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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 December 31, 2002



Commission File No. 0-24624



CHINDEX INTERNATIONAL, INC.



(Exact name of registrant as specified in its charter)
















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 [ x ] No [  ]





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained 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. [ x ]





Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes [   ]  No [ x ]





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 June 28, 2002 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $7,100,000.





The number of shares outstanding of each of the issuer's class of common equity, as of March 20, 2003, was 733,308 shares of Common Stock and 193,750 shares of Class B Common Stock.






Documents Incorporated by Reference: Part III: Proxy Statement









PART I



ITEM 1. BUSINESS





GENERAL



.  Chindex International, Inc. is an American public company with its common stock traded on NASDAQ.  The Company's headquarters are located in the Washington, D.C. metropolitan area.  In 2002 the Company changed its state of incorporation from New York to Delaware and formally changed its name from U.S.-China Industrial Exchange, Inc. to Chindex International, Inc.  ("Chindex" or the "Company").   Chindex, founded in 1981, is a leading American company in the 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.  First, the Company's original business has been its Capital Medical Equipment Division, through which Chindex markets, sells, and facilitates the export of select capital healthcare equipment and instrumentation throughout China on the basis of exclusive agreements with the manufacturers of these products.  Chindex is the 

largest independent U.S. distributor of healthcare equipment in China.  Second, in addition to the sale of capital equipment, the Company's Healthcare Products Distribution Division, through a network of wholly foreign-owned subsidiaries, imports and distributes off-the-shelf healthcare instrumentation and health-related consumable products.  Finally, the Healthcare Services Division operates the Company's private hospitals, Beijing United Family Hospital and Clinics ("Beijing United"), and Shanghai United Family Hospital and Clinics ("Shanghai United") which is scheduled to open in 2003.  In 2002, the Company opened its first satellite clinic associated with Beijing United in Shunyi County outside of Beijing.  For financial information regarding the Company's segments see footnote 10 to the Financial Statements contained in Item 10.  The financial information regarding the segments has been restated for 2001 as a result of the Company's recent split of its Healthcare Products segment into two separate segme

nts.



In 2002, Chindex was awarded the annual U.S. Secretary of State's Award for Corporate Excellence by Secretary of State Colin Powell.  The award recognizes exemplary business practices, innovation and good corporate citizenship in the Company's operations overseas.  Chindex was one of only two companies to receive this prestigious award.



Chindex has 619 full-time employees worldwide, 605 of whom reside in China and Hong Kong. In China and Hong Kong, Chindex operates three representative offices and four subsidiary companies.  The Company also participates in four joint ventures, the most recent of which is Natural Formula Asia Ltd., a joint venture established in Hong Kong between the Company's Hong Kong subsidiary (40% ownership) and two Israeli companies.  The Company also has three subsidiaries in the Republic of Mauritius and one in the British Virgin Islands which were established in 2001 as part of a tax restructuring plan.  In addition, in 2002, the Company established a subsidiary in Germany in order to facilitate the Company's participation in German Government-funded loan programs for the sale in China of medical equipment.



Chindex was established to take advantage of the marketing opportunities presented by the commercial opening of China to the West in the late 1970s and early 1980s.  The Company opened initial offices in Beijing and New York in order to provide representative services, including product marketing, sales, distribution, and technical support to Western manufacturers of electronic instrumentation and industrial machinery.



During its early years of operation, Chindex began work in the healthcare and industrial machinery market sectors.  Relationships were initiated with manufacturers of a variety of capital medical equipment and off-road construction and mining machinery.  By the end of its second year, the Company had hired its first in-house technical support engineer in order to provide service in connection with its sales.  By 1985, the Company had developed an organizational structure which consisted of two discrete marketing groups: capital medical equipment and industrial machinery.  The Company has been continually active in pursuit of new product areas, technologies, and emerging market segments within its industry focus in China.



In response to the fast-paced development of the Chinese market-oriented economic reforms through the mid-1980s, the Company opened representative offices in Guangzhou (southern China) and Shanghai (central China) to expand its sales capabilities.  In addition, to increase its technical service capabilities, in 1986, Chindex opened its first cooperative venture, the Chindex Meheco Service Center, which provided access to bonded warehouse facilities for the importation of spare parts inventories utilized by the Technical Service operations of the Company.  As the Chinese economy has continued to show exceptional growth rates Chindex has pursued the expansion of its business operations through staff and facilities expansion, as well as increased product offerings.  The regional offices support a network of territory sales managers, local area regional representatives, and technical service engineers throughout the country.



In order to increase the Company's overall market access in China, Chindex opened its first foreign subsidiary, Chindex Holdings International Trade (Tianjin), Ltd., in the Tianjin Free Trade Zone in 1994.  A second subsidiary, Chindex Shanghai International Trading Co., Ltd., was opened in the Waigaoqiao Free Trade Zone of Shanghai, in mid-1998.  The subsidiaries are managed by the Healthcare Products Distribution division and provide Chindex with a unique nationwide distribution system for off-the-shelf medical devices and consumables used in hospitals as well as home healthcare and health-oriented products sold to consumers in retail pharmacies.



In early 1996, Chindex established operations in Hong Kong through another foreign subsidiary, Chindex Hong Kong Limited.  This subsidiary has been staffed for sales and technical support in the healthcare sectors of the Hong Kong market.  



To provide funding for growth initiatives and to capitalize on its sustained investment and long-term management expertise in China, Chindex successfully completed two public offerings in 1994 and 1996, the proceeds of which allowed the Company to initiate and develop a growth plan based on expansion of its traditional healthcare equipment sales and service operations, development of primary healthcare ventures, expansion of product distribution capabilities in healthcare products, and investment in the growth of the Hong Kong market services.



To address the long-term financing needs of its customers in the China marketplace, Chindex has worked with the U.S. Government to utilize direct loan and loan guarantee programs to extend financing to Chinese buyers in cooperation with the Chinese Ministries of Health and Finance.  Chindex has utilized assistance from the Export-Import Bank of the United States (Ex-Im Bank) on three separate projects spanning a five year period from 1995 to 2000, totaling $34 million in medical equipment exports.  In addition, Chindex has also secured $11.7 million in financing for Chinese hospitals through three separate commercial loan transactions in 2001 and 2002.  These transactions have helped to sustain Chindex's competitive position in the face of increased competition from other suppliers in the China marketplace.



In 1997, Chindex opened Beijing United, a joint venture between Chindex and a company affiliated with the Chinese Academy of Medical Sciences.  Chindex invested approximately $4.0 million in the Beijing United project, which has brought an international-standard family hospital to China.  The Chindex multi-year development plan, which is subject to obtaining requisite financing among other conditions, includes a series of family hospitals and clinics in major metropolitan centers in China over the next several years as it establishes itself as the premier private hospital corporation in China.  Chindex has already received approval from China's Ministry of Health for, and has commenced construction of its second planned hospital, Shanghai United Family Hospital, which is expected to open in 2003.





CAPITAL MEDICAL EQUIPMENT





On the basis of exclusive distribution agreements, Chindex offers manufacturers of top-quality capital medical equipment  access to the greater Chinese marketplace through a wide range of marketing, sales, and technical services for their products.  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, the Company provides comprehensive marketing coverage on behalf of its 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, advertisement 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.





Since its founding in 1981, Chindex has invested in its operations in the marketing and sales of capital medical equipment. Chindex has been the largest independent U.S. distributor of healthcare equipment in China for many years. 



The capital medical operations in China are managed by the Medical Department, which focuses on exporting top quality Western capital medical equipment to the China market.  These export sales are denominated in U.S. dollars and are made to China's larger hospitals.  The Medical Department is organized both by clinical or therapeutic product specialty and by region. 



The Medical Department markets its products directly to hospitals, through 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.  The Company's marketing is addressed to all relevant participants in the purchasing decision, including the doctors and hospital administrators.  Chindex has sold products to more than 2,000 hospitals in China, many of which have been repeat customers.



Most purchases of the capital medical equipment sold by Chindex in China, regardless of the nature of the end-user, are made through 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 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.  The Company markets its products directly to end-users, but in consummating a sale the company also must interact with the particular FTC representing the end-user.  For this reason, the Company seeks to maintain ongoing relationships with the FTCs in its industries. 



The entry of China into the World Trade Organization ("WTO") in 2001 has had a very positive impact from the Company's point of view and the Company expects that this will continue.  Among the WTO-related changes in the China business environment of importance to the Company are lower tariff rates on imported goods, greater openness in government regulation of business and greater flexibility in the rules relating both to domestic distribution and to participation by Chinese enterprises in foreign trade without the need for utilizing an FTC.  These changes are being phased in over several years, although the Company has already experienced reduced tariff rates on some of the products that it sells in China.



The Company maintains a separate technical service unit, which is closely tied to the Medical Department.  Chindex is responsible for the technical support of virtually all the medical equipment it sells.  To support its capital healthcare equipment business, the Company owns and operates a full-service technical service center.  This service center supports spare parts inventories and factory-trained service engineers on a nationwide basis.  It also makes use of a joint venture organization, the Chindex Meheco Technical Service Center, which provides access to bonded warehousing facilities.



Chindex's Hong Kong subsidiary was opened in 1996 to address the capital medical equipment in Hong Kong.  In this market, Chindex offers marketing and distribution services similar to what it provides in the mainland, but tailored to the specific characteristics of the Hong Kong marketplace.  On behalf of and in conjunction with its clients, Chindex Hong Kong participates in the tendering process for the sale of equipment to public hospitals.  In addition, Chindex Hong Kong also markets separately to the private hospital system in that territory.  



Since 1995, Chindex has been utilizing loans and loan guarantees from Ex-Im Bank to help hospitals in China finance their purchases of medical equipment from Chindex.  Chindex has also arranged commercial financing that is guaranteed by the Chinese government but without Ex-Im Bank participation.  While these transactions are primarily used to promote purchases of the products that Chindex exclusively distributes in China, equipment manufactured by non-client suppliers has also been incorporated.  Some of the non-client manufacturers who have participated in Chindex's Ex-Im Bank-supported contracts include Marconi Medical Systems, Spacelabs Medical, Draeger Medical, Alcon Laboratories, Stryker Corporation, ADAC Laboratories, Varian Medical Systems and PerkinElmer. 



Among its many clients, the Chindex Medical Department represents the following manufacturers of premier healthcare instrumentation and systems:





 Siemens AG is a world leader in the manufacture of medical equipment.  In 2001, Chindex and Siemens entered into a five year agreement calling for Chindex to be the exclusive distributor in China for the Siemens line of diagnostic color ultrasound imaging devices manufactured by Acuson Corporation (acquired by Siemens in 2000) and by Siemens.  Siemens has appointed Chindex as the sole distributor in Hong Kong as well.  Chindex has been the exclusive Acuson distributor in China since Acuson entered the China market in 1987, and in Hong Kong since 1996.  In 2002, the sale of Siemens and Acuson products accounted for approximately 16% of the Company's revenues.  





Bard Electrophysiology manufactures products which aid in the diagnosis and treatment of electrophysiology disorders.  Chindex assumed the exclusive distributorship of Bard's Computerized Labsystems in China in 1999.  The Labsystems are used in cardiac cath labs and complement Chindex's other cardiology product offerings.





Hologic, Inc. is a leading developer, manufacturer and supplier of bone densitometers, mammography and breast biopsy devices, and direct-to-digital X-ray systems.  Chindex began representing Hologic in both China and Hong Kong in 2001.





Nova Biomedical, Inc. is a leading American manufacturer of medical laboratory analysis equipment used in critical care as well as central laboratory environments in the hospital.  Chindex has represented Nova Biomedical in the China market since 1986.





Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company, the technology leader in dry chemistry analyzers, is the manufacturer of the Vitros (formerly Ektachem, a Kodak trademark) dry slide chemistry analyzer system developed originally by the Eastman Kodak Company.  The dry slide reagents used in all of these analyzers are supplied to Chinese customers through the domestic logistics distribution network of the Company's Healthcare Products Distribution division.





PLC Medical Systems, a wholly-owned subsidiary of PLC Systems, manufactures The Heart Laser

 System, a patented technology for Transmyocardial Revascularization ("TMR"), a new cardiosurgical procedure with the potential to provide patients suffering from coronary artery disease with a third alternative to angioplasty and cardiac bypass surgery.  Chindex began to represent PLC in China in early 1998.





Steris Corporation is a leading provider of infection prevention, contamination prevention, microbial reduction, and surgical support systems, products, services, and technologies.  Since 1996, Chindex has marketed the Steris' line of Amsco sterilizers, a leader in infection control and surgical equipment, services, and consumable products for the healthcare and scientific markets. In addition, Chindex markets Steris lines of surgical equipment in China.





The Company entered into two new distribution agreements at the end of 2002.  The first of these is with Quinton Cardiology Systems, Inc., a leading manufacturer of a family of diagnostic cardiology systems used in the diagnosis, treatment and rehabilitation of patients with cardiovascular disease.  The second agreement is with BrainLAB, Inc., a leading company in the fields of image-guided surgery and stereotactic radiosurgery.





HEALTHCARE PRODUCTS DISTRIBUTION





As an important aspect of its WTO accession plan, China has committed to opening its distribution sector fully to foreign participation in mid-2003.  Chindex, through its Healthcare Products Distribution (HPD) division, has been a significant player in this area since 1995, offering foreign manufacturers a unique nationwide distribution system for low price medical devices and consumables sold in hospitals, home healthcare, and other products sold to consumers in retail pharmacies.  With an established distribution network, Chindex's HPD division is poised to take advantage of new opportunities created by China's WTO-based liberalization, as well as Chinese government-mandated consolidation in the distribution industry, and to continue to leverage its experience and increasing scale of operations.



Through a network of wholly foreign-owned enterprise ("WFOE") companies, chartered in China's free trade zones, 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 obtained legally under Chinese regulations.  The Chindex HPD division is comprised of three primary business units: Logistics Services, Retail Pharmacy Sales, and Hospital Dealer Sales.





Logistics Services



Chindex Logistics is the core of the HPD division, as it is through this business unit that the Company operates the import and distribution channels for bringing products to buyers nationwide.  The Logistics business unit provides customized logistics services to other Chindex departments and business units, as well as to outside clients on a third party logistics basis.  Chindex Logistics services allow clients to avoid having to immerse themselves in the minutiae of China's opaque and heavily-regulated distribution sector so that they can focus on providing solutions to their end-user customers in China.  The logistics services cover all aspects of importing products and delivering them to the local customers' sites as well as value-added administrative and financial services.  In addition to providing logistics support to internal clients, Chindex Logistics provides third party logistics services to providers of products related to the Company's core healthcare and health-related markets, includin

g:



Becton Dickinson a leader in the design and worldwide delivery of healthcare devices, systems and services.  In mid-2000, Becton Dickinson decided to outsource its logistics function to Chindex, allowing Becton Dickinson to focus on manufacturing, marketing, clinical education, and sales management.



Pari GmbH is an independent German company which manufactures nebulizers.  Pari manufactures these devices, used for aerosol delivery of drugs, in facilities in Germany as well as the United States.  Chindex is serving as logistics partner to import both hospital and consumer-oriented base units, accessories, and spare parts to support Pari's network of regional dealers in China. 



Whitney International, Inc. markets and sells Codonics medical printers and paper in China.  In early 2000, Chindex assumed the role of logistics provider for Whitney's Codonics business throughout China.



In conjunction with the growth and expansion of its distribution infrastructure, Chindex is investigating new potential product areas in the healthcare sector, as well as new product lines that complement the products which are currently imported and distributed by HPD.  Chindex has developed a range of proven products distribution capabilities and, as an integral part of the Company's growth plan, Chindex plans to continue to capitalize on its resources and experience in this area. 





Retail Pharmacy Sales



Chindex's 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 plans call for coverage of all of the major pharmacies in the top 30 urban markets (accounting for about 80% of demand and purchasing power for mass-premium imported consumer goods).  The Company currently distributes to 25 cities and nearly 300 stores, doing business with eight of the top ten retail pharmacy chains in China, including the master franchiser for The Medicine Shoppe.  



Chindex's personalized, high service approach calls for intensive coverage of all partner outlets by a field force of customer service representatives.  Several new product areas are under development in parallel with the rapidly growing 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 difficulties.



Chindex is paving the way into retail pharmacy distribution through a partnership with L'Oreal, the world's largest producer of cosmetic products.  In 1998, under the partnership agreement, Chindex became the exclusive distributor of a prominent brand of health-oriented cosmetics and skin care products.  Chindex's unique ability to closely control both the inventory and the distribution channels in China has proven successful in both the test market and expansion phases of distribution for this product line.  Chindex currently has exclusive distribution rights to the following premier brands, which do or will reach the market through its Retail Sales pipeline:



Summer's Eve brand of feminine hygiene products, manufactured by C.B. Fleet Company, Inc.



 Natural Formula brand of hair care products, manufactured by Nesh Cosmetics Ltd., the market leader in Israel, to be sold into China by Natural Formula Asia, Ltd.,  the Nesh-Chindex joint venture in Hong Kong, 



Vichy Laboratories and La Roche-Posay  brand of skin care products, manufactured by the Cosmetique Active International division of L'Oreal.





Hospital Dealer Sales



Through its Hospital Dealer Sales division, Chindex HPD taps the substantial and growing market for high quality imported medical consumables and low-priced instrumentation via a network of sub-distributors located throughout China.  The network includes over two hundred active accounts which cover all of China's 350 hospitals with more than 500 beds.  These hospitals account for approximately 80% of the demand for imports in China.  



Chindex provides marketing, logistical, and distribution services to the following manufacturers of medical instrumentation and consumables through its Hospital Dealer Sales division:



Guidant Corporation is a world leader in the design and development of cardiovascular products.  In 1999, Chindex assumed the exclusive distributorship for Guidant's line of vascular intervention products, including the products which compose Guidant's Coronary Stent System.



Hudson RCI is a world leader in the development of disposable products for the respiratory care and anesthesia markets.  Since 2000, Chindex has distributed an increasingly wide range of Hudson RCI products, including Sheridan catheters, a product line previously manufactured by Tyco/Kendall. 



Truphatek is an Israeli manufacturer of laryngoscopes.  Chindex has been the exclusive distributor for Truphatek in China since 1993.  Since 1997, HPD has assumed responsibility for stocking, marketing, and distributing these instruments throughout China.



Tuttnauer, another Israeli manufacturer, is a world leader in tabletop autoclave sterilization systems, which are used in many medical applications including opthamology, dentistry, and operating rooms.  Chindex and Tuttnauer began their partnership in the China marketplace in 1993.  



Tyco/Kendall Healthcare Products Company is the second largest healthcare company in the world and a leading U.S. manufacturer of healthcare consumable products.  Chindex is the exclusive distributor throughout China and Hong Kong for Kendall's urology product lines.





HEALTHCARE SERVICES





In 1994, using its extensive expertise in healthcare as a foundation, Chindex began a long-term program to establish a private hospital network in China.  In 1997, Chindex opened Beijing United Family Hospital and Clinics (Beijing United), marking the successful completion of the first phase of its program.  Beijing United is the first officially approved private, international-standard hospital in China.  Future phases of Chindex's private hospital network program are planned to expand delivery of international-standard healthcare services to China's growing middle class throughout the country.





Beijing United Family Hospital and Clinics



Beijing United is a unique, state-of-the-art, fee-for-service, 50-bed specialty hospital providing primary family care for expatriates and Chinese citizens in Beijing.  The hospital is housed in a modern facility in the eastern section of Beijing, and features seven 5-star birthing suites, three operating theatres, a medical - surgical inpatient ward, a pediatric ward, two executive VIP suites, a neonatal intensive care unit, an adult intensive care unit, nursery, a clinical laboratory, extensive digital diagnostic imaging facilities, a pharmacy, 24 hours emergency department and six outpatient clinics. 



Beijing United completed a significant expansion development program in 2002 resulting in a doubling of the hospital's capacity. In 2002, Beijing United also began to fulfill its strategy of expansion through well-placed satellite clinics, with the opening of the Beijing United Family Clinic - Shunyi ("Shunyi Clinic"). The Shunyi Clinic is the first satellite clinic associated with Beijing United and 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.  This clinic has further broadened the patient base of Beijing United and subsequently the referral base for Beijing United's inpatient services. Plans are also underway to open additional affiliated satellite clinics throughout Beijing, expanding upon this initial program to provide outpatient services



Emphasizing the need for well-care and patient-centered care, Beijing United offers a full range of top-quality family healthcare services, including mental health services, for men, women, and children.  The hospital is staffed by a mix of Western and Chinese physicians and operates in accordance with international hospital standards.  Beijing United is also committed to community outreach programs and offers healthcare education classes, including CPR, Lamaze, and Stress Management.



Beijing United was the first officially approved healthcare joint venture to provide international-standard healthcare services in China.  It was formed as a 90/10 contractual joint venture between Chindex and the Chinese Academy of Medical Sciences and received its initial national level approvals from the Chinese Ministry of Health ("MOH") and Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") in 1995.  





Shanghai United Family Hospital and Clinics



In late 2001, Chindex received approval from the MOH and in early 2002 received approval from MOFTEC to open a second hospital venture.  The new hospital is located in Shanghai and will ultimately be a 50-bed facility, offering a full range of inpatient and outpatient services to both Shanghai's expatriate and Chinese communities.  This hospital is also a joint venture undertaking, with Chindex holding a 70% equity interest.  Construction on the hospital has commenced and  Shanghai United is scheduled to open in phases beginning mid-2003.  Funding for the development of this hospital has been obtained through an agreement with a major supplier for deferred payment on equipment purchases by the Company from the supplier.





Chindex Healthcare Network Expansion



Chindex's strategy is to continue to provide care to the expatriate community and increasingly to provide quality specialty healthcare to affluent Chinese society. An increasing portion of the Chindex healthcare network's market will be the growing urban middle class population.   The Chindex strategic business plan calls for the establishment of additional hospitals, each with affiliated satellite clinics, in selected urban cities throughout eastern China.  These hospitals would be networked with each other and with Beijing United through a central administrative arm.  In addition to the top-quality primary family healthcare services that would be available at each hospital in the network, Chindex also plans to integrate visits by rotating specialists to each hospital, expanding the range of services offered.  





 



 



COMPETITION





In the sale of products, the Company competes with other independent distributors in China that market similar products. In addition to other independent distributors, the Company faces more significant competition from direct distribution by established manufacturers. In the medical products field, for example, the Company competes with General Electric Corporation ("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 the Company 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 the Company. The Company believes that GE, Philips, and Toshiba are the largest such direct competitors in the medical products field.  The Company believes that its pro

ducts incorporate technologies that are more advanced than those available in products currently available from domestic Chinese manufacturers.



In the sales and distribution of off-the-shelf medical products and consumables, the Company's 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 the Company to the China market compete with similar products of foreign, joint venture and domestic manufacturers.  The Company's competitive position for product sales depends in part upon its ability to attract and retain qualified personnel in sales, technical and administrative capacities. In addition, many of the Company's various competitors have greater resources, financial or otherwise, than does the Company.



Two of the Company's subsidiaries, Chindex Holdings International Trade (Tianjin) Ltd., and Chindex Shanghai International Trading Co., Ltd., sell goods and receive payment in local Chinese currency and use the currency to pay for local expenses. Payments are often required to be made in advance for consumable products. The Company recognizes that any devaluation in the local currency may have a negative impact on the results of operations.  



At the present time, there are no Western-owned hospitals in Beijing which compete with Beijing United Family Hospital in catering to the expatriate diplomatic and affluent local Chinese markets.  There are several Western-operated clinics and a variety of foreign-invested joint ventures which provide outpatient services.





EMPLOYEES



At December 31, 2002, the Company had 619 full-time salaried employees, and 24 part-time employees.  Of the full time employees, 605 are in China and Hong Kong. Of the full-time personnel in China and Hong Kong, 67 are expatriates and 538 are Chinese or third country nationals. Of the Company's non-U.S. based full-time employees, 279 are employed at Beijing United.






INTERNET INFORMATION AND SEC DOCUMENTS



The Company's internet site is located at www.chindex.com.  Copies of the Company's reports 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 the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission.





FORWARD-LOOKING STATEMENTS



With the exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-K and, if any, in the Company's 2002 Annual Report to Stockholders are forward-looking statements that involve risks and uncertainties, including risks associated with uncertainties pertaining to the Company's (i) performance goals, including successful conclusion of efforts to secure government-backed financing, (ii) future revenues and earnings, including revenues from the Company's developmental businesses such as the healthcare services, (iii) markets, including growth in demand in China for the Company's products and services, and (iv) proposed new operations, including without limitation that there can be no assurance as to the opening schedule, budgeting or success of the Company's hospital in Shanghai.  Actual results events and performance may differ materially.  Readers are cautioned not to place undue reliance on these forward-looking statement

s, which speak only as of the date hereof.  The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.





ITEM 2.. PROPERTIES





The Company's representative headquarters in China are located at a newly renovated facility in Beijing. The Company's prior facility was designated for redevelopment in 2002 and accordingly, the Company moved into new space in mid-2002. The Company has a ten year lease for this new space.  The Company also leases regional offices in the Chinese cities of Shanghai, Guangzhou and Tianjin. The Company's executive and administrative offices are located in Bethesda, Maryland, which provides access to nearby Washington, D.C.



The Company also leases 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 five-year lease for the building housing the dental clinic. This lease provides for a ten-year extension. The Company initially renovated the first two floors of the main building for Beijing United Family Hospital. The Company 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.  The Company believes that its facilities will be sufficient to satisfy the Company's current requirements for at least the next twelve months.



On March 1, 2002, the Company also entered into an 18-year lease for its 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 55,339 square feet.





ITEM 3. LEGAL PROCEEDINGS



There are no pending material legal proceedings to which the Company or any of its properties is subject.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None



PART II



ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



The Company's Common Stock is listed on NASDAQ under the symbol CHDX. The following table shows the high and low Common Stock bid quotations in the over-the-counter market, as quoted on NASDAQ. Such quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.








DELAWARE 




13-3097642







(State or other jurisdiction of



incorporation or organization)




(I.R.S. Employer Identification No.)





















































 



As of March 26, 2003, there were 14 record holders and there were estimated to be approximately 1,170 beneficial owners of the Company's Common Stock. There are three owners of the Company's Class B Common Stock. 



The Company has not paid any cash dividends on its Common Stock since inception, and it does not anticipate paying any cash dividends in the foreseeable future. The Company expects to retain earnings for use in its business.





ITEM 6. SELECTED FINANCIAL DATA





(in thousands except per share data)








Quarter Ended




High Bid




Low Bid







March 31, 2001




$10.75




 $6.63







June 30, 2001		




12.67




 7.13







September 30, 2001




13.40




 7.05







December 31, 2001	 




14.89




 5.56







March 31, 2002




13.87




9.28







June 30, 2002




11.81




9.14







September 30, 2002




10.99




6.33







December 31, 2002




8.98




6.42
























































































































































































































































ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION



General



The Company's revenues continued to grow in 2002, with increases occurring in all three segments of the Company's business.  In 2002, the Company expanded the number of segments into which its business is divided by dividing the former Healthcare Products segment into two: Capital Medical Equipment and Healthcare Products Distribution.   In 2002, the Company, continuing its loan program efforts, shipped a total of $8.8 million under a program of commercial bank financing for its customers in China.  The Company recorded net income in 2002 of $259,000 or a 33% decrease from 2001 net income of $384,000.  Income from operations was $95,000 in 2002 compared to a loss from operations of $401,000 in 2001. 



 The Healthcare Services segment of the Company's business saw a number of changes in 2002.  During the year the Company completed a significant expansion of its Beijing United Hospital and Clinics ("Beijing United"), doubling its capacity. This expansion involved the renovation of the upper floors of the hospital building that previously had been subleased to a tenant.  Also in 2002, Chindex opened its first outpatient satellite clinic affiliated with Beijing United in Shunyi County outside of Beijing.



In addition to expansion efforts at Beijing United, the Company completed negotiations for its new hospital in Shanghai and, in February of 2002, entered into a joint venture agreement with Shanghai Changning Central District Hospital (a 70-30 equity joint venture, with the Company holding 70%) for the establishment of Shanghai United Family Hospital and Clinics ("Shanghai United").  The business license for Shanghai United was received in July of 2002.  The Company has also entered into an 18-year lease for a stand-alone four story building on the campus of the Changning Hospital.  Financing for Shanghai United is being obtained through an agreement with a major supplier whereby extended payment terms on up to $4 million in purchases by the Company are being provided.  Construction on Shanghai United is underway and is expected to open in 2003.   





Critical Accounting Policies 



The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States requires the Company 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 revenues and expenses during the reporting period. The Company's 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 the Company's accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term service contracts, impairments and estimation of useful lives of long-term assets, income tax recognition of deferred tax items, and accruals for contingencies. Our policy and related procedures for revenue recognition on long-term service contracts are summarized below. In addition, Note 1 to the Consolidated Financial Statements includes further discussion of the Company's significant accounting policies. 



Revenue Recognition - Sales and most commissions are recognized upon product shipment. Costs associated with shipping, handling, installation, after-sale servicing and warranty are not significant and are recognized in Cost of Sales as they are incurred.  Revenues related to services provided by Beijing United are recognized in the period services are provided. Costs associated with such services are recognized in the period incurred.



Stock-based Compensation - The Company accounts for stock-based compensation to employees under Accounting Principles Board ("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. "  (see "Stock Option Plan") 





Fiscal year 2002 compared to 2001



The Company's revenues for 2002 were $70,617,000, up 26% from 2001 revenues of $56,118,000.  Of these amounts, $8,821,000 in 2002 and $4,196,000 in 2001 were attributable to loan project sales by the Company for its customers.  The Company believes that this type of financing is important to its customers and will continue to try to offer such financings in the future. These financings can be very complex and their timing and impact on the Company's results are difficult to predict (see "Timing of Revenues"). 



Capital Medical Equipment Segment



In 2002 this segment had revenues of $28,708,000, an 11% increase over the revenues of $25,819,000 in 2001. Income from operations for the segment was $198,000 in 2002 compared to income from operations of $439,000 in 2001.  The decrease was primarily attributable to a decrease in the gross profit percentage.  The period-to-period revenues of this segment fluctuate due to financing programs facilitated by the Company from time to time and due to fluctuating hospital purchasing cycles in China.  The increase for 2002 was primarily attributable to loan project sales by the Company to its customers, which were $8,821,000 in the recent year as compared to $4,196,000 in the prior year.  The U.S. dollar-based sales of capital medical equipment are often contingent on financing (see "Timing of Revenues"). 



Gross profit in 2002 increased to $7,822,000 from $7,451,000 in 2001. As a percentage of revenues, gross profit from the capital medical equipment segment for the recent period was 27% as compared to 29% in the prior period.  The gross profit in 2001 reflected a different mix of revenue sources having different profit margins.  In particular, in the recent year, the Company had less service contract revenues, which carry higher margins, than in the prior year.  Service contract revenues in Hong Kong were down significantly because of the downturn in the economy there.  The Company anticipates that service contract revenues will not return to previous levels.  In addition, competitive factors such as the timing and composition of major tenders, as well as the ongoing competitive pricing pressures due to Chinese government tendering regulations in the sale of capital medical equipment in the year yielded lower margins on such sales.  Finally, gross margins on loan project sales are generally lower than on t

he Company's other sales because the Company is not required to provide warranty service on many of the products sold through the loan programs.  Loan program shipments in 2002 were more than twice as large as in 2001. 



Expenses for the capital medical equipment segment in 2002 increased to $7,624,000 from $7,012,000 in 2001, and as a percentage of revenues over the period were the same at 27%.  Salaries for the segment in 2002 increased by $561,000 from 2001and as a percentage of revenues over the period increased to 10% from 9%.  The salary increase was primarily due to increased payroll benefits mandated by the Chinese government.  



In addition, travel and entertainment expenses for the segment increased $197,000 but were flat at 5% of revenues in both years.  Other costs decreased $123,000 as compared to the prior year, primarily due to lower administration allocations and lower promotion costs offset by increased exhibition fees and bad debt reserve.





Healthcare Products Distribution Segment



The Health Care Products Distribution ("HPD") segment, consisting of medical consumables and personal healthcare products, had revenue growth of 35% to $28,946,000 in 2002 from 2001 revenues of $21,520,000.  This increase was attributable to an increase in sales in the hospital and retail pharmacy markets.  The segment had a loss from operations of $639,000 in 2002 compared to a loss from operations of $1,316,000 in 2001. The sales of medical consumables and personal healthcare products are local currency-based sales 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 2002 rose to $3,856,000 from $2,842,000 in 2001. As a percentage of revenues, gross profit from the HPD segment remained consistent at 13% in 2002 and 2001.



Expenses for the healthcare products distribution segment in 2002 increased to $4,457,000 from $4,158,000 in 2001, but decreased as a percentage of revenues over the twelve month period to 15% from 19%.  Salaries for the segment increased $354,000, but remained flat as a percentage of revenues over the years at 5%.  The increase is primarily due to increased payroll benefits mandated by the Chinese government.  In addition, travel and entertainment expense for the segment increased $76,000 but was flat at 1% of revenues for both years and other costs decreased $131,000 primarily from decreased promotion.





Healthcare Products Segment 



In order to provide a complete segment comparison the following is a comparison of the 2002 and 2001 results for the products now contained in two segments, the Capital Medical Equipment segment and the Healthcare Products Distribution segment.   In 2000, the company treated these two as one segment and thus, comparable information is not available and it would be impracticable to compare the two years on the basis of the segmentation in effect in 2002.  



If the Company had not separated the two segments, the prior Healthcare Products segment, which was a combination of the Capital Medical Equipment segment and the Healthcare Products Distribution Segment, would have reported revenue of $57,654,000 in 2002 as compared to $47,339,000 in 2001.  Gross profit would have been $11,678,000 in 2002 as compared to $10,293,000 in 2001.  As a percentage of revenues the old segment would have reported 20% in 2002 as compared to 22% in 2001.  Expenses would have increased to $12,081,000 in 2002 as compared to $11,170,000 in 2001.





Healthcare Services Segment



For 2002, the revenues from this segment were $12,963,000, an increase of 48% over 2001 revenues of $8,779,000.  Income from operations in 2002 was $536,000 as compared to $476,000 in 2001.  During the recent period, Beijing United continued to expand the services offered, which contributed to increased patient visits as well as increased inpatient stays over the prior year.  Healthcare services costs during 2002 were $12,427,000, an increase of 50% over 2001 costs of $8,303,000.  This increase was due primarily to the costs associated with increased services offered.  The hospital has recently finished expanding its present facility to include space formerly occupied by a sublease tenant (see Liquidity and Capital Resources).  The hospital also has continued its efforts to explore the establishment of additional affiliated satellite clinics to serve as referral sites to its hospital.  In this regard, Beijing United is

 affiliated with a satellite clinic that opened in November of 2002.  This clinic, in Shunyi County outside of Beijing, is funded by a Chindex subsidiary and is staffed by doctors and other health professionals from the Beijing United.  Salaries increased by $2,450,000 (salaries were 50% and 46% of revenue for 2002 and 2001, respectively), with all other costs increasing $1,674,000, including $193,000 in supplies, $457,000 in rent, $129,000 to establish a bad debt reserve and $104,000 in administrative allocation.  The salary increases resulted from increased staffing for the emergency room and for other expanded facilities as well as additional payroll benefits.





Minority Interest



The Company's agreement with its joint venture partner for Beijing United calls for the partner to receive 10% of the profits of the hospital.  In 2002, this minority interest in the net local income of Beijing United amounted to $71,000 as compared to $18,000 for 2001.  This income is directly related to the local entity profitability of the hospital.  The Company also recorded a $38,000 start-up loss on its investment in a joint venture in Hong Kong.  This was offset by The Company's minority partner share loss of $121,000 in its new start-up hospital venture in Shanghai.





Other Income and Expenses



Other expense (other than interest) in 2002 was $131,000, compared to other income (other than interest) of $578,000 for 2001.  The prior period other income was derived substantially from the sublease of space in the facility housing Beijing United that ended on December 31, 2001.  The part of the building that was subleased has now been renovated as part of the hospital expansion.  Although the Company did not anticipate any sublease revenues in 2002, it does anticipate that now that the space is renovated and in service for Beijing United, the Company will recognize additional revenues through the expanded operations of Beijing United, which may offset part or all of the loss of income from the sublease.





Taxes



The Company recorded a $240,000 benefit from taxes in 2002 as compared to a benefit for taxes of $77,000 in 2001.  This tax computation is in accordance with current accounting standards but assumes a certain level of future profitability.  The Company believes this properly recognizes the benefits the Company has achieved as a result of its tax restructuring and short-term anticipation of future income tax loss carryforward utilization.



As a result of this restructuring the Company expects to make use of a portion of its U.S. federal net operating losses and accordingly, recorded a $660,000 deferred tax valuation adjustment in addition to last years $232,000 recorded on previously fully reserved tax losses. The Company expects these net operating losses to be recognizable in 2003 to 2004.





Fiscal year 2001 compared to 2000



The Company's revenues for 2001 were $56,118,000, up 25% from 2000 revenues of $45,064,000.  These amounts include bulk medical equipment sales of $4,196,000 in 2001 and $9,396,000 in 2000, due to sales attributable to shipments made under the Company's loan financing transactions. The Company believes that this type of financing is important to its customers and the Company and will continue to try to offer such financings in the future. These financings can be very complex and their impact and timing on the Company's results are difficult to predict (see "Timing of Revenues").  



The Company recorded net income in 2001 of $384,000 or a 40% decrease from 2000 net income of $641,000. 



Healthcare Products 



The following comparison on Healthcare Products includes the products now contained in two segments, the Capital Medical Equipment segment and the Healthcare Products Distribution segment.   In 2000, the company treated these two as one segment and thus, comparable information is not available and it would be impracticable to compare the two years on the basis of the segmentation in effect in 2002.  



The healthcare products segment, consisting of medical equipment, medical consumables and personal healthcare products, had revenue growth of 21% to $47,339,000 in 2001 from 2000 revenues of $39,049,000. The 2001 revenues included $25,817,000 in sales of medical equipment (55%) and $21,522,000 in sales of medical consumables and personal healthcare products (45%).  In 2000, the sales of medical equipment constituted 68% of the total for healthcare product sales, while the sales of medical consumables and personal healthcare products constituted 32% of the total.  The segment had a loss from operations of $877,000 in 2001 compared with a loss from operations of $66,000 in 2000.  The sales of medical equipment are U.S. Dollar-based export sales often contingent on financing (see "Timing of Revenues").  The sales of medical consumables and personal healthcare products are local currency-based sales made from inventories maintained locall

y in China (see "Foreign Currency Exchange and Impact of Inflation") to a network of sub-dealers and pharmacies. 



Gross profit in 2001 rose to $10,293,000 from $9,529,000 in 2000. As a percentage of revenue, gross profit from the healthcare products segment declined in 2001 to 22% from 24% in 2000.  This decrease in gross profit is related to the increase in local currency sales of medical consumables and personal healthcare products since these sales are made at a lower average gross profit than U.S. dollar capital equipment sales.



Expenses for the healthcare products segment in 2001 increased to $11,170,000 (24% of revenue) from $9,595,000 in 2000 (25% of revenue). Salaries increased $587,000 (salaries were 13% of revenue in 2001 and 14% in 2000), primarily due to increased hires. In addition, travel and entertainment expense increased $174,000 (travel and entertainment was 4% of revenue in 2001 and 5% in 2000) as a result of increased marketing efforts and other costs increased $597,000.



Healthcare Services



	The healthcare services segment consists of a Western style primary care hospital and outpatient facility. In 2001, the revenues from this segment increased to $8,779,000 or 46% over 2000 revenues of $6,015,000. Income from operations was $476,000 in 2001 compared to $218,000 in 2000.  During 2001, the hospital continued the expansion of its service offerings and the revenue increases for the year reflect increased patient visits taking advantage of these services.  Healthcare services costs increased in 2001 to $8,303,000 or 43% over 2000 costs of $5,797,000.  This increase was due to the costs associated with increases in services.  Also, in September 2001 the Company completed first floor renovations and added a full time emergency room.  The hospital is currently expanding its present facility and continues to explore the possibility of additional satellite clinics to serve as referral sites to its hospital.  Salaries increased by $1,727,000 (salaries were 46% of revenue in 2001 versus 39% in 200

0), with all other costs increasing $996,000.





Other Income and Expenses



Interest income in 2001 declined to $161,000 from $200,000 in 2000. In addition, the Company incurred $13,000 in interest expense in 2001 and had $94,000 in interest expense in 2000 (see "Liquidity and Capital Resources"). 



Other income (other than interest) increased slightly in 2001 to $578,000 from $558,000 in 2000.  This other income is primarily from the net sublease income.  This sublease ended December 31, 2001 and this part of the building is now being renovated as part of the hospital expansion.  The Company does not anticipate any significant revenue in this category in 2002.





Taxes



The Company has undertaken a global restructuring in which it has reorganized its structure and is modifying inter-company relationships to better accommodate its predominantly Chinese operations.  This restructuring was motivated, in part, by the Company's desire to "incorporate" various functions previously operated as a division or branch of the U.S. parent and, in part, due to its intent to expand its presence in the direct health care market by opening an additional hospital.



This restructuring provides the flexibility to structure operations in the People's Republic of China to comply with the various legal and regulatory restrictions and encourages cash flow among the foreign subsidiaries to new investments without triggering U.S. federal income tax.  This flexibility further permits the Company to aggressively pursue Chinese and other tax incentives, rebates, and holidays without triggering U.S. federal income tax.  In addition, the new legal structure creates a desirable environment should the Company wish to attract third party investment in a new Chinese hospital or the Chinese hospitals as a whole.  As such, this reorganization aligns the U.S. tax result with the Company's overall business plan and facilitates the free flow of cash among the Company's foreign subsidiaries.



As a result of this restructuring the Company expects to make use of a portion of its U.S. federal net operating losses and accordingly, recorded a $232,000 deferred tax valuation adjustment on previously fully reserved tax losses. The Company expects these net operating losses to be recognizable in 2002 or 2003.






 



LIQUIDITY AND CAPITAL RESOURCES



As of December 31, 2002, total accounts receivable increased by $3,542,000 as compared to December 31, 2001. This was primarily due to the large loan project transaction shipping at the end of 2002 while no large loan transaction shipped during the last half of the year ended December 31, 2001.



Substantially all of the $3,974,000 increase as of December 31, 2002 in accounts payable and accrued expenses was related to vendor payments for the loan project shipped at the end 2002.  Payments related to this shipment are expected to be paid during 2003.



As of December 31, 2002, inventories were $10,346,000, increasing $2,981,000 from the December 31, 2001 balance of $7,365,000. This increase was due to expansion of the Healthcare Products Distribution network and pending Capital Medical Equipment loan shipments awaiting final shipping instructions.  



As of December 31, 2001 the Company capitalized $3,395,000 of improvements and equipment, primarily for the expansion of Beijing United into the two remaining floors previously sub-leased.  The Company is currently renovating and outfitting its hospital facility in Shanghai, which is being primarily financed through vendor financing and local bank borrowings.  The Company has signed an agreement with a major supplier whereby the supplier has agreed to provide long term (one and one-half years on transactions to date) payment terms on the Company's purchases of medical equipment from the supplier.  The arrangement carries an interest component of five percent.  Due to this vendor financing the Company has recorded long-term accounts payable of $3,609,000 as of December 31, 2002.



As of December 31, 2002, letters of credit issued by the Company's principal bank, AllFirst, amounted to approximately $362,000 and $1,346,000 were outstanding under the line of credit facility. Borrowings under the credit facility bear interest at 1% over three month London Interbank Offered Rate ("LIBOR").  Beijing United has completed short term financing arrangements in China with Hongkong Shanghai Banking Corp. ("HSBC") for up to $600,000 in revolving loans or standby credit.  Terms of the agreement are customary, with the interest rate being 1.75% over the 3 month Singapore Interbank Money Market Offer Rate ("SIBOR").  Beijing United has agreed to utilize HSBC for a certain portion of its credit card settlement business.  As of December 31, 2002 this line of credit was full utilized.





The following table sets forth the Company's contractual cash obligations as of December 31, 2002:








For the year ended December 31:




2002




2001




2000




1999




1998







Net sales




$70,617




$56,118




$45,064




$37,128




$21,563







Percent increase




26%




25%




18%




72%




-10%







Income (loss) from operations




95




(401)




152




(221)




(3,613)







Other income and expenses




(126)




726




664




896




1,661







Net income (loss) before tax




19




307




780




657




(1,964)







Benefit from (provision for) income taxes




240




77




(139)




(265)




(75)







Net income (loss)




259




384




641




392




(2,039)




 
 
 
 
 
 






Net income (loss) per share-basic




.30




.45




.79




.50




(2.58)







Net income (loss) per share-diluted




.29




.42




.76




.49




(2.58)







Market closing price per share - end of year




7.42




14.00




6.75




18.25




2.72







Book value per share at end of year




15.07




15.99




16.36




15.93




15.43







Cash dividends declared




.00




.00




.00




.00




.00




 
 
 
 
 
 






At December 31:

 
 
 
 
 






Total assets




$43,126




$33,369




$36,498




$24,384




$28,553







Short term debt




1,946




200




0




0




0







Long term debt or accounts payable




3,609




0




0




91




272







Total capital




13,968




13,611




13,235




12,587




12,196




 
 
 
 
 
 






Segment information for the year ended December 31:

 
 
 
 
 






Capital Medical Equipment-sales




$28,708




$25,819

 
 
 






Capital Medical Equipment -gross margin percent




27%




29%

 
 
 






Capital Medical Equipment -operations income




198




439

 
 
 






Healthcare Products Distribution-sales




28,946




21,520

 
 
 






Healthcare Products Distribution-gross margin percent




13%




13%

 
 
 






Healthcare Products Distribution-operations loss




(639)




(1,316)

 
 
 






Healthcare Products-sales




*




*




$39,049




$33,182




$19,750







Healthcare Products-gross margin percent




*




*




24%




25%




29%







Healthcare Products-operations income (loss)




*




*




(66)




243




(2,527)







Healthcare Services-sales




12,963




8,779




6,015




3,946




1,860







Healthcare Services-operations income (loss)




536




476




218




(464)




(1,086)







*the company expanded to three segments in 2002 and restated 2001

























































For information about these contractual cash obligations, see Notes 7 and 8 to the consolidated financial statements appearing elsewhere in this report.



	The Company continues to consider various other financing alternatives to satisfy its future expansion, capital improvements and equipment requirements.





TIMING OF REVENUES



The timing of the Company's revenues is affected by several significant factors. Many end-users of the capital equipment products sold by the Company depend to a certain extent upon the allocation of funds in the budgeting processes of the Chinese government and the availability of credit from the Chinese banking system. These processes and the availability of credit are based on policy determinations by the Chinese government and are not necessarily subject to fixed time schedules.



In addition, the sales of certain products often require protracted sales efforts, long lead times and other time-consuming steps. 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 the Company's or its purchasers' abilities to arrange for credit sources, including Ex-Im Bank or other loan financing. As a result, the Company's 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 the Company's revenue in any one period. As a result, a relatively small reduction in the number of orders can have a material impact on the Company's revenues in any year. Further, because the Company recognizes revenues and expenses as products are shipped, the timing of shipments could affect the Company's operating results for a particular period.  At the same time, a g

rowing percentage of the Company's revenues are attributable to hospital services and local currency sales through the HPD, both of which have more even revenue streams.



 



FOREIGN CURRENCY EXCHANGE AND IMPACT OF INFLATION



The results of operations of the Company for the periods discussed have not been significantly affected by inflation or foreign currency fluctuation.  Since the Company receives over 60% of its revenues in local Chinese currency, the Company has some foreign currency risk.  Changes in the valuation of the Chinese Renminbi or Hong Kong dollar may have an impact on the Company's results of operations in the future. The Company's subsidiaries, Chindex Tianjin, Chindex Shanghai and Beijing United, sell products and services in Renminbi. 



The Company has also purchased and will continue to purchase some products in Western currencies other than U.S. dollars and has 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, the Company could experience a negative impact on profitability. The Company anticipates hedging transactions wherever possible to minimize such negative impacts.  Currently there are no such hedges.



 



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 



The Company is exposed to market risks in a variety of ways.  The principal market risk is related to the nature of the Chinese economy and political system.  Since the Company generates all of its revenues from China, any risk having to do with the environment in China for a foreign business operating there can have a significant impact on the Company.   



The Chindex growth plan includes continuing expansion of the Capital Medical Equipment business, rapid expansion of the HPD product portfolio, with an emphasis on increasing the number and variety of products that are sold directly to retail pharmacies, and the development of a network of private family hospitals, based on the Beijing United model, to serve China's growing middle class.  Management continues to develop this growth plan, the implementation of which will be contingent on a number of factors, including requisite financing.



Although the Company remains optimistic about the marketplace, there are continuing uncertainties as to the direction of China's on-going political and economic reforms, the possibility for future devaluation of the Chinese or Hong Kong currencies, and China's relationship with the United States.  These uncertainties may influence the budgeting and purchasing process in China.  Any of the foregoing circumstances may impede trade with China, thus impairing the ability of the Company's customers to purchase the Company's products.  In the Company's view, China's entry into the World Trade Organization in 2001 has made the dangers from these uncertainties less significant.  Other possibly adverse circumstances include a decrease in the funds available for Chinese end-users as a result of a general economic slowdown, and increased competition from other American and European companies.





Internal Political Risk



The Company's interests may be adversely affected by the political environment in China.  China is a socialist state which since 1949 has been, and is expected to continue to be, controlled by the Communist Party of China.  Changes in the top political leadership of the Chinese government and/or the Communist Party, may have a significant impact on policy and the political and economic environment in China.  Moreover, economic reforms and growth have been more successful in certain sections of the country than others, and the continuation or increase of such disparities could affect political or social stability.





Government Control Over Economy



The government of China has exercised and continues to exercise substantial control over virtually every section of the Chinese economy through regulation and state ownership.   China's continued commitment to reform and the development of a vital private sector in that country have, to some extent, limited the practical effects of the control currently exercised by the government over individual business enterprises.  However, the economy continues to be subject to significant government controls which, if directed towards business activities of the Company, could have a significant adverse impact on the Company.  For example, if the government were to limit the number of foreign personnel who could work in the country, or were to substantially increase taxes on foreign businesses or were to impose any number of other possible types of limitations on the Company's operations, the impact would be significant.





Legal System



China's legal system is a civil law system, which is based on written statutes and in which decided legal cases have little precedential value.  Moreover, China's legal system is still in the early stage of development and there are not sufficient numbers of trained judges or other legal professionals to manage disputes that may arise.  As a result, the administration of laws and regulations by government agencies in China may be subject to considerable discretion.  





Foreign Trade Corporations



In the sale of its capital equipment to China, the Company must make most of its sales through foreign trade corporations ("FTCs").   Although purchasing decisions are made by the end-user, which is obligated to pay the applicable purchase prices, the Company enters into a formal purchase contract with only the FTC.  By virtue of its direct contractual relationship with the FTC, rather than the end-user, the Company is to some extent dependent upon the continuing existence of and contractual compliance by the FTC until the particular transaction has been completed.  






ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA






Report of Ernst & Young LLP, Independent Auditors



The Board of Directors and Stockholders



Chindex International, Inc.



 



We have audited the accompanying consolidated balance sheets of Chindex International, Inc. (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a).  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 auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.  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



March 14, 2003





CHINDEX INTERNATIONAL, INC.



CONSOLIDATED BALANCE SHEETS








 



 




Total




2003




2004




2005




2006




2007




Thereafter







Line of credit




$  1,946,000




$1,946,000 




$           0 




$           0 




$           0    




$           0    




   $              0







Vendor financing




3,609,000




0




3,609,000




0




0




0




0







Operating leases




12,224,000




1,454,000




1,137,000




994,000




993,000




993,000




  6,653,000









Total contractual cash obligations






$17,779,000 




$3,400,000




$4,746,000 




$994,000 




$993,000 




$993,000 




   $6,653,000 

































































































































































































See accompanying notes




 



 



 



CHINDEX INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS





 











December 31,








2002




2001










ASSETS











Current Assets:












Cash and cash equivalents




$6,100,000




$5,459,000








Trade receivables less allowance for doubtful accounts of $883,000 in 2002 and $604,000 in 2001




16,195,000




12,932,000








Inventories




10,346,000




7,365,000








Income taxes receivable




11,000




165,000








Deferred income taxes




892,000




232,000








Other current assets




1,793,000




1,668,000










Total current assets




35,337,000




27,821,000







Property & equipment, net




7,128,000




4,751,000







Other assets




661,000




797,000










Total assets




$43,126,000




$33,369,000






















LIABILITIES AND STOCKHOLDERS' EQUITY











Current Liabilities:












Accounts payable and accrued expenses




$22,612,000




$18,625,000








Accrued contract training




920,000




915,000








Short term loan payable




1,946,000




200,000










Total current liabilities




25,478,000




19,758,000







Long-term accounts payable




3,609,000




0










Total liabilities




29,087,000




19,758,000







Minority interest




71,000




18,000







Stockholders' Equity:












Preferred stock, $.01 par value, 5,000 shares authorized, none issued




0




0








Common stock, $.01 par value, 2,500,000 shares authorized, including 200,000 designated Class B:














Common stock - 733,308 and 657,319 shares issued and outstanding in 2002 and 2001, respectively




7,000




7,000










Class B stock - 193,750 shares issued and outstanding in 2002 and 2001




2,000




2,000








Additional capital




17,384,000




17,303,000








Accumulated other comprehensive income (loss)




9,000




(8,000)








Accumulated deficit




(3,434,000)




(3,693,000)










Total stockholders' equity




13,968,000




13,611,000










Total liabilities and stockholders' equity




$43,164,000




$33,369,000
































































































































































































See accompanying notes





 



 



 



 



 



CHINDEX INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS





 











For the year ended December 31,








2002




2001




2000

















Total sales and service revenue




$70,617,000




$56,118,000




$45,064,000





















Cost and expenses














Cost of goods and services sold




47,549,000




38,426,000




30,529,000








Salaries and payroll taxes




13,463,000




10,091,000




7,777,000








Travel and entertainment




2,601,000




2,139,000




1,897,000








Other




6,909,000




5,863,000




4,709,000





















Income (loss) from operations




95,000




(401,000)




152,000





















Minority interest




50,000




(18,000)




(36,000)





















Other income and (expenses)














Interest expense




(54,000)




(13,000)




(94,000)








Interest income




59,000




161,000




200,000








Miscellaneous (loss) income , net




(131,000)




578,000




558,000










Total other (loss) income




(126,000)




726,000




664,000





















Income before income taxes




19,000




307,000




780,000







(Benefit from) provision for income taxes




(240,000)




(77,000)




139,000







Net income




$259,000




$384,000




$641,000





















Net income per common share - basic




$  .30




$  .45




$  .79







Weighted average shares outstanding - basic




874,870




851,069




808,722







Net income per common share - diluted




$  .29




$  .42




$  .76










Weighted average shares outstanding - diluted




899,192




921,927




838,716



































For the year ended December 31,








2002




2001




2000







OPERATING ACTIVITIES













Net income




$259,000