| CHINDEX INTERNATIONAL INC ITEM 1A RISK FACTORS You should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 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 service and product 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 technology |
| Many of our competitors are committing substantial capital and, in many instances, are forming alliances to acquire or maintain market leadership |
| 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 expand our distribution capabilities for medical products |
| 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 distribution 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: -6- _________________________________________________________________ • our future operating performance; • the demand for our services and products; • general economic conditions and conditions affecting suppliers, customers and patients; • competition; and • legal and regulatory factors affecting us and our business |
| 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, fiscal 2005 and fiscal 2006 and may continue to experience net losses |
| Consequently, we may not have the ability to finance future operations |
| These net losses are principally attributable to increased costs, including: at our parent level, corporate governance compliance and local taxes; in our Medical Products division, increased salaries, bad debt allowances and periods of lackluster sales; and, in our Healthcare Services division, in fiscal 2004 and fiscal 2005 periods, start-up and service-expansion expenses relating to hospital operations at SHU, including increases in staff, insurance costs, supplies and other expenses |
| In fiscal 2006 many of these expenses diminished as operations in Shanghai commenced |
| However, expenses in connection with maintenance and operation, as well as expansion, if any, of our Healthcare Services division will remain significant |
| Continued losses in operating divisions would reduce the cash available from operations to service our indebtedness, as well as limit our ability to finance our operations |
| 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 |
| -7- _________________________________________________________________ If we lost the services of our key personnel, then our leadership, expertise, experience, business relationships, strategic and operational 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, Lawrence Pemble, the Treasurer and Executive Vice President and Elyse Beth Silverberg, the 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 dlra2cmam000cmam000 on the life of Ms |
| Pemble is subject to an employment agreement that contains non-competition, non-solicitation and confidentiality provisions, but we do not maintain an insurance policy on his life |
| Silverberg is subject to an employment agreement that contains non-competition, non-solicitation and confidentiality 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 |
| Our business could be adversely affected by inflation or foreign currency fluctuation |
| Since we receive more than 70prca of our revenues in local Chinese currency, with the remainder in US dollars (USD), we have foreign currency risk |
| Contracts denominated in USD, where the goods are purchased in USD, would not be subject to foreign currency risk |
| In the event of a decline in the value of the USD, however, goods that are purchased by us in USD and resold in Chinese Renminbi (RMB) 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 RMB or Hong Kong Dollar may have an impact on our results of operations in the future |
| Our subsidiaries, Chindex Tianjin, Chindex Shanghai, BJU, and SHU, sell products and services in RMB We have also purchased and will continue to purchase some products in Western currencies other than USD and have sold and will continue to sell such products in China for USD To the extent that the value of the USD declines against such Western currencies, we could experience a negative impact on profitability |
| 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 USD at March 31, 2006, indicated that if the USD uniformly increased in value by 10prca relative to the RMB, then we would experience a 9prca smaller loss |
| Conversely, a 10prca increase in the value of the RMB relative to the USD at March 31, 2006 would have resulted in a 10prca additional loss |
| Risks Relating to the Healthcare Services Division If we do not attract and retain qualified physicians, administrators 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 healthcare 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 |
| -8- _________________________________________________________________ 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 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 US 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 legal 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 implemented in fiscal 2006 new clinical and financial reporting systems throughout our healthcare services operations |
| This implementation, future upgrades to it and other proposed system-wide improvements in information systems are expected to require 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 |
| -9- _________________________________________________________________ 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 healthcare 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 or Shanghai, 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 healthcare organization, having greater resources in the provision or management of healthcare services, will not decide to engage in operations similar to those being conducted by us in Beijing or Shanghai |
| Expansion of healthcare services to reach the Chinese population depends to some extent on the development of an insurance product which is not now available |
| Medical insurance is not generally available to the Chinese population and so visits to our hospital facilities by the local population are usually paid for in cash |
| Our expansion plans call for increasing the number of local Chinese who use our facilities |
| In order to achieve this we are working with various organizations to develop an insurance product which would cover some or all of the costs of visits to our facilities and thus effectively open up the market on a broader basis |
| If such efforts fail our ability to continue to grow the Healthcare Services division of the Company could be at risk |
| Our loan from the International Finance Corporation (IFC) places restrictions on the conduct of our healthcare services business |
| The loan from the International Finance Corporation (IFC) to BJU and SHU, which is guaranteed by the parent corporation, requires us to achieve specified liquidity and coverage ratios and meet other operating requirements in order for us to conduct certain transactions in our healthcare services business |
| The terms of our indebtedness with the IFC impose significant restrictions on our business |
| The indentures governing our outstanding notes and the agreement governing our loan contain various covenants that limit the ability of our hospitals to, among other things: (1) incur or guarantee additional indebtedness, (2) create or permit to exist certain liens, (3) enter into business combinations and asset sale transactions |
| In addition, the loan agreement also creates liquidity and coverage ratios and other operating requirements that limit the ability of our hospitals to, among other things: (1) make intercompany payments, including dividends and management fees to affiliate companies, (2) make investments, enter into transactions with affiliates, (3) incur expenditures for fixed or non-current assets |
| These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand a future downturn in our business, conduct operations or otherwise take advantage of business opportunities that may arise |
| Our loan agreement also requires us to maintain specified financial ratios and our ability to do so may be affected by events beyond our control such as business conditions in China |
| Our failure to maintain applicable financial ratios, in certain circumstances, would limit or prevent us from making payments from the hospitals to the parent company and would otherwise limit the hospitals’ flexibility in financial matters |
| Risks relating to our Medical Products division 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, 2006, Siemens Medical Solutions (Siemens) and Guidant Corporation (Guidant) represented 49prca and 22prca of our product revenue and were the only suppliers where such percentage was at least 10prca |
| During the fiscal year ended March 31, 2005, Siemens and -10- _________________________________________________________________ Guidant represented 39prca and 18prca of our product revenue and were the only suppliers where such percentage was at least 10prca |
| During the fiscal year ended March 31, 2004, Siemens, Guidant and Becton-Dickenson (BD) represented 17prca, 14prca and 10prca of our product revenue and were the only suppliers where such percentage was at least 10prca |
| 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 and there is no assurance that the agreement will be extended in whole or in part |
| If the agreement is not extended this could have a significant effect on our revenue |
| Our agreement with Guidant expired on December 31, 2005, but the business has continued on the same terms at will |
| Our agreement with BD, 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 our respective distribution arrangements |
| 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, BD established a subsidiary in China that performs certain services previously performed by us |
| In that example, we did not have a binding contractual arrangement limiting BD’s decision to internalize rather than outsource those services to us |
| 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 |
| Our sales of medical products depend to some extent on our suppliers continuing to improve their products and introduce new models |
| If a supplier fails to upgrade its product line as quickly as competitive manufacturers have done this could adversely impact our revenues |
| The market for medical equipment in China is highly competitive and buyers are very interested in purchasing the latest technology |
| In operating under exclusive agreements with certain manufacturers we are tied to a single source in each product area and are dependent on the acceptance of the manufacturers’ products in the market place |
| If there is a delay in the introduction of new products or technology this could influence buyers to choose competitive offerings from other companies |
| 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 medical 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 medical 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 |
| -11- _________________________________________________________________ We have not been able to arrange financings, from third party banks or governments, for our customers in every year |
| Future periodic financings arranged on behalf of our customers cannot be assured |
| The absence of these financings could result in lower sales |
| During fiscal 2006, we recognized dlra3cmam923cmam000 in sales related to third party financings pursuant to a German KfW Development Bank loan program which constituted 7prca of our product sales for the year |
| No third party sales 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 |
| The arrangements for these financings and resultant sales had been planned and implemented 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 |
| There can be no assurance that KfW Development Bank or US Export-Import Bank financing commitments will be obtained by us for our customers in the future |
| The absence of these financings would have an adverse impact on our sales volume |
| In late 2001, the Chinese Ministry of Finance notified the US Export-Import Bank that a new framework agreement would be needed for future financings of the type that we had provided to our customers since 1995 |
| On January 24, 2005, the US Export-Import Bank and the Chinese Ministry of Finance signed a new framework agreement setting forth the terms under which government-supported financings will be provided from the US and implemented in China |
| In January, 2006, the implementing regulations for such financings were issued by the Chinese government and the process of finalizing the specific sub-agreements between the US Export-Import Bank and the commercial banks selected by the Chinese government was begun |
| When it is, we anticipate that financing arrangements with the Bank will resume |
| We have announced our intention to obtain such financing |
| However, there can be no assurances that any such sub-agreements or other requisite banking 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 12 manufacturers and are named as an additional insured on 10 of those manufacturers’ product liability policies |
| 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 |
| -12- _________________________________________________________________ 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 medical products 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 the products we distribute |
| In addition to other independent distributors, we face significant competition from direct distribution by 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 a wide variety of products in China to different market sectors (including non-medical) under one brand name, 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 products have been reduced and tariffs have been lowered |
| In addition, the investment environment has improved for companies interested in establishing manufacturing operations in China |
| All of these developments may lead to increased imports of foreign medical products and increased domestic production of such products and therefore lead to increased competition in the domestic medical products markets |
| 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 merchandise and parts inventories, which are 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 merchandise and parts inventories |
| Although we closely monitor our inventory exposure through a variety of inventory control procedures and policies, including reviews for obsolescence and valuation, there can be no assurance that such procedures and policies will continue to be effective or that -13- _________________________________________________________________ unforeseen product development or price changes will not result in an inability to provide timely supply 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 products into China, we must make a substantial portion 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 |
| 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 our Medical Products division we plan to increase sales of medical instrumentation and other medical products 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 purchase from us to fill specific orders from their customers or to maintain certain predetermined stocking levels |
| 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 |
| If the Chinese Government tightens controls on purchases of medical equipment our sales could be adversely affected |
| The Chinese Government has adopted a number of policies relating to purchase of medical products that affect how we can market and sell such products |
| For example, for certain expensive products the Government requires that a tendering process be utilized instead of direct sale negotiations between suppliers and customers |
| In fiscal 2006, we experienced an expansion of the tendering requirement to include less expensive products |
| To the extent that requirements such as the tendering regulations might continue to be expanded, our sales could be adversely affected |
| 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 economies of most developed countries in many respects, including government investment, the level of development, control of capital investment, control of foreign exchange and allocation of resources |
| -14- _________________________________________________________________ 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 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 RMB Our revenues in RMB typically are converted into USD 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 |
| -15- _________________________________________________________________ The SARS outbreak or similar outbreak, such as Avian flu, 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 8cmam460 cases of SARS and more than 790 deaths had been reported in over 30 countries |
| Since the SARS epidemic in China had conflicting impacts on our healthcare businesses, the extent of the adverse impact that any future SARS outbreak or similar epidemic such as Avian flu, could have on the Chinese economy and on us cannot be predicted at this time |
| Any further epidemic 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 |
| Recently in Asia and elsewhere there have been limited cases of Avian flu (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 |
| Any further such outbreak could severely restrict the level of economic activity in affected areas, which could have a material adverse effect on us as previously experienced |
| 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 |
| 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 775cmam000 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 that the holders of Class B common stock have six votes per share on each matter considered by our stockholders |
| As of March 31, 2006, the three management holders of our outstanding Class B common stock represented approximately 12prca of our outstanding capital stock and were deemed to beneficially own capital stock representing approximately 44prca of total voting power and may be able to cause the -16- _________________________________________________________________ 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 500cmam000 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 |