domestic manufacturers. Our competitive position for
product sales depends in part upon our ability to attract and retain qualified personnel in sales,
technical and administrative capacities. In addition, many of our various competitors have greater
resources, financial or otherwise, than we do. At the present time, there are no Western-owned hospitals in Beijing that compete with Beijing
United Family Hospital in catering to the expatriate diplomatic and affluent local Chinese markets.
Although there are several foreign invested hospitals in Shanghai, these hospitals are focused on
a different demographic segment than Shanghai United Family Hospital and do not pose a competitive
threat in terms of drawing potential SHU patients away. There are, however, several
Western-operated -6-




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##### 



clinics and a variety of foreign-invested joint ventures that provide outpatient
services in both Beijing and Shanghai. Employees At March 31, 2005, the Company had 1,003 full-time salaried employees. Of these, 985 are in
China and Hong Kong. Of the full-time personnel in China and Hong Kong, 112 are expatriates and
873 are Chinese or third country nationals. Of our non-U.S. based full-time employees, 569 are
employed by the United Family Hospitals and Clinics. Internet Information and SEC Documents Our Internet site is located at www.chindex.com. Copies of our reports and amendments thereto
filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including Annual
Reports filed on Form 10-K, Quarterly Reports filed on Form 10-Q and Current Reports filed on Form
8-K may be accessed from the Companys website, free of charge, as soon as reasonably practicable
after we electronically files such reports with, or furnishes such reports to, the Securities and
Exchange Commission (SEC). The information found on our Internet site is not part of this or any
other report or statement Chindex files with or furnishes to the SEC. ITEM 2. PROPERTIES Our representative headquarters in China are located at a newly renovated facility in Beijing.
Our prior facility was designated for redevelopment in 2002 and, accordingly, we moved into new
space in mid-2002. We have a ten-year lease for this new space. We also lease regional offices in
the Chinese cities of Shanghai, Guangzhou and Tianjin. Our executive and administrative offices are
located in Bethesda, Maryland, which provides access to nearby Washington, D.C. These facilities
are used by corporate administration, the Medical Capital Equipment Division and the Healthcare
Products Distribution Division. We also lease a four-story building of approximately 52,000 square feet in Beijing for Beijing
United. This lease expires in 2010. In 1998, the Hospital entered into a lease for the building
housing the dental clinic. This lease also expires in 2010. We initially renovated the first two
floors of the main building for Beijing United Family Hospital. We had subleased the remaining two
floors until the end of 2001, when the tenant moved out of the space, allowing the hospital to
renovate the space for hospital use. This renovation was completed in 2002. This facility is used
by the Healthcare Services Division. We have an 18-year lease for our new hospital facility in Shanghai. The lease is for a
four-story stand-alone building on the grounds of the Shanghai Changning District Central Hospital.
The building has approximately 54,000 square feet. This facility is used by the Healthcare
Services Division. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Part II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER REPURCHASES
OF EQUITY SECURITIES -7-




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Our common stock is listed on The NASDAQ SmallCap Market under the symbol CHDX. The following
table shows the high and low common stock closing prices as quoted on the Nasdaq SmallCap Market.
Such quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions. The closing prices below have been adjusted to give
effect to two two-for-one stock splits in the form of 100% stock dividends, the first of which was
in September 2003 and the second of which was in January 2004. High
    
    
    LowYear Ended March 31, 2004:First Quarter
    
    $
    5.10
    
    
    $
    2.12Second Quarter
    
    
    11.10
    
    
    
    5.05Third Quarter
    
    
    17.92
    
    
    
    8.23Fourth Quarter
    
    
    23.00
    
    
    
    9.54Year Ended March 31, 2005:First Quarter
    
    
    14.00
    
    
    
    9.05Second Quarter
    
    
    10.20
    
    
    
    6.21Third Quarter
    
    
    11.37
    
    
    
    7.40Fourth Quarter
    
    
    10.24
    
    
    
    6.15
 As of June 1, 2005, there were 42 record holders of our common stock and six record
owners of our Class B common stock. We have never declared or paid cash dividends on our common
stock. We currently intend to retain all available funds and future earnings, if any, for use in
the operation and expansion of our business and do not anticipate paying dividends in the
foreseeable future. We did not repurchase any shares of common stock in the fourth quarter of
fiscal 2005. Equity compensation plan information as of March 31, 2005 is as follows: (a)
    
    
    (b)
    
    
    (c)Number ofSecuritiesRemainingAvailableforNumber of
    
    
    
    
    
    
    Future IssuanceSecurities to Be
    
    
    
    
    
    
    UnderIssued Upon
    
    
    Weighted Average
    
    
    EquityExercise of
    
    
    Exercise
    
    
    CompensationOutstanding
    
    
    Price of Outstanding
    
    
    Plans (excludingOptions,
    
    
    Options, Warrants
    
    
    securitiesWarrants and
    
    
    and
    
    
    reflected in columnPlan Category
    
    Rights
    
    
    Rights
    
    
    (a)Equity Compensation Plans
Approved By Security Holders1994 Stock Option and Grant Plan
    
    
    1,113,144
    
    
    $
    4.85
    
    
    
    76,8002004 Stock Option and Grant Plan
    
    
    0
    
    
    
    0
    
    
    
    500,000Approved By
Security Holders Equity Compensation Plans Not
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    1,113,144
    
    
    
    
    
    
    
    576,800
 -8-




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Other information required by this Item can be found in Note 5 Stockholders Equity. -9-




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PART II ITEM 6. SELECTED FINANCIAL DATA Three months endedYear ended March 31,
    
    
    March 31,
    
    
    Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001
    
    
    2000(unaudited)(in thousands, except for per share data)Statement of Operations DataNet sales
    
    $
    100,775
    
    
    $
    88,183
    
    
    $
    21,849
    
    
    $
    15,578
    
    
    $
    70,617
    
    
    $
    56,118
    
    
    $
    45,064Percent increase over prior
period
    
    
    14
    %
    
    
    25
    %
    
    
    40
    %
    
    
    47
    %
    
    
    26
    %
    
    
    25
    %
    
    
    21
    %(Loss) income from operations
    
    
    (5,458
    )
    
    
    (1,590
    )
    
    
    222
    
    
    
    (293
    )
    
    
    183
    
    
    
    (419
    )
    
    
    116Other (expenses) income
    
    
    (257
    )
    
    
    (111
    )
    
    
    (66
    )
    
    
    (12
    )
    
    
    (126
    )
    
    
    726
    
    
    
    664Net (loss) income before income
taxes
    
    
    (5,715
    )
    
    
    (1,923
    )
    
    
    156
    
    
    
    (305
    )
    
    
    19
    
    
    
    307
    
    
    
    780Benefit from (provision for)
income taxes
    
    
    57
    
    
    
    (64
    )
    
    
    (80
    )
    
    
    113
    
    
    
    240
    
    
    
    77
    
    
    
    (139
    )Net (loss) income
    
    
    (5,658
    )
    
    
    (1,987
    )
    
    
    76
    
    
    
    (192
    )
    
    
    259
    
    
    
    384
    
    
    
    641Net (loss) income per share-basic
    
    
    (1.06
    )
    
    
    (.53
    )
    
    
    .02
    
    
    
    (.05
    )
    
    
    .07
    
    
    
    .10
    
    
    
    .17Net (loss) income per
share-diluted
    
    
    (1.06
    )
    
    
    (.53
    )
    
    
    .02
    
    
    
    (.05
    )
    
    
    .07
    
    
    
    .10
    
    
    
    .17Market closing price per share 
end of year
    
    
    6.18
    
    
    
    10.09
    
    
    
    2.00
    
    
    
    2.78
    
    
    
    1.86
    
    
    
    3.18
    
    
    
    1.53Book value per share at end of
period
    
    
    3.84
    
    
    
    3.89
    
    
    
    3.79
    
    
    
    3.65
    
    
    
    3.77
    
    
    
    3.71
    
    
    
    3.61Cash dividends declared
    
    
    .00
    
    
    
    .00
    
    
    
    .00
    
    
    
    .00
    
    
    
    .00
    
    
    
    .00
    
    
    
    .00Balance Sheet Data (at end of period):Total assets
    
    $
    57,288
    
    
    $
    47,851
    
    
    $
    42,340
    
    
    $
    32,859
    
    
    $
    43,126
    
    
    $
    33,369
    
    
    $
    36,498Long term liabilities
    
    
    2,873
    
    
    
    125
    
    
    
    3,734
    
    
    
    0
    
    
    
    3,609
    
    
    
    0
    
    
    
    0Total stockholders equity
    
    
    24,963
    
    
    
    17,198
    
    
    
    14,044
    
    
    
    13,497
    
    
    
    13,968
    
    
    
    13,611
    
    
    
    13,235
 Three months endedYear ended March 31,
    
    
    March 31,
    
    
    Year ended December 31,2005
    
    
    2004
    
    

    2003
    
    
    2002
    
    
    2002
    
    
    2001
    
    
    2000(unaudited)Segment information:Medical Capital Equipment-sales
    
    $
    42,957
    
    
    $
    33,836
    
    
    $
    7,716
    
    
    $
    6,653
    
    
    $
    28,708
    
    
    $
    25,819
    
    
    
    *Medical Capital Equipment
-gross margin percent
    
    
    26
    %
    
    
    28
    %
    
    
    32
    %
    
    
    22
    %
    
    
    27
    %
    
    
    29
    %
    
    
    *Medical Capital Equipment
operating (loss) income
    
    
    (11
    )
    
    
    (269
    )
    
    
    521
    
    
    
    (174
    )
    
    
    198
    
    
    
    439
    
    
    
    *Healthcare Products
Distribution-sales
    
    
    35,017
    
    
    
    38,393
    
    
    
    10,663
    
    
    
    6,126
    
    
    
    28,946
    
    
    
    21,520
    
    
    
    *Healthcare Products
Distribution-gross margin
percent
    
    
    12
    %
    
    
    12
    %
    
    
    10
    %
    
    
    12
    %
    
    
    13
    %
    
    
    13
    %
    
    
    *Healthcare Products
Distribution-operating loss
    
    
    (2,603
    )
    
    
    (641
    )
    
    
    (121
    )
    
    
    (161
    )
    
    
    (601
    )
    
    
    (1,316
    )
    
    
    *Healthcare Products-sales
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    $
    39,049Healthcare Products-gross
margin percent
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    24
    %Healthcare Products-operating
(loss) income
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    (66
    )Healthcare Services-sales
    
    
    22,801
    
    
    
    15,954
    
    
    
    3,470
    
    
    
    2,799
    
    
    
    12,963
    
    
    
    8,779
    
    
    
    6,015Healthcare Services-operating
(loss) income
    
    
    (2,844
    )
    
    
    (680
    )
    
    
    (178
    )
    
    
    42
    
    
    
    586
    
    
    
    458
    
    
    
    218
 
 *
    
    We expanded to three segments in 2002 and restated 2001. We changed our fiscal
year end to March 31 as of 2004. -10-




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##### 



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOverview Chindex International, Inc. is a Delaware corporation with headquarters located in the
Washington, D.C. metropolitan area. We were founded in 1981 and currently are an American provider
of healthcare products and services to China, including Hong Kong. We operate in three business
segments:  
    
    Medical Capital Equipment Division.This division markets, sells and
facilitates the export of select capital healthcare equipment and instrumentation to
China on the basis of both exclusive and non-exclusive agreements with the
manufacturers of these products. We believe, based on our knowledge and experience in
the Chinese healthcare system, that we are the largest independent U.S. distributor of
healthcare equipment in China. For the fiscal year ended March 31, 2005, the Medical
Capital Equipment Division accounted for 43% of our revenue.
    
    Healthcare Products Distribution Division.This division, through a
network of wholly owned foreign subsidiaries in China, imports and distributes
off-the-shelf healthcare instrumentation and health-related consumable products
developed by third parties. For the fiscal year ended March 31, 2005, the Healthcare
Products Distribution Division accounted for 35% of our revenue.
    
    Healthcare Services Division.This division operates our private hospitals
and clinics. Beijing United Family Hospital and Clinics (BJU) opened in 1997 and
Shanghai United Family Hospital and Clinics (SHU) opened at the end of 2004. We have
opened satellite clinics associated with our hospitals in both Beijing and Shanghai.
For the fiscal year ended March 31, 2005, the Healthcare Services Division accounted
for 22% of our revenue. Substantially all of our 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 Medical Capital Equipment Division and Healthcare Products Distribution Division are
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. The timing of
sales of such equipment may depend on the timing of our customers ability to arrange for credit
sources. Further, because we recognize revenue and expenses relating to certain contracts as such
products are shipped, the timing of shipments, among other things, affects our operating results
for a particular period. 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 -11-




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##### 



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 degrees of judgment than others in their
application. These include revenue recognition, receivable collectibility and income tax
recognition of deferred tax items. In addition, Note 1 to the Consolidated Financial Statements
includes further discussion of our significant accounting policies. Revenue recognition Sales of equipment and healthcare products are recognized upon product shipment. We provide
installation, warranty, and training services for certain of our capital equipment 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, after-sale servicing and warranty are
not significant and are recognized in cost of sales as they are incurred. The estimated cost for
training services is accrued upon shipment. Revenue related to services provided in our Healthcare Services segment is recognized in the
period services are provided. Revenue includes an estimate of services at the end of the period
for patients who have not completed service. Costs associated with such services are recognized in
the period incurred. Receivable collectibility We grant credit to some customers in the ordinary course of business. We evaluate
collectibility of accounts receivable periodically and adjust our allowance for doubtful accounts
accordingly. Bad debts are experienced predominately in the Healthcare Services business and to a
lesser extent in the Medical Capital Equipment business. We have experienced few losses in the
Healthcare Products Distribution business. We incurred bad debt expense in healthcare services of $920,000, $777,000 and $118,000 in the
years ended March 31, 2005 and 2004, and three months ended March 31, 2003, respectively and
$508,000 in the remaining two divisions only for the year ended March 31, 2005. In addition, we
increased the reserve for doubtful accounts from $1,131,000 at March 31, 2004 to $1,851,000 at
March 31, 2005 as the result of a detailed review of accounts receivable. 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 in the year ended March 31, 2005 because we are not able
to conclude that it is more likely than not that those assets will be realized. We released
deferred tax valuation allowances totaling $660,000 in the year ended December 31, 2002 based on
assessments in those years that it was more likely than not that we would be able to use our U.S.
federal net operating loss carryforwards. Certain of these benefits were realized in tax filings
for the period ended March 2003. These U.S. net operating loss carryforwards do not expire before
2024. -12-




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##### 



Fiscal year ended March 31, 2005 compared to fiscal year ended March 31, 2004 General Our revenue for 2005 was $100,775,000, up 14% from 2004 revenue of $88,183,000. We
experienced continued revenue growth in the medical capital equipment and healthcare services
segments, with revenue growth of 27% in the medical capital equipment segment and 43% in the
healthcare services segment, as compared to the prior year. We experienced a 9% decrease in
revenue over the prior year in our healthcare products distribution segment, the reasons for which
are discussed below. Costs and expenses were $106,233,000 for fiscal 2005 as compared with costs
and expenses of $89,773,000 for fiscal 2004. The increased costs in particular segments are
discussed below. In general, however, greater than anticipated increased costs were experienced
principally in the healthcare services segment in connection with the expansion of hospital
services in Beijing and the commencement of services in Shanghai and to a lesser extent in the
other two segments. We recorded a net loss of $5,658,000 for fiscal 2005, as compared to a net loss
of $1,987,000 for fiscal 2004. There were a number of increased costs at the parent level of the
Company, including significant increases related to local entity excise taxes and increased
corporate governance, including in general Sarbanes-Oxley compliance and in particular preparation
for compliance with section 404 thereof and an increase in our allowance for doubtful accounts.
The largest parent level increases, which have been allocated among the segments as described
below, include increased payroll of $447,000 and increased professional fees of $118,000 both
substantially related to compliance and corporate reporting, increased excise taxes of $221,000,
and increased rent of $249,000. Our business operations in fiscal 2006 will focus on cost reduction programs at the corporate
level and cost containment programs at the operating division level. We expect continued growth
generally in line with levels achieved in 2005 in the medical capital equipment and healthcare
services segments. We have reorganized certain hospital product offerings in the healthcare
products distribution division and have initiated a search for a strategic partner in the retail
pharmacy business unit of that segment. Medical Capital Equipment Segment The medical capital equipment segment exports high quality Western medical capital equipment
to the China market. In fiscal 2005, this segment had revenue of $42,957,000, a 27% increase over
revenue of $33,836,000 in fiscal 2004. The revenue increase reflects the continued development of
and revenue from new sales channels for our capital medical equipment, involving greater use of
local Chinese sub-distributors, as well as the fact that SARS was a significant negative factor in
the prior year. Finally, the addition of a new range of medium-priced ultrasound products from
Siemens enabled us to penetrate new market segments, thus helping to increase sales. Gross profit for the medical equipment segment in fiscal 2005 increased to $11,381,000 from
$9,427,000 in fiscal 2004, and as a percentage of revenue was 26% in the recent year as compared to
28% in the prior year. The reduction in gross profit margin is a function of the increased use of
channel sales, (i.e. sales through Chinese subdistributors) where the available commission to the
Company is slightly less than in a direct sale. Sales under government backed financing
arrangements also are made at lower gross profit margins and the gross profit margin may trend
downward in those periods where we have significant loan and channel sales. Expenses for the medical capital equipment segment in fiscal 2005 increased to $11,392,000
from $9,696,000 in the twelve months ended March 31, 2004 and, as a percentage of revenue over the
periods, decreased to 27% from 29%. Salaries for the segment in fiscal 2005 increased by $585,000
over fiscal 2004, and as a percentage of revenue was 10% compared to 11% for the twelve months
ended March 31, 2004. Other costs increased $1,111,000 over the periods, primarily due to the
segments allocated portion of additional parent-level administrative expenses and bad debt
expenses. The segment had a loss -13-




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##### 



from operation of $11,000 in the recent period, compared with a
loss from operations of $269,000 in the prior period. In fiscal 2006 the medical capital equipment segment will focus on cost containment and
expansion of market penetration primarily through continuing growth in the use of local
subdistributor networks. We will also intend to continue to add new products and technologies to
our offerings. Healthcare Products Distribution Segment The healthcare products distribution segment distributes medical consumables and healthcare
products from inventories maintained locally in China to a network of sub-dealers and pharmacies on
a local currency basis. In fiscal 2005, this segment had a decrease in revenue of 9% to
$35,017,000 as compared to revenue of $38,393,000 in fiscal 2004. The decrease in revenue during
the recent period was attributable to faster than expected phase-out of third party logistics
services, the readjustment of distribution territories by a large supplier and delays in the
program for the rollout of additional branded products in the retail pharmacy business. Gross profit in fiscal 2005 decreased to $4,101,000 from $4,788,000 in the twelve months ended
March 31, 2004. As a percentage of revenue, gross profit from the healthcare products distribution
segment for the current year was 12%, approximately the same percentage as in the prior year. We
encountered increased pricing pressures from our current suppliers and thus did not realize the
expected increase in gross profit margin. In addition, with respect to our retail product sales
through Chinese pharmacies, as part of the annual distributor agreement review process, effective
January 1, 2005 our territory for one large supplier was significantly reduced. Although, as
noted above, this reduction led to decreased revenues in the current period, going forward we
intend to offset this decrease to a significant extent with an increase in the number of pharmacy
outlets covered in the retained provinces based on our suppliers announced intention to expand
market penetration. Expenses for the healthcare products distribution segment in fiscal 2005 increased to
$6,704,000 from $5,429,000 in fiscal 2004, and increased to 19% as a percentage of revenue as
compared to 14% for prior period. Salaries for the segment increased $279,000 primarily due to the
timing of payment of bonuses to employees. In addition, other expenses increased $996,000,
primarily due to the segments allocated portion of additional parent-level administrative costs,
increased promotion expenses of $268,000 and bad debt expense. The segment had a loss from
operations of $2,603,000 in the recent period, compared with a loss from operations of $641,000 in
the prior period. In fiscal 2006 the healthcare products distribution segment will focus on cost containment and
strategic positioning of the retail pharmacy business unit. We have begun exploring opportunities
to diversify our supplier base through strategic relationships with other potential business
partners. Healthcare Services Segment During fiscal 2005, the healthcare services segment consisted of an international standard
private healthcare facility, Beijing United Family Hospital and Clinics (BJU), an affiliated
satellite clinic in Beijing, our new hospital in Shanghai, Shanghai United Family Hospital and
Clinics (SHU), and a clinic affiliated with SHU. For the first nine months of fiscal 2005, SHU was in development. SHU received its operating
license from the Chinese government on October 19, 2004 and held its opening ceremony on October
21, 2004. SHU was considered fully operational as of January 1, 2005 when inpatient services
began. Development costs related to SHU were $2,044,000 for the nine month period, an increase from
$780,000 in fiscal 2004. For fiscal 2005, the revenue from the segment was $22,801,000, an increase of 43% over fiscal -14-




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2004 revenue of $15,954,000. The increased revenues were primarily attributable to growth in
patient volumes partially due to increased services in the Beijing market and to a lesser degree
the opening of the new facility in Shanghai. During the prior year the hospital was significantly
impacted by the SARS crisis in Beijing, which was principally responsible for the loss in that
year. Healthcare services operating costs increased for fiscal 2005 to $23,601,000, a 49%
increase over fiscal 2004 costs of $15,854,000. Salaries increased by $4,830,000 (salaries were
58% and 53% of revenue for fiscal years 2005 and 2004, respectively). These increases were due
primarily to the costs associated with increased services offered, the period of preparation for
JCI accreditation at the BJU facility and three months opening of the Shanghai facilities.Other
costs increased $2,917,000, primarily due to increases in direct patient care expenses, other
professional fees, excise taxes and depreciation. The healthcare services segment had a loss from
operations of $2,844,000 (including $2,044,000 of development expenses) in fiscal 2005, compared
with a loss from operations of $680,000 (including $780,000 of development expenses) in the prior
year. In fiscal 2006 the healthcare services segment will focus on cost containment and continued
growth in both the Beijing and Shanghai markets. Subject to the availability of capital, we will
continue to ramp-up operations in Shanghai, expand services at all facilities and open a new
affiliated satellite clinic in Beijing. We also expect to receive JCI accreditation for our main
facility in Beijing during the year. Other Income and Expenses Interest expense incurred on short-term capitalized leases of $189,000, short-term debt of
$2,839,000, long-term capitalized leases of $124,000 and long-term debt of $2,749,000 amounted to
$318,000 whereas we had $249,000 in the prior period. Interest expense of $229,000 for the current
period is net of $89,000 of capitalized interest. The long-term debt is for the development of SHU
(see Liquidity and Capital Resources). There was no capitalized interest in the prior year
because no substantial borrowings had occurred. Taxes We recorded a $57,000 benefit from taxes in fiscal 2005 as compared to a provision for taxes
of $64,000 for fiscal 2004. Our deferred tax asset increased by $1,871,000. We also recorded an
additional valuation allowance of $1,670,000 that relates primarily to the China operations. The
valuation allowance was recorded due to the conclusion that the realization of the tax benefit is
currently unknown for the China operations. The remaining tax benefit of $201,000 was recorded for
the US operations. This tax computation is in accordance with current accounting standards but
assumes a certain level of future profitability. We believe the recognition of the $201,000 in
deferred tax assets properly recognizes the benefits we have achieved as a result of our tax
restructuring and expect to utilize a substantial portion of the loss carry-forward benefit in
fiscal years 2006 and 2007. We have provided a 100% valuation allowance on deferred tax benefits
related to losses incurred at Shanghai United, since it has no operating history to support a
conclusion that realization of the tax benefit is more likely than not. Fiscal 2004 compared to twelve months ended December 31, 2002 General Our revenue for fiscal 2004 was $88,183,000, up 25% from the twelve months ended December 31,
2002 revenue of $70,617,000. We experienced continued revenue growth in each of the three segments
of the business, with revenue growth of 18% in the medical capital equipment segment, 33% in the
healthcare products distribution segment, and 23% in the healthcare services segment, compared to
the twelve months ended December 31, 2002. The growth in revenue in the medical capital equipment
and healthcare products distribution segments was primarily a result of increased marketing and
sales -15-




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##### 



efforts and expense. The growth in revenue in the healthcare services segment was primarily
a result of expanded services offered at Beijing United, including the addition of staff to support
those services. Costs and expenses were $89,773,000 for fiscal 2004 as compared with costs and
expenses of $70,434,000 for the twelve months ended December 31, 2002. We recorded a net loss of
$1,987,000 for fiscal 2004, as compared to net income of $259,000 for the twelve months ended
December 31, 2002. Each of our three segments experienced an operating loss in fiscal 2004. We
believe that there are three principal reasons for the loss from operations for the fiscal year.
First, the fiscal year was marked by the extraordinary experience of dealing with Severe Acute
Respiratory Syndrome (SARS), which had a significant negative impact in a variety of ways on our
business. Normal Beijing business activity came to a near standstill resulting in the delay of
contract negotiations for the sale of medical capital equipment and hospital visits were far below
our expectations as foreign residents in Beijing left the capital. Second, the lack of
government-sponsored loan programs in the period also adversely impacted the volume of our sales.
Third, we continued to incur operational expenses in connection with SHU, while the opening of that
hospital was delayed due to a number of factors. Cost increases for the segments are discussed
below. There were a number of increased costs at our parent level, including for an upgrade of our
data systems in China and new offices in Beijing. The largest parent level increases, which have
been allocated among the segments as described below, include increased payroll of $163,000,
increased professional fees of $117,000, increased accounting and legal fees of $82,000, and
increased rent of $136,000. Medical Capital Equipment Segment The medical capital equipment segment exports high quality Western medical capital equipment
to the China market. In fiscal 2004, this segment had revenue of $33,836,000, an 18% increase over
revenue of $28,708,000 in the twelve months ended December 31, 2002. Loss from operations was
$269,000 in fiscal 2004 compared with income from operations of $198,000 in the twelve months ended
December 31, 2002. Gross profit in fiscal 2004 increased to $9,427,000 from $7,822,000 in the twelve months ended
December 31, 2002. Gross profit margin for the medical capital equipment segment for the recent
fiscal year was 28% as compared to 27% in the prior period. Expenses for the medical capital
equipment segment in fiscal 2004 increased to $9,696,000 from $7,624,000 in the twelve months ended
December 31, 2002 and, as a percentage of revenue over the periods, increased to 29% from 27%.
Payroll for the segment in fiscal 2004 increased by $864,000 over payroll in the twelve months
ended December 31, 2002, and as a percentage of revenue was 11% compared to 10% for the twelve
months ended December 31, 2002. The payroll increase was primarily due to increased sales
personnel in connection with expanding the marketing of the segments products. In addition,
travel and entertainment expenses for the segment increased $428,000. Other costs increased
$781,000 over the periods, primarily due to the segments allocated portion of additional
parent-level administrative expenses and higher costs for new customs fees related to parts
purchases, promotion, meeting expenses and telephones. Healthcare Products Distribution Segment The healthcare products distribution segment, consisting of medical consumables and personal
healthcare products, had revenue growth of 33% to $38,393,000 fiscal 2004, as compared to revenue
of $28,946,000 in the twelve months ended December 31, 2002. The segment had a loss from
operations of $641,000 in the recent fiscal year, compared with a loss from operations of $601,000
in the twelve months ended December 31, 2002. We anticipate that revenue growth in this segment
will be slower as several customers contemplate and effectuate direct sales and new products are
subjected to an increasingly formalized Chinese regulatory process. For example, one significant
client, Becton-Dickenson, had recently established a subsidiary in China that performs the
logistical services previously performed by our healthcare products distribution division. Another
client, Guidant, established a similar subsidiary in China. This transition away from lower margin
logistical services is consistent with the divisions strategy of prioritizing higher margin
business. With respect to delays in the Chinese -16-




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regulatory process, the launch of new products
required longer lead times, due to the fact that Chinas regulatory environment is becoming more
professional, bureaucratic and transparent, resulting in longer regulatory cycle time. During the
regulatory approval process, some products that the division planned to launch encountered delays.
The divisions local currency sales of medical consumables and personal healthcare products are
made from inventories maintained locally in China (see Foreign Currency Exchange and Impact of
Inflation) to a network of sub-dealers and pharmacies. Gross profit in fiscal 2004 rose to $4,788,000 from $3,856,000 in the twelve months ended
December 31, 2002. Gross profit margin from the healthcare products distribution segment decreased
to 12% for the 2004 fiscal year from 13% for the twelve months ended December 31, 2002. Expenses for the healthcare products distribution segment in fiscal 2004 increased to
$5,429,000 from $4,457,000 in the twelve months ended December 31, 2002, but decreased to 14% as a
percentage of revenue as compared to 15% for the twelve months ended December 31, 2002. Payroll
for the segment increased $281,000 primarily due to increased staff compensation. In addition,
travel and entertainment expense for the segment was relatively unchanged while other costs
increased $694,000, due primarily to the segments allocated portion of additional parent-level
administrative costs, increased other professional fees of $221,000 and $163,000 in promotion. Healthcare Services Segment The healthcare services segment consists of two Western style primary care hospitals, Beijing
United Family Hospital and Clinics (BJU) and Shanghai United Family Hospital and Clinics (SHU),
which continued to be under construction, as well as an affiliated satellite clinic in Beijing.
For fiscal 2004, the
revenue from this segment was $15,954,000, an increase of 23% over the twelve months ended
December 31, 2002 revenue of $12,963,000. The segment had a loss from operations of $680,000 in
the recent fiscal year, compared with income from operations of $586,000 for the twelve months
ended December 31, 2002. During the recent fiscal year, the hospital was significantly negatively
impacted by the SARS crisis in Beijing. Many of BJUs expatriate patients left the country and
many others deferred visits during the April to August period. Healthcare services costs increased
for fiscal 2004 to $16,634,000, a 34% increase over the twelve months ended December 31, 2002 costs
of $12,377,000. This increase was due primarily to the costs associated with adding to BJU
dermatology services and an intensive care unit plus $780,000 of operating expenses of the not yet
open SHU facility. Payroll increased by $2,181,000 (payroll was 55% of revenue for fiscal 2004 and
50% for the twelve months ended December 31, 2002), with all other costs increasing a total of
$2,027,000, including increases of $679,000 in bad debt accounts, $437,000 in other professional
fees and $193,000 in depreciation. During fiscal 2004, in the process of the ongoing roll-out of
our new clinical and financial reporting systems throughout this segment, we completed a review of
all accounts receivable reflected on our predecessor systems. The increase in our bad debt
accounts over periods is primarily based on our determinations in that review that certain patients
and/or responsible parties had departed China or otherwise practically became unreachable. The
rollout of our new systems also impacted our allowance for doubtful accounts. In addition to our
normal reviews, the review of all accounts in connection with the roll-out resulted in an increase
in our allowance for doubtful accounts from $883,000 at December 31, 2002 to $1,131,000 at March
31, 2004. Our new systems are designed to better monitor our accounts receivable aging. The opening of SHU, which was originally scheduled for the fall of 2003, did not occur until
the fall of 2004. The delay in opening the new hospital was due to a number of factors. During
the SARS epidemic, travel between Beijing and Shanghai was very difficult and proved a major
disruption in the schedule. After the SARS experience ended, we decided to reevaluate the SHU
design in light of lessons learned during the epidemic. As a result of this reevaluation, a number
of specific design changes were made, such as adding a fever clinic, changing the air conditioning
system and increasing the number of rooms where negative pressure could be utilized. -17-




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Loss on Equity Investment We recorded an additional equity investment loss of $222,000 in fiscal year 2004, which
represents our pro-rata share of additional capital for Natural Formula Asia (NFAL), a joint
venture in which we have a 40% interest. The joint venture purchases various cosmetics made by
Nesh, an Israeli cosmetics manufacturer, and sells such products into China through pharmacy
channels developed by us. Our investment is in the form of a loan to the joint venture. The loan,
which was accrued but not yet executed as of March 31, 2004, bears interest at the rate of 5%
commencing May 15, 2004, has no stated maturity date and may be prepaid. We reported a loss of
$38,000 for this venture in the year ended December 31, 2002. Other Income and Expenses Interest expense on short-term capitalized leases of $123,000, short-term debt of $5,668,000
and long-term capitalized leases of $125,000 amounted to $249,000 whereas we had $54,000 the prior
period. Over $2,900,000 of short-term debt is for the development of SHU that is currently under
construction (see Liquidity and Capital Resources). Taxes We recorded a $64,000 provision for taxes in fiscal 2004 as compared to a benefit from taxes
of $240,000 for the twelve months ended December 31, 2002. Our deferred tax asset increased by
$909,000. This tax computation is in accordance with current accounting standards but assumes a
certain level of future profitability. We believe this properly recognizes the benefits we have
achieved as a result of our tax
restructuring and expect to utilize a substantial portion of the loss carry-forward benefit in
fiscal years 2005 and 2006. We have provided a 100% valuation allowance on deferred tax benefits
related to development expenses incurred at Shanghai United, since it has no operating history to
support a conclusion that realization of the tax benefit is more likely than not. Three months ended March 31, 2003 compared to three months ended March 31, 2002 (transition) Our revenue for the three months ended March 31, 2003 was $21,849,000, up 40% from the three
months ended March 31, 2002 revenue of $15,578,000. We experienced continued growth in each of the
three segments of the business, with revenue growth of 16% in the medical capital equipment
segment, 74% in the healthcare products distribution segment, and 24% in the healthcare service
segment, compared to the same period last year. We recorded net income of $76,000 for the three
months ended March 31, 2003, as compared to a net loss of $192,000 for the three months ended March
31, 2002. Medical Capital Equipment Segment In the three months ended March 31, 2003, the medical capital equipment segment had revenue of
$7,716,000, a 16% increase over revenue of $6,653,000 in the three months ended March 31, 2002.
Income from operations was $521,000 in the recent period compared with a loss from operations of
$174,000 in the prior period. Gross profit in the three months ended March 31, 2003 increased to $2,474,000 from $1,439,000
in the three months ended March 31, 2002. Gross profit margin for this segment for the recent
period was 32% as compared to 22% in the prior period. The increase in gross profit margin is
primarily attributable to two factors. First, we had made this a priority for our sales staff and
instituted additional reporting and reviewed margin issues on a contract-by-contract basis.
Accordingly, where a salesperson might previously have been inclined to accept an offer from a
customer to purchase our equipment at a less than optimum margin, the salesperson knew that the
contract would be reviewed critically once it was brought back to our senior review staff. This
created an additional incentive for the salesperson to seek better pricing from the customer.
Second, in the recent period there were no loan program sales, which typically are at a lower gross
margin because we are not required to provide warranty service. Thus, in periods -18-




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##### 



where there are
loan program sales, such as the three months ended March 31, 2002, the average gross profit margin
is often lower because of the inclusion of these lower-margin loan sales in the mix. Further, to
the extent, as we intend, that in future periods a larger portion of sales are made through
sub-dealers, which are local Chinese distributors, then our gross profit margin may be
proportionately lower. Sub-dealers represent an additional layer in the distribution process and
their compensation reduces our profit. They purchase our products and resell them to customer
hospitals. We cannot yet quantify the impact such increase might have or the extent thereof and
the related cost cannot as yet be determined. Expenses for the medical capital equipment segment in the three months ended March 31, 2003
increased to $1,953,000 from $1,609,000 in the three months ended March 31, 2002 and as a
percentage of revenue over the periods increased to 25% from 24%. Salaries for the segment in the
three months ended March 31, 2003 increased by $238,000 from the three months ended March 31, 2002,
and as a percentage of revenue over the periods increased to 11% from 9%. The salary increase was
primarily due to increased payroll benefits mandated by the Chinese government and increased
commissions. In addition, travel and entertainment expenses for the segment decreased $11,000.
Other costs increased $101,000 over the periods, primarily due to additional administrative
expenses offset by lower costs for exhibitions. Healthcare Products Distribution Segment The healthcare products distribution segment had revenue growth of 74% to $10,663,000 in the
three months ended March 31, 2003, as compared to revenue of $6,126,000 in the three months ended
March 31, 2002. The segment had a loss from operations of $121,000 in the recent period, compared
with a loss from operations of $161,000 in the prior period. The large revenue growth over the
periods is attributed 26% to a temporary arrangement with an existing client to handle part of
their product line that we had not previously handled and that we will not handle in the future.
The remaining 48% increase in revenue was caused by growth across multiple product lines resulting
from strong demand for healthcare and consumer products by our Chinese customers as well as our
strong competitive position and management. Gross profit in the three months ended March 31, 2003 rose to $1,097,000 from $767,000 in the
three months ended March 31, 2002. Gross profit margin from the healthcare products segment for
the recent period was 10% as compared to 12% in the prior period. The decrease in gross profit is
primarily attributable to the low margin non-recurring sale mentioned above. Expenses for the healthcare products distribution segment in the three months ended March 31,
2003 increased to $1,218,000 from $928,000 in the three months ended March 31, 2002, but decreased
as a percentage of revenue over the periods to 11% from 15%. Payroll for the segment increased
$151,000 primarily due to increased staff compensation. In addition, travel and entertainment
expense for the segment increased $6,000 (but was flat at 1% of revenue for both periods) and other
costs increased $134,000 due primarily to increased promotion expense and costs relating to
facilities. Healthcare Services Segment For the three months ended March 31, 2003, the revenue from this segment was $3,470,000, an
increase of 24% over the three months ended March 31, 2002 revenue of $2,799,000. The segment had
a loss from operations of $178,000 in the recent period, compared with income from operations of
$42,000 in the prior period. During the recent period, the hospital completed the $2.6 million
expansion of its Beijing facility, which contributed to increased patient visits as well as
increased inpatient stays over the periods. Total inpatient days in the hospital increased to 669
in the three months ended March 31, 2003 from 518 in the three months ended March 31, 2002, an
increase of 29%. For outpatient clinic visits, total clinic visits increased to 13,152 in the
three months ended March 31, 2003, from 12,200 for the three months ended March 31, 2002, an
increase of 8%. Healthcare services costs increased 32% over the periods from $2,757,000 to
$3,648,000. This increase was due primarily to the costs associated with -19-




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expanded services
offered. Payroll increased by $452,000 (payroll was 56% and 54% of revenue for the three months
ended March 31, 2003 and 2002, respectively), with all other costs increasing $445,000, including
increases of $186,000 in development expenses related to SHU, $90,000 in doubtful accounts reserve,
$134,000 in professional fees and $90,000 in rent expense. Other Income and Expenses Interest expense on short-term debt of $696,000 and long term debt of $3,734,000 amounted to
$51,000 whereas we had little expense in the prior period. The long-term debt relates to the
development of SHU that is currently under construction (see
Liquidity and Capital Resources). Taxes We recorded an $80,000 provision for taxes for the three months ended March 31, 2003 as
compared to a benefit from taxes of $113,000 for the three months ended March 31, 2002. Liquidity and Capital Resources As of March 31, 2005, our cash and cash equivalents, net accounts receivable and net
inventories were $8,173,000, $15,826,000 and $10,856,000, respectively, as compared to $6,791,000,
$17,374,000 and $10,363,000, respectively, as of March 31, 2004. As of March 31, 2005, our short-term loan payable was comprised entirely of bank loans of
$2,839,000. BJU has a short-term financing arrangement in China with the Hong Kong and Shanghai
Banking Corporation (HSBC) for $600,000 in revolving loans bearing interest at 1.5% over the
three-month Singapore Interbank Money Market Offer Rate (SIBOR). Also, a line of credit is included
in the arrangement with HSBC for up to $1,200,000, bearing interest at 2.25% over SIBOR and having
a term of up to three years. As of March 31, 2005, the balances on these credit lines were $600,000
and $603,000, respectively. The remaining $1,636,000 of short-term loan payable is the current
portion of a $4 million loan facility for SHU with HSBC. We opened our hospital facility in Shanghai in October 2004, the cost of which was financed
through (i) vendor financing (ii) local bank borrowings and (iii) proceeds of the sale of 1.5
million shares of common stock and warrants. The local bank borrowing for SHU consists of the $4
million loan facility with HSBC referenced above, which was fully utilized during calendar 2004.
Of this loan, in addition to the $1,636,000 that is classified as short-term, $2,006,000 is
classified as long-term. The long-term facility has a five-year term and an interest rate of 2.5%
over the six month SIBOR. We have guaranteed the full amount of the HSBC facilities. As of March 31, 2005, letters of credit in the aggregate amount of approximately $141,000 were
outstanding and we had no borrowings outstanding under our $1,750,000 credit facility with M&T
Bank, which remains available. The borrowings under the credit facility bear interest at 1% over
the three-month London Interbank Offered Rate (LIBOR). In fiscal 2005, we also received a portion of the net proceeds of a sale of 1.5 million shares
of common stock and warrants to purchase 300,000 shares at an exercise price of $9.00 per share,
which proceeds were received on March 31, April 1 and May 5, 2004 (the 2004 Private Placement).
Although the total net proceeds from the 2004 Private Placement were approximately $12.1 million,
the amount received in fiscal 2005 was approximately $7.2 million. Such net proceeds were used to
repay a portion of our vendor financing, for capital expenditures, and for working capital
purposes. At the end of fiscal 2005, we consummated a second sale of shares of common stock and warrants
(the 2005 Private Placement). In connection therewith, on March 24, 2005, the Company received
approximately $6 million of net proceeds for the sale of 1,080,397 shares of common stock and -20-




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warrants to purchase an additional 378,137 shares at an exercise price of $6.00 per share. The net
proceeds were used for working capital purposes. Over the next twelve months we anticipate capital expenditures of $2-6 million; however,
substantially all of these expenditures are expected to be elective and subject to the availability
of capital. We intend to finance these expenditures as well as our other cash requirements
principally through availability under a vendor financing arrangement available through August
2009, which provides for up to $4 million in credit facilities at an interest rate of 5% per annum.
Each grant of credit under the facility expires after 18 months to be replaced by subsequent
purchases and payables. In addition we intend to finance expenditures through additional bank
loans, to the extent available, as well as through current cash and cash flow from operations.
With respect to bank financing, we have been engaged in discussions in China with several local and
international banks after an increase in our existing credit facility from HSBC was not
forthcoming. We continue to consider various other financing alternatives to satisfy our future
expansion, capital improvements and equipment requirements. If we are unable to obtain additional
financing we may have to curtail or terminate certain operations. We continue to consider various other financing alternatives to satisfy our future expansion,
capital improvements and equipment requirements. The following table sets forth our contractual obligations as of March 31, 2005: (thousands)Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLine of credit
    
    $
    1,203
    
    
    $
    1,203
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Bank Loan
    
    
    3,641
    
    
    
    1,636
    
    
    
    669
    
    
    
    668
    
    
    
    668
    
    
    
    0
    
    
    
    0Vendor financing
    
    
    744
    
    
    
    149
    
    
    
    149
    
    
    
    149
    
    
    
    149
    
    
    
    148
    
    
    
    0Capital leases
    
    
    335
    
    
    
    177
    
    
    
    56
    
    
    
    40
    
    
    
    39
    
    
    
    23
    
    
    
    0Operating leases
    
    
    13,114
    
    
    
    2,387
    
    
    
    2,134
    
    
    
    1,876
    
    
    
    1,339
    
    
    
    1,274
    
    
    
    4,104Total contractual
obligations
    
    $
    19,037
    
    
    $
    5,552
    
    
    $
    3,008
    
    
    $
    2,733
    
    
    $
    2,195
    
    
    $
    1,445
    
    
    $
    4,104
 For information about these contractual obligations, see Notes 4 and 8 to the
consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Timing of Revenue The timing of our revenue is affected by several factors. The sales of certain products sold
by our Medical Capital Equipment division often require protracted sales efforts, long lead times
and other time-consuming steps. For example, many end users are required to purchase capital
equipment through a formal tendering process which often entails an extended period of time before
the sale can be completed. Further, in light of the dependence by purchasers of capital equipment
on the availability of credit, the timing of sales may depend upon the timing of our or our
purchasers abilities to arrange for credit sources, including loans from local Chinese banks or
financing from international loan programs such as those offered by Export-Import Bank. As a
result, our operating results have varied and are expected to continue to vary from period to
period and year to year. In addition, a relatively limited number of orders and shipments may
constitute a meaningful percentage of our revenue in any one period. As a result, a relatively
small reduction in the number of orders can have a material impact on our revenue in any year.
Further, because we recognize revenue and expense as products are shipped, the timing of shipments
could affect our operating results for a particular period. At the same time, a significant
percentage of our revenue is attributable to hospital services and local currency sales through the
HPD, both of which have more even revenue streams. -21-




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Foreign Currency Exchange and Impact of Inflation Our results of operations for the periods discussed have not been significantly affected by
inflation or foreign currency fluctuation. Since we receive over 65% of our revenue in local
Chinese currency, we have some foreign currency risk. Changes in the valuation of the Chinese
Renminbior Hong Kong dollar may have an impact on our results of operations in the future. Our
subsidiaries, Chindex Tianjin, Chindex Shanghai, Beijing United, and Shanghai United, sell products
and services in Renminbi. For over 20 years the Chinese and Hong Kong dollars have been pegged to
the US dollar. While discussions about the possible removal of this pegged rate have been in the
news we do not believe at this time any change is imminent. Also, Chinese currency is not freely
tradable and we do not hedge our transactions. We monitor the situation globally and continue to
keep up with the discussion. While there can be no assurances that a change will not occur, we do
not believe any such change will have a material adverse effect. We also have purchased and will continue to purchase some products in freely transferable
Western currencies other than U.S. dollars and have sold and will continue to sell such products in
China for U.S. dollars. To the extent that the value of the U.S. dollar declines against such a
currency, we could experience a negative impact on profitability. We anticipate hedging
transactions wherever possible to minimize such negative impacts. Currently there are no such
hedges. As part of our risk management program, we also perform sensitivity analyses to assess
potential changes in revenue, operating results, cash flows and financial position relating to
hypothetical movements in currency exchange rates. Our sensitivity analysis of changes in the fair
value of the RMB to the U.S. Dollar at March 31, 2005, indicated that if the U.S. Dollar uniformly
increased in value by 10 percent relative to the RMB, then we would have experienced a 10% smaller
loss. Conversely, a 10 percent increase in the value of the RMB relative to the U.S. Dollar at
March 31, 2005 would have resulted in a 12% additional loss. If the Chinese Government decides to adjust the value of the RMB so that it increases in value
as against the U.S. Dollar, we may respond with adjustments to our operating processes so as to
improve the benefit to the Company of such a change. For example, we could increase the proportion
of capital equipment that we sell in RMB instead of in U.S. Dollars. Moreover, our U.S. sourced
products would be cheaper for our customers, thus improving our competitive position vis-à-vis
products from some other countries. RISK FACTORS You should carefully consider the risks described below, together with all of the other
information included in this Annual Report onForm 10-K. The following risks and uncertainties are
not the only ones we face. However, these are the risks our management believes are material. If
any of the following risks actually materialize, our business, financial condition or results of
operations could be harmed. This report contains statements that are forward-looking. These
statements are based on current expectations and assumptions that are subject to risks and
uncertainties such as those listed below and elsewhere in this report, which, among others, should
be considered in evaluating our future performance. Risks Related to Our Business and Financial Condition Our business is capital intensive and we may not be able to access the capital markets when we
would like to raise capital. We may not be able to raise adequate capital to complete some or all of our business
strategies or to react rapidly to changes in technology, products, services or the competitive
landscape. Healthcare product and services providers in China often face high capital requirements
in order to take advantage of new market opportunities, respond to rigorous competitive pressures
and react quickly to changes in -22-




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##### 



technology. Many of our competitors are committing substantial
capital and, in many instances, are forming alliances to acquire or maintain market leadership.
Our business is capital intensive and there can be no assurance that we will be able to satisfy our
capital requirements in the future. In particular, our strategy in the business of providing
healthcare services includes the establishment and maintenance of healthcare facilities, which
require significant capital. In addition, we plan to develop our own brand of baby care products
and to expand our distribution capabilities. In the absence of available capital, we would be
unable to establish or maintain healthcare facilities as planned, and would be unable to expand our
business as planned. We do not presently have sufficient capital resources to implement most of
our expansion plans in the absence of improved financial performance, as to which there can be no
assurance. We may not generate sufficient cash flow to fund our capital expenditures, ongoing operations and
indebtedness obligations. Our ability to service our indebtedness and to fund planned capital expenditures will depend
on our ability to generate cash flow. Our ability to generate cash flow is dependent on many
factors, including:  
    
    our future operating performance;
    
    the demand for our products and services;
    
    general economic conditions and conditions affecting suppliers, customers and patients;
    
    competition and our ability to stabilize customer losses; and
    
    legal and regulatory factors affecting us and our business. Some of these factors are beyond our control. If we are unable to generate sufficient cash
flow, we may not be able to repay indebtedness, operate our business, respond to competition,
pursue our growth strategy, which is capital intensive, or otherwise meet cash requirements. We experienced a net loss in each of fiscal 2004 and fiscal 2005 and may continue to experience net
losses. Consequently, we may not have the ability to finance future operations. We experienced a net loss in each of fiscal 2004 and fiscal 2005. These net losses are
principally attributable to increased costs, including: at our parent level, primarily as a result
of corporate governance compliance and local taxes; in our Medical Capital Equipment division,
primarily as a result of increased salaries and bad debt allowances; in our Healthcare Products
Distribution division, primarily as a result of pricing and other pressures from suppliers and
limitations on the availability of financing to our customers; and, in our Healthcare Services
division, primarily as a result of start-up and service-expansion expenses relating to hospital
operations in Shanghai, including increases in staff, insurance costs, supplies and other expenses.
We expect that, while many of these expenses will diminish now that the operations in Shanghai
have been commenced, expenses in connection with maintenance and operation, as well as expansion,
if any, of our Healthcare Services division will remain significant. In addition, we recently
experienced a reduction in territories covered for a large supplier in the Healthcare Products
Distribution division, which we intend to offset in part by increased sales, as to which there can
be no assurances, in the retained territories. Continued losses would reduce our cash available
from operations to service our indebtedness, as well as limit our ability to finance our
operations. -23-




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If we fail to manage our growth or maintain adequate internal accounting, disclosure and other
controls, we would lose the ability to manage our business effectively and/or experience errors or
information lapses affecting public reporting. We have expanded our operations rapidly in recent years and continue to explore ways to extend
our product and service offerings. Our growth may place a strain on our management systems,
information systems, resources and internal controls. Our ability to successfully distribute
products and offer services requires adequate information systems and resources and oversight from
senior management. We will need to modify and improve our financial and managerial controls,
reporting systems and procedures and other internal control and compliance procedures as we
continue to grow and expand our business. If we are unable to manage our growth and improve our
controls, systems and procedures, they may be ineffective, we may be unable to operate efficiently
and we may lose the ability to manage many other aspects of our business effectively and/or
experience errors or information lapses affecting public reporting. A control system, no matter how well designed and operated, cannot provide absolute assurance
that the objectives of the control system are met, and no evaluation of controls can provide
absolute assurance that all control issues have been detected. If we are not successful in
discovering and eliminating weaknesses in internal controls, then we will lose the ability to
manage our business effectively. Failure to achieve and maintain effective internal controls in accordance with Section 404 of The
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our ability to ensure timely and
reliable financial reporting. Section 404 of The Sarbanes-Oxley Act of 2002 requires our management to report on, and our
independent auditors to attest to, our internal control over financial reporting. We are actively
continuing our ongoing process of documenting, testing and evaluating the effectiveness of, and
remediating any issues identified related to, our internal control over financial reporting. The
process of documenting, testing and evaluating our internal control over financial reporting is
complex and time consuming. Due to this complexity and the time-consuming nature of the process and
because currently unforeseen events or circumstances beyond our control could arise, we cannot
assure you that we ultimately will be able to comply fully with Section 404 in our Annual Report on
Form 10-K for the year ending March 31, 2007 or that we will be able to conclude our internal
control over financial reporting is effective as of the date. We may not be able to conclude on an
ongoing basis that we have effective internal control over financial reporting in accordance with
Section 404, which could adversely affect public confidence in our ability to record, process,
summarize and report financial data to ensure timely and reliable external financial reporting. If we lost the services of our key personnel, then our leadership, expertise, experience, business
relationships, strategic and operating planning and other important business attributes would be
diminished. Our success to a large extent depends upon the continued services of certain executive
officers, particularly Roberta Lipson, the chief executive officer and president and Elyse Beth
Silverberg, our executive vice president and secretary. We have entered into an employment
agreement with Ms. Lipson that contains non-competition, non-solicitation and confidentiality
provisions, and we maintain key-person life insurance coverage in the amount of $2,000,000 on the
life of Ms. Lipson. Ms. Silverberg is subject to an employment agreement that contains
non-competition, non-solicitation and provisions, but we do not maintain an insurance policy on her
life. The loss of service of any of our key employees could diminish our leadership, expertise,
experience, business relationships, strategic and operating planning and other important business
attributes, thus materially harming our business. -24-




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Our business could be adversely affected by inflation or foreign currency fluctuation. Since we receive more than 65% of our revenues in local Chinese currency (with the remainder
in U.S. Dollars), we have foreign currency risk. Contracts denominated in U.S. Dollars, where the
goods are purchased in U.S. Dollars, would not be subject to foreign currency risk. In the event
of a decline in the value of the U.S. Dollar, however, goods that are purchased by us in U.S.
Dollars and resold in Chinese Renminbi would become more competitive in the Chinese market, which
would allow us to either reduce prices and increase quantities or maintain prices at a higher gross
profit margin. Similarly, changes in the valuation of the Chinese Renminbi or Hong Kong Dollar may
have an impact on our results of operations in the future. Our subsidiaries, Chindex Tianjin,
Chindex Shanghai, Beijing United, and Shanghai United, sell products and services in Renminbi. We
have also purchased and will continue to purchase some products in Western currencies other than
U.S. Dollars and have sold and will continue to sell such products in China for U.S. Dollars. To
the extent that the value of the U.S. Dollar declines against such Western currencies, we could
experience a negative impact on profitability. We anticipate hedging transactions wherever possible
to minimize the impact from exposure to foreign currency exchange fluctuations. We have limited
hedging experience and there can be no assurance that such strategies will be successful in
eliminating or reducing our risk. Currently there are no such hedges. As part of our risk management program, we also perform sensitivity analyses to assess
potential changes in revenue, operating results, cash flows and financial position relating to
hypothetical movements in currency exchange rates. Our sensitivity analysis of changes in the fair
value of the RMB to the U.S. Dollar at March 31, 2005, indicated that if the U.S. Dollar uniformly increased in value by
10% relative to the RMB, then we would experience a 10% smaller loss. Conversely, a 10% increase
in the value of the RMB relative to the U.S. Dollar at March 31, 2005 would have resulted in a 12%
additional loss. Risks relating to our Medical Capital Equipment and Healthcare Products Distribution
Divisions We depend on our relations with suppliers and would be adversely affected by the termination of
arrangements with, or shortage or loss of any significant product line from, them. We rely on a limited number of suppliers that account for a significant portion of our
revenues. During the fiscal year ended March 31, 2005, Siemens, Guidant and LOreal represented
39%, 18% and 22% of our product revenue and were the only suppliers where such percentage was at
least 10%. During the fiscal year ended March 31, 2004, Siemens, Guidant, LOreal and
Becton-Dickenson represented 17%, 14%, 12% and 10% of our revenue and were the only suppliers where
such percentage was at least 10%. During the twelve months ended December 31, 2002, Siemens,
Becton-Dickenson and LOreal represented 16%, 16% and 10% of our revenue and were the only
suppliers where such percentage was at least 10%. Although a substantial number of our
relationships with our capital equipment suppliers are pursuant to exclusive contracts, including
Siemens (but not the other suppliers named above), with which we have a 5-year contract terminable
for failure to meet sale objectives, the relationships are based substantially on mutual
satisfaction in addition to the terms of the contractual arrangements. Our agreement with Siemens
expires on September 25, 2006. Our agreement with Guidant expires on December 31, 2005. An
agreement with LOreal, which was recently renewed and revised, expires on December 31, 2005 and
represents a reduction in territories from those serviced under the predecessor agreement, and
automatically renews for successive one year periods unless notice is given by either party of
intent to allow the agreement to expire. Our agreement with Tyco renews annually effective July 1
unless either party provides notice of intent to let it expire. Our agreement with
Becton-Dickenson, which we no longer represent, expired by its terms on December 31, 2004. None of
these agreements contains short-term cancellation provisions, except typical provisions allowing
cancellation for breach of contract, bankruptcy, change of ownership, etc. Certain of our
contracts with our other suppliers contain short-term cancellation provisions permitting the
contracts to be terminated on short notice (from 30 days to six months), minimum sales quantity
requirements or targets and provisions triggering termination upon the occurrence of certain
events. From time to time, we and/or our suppliers terminate or revise -25-




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their respective
distribution arrangements. We are currently in negotiations with one of our large suppliers.
There can be no assurance that cancellations of or other material adverse effects on our contracts
will not occur. As an example of the foregoing risk, as previously disclosed, one significant
client, Becton-Dickenson, of our healthcare products distribution business recently established a
subsidiary in China that perform certain services previously performed by that division. In that
example, we did not have a binding contractual arrangement limiting Becton-Dickensons decision to
internalize rather than outsource to us those services. There can be no assurance that our
suppliers will not elect to change their method of distribution into the Chinese marketplace to a
form that does not use our services. Timing of revenues and fluctuations in financial performance vary significantly from quarter to
quarter and are not necessarily indicative of our performance over longer periods. The timing of our revenues is affected by several significant factors. Many end-users of the
capital equipment that we sell depend to a certain extent upon the availability of funds in the
budgeting processes of the Chinese government and the availability of credit from the Chinese
banking system and otherwise. These processes and the availability of credit fluctuate in amounts
and timing because they are based on policy determinations by the Chinese government and the
discretion of financial institutions. Further, in light of the dependence by purchasers on the
availability of credit, the timing of sales may depend upon the timing of our or our purchasers
abilities to arrange for credit sources. A relatively limited number of orders and shipments of
capital equipment may constitute a meaningful percentage of our revenues in any
one period. Correspondingly, a relatively small reduction in the number of orders can have a
material impact on our revenues in any one quarter or year. In addition, because we recognize
revenues and expenses relating to certain contracts as products are shipped, the timing of
shipments affects our operating results for a particular period. As a result, our operating
results have varied and are expected to continue to vary significantly from quarter to quarter and
our results of operations for any particular quarter are not necessarily indicative of results that
may be expected for any subsequent quarter or related fiscal year. We have not been able to obtain in every year financings, from third party banks or governments,
for our customers and future periodic financings obtained for our customers cannot be assured;
their impact on a fiscal period may be more concentrated than the related procurement period; the
absence of these financings results in lower sales. Although none were obtained during fiscal 2004 or fiscal 2005, periodic financings obtained
for customers have had a positive impact on our results of operations during the periods in which
they are consummated, including the twelve months ended December 31, 2001 and 2002, and may not be
indicative of future results. As an example of these financings, pursuant to three separate
Export-Import Bank financing arrangements, we recognized approximately $8.4 million, $14.0 million
and $11.6 million, respectively, in sales as a result of the shipments of capital equipment sold to
end-users from 1995 to 2000. During the fiscal years ended December 31, 1998, 1999, 2000, 2001 and
2002, sales pursuant to these arrangements constituted approximately 9%, 32%, 21%, 7% and 12%,
respectively, of our total sales. Arrangements for the first of these financings began in mid-1993
and revenues from that first financing were recognized in 1996; arrangements for the second of
these financings began in early 1998 and $2.0 million of revenues from that second financing were
recognized in 1998 and the balance was recognized in 1999; and arrangements for the third of these
financings began in late 1998 and $9.4 million of revenues from that third financing were
recognized in 2000 and the balance was recognized in 2001. These sales and financings had been
arranged over a long period of time, prior to our recognition of the revenue for them. As a result
of the financings, we recognized relatively substantial sales during relatively short periods.
Accordingly, our results of operations for the respective fiscal quarters during which the sales
were reflected were significantly and positively impacted by the timing of the payments from the
financing and were not necessarily indicative of our results of operations for any other quarter or
fiscal year. The can be no assurance that any Export-Import Bank financing commitments will be
obtained by us for our customers in the future. The absence of these financings would continue to
have an adverse impact on our sales volume. -26-




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##### 



The relevant agencies of the Chinese and U.S. governments had negotiated for several
years with the Export-Import Bank on a new framework for government-supported loan programs, during
which period all such loan programs were postponed or unavailable. On January 24, 2005, however,
the Bank and the Chinese Ministry of Finance signed the new framework agreement setting forth the
terms under which government-supported financings will be provided from the U.S. and implemented in
China. Consequently, potential hospital customers interested in using this type of financing to
purchase U.S.-sourced equipment from us had to await such approval. Although the new framework
agreement will now permit financing arrangements with the Bank to resume, and we have announced our
intention to obtain such financing, there can be no assurances that any such arrangements will be
reached or consummated. We may be subject to product liability claims and product recalls, and in the future we may not be
able to obtain insurance against these claims at a reasonable cost or at all. The nature of our business exposes us to potential product liability risks, which are inherent
in the distribution of medical equipment and healthcare products. We may not be able to avoid
product liability exposure, since third parties develop and manufacture our equipment and products.
If a product liability claim is successfully brought against us or any of these third party
manufacturers, or if a significant product recall occurs, then we would experience adverse
consequences to our reputation, we might be required to pay damages, our insurance, legal and other
expenses would increase, we might lose customers and/or suppliers and there may be other adverse
results. We do not maintain product liability insurance, but we do request that we be named as an
additional insured on policies held by our manufacturers. There can be no assurance that one or
more liability claims will not exceed the coverage limits of any of such policies. We currently
represent approximately 19 manufacturers and currently are named as an additional insured on 12 of
14 of those manufacturers that we have approached in this regard. Since most products handled by
us do not involve invasive measures, they do not represent a significant risk from product
liability. Guidant, however, is one of the manufacturers with respect to which we have been added
as an additional insured, since the stents manufactured by it and sold by us are inserted in the
body. If we or our manufacturers fail to comply with regulatory laws and regulations, we or such
manufacturers may be subject to enforcement actions, which could affect their ability to develop,
market and sell products successfully. This could harm our reputation and lead to less acceptance
of such products by the market. These enforcement actions may include:  
    
    product seizures;
    
    voluntary or mandatory recalls;
    
    voluntary or mandatory patient or physician notification; and
    
    restrictions on or prohibitions against marketing the products. We face competition that may adversely impact us, which impact may be increased as a result of
Chinas inclusion in the World Trade Organization. We compete with other independent distributors of capital equipment in China. Given the rapid
pace of technological advancement, particularly in the medical products field, other independent
distributors may introduce products into our markets that compete directly with our sales. In
addition to other independent distributors, we face significant competition from direct
distributors of established manufacturers. In the medical products field, for example, we compete
with certain major manufacturers that maintain their own direct sales forces in China. In
addition, to the extent that certain manufacturers
market under one brand name a wide variety of products in China to different market sectors
(including -27-




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##### 



non-medical), those manufacturers may be better able than we are to establish brand name
recognition across industry lines. As a result of China becoming a member of the World Trade Organization, or WTO, import
restrictions on medical equipment are expected to be gradually reduced. The WTO also requires
China to lower its import tariffs as a condition for membership. Reduced import restrictions
and/or lower tariffs may lead to increased imports of foreign medical equipment and therefore lead
to increased competition in the domestic medical equipment markets. Similarly, reduced import
restrictions and/or lower tariffs on medical equipment may affect the competition in the end-use
markets of our customers and indirectly affect our sales to such customers. There can be no
assurance that we will be able to compete effectively with such manufacturers and distributors. If we are not able to hire and retain qualified sales representatives and service specialists, then
our marketing competitiveness, selling capabilities and related growth efforts will be impaired. We believe that to be successful we must continue to hire, train and retain highly qualified
sales representatives and service specialists. Our sales growth has depended on hiring and
developing new sales representatives. Due to the relationships developed between our sales
representatives and our customers, upon the departure of a sales representative we face the risk of
losing the representatives customers, especially if the representative were to act as a
representative of our competitors. In addition, the imaging equipment market and other
high-technology medical equipment markets rely on the hiring and retention of skilled service
specialists to maintain such equipment. There may be a shortage of these skilled specialists,
which may result in intense competition and increasing salaries. Any inability on our part to hire
or retain such skilled specialists could limit our ability to expand into markets and then our
marketing competitiveness, selling capabilities and related growth efforts will be impaired. We must maintain a significant investment in inventory, which is costly and, if not properly
managed, would result in an inability to provide timely marketing and delivery and could result in
financial or operating imbalances and problems with liquidity and capital resources. In order to provide prompt and complete service to our customers, we maintain a significant
investment in healthcare product inventory. Although we closely monitor our inventory exposure
through a variety of inventory control procedures and policies, there can be no assurance that such
procedures and policies will continue to be effective or that unforeseen product development or
price changes will not result in an inability to provide timely marketing and delivery and could
result in financial or operating imbalances and problems with liquidity and capital resources. If we do not maintain good relations with foreign trade corporations, our ability to import
products may be adversely affected. In the sale of our medical capital equipment into China, we must make most of our sales
through foreign trade corporations, or FTCs. Although purchasing decisions are made by the
end-users, which may be individuals or groups having the required approvals from their
administrative organizations and which are obligated to pay the applicable purchase prices, we
enter into a formal purchase contract with only the FTCs. The FTCs make purchases on behalf of the
end-users and are legally authorized by the Chinese government to conduct import business. These
organizations are chartered and regulated by the government and are formed to facilitate foreign
trade. We market our products directly to end-users, but in consummating sales we also must
interact with the particular FTCs representing the end-users. By virtue of our direct contractual
relationship with the FTC, rather than the end-user, we are to some extent dependent upon the
continuing existence of and contractual compliance by the FTCs until the particular transaction has
been completed. -28-




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Our dependence on sub-distributors and dealers could be detrimental to our financial condition if
those sub-distributors or dealers do not sell our products. In the sale of our medical capital equipment, medical consumables and low-priced
instrumentation, we plan to increase sales to independent sub-distributors and dealers, who in turn
sell to end users. If the efforts of such sub-distributors and dealers prove unsuccessful, if such
sub-distributors and dealers abandon or limit their sales of our products, or if such
sub-distributors and dealers encounter serious financial difficulties, our results of operations
and financial condition could be adversely affected. Sub-distributors and dealers generally
purchase from us to fill specific orders from their customers. As a result, there can be no
assurance that sub-distributors and dealers will continue to purchase our products. Further, such
sub-distributors and dealers generally are not exclusive to us and are free to sell, and do sell,
competing products. Risks Relating to the Healthcare Services Division Our Shanghai United Family Hospital only commenced operations in October 2004 and there can be no
assurances that it will achieve profitability. Our Shanghai United Family Hospital had its opening ceremony on October 21, 2004 after
significant delays. The facility did not immediately offer full services and phased in services
since then, including initiating in-patient services in January 2005. There can be no assurances
that the facility will achieve or sustain profitability or that additional capital will be
available to finance additional facilities, such as satellite clinics, which comprises our current
healthcare services growth strategy. If we do not attract and retain qualified physicians or other hospital personnel, our hospital
operations would be adversely affected. Our success in operating our hospitals and clinics will be, in part, dependent upon the number
and quality of physicians on the medical staffs of these hospitals and our ability to maintain good
relations with our physicians. As we offer International-standard medicine at our hospitals and
clinics, we are further dependent on attracting a limited number of qualified Western medical
professionals, not all of whom have long-term relationships with China. Physicians may terminate
their affiliation with our hospitals at any time. If we are unable to successfully maintain good
relationships with physicians, our results of operations may be adversely affected. In addition,
the failure to recruit and retain qualified management, nurses and other medical support personnel,
or to control labor costs, could have an adverse effect on our business and results of operations. Our business is heavily regulated and failure to comply with those regulations could result in
penalties, loss of licensure, additional compliance costs or other adverse consequences. Healthcare providers in China, as in most other populous countries, are required to comply
with many laws and regulations at the national and local government levels. These laws and
regulations relate to: licensing; the conduct of operations; the relationships among hospitals and
their affiliated providers; the ownership of facilities; the addition of facilities and services;
confidentiality, maintenance and security issues associated with medical records; billing for
services; and prices for services. If we fail to comply with applicable laws and regulations, we
could suffer penalties, including the loss of our licenses to operate. In addition, further
healthcare legislative reform is likely, and could materially adversely affect our business and
results of operations in the event we do not comply or if the cost of compliance is expensive. The
above list of certain regulated areas is not exhaustive and it is not possible to anticipate the
exact nature of future healthcare legislative reform in China. Depending on the priorities
determined by the Chinese Ministry of Health, the political climate at any given time, the
continued development of the Chinese healthcare system and many other factors, future legislative
reforms may be highly diverse, including stringent infection control policies, improved rural
healthcare facilities, increased regulation of the distribution of pharmaceuticals and numerous
other policy matters. Consequently, the implications of -29-




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these future reforms could result in penalties, loss of licensure, additional compliance costs
or other adverse consequences. Our operations could be adversely affected by the high cost of malpractice insurance. In recent years, physicians, hospitals and other healthcare providers in the U.S. have become
subject to an increasing number of legal actions alleging malpractice or related legal theories.
Many of these actions involve large claims and significant defense costs. While similar lawsuits
are not common in China, to protect us from the cost of any such claims, we generally maintain
professional malpractice liability insurance and general liability insurance coverage in amounts
and with deductibles that we believe to be appropriate for our operations. However, our insurance
coverage may not cover all claims against us or continue to be available at a reasonable cost for
us to maintain adequate levels of insurance. We depend on information systems, which if not implemented and maintained could adversely affect
our operations. Our healthcare services business is dependent on effective information systems that assist us
in, among other things, monitoring utilization and other cost factors, supporting our healthcare
management techniques, processing billing and providing data to regulators. If we experience a
reduction in the performance, reliability or availability of our information systems, our
operations and ability to produce timely and accurate reports could be adversely impacted. Our information systems and applications require continual maintenance, upgrading and
enhancement to meet operational needs. Moreover, the proposed expansion of facilities and similar
activities require transitions to or from, and the integration of, various information systems. We
regularly upgrade and expand our information systems capabilities and currently are in the process
of rolling out, for expected completion in the first quarter of fiscal 2006, new clinical and
financial reporting systems throughout our healthcare services operations, which rollout and other
proposed system-wide improvements in information systems are expected to require additional capital
expenditures. If we experience difficulties with the transition to or from information systems or
are unable to properly implement, finance, maintain or expand our systems, we could suffer, among
other things, from operational disruptions, which could adversely affect our prospects or results
of operations. Our operations face competition that could adversely affect our results of operations. Our Beijing and Shanghai healthcare facilities compete with a large number and variety of
health care facilities in their respective markets. There are numerous Chinese hospitals available
to the general populace, as well as international clinics serving the expatriate business and
diplomatic community. Although we believe that existing international clinics do not currently
provide competitive, specialized International-standard services in Beijing, there can be no
assurance that these or other clinics, hospitals or other facilities will not commence or expand
such operations, which would increase their competitive edge. Further, there can be no assurance
that a qualified Western or other health care organization, having greater resources in the
provision or management of health care services, will not decide to engage in operations similar to
those to be conducted by us in Beijing or Shanghai. Risks Relating to Doing Business in China Substantially all of our assets are located in China, and substantially all of our revenue is
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 of China differs from the economics of most developed countries in
many respects, including -30-




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government investment, the level of development, control of capital investment, control of
foreign exchange and allocation of resources. The economic policies of the Chinese government and economic growth of China could adversely affect
us. Since the late 1970s, the Chinese government has been reforming the Chinese economic system
from a planned economy to a market-oriented economy. In recent years, the Chinese government has
implemented economic reform measures emphasizing decentralization, utilization of market forces in
the development of the Chinese economy and a higher level of management autonomy. These reforms
have resulted in significant economic growth and social progress, but the growth has been uneven
both geographically and among various sectors of the economy. Economic growth has also been
accompanied by periods of high inflation. The Chinese government has implemented various policies
from time to time to restrain the rate of such economic growth, control inflation and otherwise
regulate economic expansion. In addition, the Chinese government has attempted to control
inflation by controlling the prices of basic commodities. Although we believe that the economic
reforms and macroeconomic policies and measures adopted by the Chinese government will continue to
have a positive effect on economic development in China, these policies and measures may, from time
to time, be modified or reversed. Adverse changes in economic and social conditions in China, in
the policies of the Chinese government or in the laws and regulations in China, could have a
material adverse effect on the overall economic growth of China and on infrastructure investment in
China. These developments could adversely affect our financial condition, results of operations
and business, by, for example, reducing the demand for our products and/or services. The Chinese legal system is relatively new and may not provide protections to us or our investors. The Chinese legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential value. In 1979, the
Chinese government began to promulgate a comprehensive system of laws and regulations governing
economic matters in general, including corporate organization and governance, foreign investments,
commerce, taxation and trade. Legislation over the past 20 years has significantly enhanced the
protections afforded to various forms of foreign investment in China. However, these laws,
regulations and legal requirements are relatively recent, and their interpretation and enforcement
involve uncertainties, which may limit the legal protections available to foreign investors. The Chinese government recently underwent substantial reforms after the meeting of the
National Peoples Congress in March 2003. The Chinese government has reiterated its policy of
furthering reforms in the socialist market economy. No assurance can be given that these changes
will not have an adverse effect on business conditions in China generally or on our business in
particular. The conversion of Renminbi into foreign currency is regulated, which regulations could adversely
affect us. A significant portion of our revenues and operating expenses are denominated in Renminbi. Our
revenues in Renminbi typically are converted into U.S. dollars and transferred to the United States
for payment of invoices and as subsidiary dividends. The transmission of foreign currency out of
China is subject to regulation by Chinas State Administration for Foreign Exchange, or SAFE. It
is possible that SAFE could impose new or increase existing restrictions on such currency uses or
otherwise impose exchange controls that adversely affect our practices. Adverse actions by SAFE
also could affect our ability to obtain foreign currency through debt or equity financing,
including by means of loans or capital contributions. -31-




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The SARS outbreak or similar outbreak could further adversely affect our operations. In March 2003, several countries, including China, experienced an outbreak of a new and highly
contagious form of atypical pneumonia now commonly known as severe acute respiratory syndrome, or
SARS. The severity of the outbreak in certain municipalities, such as Beijing, and provinces, such
as Guangdong Province, materially affected general commercial activity. According to the World
Health Organization, over 8,460 cases of SARS and more than 790 deaths had been reported in over 30
countries as of June 2003. Since the SARS epidemic in China had conflicting impacts on our
healthcare businesses, the extent of the adverse impact that any future SARS outbreak could have on
the Chinese economy and on us cannot be predicted at this time. Any further SARS outbreak could
significantly disrupt our ability to adequately staff our facilities and may generally disrupt
operations. In particular, a large percentage of the expatriate community that uses our healthcare
services left China during the height of the SARS epidemic and could be expected to do so again
under similar circumstances. Although no one is able to predict the future impact of SARS, the
Chinese government and the Chinese healthcare industry have taken measures to prepare in the event
of another SARS outbreak. The Chinese government has indicated that any future outbreak would be
contained and not present the same magnitude of social and economic disruption as experienced in
the first outbreak. Although cases of SARS in China recently have been reported, no significant
adverse impact has resulted from those cases. Nonetheless, any further outbreak could severely
restrict the level of economic activity in affected areas, which could have a material adverse
effect on us as previously experienced. In addition, in the past decade the greater China region
has experienced limited cases of avian influenza (commonly known as bird flu) in the human
population. While the risk of sustained human-to-human transmission is low, the possibility of new
virus outbreaks and related adverse impact on our ability to conduct normal business operations
cannot be discounted. The Chinese government could change its policies toward, or even nationalize, private enterprise,
which could harm our operations. Over the past several years, the Chinese government has pursued economic reform policies,
including the encouragement of private economic activities and decentralization of economic
regulation. The Chinese government may not continue to pursue these policies or may significantly
alter them to our detriment from time to time without notice. Changes in policies by the Chinese
government resulting in changes in laws, regulations, their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion or imports and sources of supply could
materially and adversely affect our business and operating results. The nationalization or other
expropriation of private enterprises by the Chinese government could result in the total loss of
our investment in China. Although several tax reforms that may be favorable to us have materialized in 2004, the
Chinese tax system is subject to substantial uncertainties in both interpretation and enforcement
of the laws. In the past, following the Chinese governments program of privatizing many state
owned enterprises, the Chinese government attempted to augment its revenues through heightened tax
collection efforts. Continued efforts by the Chinese government to increase tax revenues could
result in other decisions or interpretations of the tax laws by the taxing authorities that
increase our future tax liabilities or deny us expected refunds. Risks Related to our Corporate Structure Control by insiders and their ownership of shares having disproportionate voting rights could have
a depressive effect on the price of common stock, impede a change in control and impede management
replacement. Certain of our present management stockholders own 775,000 shares of our Class B common stock,
which vote as a single class with the common stock on all matters except as otherwise required by
law. The Class B common stock and the common stock are identical on a share-for-share basis,
except -32-




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that the holders of Class B common stock have six votes per share on each matter considered
by our stockholders. As of March 31, 2005, the three management holders of our outstanding Class B
common stock represented approximately 12% of our outstanding capital stock and were deemed to
beneficially own capital stock representing approximately 45% of total voting power and may be able
to cause the election of all of our directors. These management stockholders have sufficient
voting power to determine, in general, the outcome of any corporate transaction or other matter
submitted to our stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets. The disproportionate vote afforded the Class B common stock
could serve to impede or prevent a change of control. As a result, potential acquirers will be
discouraged from seeking to acquire control through the purchase of common stock, which could have
a depressive effect on the price of our securities. In addition, the effective control by these
management stockholders could have the effect of preventing or frustrating attempts to influence,
replace or remove management. Our unissued preferred stock could be issued to impede a change in control. Our certificate of incorporation authorizes the issuance of 500,000 shares of blank check
preferred stock with such designations, rights and preferences as may be determined from time to
time by our board of directors. Accordingly, the board of directors is empowered, without
stockholder approval (but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control. Although we have no present intention to

issue any shares of our preferred stock, there can be no assurance that we will not do so in the
future. -33-




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTING DATA Report of Independent Registered Public Accounting Firm To The Board of Directors and Stockholders of 
Chindex International, Inc. Bethesda, MD We have audited the accompanying consolidated balance sheet of Chindex International, Inc. (the
Company) as of March 31, 2005 and the related consolidated statements of operations, cash flows,
and stockholders equity for the year then ended. We have also audited the schedule listed in Item
15(a)(2) of this Form 10-K. These consolidated financial statements and the schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness on the companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements and schedule.
We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Chindex International, Inc. as of March 31, 2005 and
the results of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set
forth therein. /s/ BDO Seidman, LLP Bethesda, MD
June 10, 2005 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Chindex International, Inc. We have audited the accompanying consolidated balance sheet of Chindex International, Inc. (the
Company) as of March 31, 2004 and the related consolidated statements of operations, stockholders
equity, and cash flows for the year ended March 31, 2004, the three months ended March 31, 2003 and
the year ended December 31, 2002. Our audits also included the financial statement schedule listed
in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
We were not engaged to perform an audit of the -34-




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##### 



Companys internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Chindex International, Inc. at March 31, 2004 and
the consolidated results of its operations and its cash flows for the year ended March 31, 2004,
the three months ended March 31, 2003, and the year ended December 31, 2002 in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the financial statements taken as a whole, presents fairly
in all material respects the information set forth therein. /s/ Ernst & Young, LLP
McLean, Virginia
June 15, 2004 -35-




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CHINDEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(thousands except share data) March 31, 2005
    
    
    March 31, 2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,173
    
    
    $
    6,791Trade accounts receivable, less allowance for doubtful accounts of $1,851 and $1,131,
respectivelyEquipment sales receivables
    
    
    13,120
    
    
    
    15,039Patient service receivables
    
    
    2,706
    
    
    
    2,335Inventories
    
    
    10,856
    
    
    
    10,363Deferred income tax
    
    
    222
    
    
    
    467Other current assets
    
    
    2,034
    
    
    
    2,235Total current assets
    
    
    37,111
    
    
    
    37,230Property and equipment, net
    
    
    17,620
    
    
    
    8,901Long-term deferred income taxes
    
    
    1,780
    
    
    
    1,334Other assets
    
    
    777
    
    
    
    386Total assets
    
    $
    57,288
    
    
    $
    47,851LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    26,420
    
    
    $
    24,338Short-term portion of capitalized leases
    
    
    189
    
    
    
    123Short-term debt and vendor financing
    
    
    2,839
    
    
    
    5,668Income taxes payable
    
    
    4
    
    
    
    381Total current liabilities
    
    
    29,452
    
    
    
    30,510Long-term portion of capitalized leases
    
    
    124
    
    
    
    125Long-term debt and vendor financing
    
    
    2,749
    
    
    
    0Total liabilities
    
    
    32,325
    
    
    
    30,635Minority interest
    
    
    
    
    
    
    18Stockholders equity:Preferred stock, $.01 par value, 500,000 shares authorized, none issued
    
    
    0
    
    
    
    0Common stock, $.01 par value, 13,600,000 and 6,800,000 shares authorized, including
1,600,000 and 800,000 designated Class B at March 31, 2005 and 2004, respectively:Common stock  5,728,443 and 3,643,152 shares issued and
    
    
    57
    
    
    
    36outstanding at March 31, 2005 and 2004, respectivelyClass B
stock  775,000 shares issued and outstanding at March 31, 2005 and 2004
    
    
    8
    
    
    
    8Additional capital
    
    
    35,884
    
    
    
    22,488Accumulated other comprehensive income
    
    
    17
    
    
    
    11Accumulated deficit
    
    
    (11,003
    )
    
    
    (5,345
    )Total stockholders equity
    
    
    24,963
    
    
    
    17,198Total liabilities, minority interest and stockholders equity
    
    $
    57,288
    
    
    $
    47,851
 The accompanying notes are an integral part of these consolidated financial statements. -36-




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CHINDEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands except share and per share data) Year ended
    
    
    Three months ended
    
    
    Year endedMarch 31,
    
    
    March 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2002(unaudited)Product sales
    
    $
    77,974
    
    
    $
    72,229
    
    
    $
    18,379
    
    
    $
    12,779
    
    
    $
    57,654Healthcare services revenue
    
    
    22,801
    
    
    
    15,954
    
    
    
    3,470
    
    
    
    2,799
    
    
    
    12,963Total revenue
    
    
    100,775
    
    
    
    88,183
    
    
    
    21,849
    
    
    
    15,578
    
    
    
    70,617Cost and expensesProduct sales costs
    
    
    62,491
    
    
    
    58,014
    
    
    
    14,808
    
    
    
    10,578
    
    
    
    45,976Healthcare services costs
    
    
    24,636
    
    
    
    15,731
    
    
    
    3,393
    
    
    
    2,722
    
    
    
    11,671Selling and marketing expenses
    
    
    12,221
    
    
    
    10,346
    
    
    
    2,007
    
    
    
    1,567
    
    
    
    7,934General and administrative
    
    
    6,885
    
    
    
    5,682
    
    
    
    1,419
    
    
    
    1,004
    
    
    
    4,853(Loss) income from operations
    
    
    (5,458
    )
    
    
    (1,590
    )
    
    
    222
    
    
    
    (293
    )
    
    
    183Loss on equity investment
    
    
    0
    
    
    
    (222
    )
    
    
    0
    
    
    
    0
    
    
    
    (38
    )Other (expenses) and incomeInterest expense
    
    
    (229
    )
    
    
    (249
    )
    
    
    (51
    )
    
    
    (4
    )
    
    
    (54
    )Interest income
    
    
    84
    
    
    
    44
    
    
    
    14
    
    
    
    15
    
    
    
    59Miscellaneous (expense)
income  net
    
    
    (112
    )
    
    
    94
    
    
    
    (29
    )
    
    
    (23
    )
    
    
    (131
    )(Loss) income before income taxes
    
    
    (5,715
    )
    
    
    (1,923
    )
    
    
    156
    
    
    
    (305
    )
    
    
    19Benefit from (provision for) income taxes
    
    
    57
    
    
    
    (64
    )
    
    
    (80
    )
    
    
    113
    
    
    
    240Net (loss) income
    
    $
    (5,658
    )
    
    $
    (1,987
    )
    
    $
    76
    
    
    $
    (192
    )
    
    $
    259Net (loss) income per common share  basic
    
    $
    (1.06
    )
    
    $
    (.53
    )
    
    $
    .02
    
    
    $
    (.05
    )
    
    $
    .07Weighted average shares outstanding  basic
    
    
    5,313,573

    
    
    
    3,758,170
    
    
    
    3,708,232
    
    
    
    3,672,460
    
    
    
    3,699,052Net (loss) income per common share  diluted
    
    $
    (1.06
    )
    
    $
    (.53
    )
    
    $
    .02
    
    
    $
    (.05
    )
    
    $
    .07Weighted average shares outstanding  diluted
    
    
    5,313,573
    
    
    
    3,758,170
    
    
    
    3,715,908
    
    
    
    3,672,460
    
    
    
    3,796,340
 The accompanying notes are an integral part of these consolidated financial statements. -37-




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CHINDEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands) Year ended
    
    
    Three months ended
    
    
    Year endedMarch 31,
    
    
    March 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2002(unaudited)OPERATING ACTIVITIESNet (loss) income
    
    $
    (5,658
    )
    
    $
    (1,987
    )
    
    $
    76
    
    
    $
    (192
    )
    
    $
    259Adjustments to reconcile net (loss) income to net cash (used in) provided by operating
activities:Depreciation
    
    
    1,966
    
    
    
    1,309
    
    
    
    280
    
    
    
    241
    
    
    
    1,016Inventory write down
    
    
    96
    
    
    
    151
    
    
    
    31
    
    
    
    43
    
    
    
    158Provision for doubtful accounts
    
    
    1,428
    
    
    
    777
    
    
    
    118
    
    
    
    0
    
    
    
    279Deferred income taxes
    
    
    (201
    )
    
    
    (909
    )
    
    
    0
    
    
    
    0
    
    
    
    (660
    )Loss on equity investment
    
    
    0
    
    
    
    222
    
    
    
    0
    
    
    
    0
    
    
    
    38Changes in operating assets and liabilities:Trade receivables
    
    
    120
    
    
    
    (3,121
    )
    
    
    1,047
    
    
    
    467
    
    
    
    (3,542
    )Inventories
    
    
    (1,622
    )
    
    
    373
    
    
    
    (571
    )
    
    
    (979
    )
    
    
    (3,124
    )Income taxes payable or receivable
    
    
    (377
    )
    
    
    516
    
    
    
    (122
    )
    
    
    (196
    )
    
    
    154Other current assets
    
    
    201
    
    
    
    (713
    )
    
    
    270
    
    
    
    44
    
    
    
    (125
    )Other assets
    
    
    (391
    )
    
    
    25
    
    
    
    26
    

    
    
    67
    
    
    
    98Accounts payable and accrued expenses
    
    
    2,064
    
    
    
    686
    
    
    
    388
    
    
    
    (898
    )
    
    
    3,939Net cash (used in) provided by operating activities
    
    
    (2,374
    )
    
    
    (2,671
    )
    

    
    1,543
    
    
    
    (1,403
    )
    
    
    (1,510
    )INVESTING ACTIVITIESInvestment in equity joint venture
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (40
    )Purchases of property and equipment
    
    
    (9,447
    )
    
    
    (2,925
    )
    
    
    (437
    )
    
    
    (323
    )
    
    
    (3,382
    )Net cash used in investing activities
    
    
    (9,447
    )
    
    
    (2,925
    )
    
    
    (437
    )
    
    
    (323
    )
    
    
    (3,422
    )FINANCING ACTIVITIESProceeds from debt and vendor financing
    
    
    6,783
    
    
    
    1,974
    
    
    
    0
    
    
    
    502
    
    
    
    5,355Repayment of debt, vendor financing and capitalized leases
    
    
    (7,003
    )
    
    
    (623
    )
    
    
    (1,250
    )
    
    
    0
    
    
    
    0Cash (paid to) from joint venture partner investment
    
    
    0
    
    
    
    (61
    )
    
    
    0
    
    
    
    0
    
    
    
    120Proceeds from issuance of common stock
    
    
    13,179
    
    
    
    4,892
    
    
    
    0
    
    
    
    0
    
    
    
    0Proceeds from exercise of stock options
    
    
    238
    
    
    
    247
    
    
    
    0
    
    
    
    56
    
    
    
    81Net cash provided by (used in) financing activities
    
    
    13,197
    
    
    
    6,429
    
    
    
    (1,250
    )
    
    
    558
    
    
    
    5,556Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    6
    
    
    
    2
    
    
    
    0
    
    
    
    22
    
    
    
    17Net increase (decrease) in cash and cash equivalents
    
    
    1,382
    
    
    
    835
    
    
    
    (144
    )
    
    
    (1,146
    )
    
    
    641Cash and cash equivalents at beginning of period
    
    
    6,791
    
    
    
    5,956
    
    
    
    6,100
    
    
    
    5,459
    
    
    
    5,459Cash and cash equivalents at end of period
    
    $
    8,173
    
    
    $
    6,791
    
    
    $
    5,956
    
    
    $
    4,313
    
    
    $
    6,100Supplemental disclosures of cash flows information:Cash paid for interest
    
    $
    289
    
    
    $
    124
    
    
    $
    8
    
    
    $
    1
    
    
    $
    45Cash paid for taxes
    
    $
    301
    
    
    $
    460
    
    
    $
    71
    
    
    $
    56
    
    
    $
    336Non-cash investing and financing activities consist of the following:Acquisition of property and equipment via capital leases
    
    $
    205
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    229Transfer of demonstration inventory to property and equipment
    
    $
    1,033
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 The accompanying notes are an integral part of these consolidated financial statements. -38-




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##### 



CHINDEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the year ended March 31, 2005, period ended March 31, 2004 and year ended December 31, 2002
(thousands except share data) Common Stock
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherCommon Stock
    
    
    Class B
    
    
    Additional
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    TotalBalance at
December 31, 2001
    
    
    2,895,656
    
    
    $
    29
    
    
    
    775,000
    
    
    $
    8
    
    
    $
    17,275
    
    
    $
    (3,693
    )
    
    $
    (8
    )
    
    $
    13,611Net income 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259
    
    
    
    
    
    
    
    259Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    276Options exercised
    
    
    37,300
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    81Balance at
December 31, 2002
    
    
    2,932,956
    
    
    
    29
    
    
    
    775,000
    
    
    
    8
    
    
    
    17,356
    
    
    
    (3,434
    )
    
    
    9
    
    
    
    13,968Net income for the
three months ended
March 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    76Net loss 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,987
    )
    
    
    
    
    
    
    (1,987
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,985
    )Issuance of common
stock
    
    
    600,000
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    4,886
    
    
    
    
    
    
    
    
    
    
    
    4,892Options exercised
    
    
    110,196
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    246
    
    
    
    
    
    
    
    
    
    
    
    247Balance at
March 31, 2004
    
    
    3,643,152
    
    
    
    36
    
    
    
    775,000
    
    
    
    8
    
    
    
    22,488
    
    
    
    (5,345
    )
    
    
    11
    
    
    
    17,198Net loss 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,658
    )
    
    
    
    
    
    
    (5,658
    )Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,652
    )Issuance of common
stock
    
    
    1,980,397
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    13,159
    
    
    
    
    
    
    
    
    
    
    
    13,179Options exercised
    
    
    104,894
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    238Balance at
March 31, 2005
    
    
    5,728,443
    
    
    $
    57
    
    
    
    775,000
    
    
    $
    8
    
    
    $
    35,884
    
    
    $
    (11,003
    )
    
    $
    17
    
    
    $
    24,963
 The accompanying notes are an integral part of these consolidated financial statements. -39-




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##### 



CHINDEX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Chindex International, Inc. (the Company or Chindex) is a Delaware corporation operating
in several healthcare sectors of the Chinese marketplace, including Hong Kong. The Company
conducts business in three segments. The Medical Capital Equipment segment markets and sells high-technology medical equipment and
instrumentation acquired from several major U.S., European and other manufacturers. The Company
markets and sells these products in China, including Hong Kong, and provides marketing, sales and
technical services for the products. Substantially all direct sales, commissions and purchases of
these products are denominated in U.S. dollars. The Healthcare Products Distribution segment operates a logistics platform through which it
provides logistics services to internal and external clients. Sales of consumables and low value
healthcare and health-related consumer products are undertaken through Chindex Holdings
International Trade (Tianjin) Ltd., and Chindex Shanghai International Trading Co., Ltd.,
subsidiaries that sell goods and receive payments in local Chinese currency and use the currency to
pay for local expenses and U.S.-dollar imported goods. Most consumable products are shipped when
payment is received. The Healthcare Services segment operates hospitals and clinics in Beijing and Shanghai. These
hospitals generally transact business in local Chinese currency but can also receive payments in
U.S. dollars. Consolidation The consolidated financial statements include the accounts of the Company, its subsidiaries
and variable interest entities. All intercompany balances and transactions are eliminated. The Company holds a 40% interest in Natural Formula Asia Limited (NFAL), which is accounted
for using the equity method. In May 2004, the Company made a loan of an additional $220,000, in
fulfillment of an agreement in principle accounted for at the end of fiscal year 2004. This
payment was expensed completely in 2004 and there are no plans at present for further funding. Revenue Recognition Sales of equipment and consumables are recognized upon product shipment, which corresponds to
the point at which the risk of loss transfers to the customer. A small amount of retail product
uses the consignment sale model, where shipments are recorded as consignment inventory and revenue
is recognized based on sales by the retail outlet to the end customers. Revenue related to
services provided by Healthcare Services is net of contractual adjustments or discounts and is
recognized in the period services are provided. Healthcare Services makes an estimate at the end
of the month for certain in-patients who have not completed service. This estimate reflects only
the cost of care up to the end of the month. The Company earns revenue from sales of products and providing services. Substantially all
revenue in the Medical Capital Equipment segment and the Healthcare Products Distribution segment
are from the sale of products and substantially all revenue in Healthcare Services is from
providing services. See Note 12 for further information on sales and gross profit by segment. -40-




---



##### 



Accounts Receivable Accounts receivable are customer obligations due under normal trade terms. They consist
primarily of amounts due from the sale of various products and services. Senior management reviews
accounts receivable on a monthly basis to determine if any receivables will potentially be
uncollectible. Any accounts receivable balances that are determined to be uncollectible, along
with a general allowance, 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.
Management believes that the allowance for doubtful accounts as of March 31, 2005 and 2004 is
adequate. However, actual write-offs might exceed the recorded allowance. Inventories Inventory purchased to fill executed sales contracts and purchase orders that remain
undelivered at year-end (merchandise inventory), service parts and inventory of peripheral
components are stated at the lower of cost or market using the specific identification method. In
addition, two wholly foreign owned subsidiaries maintain merchandise inventory based on expected
sales targets. Certain items are purchased for demonstration purposes and subsequent sale (demonstration
inventory). Management monitors the salability of such demonstration inventory and reduces the
carrying amount to net realizable value when there is any impairment in value. On September 30,
2004, the Company determined that demonstration equipment items previously included in inventory
would no longer be considered to be available for sale. Accordingly, these items have been
included in property and equipment at their net value. Inventory items held by the Healthcare Services Division are stated at the lower of cost or
market using the average cost method. Property and Equipment Property and equipment, including such assets held by Healthcare Services, are stated at
historical cost. The costs of additions and improvements are capitalized, while maintenance and
repairs are charged to expense as incurred. Depreciation is computed on the straight line method
over the estimated useful lives of the related assets. Useful lives for office equipment, vehicles
and furniture and fixtures range from 5 to 7 years. Leasehold improvements are amortized by the
straight-line method over the shorter of the estimated useful lives of the improvements or the
lease term. Certain medical equipment is depreciated over three years. The Company assesses the impairment of long-lived assets including intangible assets in
accordance with Statement of Financial Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. The Company evaluates its long-lived assets for impairment when indicators
of impairment are identified. The Company records impairment charges based upon the difference
between the fair value and carrying value of the original asset when undiscounted cash flows
indicate the carrying value will not be recovered. No impairment losses have been recorded in the
accompanying consolidated statement of operations. Income Taxes The Companys U.S. entities file a consolidated U.S. federal tax return. The U.S. provision
for income taxes is computed for each entity in the U.S. consolidated group at the statutory rate
based upon each entitys income or loss, giving effect to permanent differences. The Companys
foreign subsidiaries file separate income tax returns on a December 31 fiscal year. -41-




---



##### 



Provisions for income taxes are based upon earnings reported for financial statement purposes
and may differ from amounts currently payable or receivable because certain amounts may be
recognized for financial reporting purposes in different periods than they are for income tax
purposes. Deferred income taxes result from temporary differences between the financial statement
amounts of assets and liabilities and their respective tax bases. A valuation allowance reduces
the deferred tax assets when it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. Fair Value of Financial Instruments The Company considers the recorded value of its financial instruments, which consist primarily
of cash and cash equivalents, trade receivables, accounts payable, and short-term debt payable and
vendor financing to approximate the fair value of the respective assets and liabilities at March
31, 2005 and March 31, 2004. Earnings Per Share The Company follows Statement of Financial Accounting Standards No. 128, Earnings per Share
(Statement 128) whereby basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities and diluted earnings per share includes such effects. The Company does
not include the effects of stock options, warrants and convertible securities for periods when the
Company reports a net loss as such effects would be antidilutive. Stock Based Compensation The Company accounts for stock-based compensation to employees under Accounting Principles
Board Opinion (APB) No. 25  Accounting for Stock Issued to Employees, and complies with the
disclosure requirements for SFAS No. 123  Accounting for Stock-Based Compensation and SFAS No.
148  Accounting for Stock-Based Compensation  Transition and Disclosure. Under APB 25
compensation expense is measured as the excess, if any, of the market value of the underlying
common stock over the amount the employee is required to pay on the date both the number of shares
and the price to be paid are known. No compensation expense has been recognized in the
consolidated statements of income as option grants generally are made with exercise prices equal to
the fair value of the underlying common stock on the award date, which is typically the date of
compensation measurement. Had compensation cost for these plans been determined consistent with
SFAS No. 123, the Companys net (loss) income and earnings per share (EPS) would have been
reduced to the following pro-forma amounts (in thousands, except share data): 2005
    
    
    2004
    
    
    2003
    
    
    2002Net (loss) income, as reported
    
    $
    (5,658
    )
    
    $
    (1,987
    )
    
    $
    76
    
    
    $
    259Deduct: total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects
    
    
    (1,266
    )
    
    
    (18
    )
    
    
    (36
    )
    
    
    (24
    )Net (loss) income, pro-forma
    
    $
    (6,924
    )
    
    $
    (2,005
    )
    
    $
    40
    
    
    $
    235Pro forma earnings per share:EPS, basic
    
    As reported
    
    $
    (1.06
    )
    
    $
    (.53
    )
    
    $
    .02
    
    
    $
    .07EPS, basic
    
    Pro forma
    
    $
    (1.30
    )
    
    $
    (.53
    )
    
    $
    .02
    
    
    $
    .06EPS, diluted
    
    As reported
    
    $
    (1.06
    )
    
    $
    (.53
    )
    
    $
    .02
    
    
    $
    .07EPS, diluted
    
    Pro forma
    
    $
    (1.30
    )
    
    $
    (.53
    )
    
    $
    .01
    
    
    $
    .06
 -42-




---



##### 



The fair value of each option is estimated at the date of grant using a modified
Black-Scholes option pricing model, with the following weighted-average assumptions for 2003 and
2002: dividend yield 0.00%; expected volatility of 62.3%; risk-free interest rate of 3.00%; and
expected life of 7.0 years. For March 2004: dividend yield 0.00%; expected volatility 99.8%;
risk-free interest rate 2.00%; expected life 7.0 years. For March 2005: dividend yield 0.00%;
expected volatility 68.33%; risk-free interest rate 3.00%; expected life 6.84 years. The weighted
average fair value of options issued for years ending March 31, 2005 and 2004, 3 months ending
March 31, 2003 and year ending December 31, 2002 was $8.38, $2.15, $.72 and $1.69, respectively. Dividends The Company has not paid cash dividends to the stockholders of its common stock and any cash
dividends that may be paid in the future will depend upon the financial requirements of the Company
and other relevant factors. On June 19, 2002, the Company declared a 10% stock dividend to holders
of record on July 15, 2002. 100% stock splits in the form of a stock dividend were announced by
the Company on August 6, 2003 with a record date of August 18, 2003 and on December 29, 2003 with a
record date of January 10, 2004. Common stock as reported in the financial statements has been
adjusted for all periods to reflect these stock dividends. Foreign Currencies Financial statements of the Companys foreign subsidiaries are translated from the functional
currency, generally the local currency, to U.S. Dollars. Assets and liabilities are translated at
the exchange rates on the balance sheet date. Results of operations are translated at average
exchange rates. Accumulated other comprehensive income in the accompanying consolidated statements
of stockholders equity consists entirely of the resulting exchange difference. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates, judgments, and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Because of the use of estimates inherent in the
financial reporting process, actual results could differ from those estimates. Areas in which
significant judgments and estimates are used include revenue recognition, receivable collectibility
and deferred tax valuation allowances. Reclassifications Certain balances in the 2004, 2003 and 2002 consolidated financial statements have been
reclassified to conform to the 2005 presentation. New Accounting Standards In December 2003, the FASB revised Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN46). FIN46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns or both. The
consolidation requirement of FIN46 (as revised) apply immediately to variable
interest entities created after January 31, 2003 and to existing entities in their first fiscal year or interim
period ending after March 15, 2004. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003, regardless of
when the variable -43-




---



##### 



interest entity was established. This accounting pronouncement did not have a
material effect on the consolidated financial statements. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R,
Share-Based Payment (SFAS 123R), which requires companies to measure and recognize compensation
expense for all stock-based payments at fair value. SFAS 123R was originally effective for all
interim periods beginning after June 15, 2005, however the SEC delayed implementation of the
statement. The Company now needs to implement SFAS 123R beginning April 1, 2006. The Company is
currently evaluating the impact of SFAS 123R on its financial position and results of operations. In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle facilities,
excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as
current period charges. The provisions of SFAS No. 151 are effective for our fiscal year beginning
April 1, 2006. The Company does not expect that the adoption will have a material impact on our
consolidated financial position or results of operations. 2. INVENTORIES
(in thousands) March 31,
    
    
    March 31,2005
    
    
    2004Inventories consist of the following:Merchandise inventory
    
    $
    7,797
    
    
    $
    7,834Healthcare services inventory
    
    
    399
    
    
    
    247Demonstration inventory, net
    
    
    0
    
    
    
    826Parts and peripherals
    
    
    2,660
    
    
    
    1,456$
    10,856
    
    
    $
    10,363
 On September 30, 2004, the Company determined that demonstration equipment items previously
included in inventory would no longer be considered to be available for sale. Accordingly, these
items have been included in property and equipment at their net value. 3. PROPERTY AND
EQUIPMENT, NET
(in thousands) March 31,
    
    
    March 31,2005
    
    
    2004Property and equipment, net consists of the
following:Furniture and equipment
    
    $
    10,079
    
    
    $
    7,212Vehicles
    
    
    68
    
    
    
    109Demonstration equipment
    
    
    2,456
    
    
    
    0Leasehold improvements
    
    
    12,607
    
    
    
    7,15125,210
    
    
    
    14,472Less: accumulated depreciation and amortization
    
    
    (7,590
    )
    
    
    (5,571
    )$
    17,620
    
    
    $
    8,901
 -44-




---



##### 



4. DEBT The Company has a $1,750,000 credit facility with M&T Bank for short-term working capital
needs, standby letters of credit, and spot and forward foreign exchange transactions. Balances
outstanding under the facilities are payable on demand, fully secured and collateralized by
government securities acceptable to the Bank having an aggregate fair market value of not less than
$1,945,000. As of March 31, 2005, letters of credit issued by the bank amounted to approximately
$141,000 and there was no outstanding balance under the line of credit facility. Borrowings under
the credit facility bear interest at 1% over the three month London Interbank Offered Rate (LIBOR). As of March 31, 2005, the Companys short-term loan payable was comprised of bank loans of
$2,839,000. BJU has a short-term financing arrangement in China with the Hong Kong and Shanghai
Banking Corporation (HSBC) for $600,000 in revolving loans bearing interest at 1.5% over the
three-month Singapore Interbank Money Market Offer Rate (SIBOR). Also, a line of credit is included
in the arrangement with HSBC for up to $1,200,000, bearing interest at 2.25% over SIBOR and having
a term of up to three years. As of March 31, 2005, the balances on these credit lines were $600,000
and $603,000, respectively. The Company opened its hospital facility in Shanghai, the cost of which was financed through
(i) vendor financing (ii) local bank borrowings and (iii) proceeds of the sale of 1.5 million
shares of common stock and warrants. The outstanding local bank borrowing for SHU consists of a
$4 million loan facility with HSBC, which was fully utilized during calendar 2004. Of this loan,
$1,636,000 is classified as short-term and $2,006,000 is classified as long-term. The long-term
facility has a five-year term and an interest rate of 2.5% over the six month SIBOR. The Company
has guaranteed the full amount of the HSBC facilities. The Company has an agreement with a major supplier whereby the supplier has agreed to provide
long term (one and one-half years on those transactions that have occurred to date) payment terms
on the Companys purchases of medical equipment from the supplier. The arrangement carries an
interest component of five percent. At March 31, 2005 and 2004 the Company has $0 and $2,998,000
of payables recorded under this agreement respectively. The following table sets forth the Companys debt obligations as of March 31, 2005: (in thousands) Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLine of credit
    
    $
    1,203
    
    
    $
    1,203
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Bank Loan
    
    
    3,641
    
    
    
    1,636
    
    
    
    669
    
    
    
    668
    
    
    
    668
    
    
    
    0
    
    
    
    0Vendor financing
    
    
    744
    
    
    
    149
    
    
    
    149
    
    
    
    149
    
    
    
    149
    
    
    
    148
    
    
    
    0
 5. STOCKHOLDERS
EQUITY Common Stock The Class B common stock and the common stock are substantially identical on a share-for-share
basis, except that the holders of Class B common stock have six votes per share on each matter
considered by stockholders and the holders of common stock have one vote per share on each matter
considered by stockholders. Each share of Class B common stock will convert at any time at the
option of the original
holder thereof into one share of common stock and is automatically converted into one share of
common -45-




---



##### 



stock upon (i) the death of the original holder thereof, or, if such stocks are subject to a
stockholders agreement or voting trust granting the power to vote such shares to another original
holder of Class B common stock, then upon the death of such original holder, or (ii) the sale or
transfer to any person other than specified transferees. Stock Option Plan The Companys 1994 Stock Option Plan (the 1994 Plan) provided for the grant, at the discretion
of the Board of Directors, of (i) options that are intended to qualify as incentive stock options
(Incentive Stock Options) within the meaning of Section 422A of the Internal Revenue Code to
certain employees, consultants and directors, and (ii) options not intended to so qualify
(Nonqualified Stock Options) to employees, consultants and directors. On April 27, 2004, the Plan
terminated by its terms and no additional options may be granted thereunder. The following is a summary of stock option activity during the years ended March 31, 2005 and
2004, the three months ended March 31, 2003 and the year ended December 31, 2002: Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    Exercise2005
    
    
    Price
    
    
    2004
    
    
    Price
    
    
    2003
    
    
    Price
    
    
    2002
    
    
    PriceOptions
outstanding,
beginning of year:
    
    
    948,700
    
    
    $
    2.30
    
    
    
    1,053,416
    
    
    $
    2.29
    
    
    
    929,416
    
    
    $
    2.35
    
    
    
    838,404
    
    
    $
    2.54Granted
    
    
    306,900
    
    
    
    12.60
    
    
    
    20,000
    
    
    
    2.60
    
    
    
    124,000
    
    
    
    1.90
    
    
    
    128,508
    
    
    
    2.60Exercised
    
    
    (104,894
    )
    
    
    2.27
    
    
    
    (110,196
    )
    
    
    2.25
    
    
    
    0
    
    
    
    0
    
    
    
    (37,300
    )
    
    
    2.18Canceled
    
    
    (37,562
    )
    
    
    10.76
    
    
    
    (14,520
    )
    
    
    2.49
    
    
    
    0
    
    
    
    0
    
    
    
    (196
    )
    
    
    2.08Options outstanding,
end of year
    
    
    1,113,144
    
    
    $
    4.85
    
    
    
    948,700
    
    
    $
    2.30
    
    
    
    1,053,416
    
    
    $
    2.29
    
    
    
    929,416
    
    
    $
    2.35
 Options exercisable at March 31, 2005, March 31, 2004, March 31, 2003 and December 31,
2002, were 1,036,344, 919,360, 1,010,476 and 886,752, respectively, with weighted average exercise
prices of $4.32, $2.30, $2.28 and $2.34, respectively. The weighted average exercise price of
options outstanding is $4.85, $2.30, $2.29 and $2.35 and the weighted average remaining contractual
life of such options is 6.55, 6.77, 7.73 and 7.68 years respectively as of March 31, 2005, March
31, 2004, March 31, 2003, and December 31, 2002. On September 1, 2004, the Companys Board of Directors approved and on October 14, 2004, the
Companys shareholders approved the Companys 2004 Incentive Stock Plan (2004 Plan). The 2004 Plan
became effective upon the shareholders approval. The 2004 Plan provides for grants of: options to
purchase common stock; restricted shares of common stock (which may be subject to both issuance and
forfeiture conditions), which we refer to as restricted stock; deferred shares of common stock
(which may be subject to the completion of a specified period of service and other issuance
conditions), which we refer to as deferred stock; stock units (entitling the grantee to cash
payments based on the value of the common stock on the date the payment is called for under the
stock unit grant); and stock appreciation rights (entitling the grantee to receive the appreciation
in value of the underlying common stock between the date of exercise and the date of grant), which
are referred to as SARs. SARs may be either freestanding or granted in tandem with an option.
Options to purchase the common stock may be either incentive stock options that are intended to
satisfy the requirements of Section 422 of the Code, or options that do not satisfy the
requirements of Section 422 of the Code. Recent Issuance of Securities As of March 29, 2004, the Company entered into a securities purchase agreement with a limited
number of accredited investors pursuant to which we agreed to issue and the investors agreed to
purchase at -46-




---



##### 



a price of $9.00 per share 1,500,000 shares of our common stock, together with warrants
to purchase an additional 300,000 shares of our common stock at an exercise price of $12.00 per
share, for an aggregate purchase price of $13,500,000. We sometimes refer to this financing as the
financing. The net proceeds to us from the financing, after deducting expenses of the financing
including placement agent fees, were approximately $12,100,000. In connection with the financing,
we also agreed to issue the placement agent five-year warrants to purchase 90,000 shares of our
common stock at an exercise price of $12.00 per share. On March 31 and April 1, 2004, the initial
closings of the financing occurred at which a total of 600,000 shares of our common stock together
with warrants to purchase 120,000 shares of our common stock were issued to the investors. In
connection with the initial closings, the placement agent was issued warrants to purchase 36,000
shares of our common stock. The final closing of the financing took place on May 5, 2004 at which
the remaining 900,000 shares of common stock together with the remaining warrants to purchase
180,000 shares of our common stock were issued to the investors. In connection with the final
closing, the placement agent was issued the remaining warrants to purchase 54,000 shares of our
common stock. As of March 21, 2005, we entered into a second securities purchase agreement with a limited
number of accredited investors pursuant to which we agreed to issue and the investors agreed to
purchase at a price of $6.00 per share 1,080,397 shares of our common stock, together with warrants
to purchase an additional 378,137 shares of our common stock at an exercise price of $9.10 per
share, for an aggregate purchase price of $6,482,382. The net proceeds to us from the financing,
after deducting expenses of the financing including placement agent fees, were approximately $6
million. In connection with the financings, we also agreed to issue to the placement agent
five-year warrants to purchase 64,005 shares of our common stock at an exercise price of $9.10 per
share. On March 24, 2005, the closing of the financing occurred. Notwithstanding the foregoing,
no warrant issued pursuant to this securities purchase agreement is exercisable until six months
from the date of issuance or may have its exercise price adjusted as a result of the anti-dilution
provisions thereof below the market value of common stock as of the date of the agreement, which
value was $7.09, subject to shareholder approval. Shares of Common Stock Reserved As of March 31, 2005, the Company has reserved 3,397,842 shares of common stock for issuance
upon exercise of remaining private placement securities, stock options and Class B common stock
convertibility. 6. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted
Earnings per Share (EPS) computations for net (loss) income and other related disclosures: (thousands except share and per share data) -47-




---



##### 



Three monthsYear ended
    
    
    Year ended
    
    
    Three months
    
    
    ended March
    
    
    Year endedMarch 31,
    
    
    March 31,
    
    
    ended March
    
    
    31, 2002
    
    
    December 31,2005
    
    
    2004
    
    
    31, 2003
    
    
    (unaudited)
    
    
    2002Net (loss) income
    
    $
    (5,658
    )
    
    $
    (1,987
    )
    
    $
    76
    
    
    $
    (192
    )
    
    $
    259Weighted average shares
outstanding- basic
    
    
    5,313,573
    
    
    
    3,758,170
    
    
    
    3,708,232
    
    
    
    3,672,460
    
    
    
    3,699,052Basic (loss) earnings per share
    
    $
    (1.06
    )
    
    $
    (.53
    )
    
    $
    .02
    
    
    $
    (.05
    )
    
    $
    .07Effect of dilutive securities:Shares issuable upon exercise of
dilutive outstanding stock
options:
    
    
    0
    
    
    
    0
    
    
    
    7,676
    
    
    
    0
    
    
    
    97,288Weighted average shares
outstanding- diluted
    
    
    5,313,573
    
    
    
    3,758,170
    
    
    
    3,715,908
    
    
    
    3,672,460
    
    
    
    3,796,340Diluted (loss) earnings per share
    
    $
    (1.06
    )
    
    $
    (.53
    )
    
    $
    .02
    
    
    $
    (.05
    )
    
    $
    .07
 For the periods in which losses were incurred, shares issuable upon exercise of stock options
are excluded from diluted earnings per share because the effect would be anti-dilutive. 7. INCOME TAXES The Companys benefit from (provision for) income taxes consists of the following for the
years ended March 31, 2005 and March 31, 2004, the three months ended March 31, 2003, and the year
ended December 31, 2002: -48-




---



##### 



(in thousands)2005
    
    
    2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Foreign
    
    
    (144
    )
    
    
    (356
    )
    
    
    (80
    )
    
    
    (545
    )State
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0(144
    )
    
    
    (356
    )
    
    
    (80
    )
    
    
    (545
    )Deferred:Federal
    
    
    170
    
    
    
    208
    
    
    
    0
    
    
    
    681State
    
    
    31
    
    
    
    2
    
    
    
    0
    
    
    
    104Foreign
    
    
    0
    
    
    
    82
    
    
    
    0
    
    
    
    0201
    
    
    
    292
    
    
    
    0
    
    
    
    785$
    57
    
    
    $
    (64
    )
    
    $
    (80
    )
    
    $
    240
 Significant components of the Companys deferred tax liabilities and assets are as follows at
March 31, 2005 and March 31, 2004: (in thousands)2005
    
    
    2004Deferred tax liabilities:Unremitted earnings on foreign
subsidiaries
    
    $
    (497
    )
    
    $
    0Deferred tax assets:Allowance for doubtful accounts
    
    
    274
    
    
    
    286Sales commissions
    
    
    240
    
    
    
    181Net operating loss carryforwards
    
    
    4,472
    
    
    
    2,463Foreign tax credit
    
    
    444
    
    
    
    194Alternate minimum tax
    
    
    47
    
    
    
    47Depreciation
    
    
    42
    
    
    
    27Other
    
    
    47
    
    
    
    0Subtotal
    
    
    5,069
    
    
    
    3,198Less valuation allowance
    
    
    (3,067
    )
    
    
    (1,397
    )Net deferred tax asset
    
    $
    2,002
    
    
    $
    1,801
 The Companys effective income tax rate varied from the statutory federal income tax rate for
the years ended March 31, 2005 and March 31, 2004, the three months ended March 31, 2003 and the
year ended December 31, 2002 as follows: 2005
    
    
    2004
    
    
    2003
    
    
    2002Statutory federal income tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Adjustments:State income taxes, net of federal benefit
    
    
    1.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0Foreign tax rate differential
    
    
    (5.0
    )
    
    
    (9.0
    )
    
    
    171.0
    
    
    
    3,036.0Use of net operating losses
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    (5,289.0
    )Change in valuation allowance
    
    
    (34.0
    )
    
    
    17.0
    
    
    
    (38.0
    )
    
    
    (3,474.0
    )Other, including permanent differences
    
    
    5.0
    
    
    
    (49.0
    )
    
    
    (136.0
    )
    
    
    4,426.01.0
    %
    
    
    (3.0
    )%
    
    
    35.0
    %
    
    
    (1,263.0
    )%
 The Company has U.S. Federal net operating losses of approximately $4.8 million that expire
through 2024. The Company also has foreign losses from China of approximately $2.6 million that
expire -49-




---



##### 



through 2010. These net operating loss carryforwards may be limited by Internal Revenue
Code section 382, the extent of the limitation has not been determined. The Company has approximately $440,000 of foreign tax credits available to off-set future U.S.
federal income taxes and, under the current law, of these credits $ 240,000 will expire in 2015 and
remaining credit of $ 200,000 will expire through 2009. The valuation allowance increased by $1.7 million which includes all foreign tax loss
carryforwards. Based on the Companys historical and expected future taxable earnings, management
believes it is more likely than not that the Company will realize the benefit of existing deferred
tax assets for US net operating losses of $1.8 million at March 31, 2005. As of March 31, 2005, the Company has recorded U.S. federal deferred income taxes on
undistributed earnings from some of its foreign subsidiaries of $497,000. It is expected that
earnings from majority of its foreign subsidiaries will be permanently reinvested in operations
outside the U.S. It is not practical to compute the estimated deferred tax liability on these
earnings. The American Jobs Creation Act of 2004 (the Job Creation Act) was enacted on October 22,
2004. Among other things, the Job Creation Act repeals an export incentive and creates a new
deduction for qualified domestic manufacturing activities. The Company is in the process of
evaluating the potential impact of this legislation. 8. COMMITMENTS Leases The Company leases office space, warehouse space, and space for both Beijing United and
Shanghai United under operating leases. Future minimum payments under these noncancelable
operating leases consist of the following: (thousands)Year ending March 31:2006
    
    $
    2,3872007
    
    
    2,1342008
    
    
    1,8762009
    
    
    1,3392010
    
    
    1,274Thereafter
    
    
    4,104Net minimum rental commitments
    
    $
    13,114
 The above leases require the Company to pay certain pass through operating expenses and rental
increases based on inflation. Rental expense was approximately $2,381,000, $1,904,000, $472,000 and $1,499,000 for the years
ended March 31, 2005 and 2004, three months ended March 31, 2003, and for the year ended December
31, 2002, respectively. -50-




---



##### 



9. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and trade receivables. Substantially all of the
Companys cash and cash equivalents at March 31, 2005 and March 31, 2004 were held by one U.S.
financial institution. All of the Companys sales during the years were to end-users located in
China or Hong Kong. Most of the Companys equipment or consumables sales are accompanied by down
payments of cash and/or letters of credit. Most of the Companys medical services provided by
Beijing United were performed in China for patients residing in China. Approximately 63% of the
payments received for such services were denominated in local currency and 37% in U.S. dollars. The Company conducts its marketing and sales and provides its services exclusively to buyers
located in China, including Hong Kong. The medical services and products provided by Beijing
United and the marketing of such services are performed exclusively for/to patients in China. The
Companys results of operations and its ability to obtain financing could be adversely affected if
there was a deterioration in trade relations between the United States and China. Of the Companys assets at March 31, 2005 and 2004, approximately $38,462,000 and $33,476,000,
respectively, of such assets are located in China, consisting principally of cash, receivables,
inventories, leasehold improvements, equipment and other assets. Also, see Note 10. 10. SIGNIFICANT CUSTOMERS/SUPPLIERS Substantially all China purchases of the Companys U.S.-Dollar sales of products, regardless
of the end-user, are made through Chinese foreign trade corporations (FTCs). Although the
purchasing decision is made by the end-user, which may be an individual or a group having the
required approvals from their administrative organizations, the Company enters into formal purchase
contracts with FTCs. The FTCs make purchases on behalf of the end-users and are authorized by the
Chinese government to conduct import business. FTCs are chartered and regulated by the government
and are formed to facilitate foreign trade. The Company markets its products directly to
end-users, but in consummating a sale the Company must also interact with the particular FTC
representing the end-user. By virtue of its direct contractual relationship with the FTC, rather
than the end user, the Company is to some extent dependent on the continuing existence of and
contractual compliance by the FTC until a particular transaction has been completed. In fiscal
2002, the Company recorded sales to Instrimpex FTC of $8,821,000; this is the only customer over
10% of total sales. Purchases from several suppliers were each over 10% of total cost of goods. These were
Siemens ($21,075,000), Guidant ($13,210,000) and LOreal ($15,134,000) for the year ended March 31,
2005. Purchases over 10% for the year ended March 31, 2004 were Siemens, ($14,945,000),
Becton-Dickenson ($8,863,000), Guidant ($11,926,000) and LOreal ($10,311,000). Purchases over 10%
for the year ended December 31, 2002 were Siemens ($11,233,000), Becton-Dickenson ($11,145,000) and
LOreal ($7,168,000). -51-




---



##### 



11. ACCOUNTING FOR VARIABLE INTEREST ENTITIES (VIE) FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other
financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of
the risk of loss from the VIEs activities, is entitled to receive a majority of the VIEs residual
returns (if no party absorbs a majority of the VIEs losses), or both. A variable interest holder
that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary
beneficiary generally must initially record all of the VIEs assets, liabilities and noncontrolling
interests at fair value and subsequently account for the VIE as if it were consolidated based on
majority voting interest. The Companys clinics in Shunyi (a densely expatriate-populated suburb of Shunyi County just
outside of Beijing) and at the Shanghai Racquet Club (geographically located in a Shanghai
expatriate residential district) as well as any future clinics are consolidated VIEs. These
entities were founded for the express purpose of projecting United Family Hospital general patient
services closer to a large patient population for the convenience of the patients. These are
primarily storefront facilities with assets of less than $250,000 consisting primarily of cash and
leasehold improvements. The Company has full control of these entities and maintains these clinics
at a breakeven basis. The impact on future operating income from the consolidation of these
entities is not expected to be significant. 12. SEGMENT REPORTING The Company has three reportable segments: Medical Capital Equipment, Healthcare Products
Distribution and Healthcare Services. The Company evaluates performance and allocates resources
based on profit or loss from operations before income taxes, not including gains or losses on the
Companys investment portfolio. All segments follow the accounting policies described in Note 1.
The following segment information has been provided per Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information: For the year ended March 31, 2005: Medical
    
    
    HealthcareCapital
    
    
    Products
    
    
    HealthcareEquipment
    
    
    Distribution
    
    
    Services
    
    
    TotalAssets
    
    $
    22,698,000
    
    
    $
    13,712,000
    
    
    $
    20,878,000
    
    
    $
    57,288,000Sales and service revenue
    
    $
    42,957,000
    
    
    $
    35,017,000
    
    
    $
    22,801,000
    
    
    $
    100,775,000Gross Profit
    
    
    11,381,000
    
    
    
    4,101,000
    
    
    
    n/a
    
    
    
    n/aGross Profit %
    
    
    26
    %
    
    
    12
    %
    
    
    n/a
    
    
    
    n/aLoss from operations
    
    $
    (11,000
    )
    
    $
    (2,603,000
    )
    
    $
    (2,844,000
    )
    
    $
    (5,458,000
    )Other (expense) net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (257,000
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,715,000
    )
 For the year ended March 31, 2004: -52-




---



##### 



Medical
    
    
    HealthcareCapital
    
    
    Products
    
    
    HealthcareEquipment
    
    
    Distribution
    
    
    Services
    
    
    TotalAssets
    
    $
    22,987,000
    
    
    $
    12,525,000
    
    
    $
    12,339,000
    
    
    $
    47,851,000Sales and service revenue
    
    $
    33,836,000
    
    
    $
    38,393,000
    
    
    $
    15,954,000
    
    
    $
    88,183,000Gross Profit
    
    
    9,427,000
    
    
    
    4,788,000
    
    
    
    n/a
    
    
    
    n/aGross Profit %
    
    
    28
    %
    
    
    12
    %
    
    
    n/a
    
    
    
    n/aLoss from operations
    
    $
    (269,000
    )
    
    $
    (641,000
    )
    
    $
    (680,000
    )
    
    $
    (1,590,000
    )Other (expense) net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111,000
    )Loss on equity investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (222,000
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,923,000
    )
 For the three months ended March 31, 2003: Medical
    
    
    HealthcareCapital
    
    
    Products
    
    
    HealthcareEquipment
    
    
    Distribution
    
    
    Services
    
    
    TotalAssets
    
    $
    19,521,000
    
    
    $
    12,571,000
    
    
    $
    10,248,000
    
    
    $
    42,340,000Sales and service revenue
    
    $
    7,716,000
    
    
    $
    10,663,000
    
    
    $
    3,470,000
    
    
    $
    21,849,000Gross Profit
    
    
    2,474,000
    
    
    
    1,097,000
    
    
    
    n/a
    
    
    
    n/aGross Profit %
    
    
    32
    %
    
    
    10
    %
    
    
    n/a
    
    
    
    n/aIncome (loss) from
operations
    
    $
    521,000
    
    
    $
    (121,000
    )
    
    $
    (178,000
    )
    
    $
    222,000Other (expense) net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,000
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    156,000
 For the year ended December 31, 2002: Medical
    
    
    HealthcareCapital
    
    
    Products
    
    
    HealthcareEquipment
    
    
    Distribution
    
    
    Services
    
    
    TotalAssets
    
    $
    21,354,000
    
    
    $
    10,616,000
    
    
    $
    11,156,000
    
    
    $
    43,126,000Sales and service revenue
    
    $
    28,708,000
    
    
    $
    28,946,000
    
    
    $
    12,963,000
    
    
    $
    70,617,000Gross Profit
    
    
    7,822,000
    
    
    
    3,856,000
    
    
    
    n/a
    
    
    
    n/aGross Profit %
    
    
    27
    %
    
    
    13
    %
    
    
    n/a
    
    
    
    n/aIncome (loss) from
operations
    
    $
    198,000
    
    
    $
    (601,000
    )
    
    $
    586,000
    
    
    $
    183,000Other (expense) net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126,000
    )Loss on equity investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    (38,000
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,000
 -53-




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##### 



13. SELECTED QUARTERLY DATA (UNAUDITED) (thousands except per share data) First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterFor the year ended March 31, 2005:Revenue
    
    $
    26,675
    
    
    $
    27,555
    
    
    $
    22,329
    
    
    $
    24,216Income (loss) before income taxes
    
    
    430
    
    
    
    (40
    )
    
    
    (3,399
    )
    
    
    (2,706
    )Net income (loss)
    
    
    244
    
    
    
    (89
    )
    
    
    (3,713
    )
    
    
    (2,100
    )Basic (loss) earnings per share of common
stock
    
    
    .05
    
    
    
    (.02
    )
    
    
    (.69
    )
    
    
    (.38
    )Diluted (loss) earnings per share of
common stock
    
    
    .04
    
    
    
    (.02
    )
    
    
    (.69
    )
    
    
    (.38
    )Cash dividends per share of common stock
    
    
    .00
    
    
    
    .00
    
    
    
    .00
    
    
    
    .00For the year ended March 31, 2004:Revenue
    
    $
    20,373
    
    
    $
    21,156
    
    
    $
    21,630
    
    
    $
    25,024(Loss) income before income taxes
    
    
    (1,726
    )
    
    
    376
    
    
    
    (502
    )
    
    
    (71
    )Net (loss) income
    
    
    (1,338
    )
    
    
    218
    
    
    
    (383
    )
    
    
    (484
    )Basic (loss) earnings per share of common
stock
    
    
    (.36
    )
    
    
    .06
    
    
    
    (.10
    )
    
    
    (.13
    )Diluted (loss) earnings per share of
common stock
    
    
    (.36
    )
    
    
    .05
    
    
    
    (.10
    )
    
    
    (.13
    )Cash dividends per share of common stock
    
    
    .00
    
    
    
    .00
    
    
    
    .00
    
    
    
    .00For the thee months ended March 31, 2003:Revenue
    
    $
    21,849Income before income taxes
    
    
    156Net income
    
    
    76Basic earnings per share of common stock
    
    
    .02Diluted earnings per share of common stock
    
    
    .02Cash dividends per share of common stock
    
    
    .00
 -54-




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##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE Previously disclosed. ITEM 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures pursuant to exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting during the quarter ended
March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required is set forth in the Proxy Statement, which is incorporated herein by
reference. ITEM 11. EXECUTIVE COMPENSATION Information required is set forth in the Proxy Statement, which is incorporated herein by
reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required is set forth in the Proxy Statement, which is incorporated herein by
reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required is set forth in the Proxy Statement, which is incorporated herein by
reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required is set forth in the Proxy Statement, which is incorporated herein by
reference. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) The following consolidated financial statements of Chindex International, Inc. are included in Part II, Item 8: -55-




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##### 



Reports of Independent Registered Public Accounting Firms. Consolidated Balance Sheets as of March 31, 2005 and March 31, 2004. Consolidated Statements of Operations for the years ended March 31, 2005 and 2004, three months
ended March 31, 2003, three months ended March 31, 2002 (unaudited) and the year ended December 31,
2002. Consolidated Statements of Cash Flows for the years ended March 31, 2005 and 2004, three months
ended March 31, 2003, three months ended March 31, 2002 (unaudited) and the year ended December 31,
2002. Consolidated Statements of Stockholders Equity for the year ended March 31, 2005, period ended
March 31, 2004, and the year ended December 31, 2002. Notes to Consolidated Financial Statements. (a)(2) The following financial statement schedule of Chindex International is included in Item
15(d): Schedule II Valuation and Qualifying Accounts. Balance
    
    
    
    
    
    
    
    
    Additions
    
    
    
    
    
    
    
    
    Balancebeginning
    
    
    
    Additions
    
    
    
    not
    
    
    
    
    
    
    
    
    endDescription (amounts in thousands)
    
    
    of year
    
    
    
    expensed
    
    
    
    expensed
    
    
    
    Deductions
    
    
    
    of yearFor the year ended March 31, 2005:Allowance for doubtful receivables
    
    
    $
    1,131
    
    
    
    $
    1,428
    
    
    
    
    
    
    
    
    $
    708
    
    
    
    $
    1,851Deferred income tax valuation allowance
    
    
    
    1,397
    
    
    
    
    1,670
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    3,067Total allowances deducted from assets
    
    
    $
    2,528
    
    
    
    $
    3,098
    
    
    
    $
    0
    
    
    
    $
    708
    
    
    
    $
    4,918For the year ended March 31, 2004:Allowance for doubtful receivables
    
    
    $
    1,001
    
    
    
    $
    777
    
    
    
    
    
    
    
    
    $
    647
    
    
    
    $
    1,131Deferred income tax valuation allowance
    
    
    
    456
    
    
    
    
    278
    
    
    
    $
    663
    
    
    
    
    0
    
    
    
    
    1,397Total allowances deducted from assets
    
    
    $
    1,457
    
    
    
    $
    1,055
    
    
    
    $
    663
    
    
    
    $
    647
    
    
    
    $
    2,528For the three months ended March 31,
2003:Allowance for doubtful receivables
    
    
    $
    883
    
    
    
    $
    118
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,001Deferred income tax valuation allowance
    
    
    
    456
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    456Total allowances deducted from assets
    
    
    $
    1,339
    
    
    
    $
    118
    
    
    
    $
    0
    
    
    
    $
    0
    
    
    
    $
    1,457For the year ended December 31, 2002:Allowance for doubtful receivables
    
    
    $
    604
    
    
    
    $
    279
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    883Deferred income tax valuation allowance
    
    
    
    1,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    990
    
    
    
    
    456Total allowances deducted from assets
    
    
    $
    2,050
    
    
    
    $
    279
    
    
    
    $
    0
    
    
    
    $
    990
    
    
    
    $
    1,339
 All other schedules for which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted. (b) Exhibits The exhibits listed below are filed as a part of this annual report:  3.1
    
    Amended and Restated Certificate of Incorporation of the Company dated October 28, 2004 (filed herewith)3.2
    
    By-laws of the Company. Incorporated by reference to Annex C to the Proxy Statement. -56-




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##### 



4.1
    
    Form of Specimen Certificate representing the Registrants Common Stock. Incorporated by reference to
Exhibit 4.2 to the Registrants Registration Statement on Form SB-2 (No. 33-78446) (The IPO Registration
Statement).4.2
    
    Form of Specimen Certificate representing Class B Common Stock. Incorporated by reference to Exhibit 4.3 to
the IPO Registration Statement.10.1
    
    The Companys 1994 Stock Option Plan, as amended as of July 17, 2001. Incorporated by reference to Exhibit
10.1 to the Companys Quarterly Report on Form 10-Q for the six months ended June 30, 2001.10.2
    
    The Companys 2004 Stock Incentive Plan. Incorporated by reference to Annex B to the Companys Proxy
Statement on Schedule 14A filed with the Securities and Exchange Commission on September 14, 2004.10.3
    
    Lease Agreement, dated as of March 1994, between the Company and Central Properties Limited Partnership,
relating to the Companys Bethesda, Maryland facility. Incorporated by reference to Exhibit 10.4 to the IPO
Registration Statement.10.4
    
    First Amendment to Lease, dated as of June 26, 1996, between the Company and Central Properties Limited
Partnership, relating to additional space at the Companys Bethesda, Maryland facility. Incorporated by reference
to Exhibit 10.5 to the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.10.5
    

    Lease Agreement between the School of Posts and Telecommunications and the Company dated November 8, 1995.
Incorporated by reference to Exhibit 10.14 to the Companys Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995.10.6
    
    Amendments Numbers One, Two and Three to the Lease Agreement between the School of Posts and
Telecommunications and the Company dated November 8, 1995, each such amendment dated November 26, 1996.
Incorporated by reference to Exhibit 10.13 to the Companys Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.10.7
    
    Lease Agreement dated May 10, 1998, between the School of Posts and Telecommunications and the Company
relating to the lease of additional space. Incorporated by reference to Exhibit 10.13 to the Companys Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998.10.8
    
    Contractual Joint Venture Contract between the Chinese Academy of Medical Sciences Union Medical &
Pharmaceutical Group Beijing Union Medical & Pharmaceutical General Corporation and the Company, dated September
27, 1995. Incorporated by reference to Exhibit 10.16 to the Companys Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.10.9
    
    First Investment Loan Manager Demand Promissory Note dated July 10, 1997 between First National Bank of
Maryland and the Company. Incorporated by reference to Exhibit 10.16 to the Companys Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.10.10
    
    Distribution Agreement dated October 11, 2001 between Siemens AG and the Company, Incorporated by reference to
Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q for the nine months ended September 30, 2001.10.11
    
    Second amendment to lease, dated as of November 24, 2000, between the Company and Central Properties Limited
Partnership, relating to the extension of the lease term for the Companys Bethesda, Maryland offices.
Incorporated by reference to Exhibit 10.19 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.10.12
    
    Employment Agreement, dated as of September 1, 2001, between the Company and Roberta Lipson. Incorporated by
reference to Exhibit 10.20 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2001.10.13
    
    Employment Agreement, dated as of September 1, 2001, between the Company and Elyse Beth Silverberg.
Incorporated by reference to Exhibit 10.21 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.10.14
    
    Employment Agreement, dated as of September 1, 2001, between the Company and Lawrence Pemble. Incorporated by
reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2001.10.15
    
    Employment Agreement, dated as of September 1, 2001, between the Company and Robert C. Goodwin, Jr.
Incorporated by reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.10.16
    
    Amendment to Employment Agreement dated November 1, 2004, between the Company and Roberta Lipson, incorporated
by reference to Exhibit 10.16 to the Companys Quarterly Report on Form 10-Q for the period ended September 30,
2004.10.17
    
    Amendment to Employment Agreement dated November 1, 2004, between the Company and Elyse Beth Silverberg,
incorporated by reference to Exhibit 10.17 to the Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2004.10.18
    
    Amendment to Employment Agreement dated November 1, 2004, between the Company and Lawrence Pemble,
incorporated by reference to Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2004.10.19
    
    Amendment to Employment Agreement dated November 1, 2004, between the Company and Robert C. Goodwin, Jr.,
incorporated by reference to Exhibit 10.19 to the Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2004.10.20
    
    Contractual Joint Venture Contract between Shanghai Changning District Central Hospital and the Company, dated
February 9, 2002. Incorporated by reference to Exhibit 10.24 to the Companys Annual Report on Form 10-K for the -57-




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##### 



fiscal year ended December 31, 2001.10.21
    
    Lease Agreement between Shanghai Changning District Hospital and the Company related to the lease of the
building for Shanghai United Family Hospital. Incorporated by reference to Exhibit 10.25 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2001.10.22
    
    Lease Agreement between China Arts & Crafts Import & Export Corporation and Chindex (Beijing) Consulting
Incorporated related to the lease of the building for the Companys main office in Beijing+. Incorporated by
reference to Exhibit 10.17 to the Companys Quarterly Report on Form 10-Q for the six months ended June 30, 2002.10.23
    
    Agreement between Siemens AG and the Company for long term payment of vendor invoices. Incorporated by
reference to Exhibit 10.18 to the Companys Quarterly Report on Form 10-Q for the nine months ended September 30,
2002.10.24
    
    Form of Securities Purchase Agreement dated as of March 29, 2004 among the Company and the purchasers
thereunder. Incorporated by reference to Exhibit 10.19 to the Companys Registration Statement on Form S-1 (No.
333-114299).10.25
    
    Form of Securities Purchase Agreement dated as of March 21, 2005 among the Company and the purchasers
thereunder. Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated March 21,
2005.10.26
    
    Form of Common Stock Purchase Warrant issued to investors on March 24, 2005. Incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K dated March 21, 2005.21.1
    
    List of subsidiaries. Incorporated by reference to Exhibit 21.1 to the Companys Registration Statement on
Form S-3 (No. 333-123975).23.1
    
    Consent of Independent Registered Public Accounting Firm (filed herewith)23.2
    
    Consent of Independent Registered Public Accounting Firm (filed herewith)31.1
    
    Certification of the Companys Chief Executive Officer Pursuant to Rule 13a-14(a) (filed herewith)31.2
    
    Certification of the Companys Executive Vice President Finance Pursuant to Rule 13a-14(a) (filed herewith)31.3
    
    Certification of the Companys Principal Accounting Officer Pursuant to Rule 13a-14(a) (filed herewith)32.1
    
    Certification of the Companys Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith)32.2
    
    Certification of the Companys Executive Vice President Finance Pursuant to 18 U.S.C. Section 1350 (filed
herewith)32.3
    
    Certification of the Companys Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith) -58-




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. CHINDEX INTERNATIONAL, INC.Dated: June 24, 2005
    
    
    
    By: /S/ Roberta LipsonRoberta LipsonPresident and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and on the dates
indicated. Dated: June 24, 2005
    
    By: /S/ A. Kenneth NilssonA. Kenneth Nilsson

Chairman of the BoardDated: June 24, 2005
    
    By: /S/ Roberta LipsonRoberta LipsonChief Executive Officer and PresidentDated: June 24, 2005
    
    By: /S/ Elyse Beth SilverbergElyse Beth SilverbergExecutive Vice President, Secretary and DirectorDated June 24, 2005
    
    By: /S/ Lawrence PembleLawrence PembleExecutive Vice President-Finance and DirectorDated: June 24, 2005
    
    By: /S/ Robert C. Goodwin, Jr.Robert C. Goodwin, Jr.Executive Vice President of Operations,Treasurer, General Counsel and DirectorDated: June 24, 2005
    
    By: /S/ Ronald ZilkowskiRonald ZilkowskiSenior Vice President Finance and Controller
 -59-




---



##### 



Dated: June 24, 2005
    
    By: /S/ Julius Y. OestreicherJulius Y. OestreicherDirectorDated: June 24, 2005
    
    By: /S/ Carol R. KaufmanCarol R. KaufmanDirectorDated: June 24, 2005
    
    By: /S/ Douglas B. GrobDouglas B. GrobDirectorDated: June 24, 2005
    
    By: /S/ Holli HarrisHolli HarrisDirector
 -60-